See accompanying notes
to the condensed consolidated financial statements.
See accompanying notes to the condensed consolidated
financial statements.
See accompanying notes to the condensed consolidated
financial statements.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Aerkomm
Inc. (formerly Maple Tree Kids Inc.) (“Aerkomm”) was incorporated on August 14, 2013 in the State of Nevada. Aerkomm
was a retail distribution company selling all of its products over the internet in the United States, operating in the infant
and toddler products business market.
On
December 28, 2016, Aircom Pacific Inc (“Aircom”) purchased 700,000 shares of Aerkomm’s common stock, representing
approximately 86.3% of Aerkomm’s issued and outstanding common stock as of the closing. As a result of the transaction,
Aircom became the controlling shareholder of Aerkomm.
On
February 13, 2017, Aerkomm entered into a share exchange agreement (“Exchange Agreement”) with
Aircom and its shareholders, pursuant to which Aerkomm acquired 100% of the issued and outstanding capital stock of
Aircom in exchange for approximately 99.7% of the issued and outstanding capital stock of Aerkomm (or 87.81% on
a fully-diluted basis). As a result of the share exchange, Aircom became a wholly-owned subsidiary of Aerkomm, and
the former shareholders of Aircom became the holders of approximately 99.7% of Aerkomm’s issued and outstanding
capital stock.
Aircom
was incorporated on September 29, 2014 under the laws of the State of California.
On
December 31, 2014, Aircom acquired a newly incorporated subsidiary, Aircom Pacific Ltd. (“Aircom Seychelles”), a corporation
formed under the laws of the Republic of Seychelles. Aircom Seychelles was formed to facilitate Aircom’s global corporate
structure for both business operations and tax planning. Presently, Aircom Seychelles has no operation. Aircom is working with
corporate and tax advisers in finalizing its global corporate structure and has not yet concluded its final plan.
On
October 17, 2016, Aircom acquired a wholly owned subsidiary, Aircom Pacific Inc. Limited (“Aircom HK”), a corporation
formed under the laws of Hong Kong. The purpose of Aircom HK is to conduct Aircom’s business and operations in Hong Kong
and China. Presently, its primary function is business development, both with respect to airlines as well as content providers
and advertisement partners based in Hong Kong and China. Aircom HK is also actively seeking strategic partnerships whom Aircom
may leverage in order to provide more and better services to its customers. Aircom also plans to provide local supports to Hong
Kong-based airlines via Aircom HK and teleports located in the Hong Kong and China regions.
On
December 15, 2016, Aircom acquired a wholly owned subsidiary, Aircom Japan, Inc. (“Aircom Japan”), a corporation formed
under the laws of Japan. The purpose of Aircom Japan is to conduct business development and operations located within Japan. Aircom
Japan is in the process of applying for, and will be the holder of, Satellite Communication Blanket License in Japan, which is
necessary for Aircom to provide services within Japan. Aircom Japan will also provide local supports to airlines operate within
the territory of Japan.
Aircom
and its subsidiaries are full service providers of in-flight entertainment and connectivity solutions with their initial market
in the Asian Pacific region.
Aerkomm
and its subsidiaries (“the Company”) have not generated significant revenues, excluding non-recurring revenues from
affiliates in 2015, and will incur additional expenses as a result of being a public reporting company. If the Company is unable
to obtain additional working capital, the Company’s business may fail. As of September 30, 2017, the Company generated a
net loss of $4,724,298 and had working capital deficiency of $2,555,589, which raises substantial doubt about its ability to continue
as a going concern. Currently, the Company has taken measures that management believes will improve its financial position by
financing activities, short-term borrowings and equity contributions.
AERKOMM
INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements - Continued
(Unaudited)
NOTE 2 –
|
Summary of Significant Accounting Policies
|
Unaudited
Interim Financial Information
The
accompanying condensed consolidated balance sheet as of September 30, 2017, the condensed consolidated statements of operations
and comprehensive loss and cash flows for the nine-month periods ended September 30, 2016 and 2017 and the consolidated statement
of changes in equity for the nine-month periods ended September 30, 2017 are unaudited. The unaudited interim condensed consolidated
financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion
of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s
financial position as of September 30, 2017 and results of operations and cash flows for the nine-month periods ended September
30, 2016 and 2017. The financial data and the other information disclosed in these notes to the condensed consolidated financial
statements related to these nine-month periods are unaudited. The results of the nine-month periods ended September 30, 2016 and
2017 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2017 or for any other
interim period or other future year.
