UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2023
or
☐ TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to
_____________
Commission File Number: 000-55925
AERKOMM INC.
(Exact name of registrant as specified in its charter)
Nevada | | 46-3424568 |
(State or other jurisdiction of
incorporation or organization) | | (I.R.S. Employer
Identification No.) |
44043 Fremont Blvd., Fremont, CA 94538
(Address of principal executive offices, Zip Code)
(877) 742-3094
(Registrant’s telephone number, including
area code)
(Former name, former address and former fiscal
year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
None | | N/A | | N/A |
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.
See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”
and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | | Accelerated filer ☐ |
| Non-accelerated filer ☒ | | Smaller reporting company ☒ |
| | | Emerging growth company ☐ |
If an emerging growth company, indicate by check
mark if the registrant has elected not to use the extended transition period for comply with any new or revised financial accounting standards
provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of January 18, 2024, there were 16,869,613 shares
of the registrant’s common stock issued and outstanding.
AERKOMM INC.
Quarterly Report on Form 10-Q
Period Ended September 30, 2023
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
AERKOMM INC.
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AERKOMM INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Balance Sheets
|
|
September 30,
2023 |
|
|
December 31,
2022 |
|
|
|
(Unaudited) |
|
|
|
|
Assets |
|
|
|
|
|
|
Current Assets |
|
|
|
|
|
|
Cash |
|
$ |
253,278 |
|
|
$ |
6,878,362 |
|
Short-term investment |
|
|
3,614,358 |
|
|
|
2,009,238 |
|
Inventories, net |
|
|
1,366,282 |
|
|
|
1,366,282 |
|
Prepaid expenses |
|
|
9,994,150 |
|
|
|
6,030,516 |
|
Other receivable – related parties |
|
|
1,440,369 |
|
|
|
308,544 |
|
Other current assets |
|
|
149,920 |
|
|
|
152,349 |
|
Total Current Assets |
|
|
16,818,357 |
|
|
|
16,745,291 |
|
Long-term Investment |
|
|
4,047,767 |
|
|
|
4,572,243 |
|
Property and Equipment |
|
|
|
|
|
|
|
|
Cost |
|
|
4,078,306 |
|
|
|
4,011,883 |
|
Accumulated depreciation |
|
|
(3,000,979 |
) |
|
|
(2,486,836 |
) |
|
|
|
1,077,327 |
|
|
|
1,525,047 |
|
Prepayment for land |
|
|
34,074,113 |
|
|
|
35,748,435 |
|
Prepayment for equipment |
|
|
308,542 |
|
|
|
458,998 |
|
Net Property and Equipment |
|
|
35,459,982 |
|
|
|
37,732,480 |
|
Other Assets |
|
|
|
|
|
|
|
|
Prepaid expenses – non-current |
|
|
2,239,552 |
|
|
|
1,995,937 |
|
Restricted cash |
|
|
3,224,355 |
|
|
|
3,223,558 |
|
Intangible asset, net |
|
|
1,031,250 |
|
|
|
1,402,500 |
|
Goodwill |
|
|
21,236,856 |
|
|
|
4,561,037 |
|
Right-of-use assets, net |
|
|
245,498 |
|
|
|
92,451 |
|
Deposits |
|
|
538,565 |
|
|
|
315,015 |
|
Total Other Assets |
|
|
28,516,076 |
|
|
|
11,590,498 |
|
Total Assets |
|
$ |
84,842,182 |
|
|
$ |
70,640,512 |
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity |
|
|
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
|