Reverse
Acquisition
On
February 13, 2017, Aerkomm completed the reverse acquisition of Aircom pursuant to the Exchange Agreement. As a result of the
reverse acquisition, Aircom became Aerkomm’s wholly-owned subsidiary. For accounting purposes, the share exchange transaction
with Aircom was treated as a reverse acquisition, with Aircom as the acquirer and Aerkomm as the acquired party. Unless the context
suggests otherwise, “the Company” referred to for the periods prior to the consummation of the reverse acquisition
is Aircom and its consolidated subsidiaries.
Principle
of Consolidation
Aerkomm
consolidates the accounts of its subsidiaries, Aircom, Aircom Seychelles, Aircom HK and Aircom Japan. All significant intercompany
accounts and transactions have been eliminated in consolidation.
All
of the entities in these condensed consolidated financial statements have adopted fiscal year end of December 31.
Reclassifications
of Prior Year Presentation
Certain
prior year balance sheet amounts have been reclassified for consistency with the current period presentation. These reclassifications
had no effect on the reported results of operations.
Use
of Estimates
The
preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that affect the amounts reported in the condensed
consolidated financial statements and accompanying notes. Actual results may differ from these estimates.
Concentrations
of Credit Risk
Financial
instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash in banks
and accounts receivable. As of September 30, 2017 and December 31, 2016, the total balances of cash in banks were insured by the
Federal Deposit Insurance Corporation (FDIC) and foreign financial institution deposits insurance.
Inventories
Inventories
are recorded at the lower of weighted-average cost or market. The Company assesses the impact of changing technology on its inventory
on hand and writes off inventories that are considered obsolete. Estimated losses on scrap and slow-moving items are recognized
in the allowance for losses.
AERKOMM
INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements – Continued
(Unaudited)
NOTE 2 –
|
Summary of Significant Accounting Policies - Continued
|
Property
and Equipment
Property
and equipment are stated at cost less accumulated depreciation. When value impairment is determined, the related assets are stated
at the lower of fair value or book value. Significant additions, renewals and betterments are capitalized. Maintenance and repairs
are expensed as incurred.
Depreciation
is computed by using the straight-line and double declining method over the following estimated service lives: computer equipment
– 3 to 5 years, furniture and fixtures – 5 years and satellite equipment – 5 years.
Construction
costs for on-flight entertainment equipment not yet in service are recorded under construction in progress.
Upon
sale or disposal of property and equipment, the related cost and accumulated depreciation are removed from the corresponding accounts,
with any gain or loss credited or charged to non-operating income in the period of sale or disposal.
The
Company reviews the carrying amount of property and equipment for impairment when events or changes in circumstances indicate
that the carrying amount of such assets may not be recoverable. It determined that there was no impairment loss for the nine-month
periods ended September 30, 2017 and 2016.
Goodwill
and Purchased Intangible Assets
The
Company’s goodwill represents the amount by which the total purchase price paid exceeded the estimated fair value of net
assets acquired from acquisition of subsidiaries. The Company tests goodwill for impairment on an annual basis, or more often
if events or circumstances indicate that there may be impairment.
Purchased
intangible assets with finite life are amortized on the straight-line basis over the estimated useful lives of respective assets.
Purchased intangible assets with indefinite life are evaluated for impairment when events or changes in circumstances indicate
that the carrying amount of such assets may not be recoverable. As of September 30, 2017 and December 31, 2016, purchased intangible
asset consists of satellite system software and is amortized over 10 years.
Fair
Value of Financial Instruments
The
Company utilizes the three-level valuation hierarchy for the recognition and disclosure of fair value measurements. The categorization
of assets and liabilities within this hierarchy is based upon the lowest level of input that is significant to the measurement
of fair value. The three levels of the hierarchy consist of the following:
Level
1 – Inputs to the valuation methodology are unadjusted quoted prices in active markets for identical assets or liabilities
that the Company has the ability to access at the measurement date.
Level
2 – Inputs to the valuation methodology are quoted prices for similar assets and liabilities in active markets, quoted prices
in markets that are not active or inputs that are observable for the asset or liability, either directly or indirectly, for substantially
the full term of the instrument.
Level
3 – Inputs to the valuation methodology are unobservable inputs based upon management’s best estimate of inputs market
participants could use in pricing the asset or liability at the measurement date, including assumptions.
The carrying amounts of the Company’s
cash, other receivable, short-term bank loan and other payable approximated their fair value due to the short-term nature of these
financial instruments.
AERKOMM
INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements – Continued
(Unaudited)
NOTE 2 –
|
Summary of Significant Accounting Policies - Continued
|
Research
and Development Costs
Research and development costs are
charged to operating expenses as incurred. For the nine-month periods ended September 30, 2017 and 2016, the Company
incurred approximately $0 and $1,579,000 in research and development costs, respectively.
Income
Taxes
Income
taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are computed for differences
between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the
future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income.
Valuation
allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense
is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.
Adjustments to prior period’s income tax liabilities are added to or deducted from the current period’s tax provision.
The
Company follows FASB guidance on uncertain tax positions and has analyzed its filing positions in all the federal, state and foreign
jurisdictions where it is required to file income tax returns, as well as all open tax years in those jurisdictions. The Company
files income tax returns in the US federal, state and foreign jurisdictions where it conducts business. The Company believes that
its income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result
in a material adverse effect on its consolidated financial position, results of operations, or cash flows. Therefore, no reserves
for uncertain tax positions have been recorded. The Company does not expect its unrecognized tax benefits to change significantly
over the next twelve months.
The
Company’s policy for recording interest and penalties associated with any uncertain tax positions is to record such items
as a component of income before taxes. Penalties and interest paid or received, if any, are recorded as part of other operating
expenses in the consolidated statement of operations.
Translation
Adjustments
If
a foreign subsidiary’s functional currency is the local currency, translation adjustments will result from the process of
translating the subsidiary’s condensed financial statements into the reporting currency of the Company. Such adjustments
are accumulated and reported under other comprehensive income as a separate component of stockholder’s equity.
Earnings
(Loss) Per Share
Basic and diluted earnings (loss)
per share (EPS) are computed by dividing income available to common shareholders by the weighted-average number of shares of common
stock outstanding during the period. Diluted earnings (loss) per share is computed by dividing income available to common shareholders
by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional
shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive
securities include stock warrants and outstanding stock options, shares to be purchased by employees under the Company’s
employee stock purchase plan. Basic and diluted earnings (loss) per common share presented for the nine-month period ended September
30, 2016 has taken into account the stock split in June 2016 and share exchange for reverse acquisition on February 13, 2017 (see
Note 1).
AERKOMM
INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements - Continued
(Unaudited)
NOTE 3 –
|
Recent Accounting Pronouncements
|
Financial
Instruments
In
January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and
Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”), which updates certain aspects of
recognition, measurement, presentation and disclosure of financial instruments. ASU 2016-01 will be effective for fiscal years
beginning after March 15, 2017, including interim periods within those fiscal years and for the Company in its first quarter of
2018. The Company is currently evaluating the impact of adopting ASU 2016-01 on its consolidated financial statements.
In
June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments” (“ASU 2016-13”), which modifies the measurement of expected credit losses of
certain financial instruments. ASU 2016-13 will be effective for fiscal years beginning after March 15, 2020, including interim
periods within those fiscal years and for the Company in its first quarter of 2021, and early adoption is permitted. The Company
is currently evaluating the impact of adopting ASU 2016-13on its consolidated financial statements.
Intangibles
In
January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other” (Topic 350): Simplifying the
Test for Goodwill Impairment, which goodwill shall be tested at least annually for impairment at a level of reporting referred
to as a reporting unit. ASU 2017-04 will be effective for annual periods beginning after March 15, 2019, and interim periods within
annual periods beginning after March 15, 2020, and early adoption is permitted. The Company is currently evaluating the impact
of adopting ASU 2017-04 on its consolidated financial statements.
Stock
Compensation
In
March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation” (Topic 718): Improvements to
Employee Share-Based Payment Accounting (“ASU 2016-09”), which simplifies certain aspects of the accounting for share-based
payment transactions, including income taxes, classification of awards and classification on the statement of cash flows.
ASU 2016-09 will be effective for annual periods beginning after March 15, 2017, and interim periods within annual periods beginning
after March 15, 2018 and for the Company in its first quarter of 2019, and early adoption is permitted. The Company is currently
evaluating the impact of adopting ASU 2016-09 on its consolidated financial statements.
Revenue
Recognition
In
May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (Topic 606) (“ASU 2014-09”),
which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition
of revenue at an amount an entity expects to be entitled when products are transferred to customers. ASU 2014-09 will be effective
for annual periods beginning after March 15, 2017, and interim periods within annual periods beginning after March 15, 2018 and
for the Company in its first quarter of 2019, and early adoption is permitted.