|
Short-term loans |
|
$ |
982,468 |
|
|
$ |
1,316,253 |
|
Accounts payable |
|
|
1,564,627 |
|
|
|
1,950,939 |
|
Accrued expenses |
|
|
4,171,413 |
|
|
|
2,433,400 |
|
Other payable – related parties |
|
|
884,382 |
|
|
|
340,467 |
|
Other payable – others |
|
|
11,214,678 |
|
|
|
5,017,040 |
|
Prepayment from customer – related party |
|
|
2,163,034 |
|
|
|
1,258,786 |
|
Long-term loan - current |
|
|
7,575 |
|
|
|
11,271 |
|
Lease liability – current |
|
|
150,818 |
|
|
|
131,181 |
|
Total Current Liabilities |
|
|
21,138,995 |
|
|
|
12,459,337 |
|
Long-term Liabilities |
|
|
|
|
|
|
|
|
Long-term bonds payable |
|
|
9,517,690 |
|
|
|
9,137,006 |
|
Convertible long-term note payable |
|
|
23,173,200 |
|
|
|
23,173,200 |
|
Long-term loan – non-current |
|
|
79,242 |
|
|
|
5,027 |
|
Contract liability – non-current |
|
|
762,000 |
|
|
|
762,000 |
|
Lease liability – non-current |
|
|
145,236 |
|
|
|
35,172 |
|
Restricted stock deposit liability |
|
|
1,000 |
|
|
|
1,000 |
|
Total Long-Term Liabilities |
|
|
33,678,368 |
|
|
|
33,113,405 |
|
Total Liabilities |
|
|
54,817,363 |
|
|
|
45,572,742 |
|
Stockholders’ Equity |
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value, 50,000,000 shares authorized, 0 shares issued and outstanding as of September 30, 2023 and December 31, 2022 |
|
|
- |
|
|
|
- |
|
Common stock, $0.001 par value, 90,000,000 shares authorized, 16,720,451 shares and 9,720,003 shares (excluding 149,162 unvested restricted shares) issued and outstanding as of September 30, 2023 and December 31, 2022 |
|
|
16,720 |
|
|
|
9,720 |
|
Additional paid in capital |
|
|
96,425,743 |
|
|
|
79,078,005 |
|
Accumulated deficits |
|
|
(65,191,369 |
) |
|
|
(53,645,981 |
) |
Accumulated other comprehensive loss |
|
|
(1,226,275 |
) |
|
|
(373,974 |
) |
Total Stockholders’ Equity |
|
|
30,024,819 |
|
|
|
25,067,770 |
|
Total Liabilities and Stockholders’ Equity |
|
$ |
84,842,182 |
|
|
$ |
70,640,512 |
|
The accompanying notes are an integral part of
these unaudited condensed consolidated financial statements.
AERKOMM INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of
Operations and Comprehensive Loss
|
|
Three-Month Period Ended
September 30, |
|
|
Nine-Month Period Ended
September 30, |
|
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
|
|
(Unaudited) |
|
|
(Unaudited) |
|
|
(Unaudited) |
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales – Related Party |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
446,367 |
|
|
$ |
- |
|
Service Income – Related Party |
|
|
61,582 |
|
|
|
2,855 |
|
|
|
61,582 |
|
|
|
6,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue |
|
|
61,582 |
|
|
|
2,855 |
|
|
|
507,949 |
|
|
|
6,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales |
|
|
26,666 |
|
|
|
- |
|
|
|
472,115 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit |
|
|
34,916 |
|
|
|
2,855 |
|
|
|
35,834 |
|
|
|
6,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses |
|
|
4,303,845 |
|
|
|
2,380,851 |
|
|
|
11,577,414 |
|
|
|
6,075,775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from Operations |
|
|
(4,268,929 |
) |
|
|
(2,377,996 |
) |
|
|
(11,541,580 |
) |
|
|
(6,069,702 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Operating Income (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange (loss) gain |
|
|
(806,619 |
) |
|
|
(1,318,614 |
) |
|
|
(1,126,762 |
) |
|
|
(2,602,872 |
) |
Bond issuance cost |
|
|
(128,663 |
) |
|
|
(121,703 |
) |
|
|
(380,684 |
) |
|
|
(360,089 |
) |
Unrealized gain (loss) on investments |
|
|
(1,320,206 |
) |
|
|
(25 |
) |
|
|
1,770,888 |
|
|
|
(21,157 |
) |
Other income (loss), net |
|
|
100,372 |
|
|
|
11,799 |
|
|
|
(264,850 |
) |
|
|
34,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Non-Operating (Loss) Income |
|
|
(2,155,116 |
) |
|
|
(1,428,543 |
) |
|
|
(1,408 |
) |
|
|
(2,949,378 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before Income Taxes |
|
|
(6,424,045 |
) |
|
|
(3,806,539 |
) |
|
|
(11,542,988 |
) |
|
|
(9,019,080 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax Expense |
|
|
- |
|
|
|
- |
|
|
|
2,400 |
|
|
|
1,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
|
(6,424,045 |
) |
|
|
(3,806,539 |
) |
|
|
(11,545,388 |
) |
|
|
(9,020,680 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in foreign currency translation adjustments |
|
|
(569,911 |
) |
|
|
1,290,912 |
|
|
|
(852,301 |
) |
|
|
2,482,003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Loss |
|
$ |
(6,993,956 |
) |
|
$ |
(2,515,627 |
) |
|
$ |
(12,397,689 |
) |
|
$ |
(6,538,677 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss Per Common Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.6410 |
) |
|
$ |
(0.3857 |
) |
|
$ |
(1.1638 |
) |
|
$ |
(0.9140 |
) |
Diluted |
|
$ |
(0.6410 |
) |
|
$ |
(0.3857 |
) |
|
$ |
(1.1638 |
) |
|
$ |
(0.9140 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares Outstanding - Basic |
|
|
10,021,349 |
|
|
|
9,869,165 |
|
|
|
9,920,450 |
|
|
|
9,869,165 |
|
Weighted Average Shares Outstanding - Diluted |
|
|
10,021,349 |
|
|
|
9,869,165 |
|
|
|
9,920,450 |
|
|
|
9,869,165 |
|
The accompanying notes are an integral part of
these unaudited condensed consolidated financial statements.
AERKOMM INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of
Changes in Stockholders’ Equity
For the nine months ended September 30, 2022
| |
Common Stock | | |
Additional Paid in | | |
Accumulated | | |
Accumulated Other Comprehensive | | |
Total Stockholders’ | |
| |
Shares | | |
Amount | | |
Capital | | |
Deficits | | |
Income (Loss) | | |
Equity | |
Balance as of January 1, 2022 | |
| 9,715,889 | | |
$ | 9,716 | | |
$ | 77,825,976 | | |
$ | (41,767,258 | ) | |
$ | (1,896,158 | ) | |
$ | 34,172,276 | |
Stock compensation expense | |
| - | | |
| - | | |
| 246,999 | | |
| - | | |
| - | | |
| 246,999 | |
Other comprehensive income | |
| - | | |
| - | | |
| - | | |
| - | | |
| 518,027 | | |
| 518,027 | |
Net loss for the period | |
| - | | |
| - | | |
| - | | |
| (2,479,213 | ) | |
| - | | |
| (2,479,213 | ) |
Balance as of March 31, 2022 | |
| 9,715,889 | | |
| 9,716 | | |
| 78,072,975 | | |
| (44,246,471 | ) | |
| (1,378,131 | ) | |
| 32,458,089 | |
Issuance of common stock | |
| 4,114 | | |
| 4 | | |
| 32,908 | | |
| - | | |