Subsequently,
the FASB issued the following standards related to ASU 2014-09: ASU No. 2016-08, “Revenue from Contracts with Customers
(Topic 606): Principal versus Agent Considerations” (“ASU 2016-08”); ASU No. 2016-10, “Revenue from Contracts
with Customers” (Topic 606): Identifying “Performance Obligations and Licensing” (“ASU 2016-10”);
and ASU No. 2016-12, “Revenue from Contracts with Customers” (Topic 606): “Narrow-Scope Improvements and Practical
Expedients” (“ASU 2016-12”). The Company must adopt ASU 2016-08, ASU 2016-10 and ASU 2016-12 with ASU 2014-09
(collectively, the “new revenue standards”).
The
new revenue standards may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect
recognized as of the date of adoption. The Company currently expects to adopt the new revenue standards in its first quarter of
2019 utilizing the full retrospective transition method. The Company is currently evaluating the impact of adopting the new revenue
standards on its consolidated financial statements.
AERKOMM
INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements - Continued
(Unaudited)
NOTE 3 –
|
Recent Accounting Pronouncements – Continued
|
Leases
In
February 2016, the FASB issued ASU No. 2016-02, “Leases” (Topic 842) (“ASU 2016-02”), which modifies lease
accounting for both lessees and lessors to increase transparency and comparability by recognizing lease assets and lease liabilities
by lessees for those leases classified as operating leases under previous accounting standards and disclosing key information
about leasing arrangements. ASU 2016-02 will be effective for fiscal years beginning after March 15, 2018, including interim periods
within those fiscal years and for the Company in its first quarter of 2019, and early adoption is permitted. The Company is currently
evaluating the timing of its adoption and the impact of adopting ASU 2016-02 on its consolidated financial statements.
Income
Taxes
In
October 2016, FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfer of Assets Other than Inventory”
(“ASU 2016-16”), which requires the recognition of the income tax consequences of an intra-entity transfer of an asset,
other than inventory, when the transfer occurs. ASU 2016-06 will be effective for annual reporting periods beginning after March
15, 2017 and for the Company in its first quarter of 2018. The Company is currently evaluating the impact of adopting ASU 2016-16
on its consolidated financial statements.
Business
Combinations
In
January 2017, the FASB issued ASU No. 2017-01, “Business Combinations” (Topic 805): Clarifying the Definition of a
Business, which a business is an integrated set of activities and assets that is capable of being conducted and managed for the
purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to investors or other
owners, members, or participants. ASU 2017-01 will be effective for annual periods beginning after March 15, 2017, and interim
periods within annual periods beginning after March 15, 2018, and early adoption is permitted. The Company is currently evaluating
the impact of adopting ASU 2017-01 on its consolidated financial statements.
As
of September 30, 2017 and December 31, 2016, inventories consisted of the following:
|
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
Satellite equipment for sale under construction
|
|
$
|
197,645
|
|
|
$
|
197,645
|
|
|
Parts
|
|
|
15,953
|
|
|
|
11,029
|
|
|
Supplies
|
|
|
722
|
|
|
|
6,437
|
|
|
|
|
|
214,320
|
|
|
|
215,111
|
|
|
Allowance for inventory loss
|
|
|
(5,646
|
)
|
|
|
(5,382
|
)
|
|
Net
|
|
$
|
208,674
|
|
|
$
|
209,729
|
|
NOTE 5 –
|
Prepaid Investment
|
As
of September 30, 2017, the Company had paid $460,000 to Aircom Telecom, LLC (Aircom Taiwan), a Taiwan company not affiliated with
the Company, as the pre-payment of subscribed capital. As of November 10, 2017, the investment transaction has not been finalized
as it is subject to the approval of Taiwan government, which approval may not be granted.
AERKOMM
INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements - Continued
(Unaudited)
NOTE 6 –
|
Property and Equipment, Net
|
As
of September 30, 2017 and December 31, 2016, the balances of property and equipment were as follows:
|
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
Computer software and equipment
|
|
$
|
123,667
|
|
|
$
|
125,524
|
|
|
Furniture and fixture
|
|
|
10,001
|
|
|
|
3,393
|
|
|
Satellite equipment
|
|
|
275,410
|
|
|
|
-
|
|
|
|
|
|
409,078
|
|
|
|
128,917
|
|
|
Accumulated depreciation
|
|
|
(86,656
|
)
|
|
|
(43,825
|
)
|
|
Net
|
|
|
322,422
|
|
|
|
85,092
|
|
|
Construction in progress
|
|
|
3,250,000
|
|
|
|
3,660,000
|
|
|
Net
|
|
$
|
3,572,422
|
|
|
$
|
3,745,092
|
|
NOTE 7 –
|
Intangible Asset, Net
|
As
of September 30, 2017 and December 31, 2016, the cost and accumulated amortization for intangible asset were as follows:
|
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
Satellite system software
|
|
$
|
4,950,000
|
|
|
$
|
4,950,000
|
|
|
Accumulated amortization
|
|
|
(948,750
|
)
|
|
|
(577,500
|
)
|
|
Net
|
|
$
|
4,001,250
|
|
|
$
|
4,372,500
|
|
NOTE 8 –
|
Short-term Bank Loan
|
The Company
has an unsecured short-term bank credit line of $10,000 from a local bank with an annual interest rate of 4.25% as of September
30, 2017.