| - | | |
| 32,912 | |
Stock compensation expense | |
| - | | |
| - | | |
| 712,341 | | |
| - | | |
| - | | |
| 712,341 | |
Other comprehensive income | |
| - | | |
| - | | |
| - | | |
| - | | |
| 673,064 | | |
| 673,064 | |
Net loss for the period | |
| - | | |
| - | | |
| - | | |
| (2,734,928 | ) | |
| - | | |
| (2,734,928 | ) |
Balance as of June 30, 2022 | |
| 9,720,003 | | |
| 9,720 | | |
| 78,818,224 | | |
| (46,981,399 | ) | |
| (705,067 | ) | |
| 31,141,478 | |
Issuance of common stock | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Stock compensation expense | |
| - | | |
| - | | |
| 59,842 | | |
| - | | |
| - | | |
| 59,842 | |
Other comprehensive income | |
| - | | |
| - | | |
| - | | |
| - | | |
| 1,290,912 | | |
| 1,290,912 | |
Net loss for the period | |
| - | | |
| - | | |
| - | | |
| (3,806,539 | ) | |
| - | | |
| (3,806,539 | ) |
Balance as of September 30, 2022 | |
| 9,720,003 | | |
$ | 9,720 | | |
$ | 78,878,066 | | |
$ | (50,787,938 | ) | |
$ | 585,845 | | |
$ | 28,685,693 | |
For the nine months ended September 30, 2023
| |
Common Stock | | |
Additional Paid in | | |
Accumulated | | |
Accumulated Other Comprehensive | | |
Total Stockholders’ | |
| |
Shares | | |
Amount | | |
Capital | | |
Deficits | | |
Income (Loss) | | |
Equity | |
Balance as of January 1, 2023 | |
| 9,720,003 | | |
$ | 9,720 | | |
$ | 79,078,005 | | |
$ | (53,645,981 | ) | |
$ | (373,974 | ) | |
$ | 25,067,770 | |
Stock compensation expense | |
| - | | |
| - | | |
| 54,891 | | |
| - | | |
| - | | |
| 54,891 | |
Other comprehensive income | |
| - | | |
| - | | |
| - | | |
| - | | |
| 134,254 | | |
| 134,254 | |
Net loss for the period | |
| - | | |
| - | | |
| - | | |
| (3,754,436 | ) | |
| - | | |
| (3,754,436 | ) |
Balance as of March 31, 2023 | |
| 9,720,003 | | |
$ | 9,720 | | |
$ | 79,132,896 | | |
$ | (57,400,417 | ) | |
$ | (239,720 | ) | |
$ | 21,502,479 | |
Issuance of common stock | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Stock compensation expense | |
| - | | |
| - | | |
| 209,995 | | |
| - | | |
| - | | |
| 209,995 | |
Other comprehensive income | |
| - | | |
| - | | |
| - | | |
| - | | |
| (416,644 | ) | |
| (416,644 | ) |
Net loss for the period | |
| - | | |
| - | | |
| - | | |
| (1,366,907 | ) | |
| - | | |
| (1,366,907 | ) |
Balance as of June 30, 2023 | |
| 9,720,003 | | |
$ | 9,720 | | |
$ | 79,342,891 | | |
| (58,767,324 | ) | |
| (656,364 | ) | |
| 19,928,923 | |
Issuance of common stock | |
| 7,000,448 | | |
| 7,000 | | |
| 16,493,000 | | |
| - | | |
| - | | |
| 16,500,000 | |
Stock compensation expense | |
| - | | |
| - | | |
| 589,852 | | |
| - | | |
| - | | |
| 589,852 | |
Other comprehensive income | |
| - | | |
| - | | |
| - | | |
| - | | |
| (569,911 | ) | |
| (569,911 | ) |
Net loss for the period | |
| - | | |
| - | | |
| - | | |
| (6,424,045 | ) | |
| - | | |
| (6,424,045 | ) |
Balance as of September 30, 2023 | |
| 16,720,451 | | |
$ | 16,720 | | |
$ | 96,425,743 | | |
$ | (65,191,369 | ) | |
$ | (1,226,275 | ) | |
$ | 30,024,819 | |
The accompanying notes are an integral part of
these unaudited condensed consolidated financial statements.
AERKOMM INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of
Cash Flows
|
|
For the
Nine Months Ended
September 30, |
|
|
|
2023 |
|
|
2022 |
|
|
|
(Unaudited) |
|
|
(Unaudited) |
|
Cash Flows from Operating Activities |
|
|
|
|
|
|
Net loss |
|
$ |
(11,545,388 |
) |
|
$ |
(9,020,680 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
897,046 |
|
|
|
769,394 |
|
Amortization of Right of Use Assets |
|
|
75,899 |
|
|
|
8,840 |
|
Stock-based compensation |
|
|
847,738 |
|
|
|
1,019,182 |
|
Unrealized (gain) loss on investments |
|
|
(1,770,888 |
) |
|
|
21,157 |
|
Amortization of bonds issuance costs |
|
|
380,684 |
|
|
|
360,089 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
- |
|
|
|
75,180 |
|
Prepaid expenses |
|
|
(4,134,587 |
) |
|
|
(1,999,853 |
) |
Other current assets |
|
|
(1,129,394 |
) |
|
|
(216,499 |
) |
Deposits |
|
|
(223,550 |
) |
|
|
10,386 |
|
Accounts payable |
|
|
(386,312 |
) |
|
|
262,419 |
|
Accrued expenses and other current liabilities |
|
|
9,622,337 |
|
|
|
1,526,171 |
|
Operating lease liability |
|
|
(5,902 |
) |
|
|
(195,544 |
) |
Net Cash Used for Operating Activities |
|
|
(7,372,317 |
) |
|
|
(7,379,758 |
) |
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|
Proceeds from disposal of short-term investment |
|
|
- |
|
|
|
(1,416,142 |
) |
Proceeds from disposal of long-term investment |
|
|
325,578 |
|
|
|
- |
|
Proceeds from sales of trading security |
|
|
- |
|
|
|
7,823 |
|
Purchase of property and equipment |
|
|
(379,128 |
) |
|
|
(11,462 |
) |
Net Cash Used by Investing Activities |
|
|
(53,550 |
) |
|
|
(1,419,781 |
) |
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock |
|
|
7,000 |
|
|
|
- |
|
Repayment of short-term loan |
|
|
(384,189 |
) |
|
|
- |
|
Proceeds from short-term loan |
|
|
- |
|
|
|
9,015,361 |
|
Repayment of long-term loan |
|
|
(8,723 |
) |
|
|
(11,065 |
) |
Payment on finance lease liability |
|
|
(8,619 |
) |
|
|
(9,279 |
) |
Net Cash (Used) Provided by Financing Activities |
|
|
(394,531 |
) |
|
|
8,995,017 |
|
|
|
|
|
|
|
|
|
|
Net (Decrease) Increase in Cash and Restricted Cash |
|
|
(7,820,398 |
) |
|
|
195,478 |
|
Cash and Restricted Cash, Beginning of Period |
|
|
10,101,920 |
|
|
|
3,288,813 |
|
Foreign Currency Translation Effect on Cash |
|
|
1,196,111 |
|
|
|
2,482,003 |
|
Cash and Restricted Cash, End of Period |
|
$ |
3,477,633 |
|
|
$ |
5,966,294 |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid during the period for income taxes |
|
$ |
2,400 |
|
|
$ |
1,600 |
|
Cash paid during the period for interest |
|
|
- |
|
|
|
18,819 |
|
|
|
|
|
|
|
|
|
|
Cash and Restricted Cash: |
|
|
|
|
|
|
|
|
Cash |
|
$ |
253,278 |
|
|
$ |
2,745,708 |
|
Restricted cash |
|
|
3,224,355 |
|
|
|
3,220,586 |
|
Total |
|
$ |
3,477,633 |
|
|
$ |
5,966,294 |
|
The accompanying notes are an integral part of
these unaudited condensed consolidated financial statements.
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial
Statements
NOTE 1 - Organization
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. Aerkomm’s
common stock is quoted for trading on the OTC Markets Group Inc. OTCQX Market under the symbol “AKOM.” On July 17, 2019, the
French Autorité des Marchés Financiers (the “AMF”) granted visa number 19-372 on the prospectus relating
to the admission of Aerkomm’s common stock to list and trade on the Professional Segment of the regulated market of Euronext Paris
(“Euronext Paris”). Aerkomm’s common stock began trading on Euronext Paris on July 23, 2019 under the symbol “AKOM”
and is denominated in Euros on Euronext Paris. This listing did not alter Aerkomm’s share count, capital structure, or current common
stock listing on the OTCQX, where it is also traded (in US dollars) under the symbol “AKOM.”