Income
tax expense (benefit) for the three-month and nine-month periods ended September 30, 2017 and 2016 consisted of the following:
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
(249,000
|
)
|
|
$
|
3,033
|
|
|
$
|
(816,000
|
)
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
|
800
|
|
|
|
-
|
|
|
Foreign
|
|
|
4,453
|
|
|
|
-
|
|
|
|
6,056
|
|
|
|
-
|
|
|
Total
|
|
$
|
4,453
|
|
|
$
|
(249,000
|
)
|
|
$
|
9,889
|
|
|
$
|
(816,000
|
)
|
The
following table presents a reconciliation of the income tax at statutory tax rate and the Company’s income tax at effective
tax rate for the three-month and nine-month periods ended September 30, 2017 and 2016.
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
Tax benefit at statutory rate
|
|
$
|
(472,974
|
)
|
|
$
|
(181,000
|
)
|
|
$
|
(1,541,054
|
)
|
|
$
|
(651,000
|
)
|
|
Net operating loss carryforwards (NOLs)
|
|
|
385,320
|
|
|
|
-
|
|
|
|
1,255,500
|
|
|
|
(345,000
|
)
|
|
Stock-based compensation expense
|
|
|
116,900
|
|
|
|
8,000
|
|
|
|
386,500
|
|
|
|
8,000
|
|
|
Amortization expense
|
|
|
4,500
|
|
|
|
(70,000
|
)
|
|
|
(8,400
|
)
|
|
|
(182,000
|
)
|
|
Prepayment from related parties
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
383,000
|
|
|
Others
|
|
|
(29,293
|
)
|
|
|
(6,000
|
)
|
|
|
(82,657
|
)
|
|
|
(29,000
|
)
|
|
Tax at effective tax rate
|
|
$
|
4,453
|
|
|
$
|
(249,000
|
)
|
|
$
|
9,889
|
|
|
$
|
(816,000
|
)
|
AERKOMM
INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements - Continued
(Unaudited)
NOTE 9 –
|
Income Taxes – Continued
|
Deferred
tax assets (liability) as of September 30, 2017 and December 31, 2016 consist of:
|
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
Net operating loss carryforwards (NOLs)
|
|
$
|
2,079,000
|
|
|
$
|
519,000
|
|
|
R&D expenses
|
|
|
359,000
|
|
|
|
63,000
|
|
|
Stock-based compensation expense
|
|
|
387,000
|
|
|
|
8,000
|
|
|
Excess of tax amortization over book amortization
|
|
|
(926,000
|
)
|
|
|
(230,000
|
)
|
|
Others
|
|
|
233,000
|
|
|
|
35,000
|
|
|
|
|
|
2,132,000
|
|
|
|
395,000
|
|
|
Valuation allowance
|
|
|
(2,132,000
|
)
|
|
|
(395,000
|
)
|
|
Net
|
|
$
|
-
|
|
|
$
|
-
|
|
Management does not believe the
deferred tax assets will be utilized in the near future; therefore, a full valuation allowance is provided. As of September 30,
2017 and December 31, 2016, the Company had federal NOLs of approximately $4,926,000 and $843,000, respectively, available to
reduce future federal taxable income, expiring in 2037. As of September 30, 2017 and December 31, 2016, the Company had State
NOLs of approximately $5,121,000 and $1,836,000, respectively, available to reduce future State taxable income, expiring in 2037.
As of September 30, 2017, the Company has Japan NOLs of approximately $340,000 available to reduce future Japan taxable income,
expiring in 2019.
As
of September 30, 2017 and December 31, 2016, the Company had approximately $37,000 and $37,000, of federal research and development
tax credit, respectively, available to offset future federal income tax. The credit begins to expire in 2034 if not utilized.
As of September 30, 2017 and December 31, 2016, the Company had approximately $39,000 and $39,000 of California state research
and development tax credit, respectively, available to offset future California state income tax. The credit can be carried forward
indefinitely.
The
Company is authorized to issue 50,000,000 shares of preferred stock, with par value of $0.001. As of September 30, 2017, there
were no preferred stock shares outstanding.
Board
of Directors has the authority to issue preferred stock in one or more series, and in connection with the creation of any such
series, by resolutions providing for the issuance of the shares thereof, to determine dividends, voting rights, conversion rights,
redemption privileges and liquidation preferences.
The
Company is authorized to issue 450,000,000 shares of common stock, with par value of $0.001.
Aircom
had restricted stock purchase agreements with certain employees or consultants with 2,890,000 shares granted on February 2, 2015.
The restricted shares were issued at fair values determined by the board of directors at the grant date. According to the agreements,
in the event of the voluntary termination of purchaser’s continuous service status, Aircom shall have the exclusive option
to repurchase all or any portion of the unvested shares held by purchaser at the original purchase price per share and the vested
shares held by purchaser at the fair market value per share as of the termination date. In February and June 2016, Aircom purchased
back 133,333 unvested shares of restricted stock at $0.005 per share from terminated employees before the stock split. In June
2016, the restricted stock was split to 27,566,670 shares. On February 13, 2017, all of Aircom’s restricted stock of 27,566,670
shares were converted to Aerkomm’s restricted stock of 10,279,738 shares at the ratio of 2.68165 to 1, pursuant to the Exchange
Agreement (see Note 1).
AERKOMM
INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements - Continued
(Unaudited)
NOTE 10 –
|
Capital Stock – Continued
|
As
of September 30, 2017 and December 31, 2016, the restricted stock shares (after share exchange) consisted of the following:
|
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
Restricted stock - vested
|
|
|
9,942,050
|
|
|
|
7,787,490
|
|
|
Restricted stock - unvested
|
|
|
337,688
|
|
|
|
2,492,248
|
|
|
Total restricted stock
|
|
|
10,279,738
|
|
|
|
10,279,738
|
|
The
unvested shares of restricted stock were recorded under deposit liability account awaiting future conversion to common stock when
they become vested.
On
March 31, 2017, the Company completed its private placement offering of 500,000 common shares at a price of $3 per share for the
aggregate amount of $1,500,000.
On
June 6, 2017, the Company completed its private placement offering 60,000 common shares at a price of $5.00 per share for the
aggregate amount of $300,000. Additionally, on June 6, 2017, pursuant to a settlement and release agreement with Priceplay Taiwan
Inc. (“PPTW”) dated March 31, 2017, among the Company, PPTW and Aircom, the Company issued 163,860 shares of its common
stock to PPTW in settlement of an outstanding $819,300 obligation of Aircom to PPTW. Additionally, pursuant to a similar settlement
and release agreement with Priceplay.com, Inc. (“PPUS”) dated March 31, 2017, the Company issued 147,400 shares of
its common stock to PPUS in settlement of an outstanding $737,000 obligation of Aircom to PPUS, and pursuant to a third similar
settlement and release agreement with Aircom and dMobile System Co. Ltd. (“dMobile”), it issued 94,220 shares of its
common stock to dMobile in settlement of an outstanding $471,100 obligation of Aircom to dMobile. In the aggregate, the Company
has issued 405,480 of shares to the three settlement recipients at a price of $5.00 per share for a total value of $2,027,400.
Including the 60,000 Shares sold to individuals in the Offering, the Company issued 465,480 shares in total for an aggregate value
of $2,327,400.
On
July 5, 2017, the Company completed its first closing of a private placement offering in which it sold 5,000 shares of its common
stock to Daniel Shih, the Company’s founder, at a price of $5.50 per share for a total of $27,500. The Company conducted
additional closings for a total of $1,424,973. The Company is offering a total of 461,819 shares of its common stock at a price
of $5.50 per share in this offering for the aggregate amount of $2,540,000 and may conduct additional closings up to that aggregate
amount.
As
of December 31, 2016, Aircom had issued stock warrants exercisable for $60,000 in value of its common stock to a service provider
as payment for services. The stock warrants allow the service provider to purchase a number of shares of Aircom common stock equal
to $60,000 divided by 85% of the of the share price paid by investors for Aircom’s common stock in the first subsequent
qualifying equity financing event, at an exercise price of $0.01 per share. On February 13, 2017, these stock warrants were converted
to Aerkomm’s stock warrants pursuant to the Exchange Agreement (see Note 1). For the nine-month period ended on September
30, 2017, Aerkomm issued additional stock warrants exercisable for $60,000 in value of Aerkomm common stock to the service provider
as payment for additional services. As of September 30, 2017, the Company cumulatively recorded $120,000 as additional paid-in
capital in total with respect to these warrants.
NOTE 11 –
|
Related Party Transactions
|
|
A.
|
Name
of related parties and relationships with the Company:
|
|
Related Party
|
|
Relationship
|
|
Daniel Shih (“Daniel”)
|
|
Founder/promoter and shareholder; Aircom’s CEO and Director between February 13, 2017 and April 27, 2017; CFO of Aircom between February 13, 2017 and May 5, 2017
|
|
Bummy Wu
|
|
Shareholder
|
|
Giretsu Shih
|
|
President of Aircom Japan
|
|
dMobile System Co. Ltd. (“dMobile”)
|
|
Daniel is the Chairman
|
|
Klingon Aerospace, Inc. (“Klingon”)
|
|
Daniel was the Chairman from February 2015 to February 2016
|
|
Law Office of Jan Yung Lin
|
|
100% owned by Jan
|
|
Priceplay.com, Inc. (“PPUS”)
|
|
Daniel is the Chairman
|
|
Priceplay Taiwan Inc. (“PPTW”)
|
|
Parent company of PPUS
|
|
Wealth Wide International Ltd. (“WWI”)
|
|
Bummy Wu is the Chairman
|
AERKOMM
INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements - Continued
(Unaudited)
NOTE 11 –
|
Related Party Transactions - Continued
|
|
B.
|
Significant
related party transactions:
|
The
Company has extensive transactions with its related parties. It is possible that the terms of these transactions are not the same
as those which would result from transactions among wholly unrelated parties.
|
a.
|
As
of September 30, 2017 and December 31, 2016
|
|
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
Rental deposit to Daniel
|
|
$
|
2,397
|
|
|
$
|
4,966
|
|
|
Other payable to:
|
|
|
|
|
|
|
|
|
|
PPTW
|
|
$
|
-
|
|
|
$
|
819,300
|
|
|
Klingon
|
|
|
762,000
|
|
|
|
762,000
|
|
|
dMobile
|
|
|
-
|
|
|
|
471,100
|
|
|
PPUS
|
|
|
-
|
|
|
|
737,000
|
|
|
Giretsu Shih
|
|
|
2,131
|
|
|
|
69,385
|
|
|
Daniel
|
|
|
79,602
|
|
|
|
49,500
|
|
|
Bummy Wu
|
|
|
-
|
|
|
|
32,149
|
|
|
W
W I
|
|
|
1,800
|
|
|
|
-
|
|
|
Others
|
|
|
53,735
|
|
|
|
15,141
|
|
|
Total
|
|
$
|
899,268
|
|
|
$
|
2,955,575
|
|
|
b.
|
For the three-month and nine-month periods ended
September 30,
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
Legal expense paid to Law Office of Jan-Yung Lin
|
|
$
|
-
|
|
|
$
|
10,000
|
|
|
$
|
-
|
|
|
$
|
10,000
|
|
|
Rent expense charged by Daniel
|
|
$
|
30,690
|
|
|
|
-
|
|
|
$
|
37,901
|
|
|
|
-
|
|
|
Rent expense charged by WWI
|
|
$
|
1,800
|
|
|
$
|
-
|
|
|
$
|
1,800
|
|
|
$
|
-
|
|
Aircom
Japan entered into a lease agreement with Daniel between August 1, 2014 and July 31, 2016, which was renewed to expire on July
31, 2018. Pursuant to the terms of this lease agreement, Aircom Japan pays Daniel a rental fee of approximately $1,215 per month.
NOTE 12 –
|
Stock Based Compensation
|
In
March 2014, Aircom’s Board of Directors adopted the 2014 Stock Option Plan (the “Aircom 2014 Plan”), which provided
for the granting of incentive stock options and non-statutory stock options to employees, consultants and outside directors of
Aircom. Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock Options, as determined by the Administrator
at the time of grant of an Option. On February 13, 2017, pursuant to the Exchange Agreement, Aerkomm assumed the options of Aircom
2014 Plan and agreed to issue options for an aggregate of 5,444,407 shares to Aircom’s stock option holders.
One-third
of the total option shares will be vested as of the first anniversary of the time the option shares are granted or the employee’s
acceptance to serve the Company, and 1/36th of the shares will be vested each month thereafter. Option price is determined by
the Board of Directors. The Plan has been adopted by the Board and shall continue in effect for a term of 10 years unless sooner
terminated under the terms of Aircom 2014 Plan.
AERKOMM
INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements - Continued
(Unaudited)
NOTE 12 –
|
Stock Based Compensation - Continued
|
On
May 5, 2017, the Board of Directors of Aerkomm adopted the Aerkomm Inc. 2017 Equity Incentive Plan (the “Aerkomm 2017 Plan”
or, the “Plan”) and the reservation of 5,000,000 shares of the Company’s common stock for issuance under the
Plan. On June 23, 2017, the Board of Directors voted to increase the number of shares of the Company’s common stock reserved
for issuance under the Plan to 10,000,000 shares. The Aerkomm 2017 Plan provides for the granting of incentive stock options and
non-statutory stock options to employees, consultants and outside directors of Aircom. Options granted under the Plan may be Incentive
Stock Options or Nonstatutory Stock Options, as determined by the Administrator at the time of grant of an Option. On June 23,
2017, the Board of Directors agreed to issue options for an aggregate of 1,455,000 shares under the Aerkomm 2017 Plan to certain
officers and directors of Aerkomm.
The
option agreements granted on June 23, 2017 are classified into three types of vesting schedule, which includes, 1) 1/6 of the
shares subject to the option shall vest commencing on the vesting start date and the remaining shares shall vest at the rate of
1/60 for the next 60 months on the same day of the month as the vesting start date; 2) 1/4 of the shares subject to the option
shall vest commencing on the vesting start date and the remaining shares shall vest at the rate of 1/36 for the next 36 months
on the same day of the month as the vesting start date; 3) 1/3 of the shares subject to the option shall vest commencing on the
first anniversary of vesting start date and the remaining shares shall vest at the rate of 50% each year for the next two years
on the same day of the month as the vesting start date. Option price is determined by the Board of Directors. The Plan has been
adopted by the Board and shall continue in effect for a term of 10 years unless sooner terminated under the terms of Aerkomm 2017
Plan. The Plan has not yet been approved by Aerkomm’s stockholders.
Valuation
and Expense Information
Measurement
and recognition of compensation expense based on estimated fair values is required for all share-based payment awards made to
its employees and directors including employee stock options. The Company recognized compensation expense of $343,835 and $22,600
for the three-month periods ended September 30, 2017 and 2016, respectively, and $1,136,835 and $22,600 for the nine-month periods
ended September 30, 2017, respectively, related to such employee stock options.
Determining
Fair Value
Valuation
and amortization method
The
Company uses the Black-Scholes option-pricing-model to estimate the fair value of stock options granted on the date of grant or
modification and amortizes the fair value of stock-based compensation at the date of grant on a straight-line basis for recognizing
stock compensation expense over the vesting period of the option.
Expected
term
The
expected term is the period of time that granted options are expected to be outstanding. The Company uses the SEC’s simplified
method for determining the option expected term based on the Company’s historical data to estimate employee termination
and options exercised.
Expected
dividends
The
Company does not plan to pay cash dividends before the options are expired. Therefore, the expected dividend yield used in the
Black-Scholes option valuation model is zero.
Expected
volatility
Since
the Company has no historical volatility, the Company used the calculated value method, which utilizes the historical volatility
of a publicly listed company in the same industry as the expected volatility for the Company, in calculating the fair value of
options granted under Aircom 2014 Plan and Aerkomm 2017 Plan.
Risk-free
interest rate
The
Company based the risk-free interest rate used in the Black-Scholes option valuation model on the market yield in effect at the
time of option grant provided in the Federal Reserve Board’s Statistical Releases and historical publications on the Treasury
constant maturities rates for the equivalent remaining terms for Aircom 2014 Plan and Aerkomm 2017 Plan.
AERKOMM
INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements - Continued
(Unaudited)
NOTE 12 –
|
Stock Based Compensation - Continued
|
Forfeitures
The
Company is required to estimate forfeitures at the time of grant and revises those estimates in subsequent periods if actual forfeitures
differ from those estimates. The Company uses historical data to estimate option forfeitures and records share-based compensation
expense only for those awards that are expected to vest.
The Company
used the following assumptions to estimate the fair value of options granted in 2015 and 2016 under Aircom 2014 Plan and Aerkomm
2017 Plan as follows:
|
Assumptions
|
|
|
|
|
Expected term
|
|
|
3 - 5 years
|
|
|
Expected volatility
|
|
|
40.11 - 59.18
|
%
|
|
Expected dividends
|
|
|
0
|
%
|
|
Risk-free interest rate
|
|
|
0.71 -
2.30
|
%
|
|
Forfeiture rate
|
|
|
0 - 5
|
%
|