On December 28, 2016, Aircom Pacific
Inc. (“Aircom”) purchased approximately 86.3% of Aerkomm’s issued and outstanding common stock as of the closing date
of purchase. As a result of the transaction, Aircom became the controlling shareholder of Aerkomm. Aircom was incorporated on September
29, 2014 under the laws of the State of California.
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. 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.
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. On November 8, 2021, Aircom Seychelles changed its name to Aerkomm SY Ltd. (“Aerkomm SY”) and the ownership
was transferred from Aircom to Aerkomm. Aerkomm SY was formed to facilitate Aircom’s global corporate structure for both business
operations and tax planning. Presently, Aerkomm SY has no operations. Aerkomm 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. On
November 8, 2021, Aircom HK changed its name to Aerkomm Hong Kong Limited (“Aerkomm HK”) and its ownership was transferred
from Aircom to Aerkomm. The purpose of Aerkomm HK is to conduct Aircom’s business and operations in Hong Kong. Presently, its primary
function is business development, both with respect to airlines as well as content providers and advertisement partners based in Hong
Kong. Aerkomm HK is also actively seeking strategic partnerships whom Aerkomm may leverage in order to provide more and better services
to its customers. Aerkomm also plans to provide local supports to Hong Kong-based airlines via Aerkomm HK and teleports located in Hong
Kong.
On December 15, 2016, Aircom acquired
a wholly owned subsidiary, Aircom Japan, Inc. (“Aircom Japan”), a corporation formed under the laws of Japan. On November
9, 2021, Aircom Japan changed its name to Aerkomm Japan, Inc. (“Aerkomm Japan”) and its ownership was transferred from Aircom
to Aerkomm. The purpose of Aerkomm. The purpose of Aerkomm Japan is to conduct business development and operations located within Japan.
Aerkomm Japan is in the process of applying for, and will be the holder of, Satellite Communication Blanket License in Japan, which is
necessary for Aerkomm to provide services within Japan. Aerkomm Japan will also provide local supports to airlines operating within the
territory of Japan.
Aircom Telecom LLC (“Aircom Taiwan”),
which became a wholly owned subsidiary of Aircom in December 2017, was organized under the laws of Taiwan on June 29, 2016. Aircom Taiwan
is responsible for Aircom’s business development efforts and general operations within Taiwan.
On June 13, 2018, Aerkomm established
a then wholly owned subsidiary, Aerkomm Taiwan Inc. (“Aerkomm Taiwan”), a corporation formed under the laws of Taiwan. The
purpose of Aerkomm Taiwan is to purchase a parcel of land and raise sufficient fund for ground station building and operate the ground
station for data processing (although that cannot be guaranteed). On December 29, 2022, Aerkomm and dMobile System Co., Ltd. (the “Buyer”)
entered into an equity sales contract pursuant to the terms of which Aerkomm sold a majority interest of 25,500,000 shares (the “Shares”)
of Aerkomm Taiwan to the Buyer for NT$255,000,000 (approximately US $9,023,354 as of December 31, 2022).
On November 15, 2018, Aircom Taiwan
acquired a wholly owned subsidiary, Beijing Yatai Communication Co., Ltd. (“Beijing Yatai”), a corporation formed under the
laws of China. The purpose of Beijing Yatai is to conduct Aircom’s business and operations in China. Presently, its primary function
is business development, both with respect to airlines as well as content providers and advertisement partners based in China as most
business conducted in China requires a local registered company. Beijing Yatai 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 China-based
airlines via Beijing Yatai and teleports located in China. On November 6, 2020, 100% ownership of Beijing Yatai was transferred from Aircom
Taiwan to Aerkomm Taiwan.
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial
Statements
NOTE 1 - Organization - Continued
On October 31, 2019, Aerkomm SY established
a new a wholly owned subsidiary, Aerkomm Pacific Limited (“Aerkomm Malta”), a corporation formed under the laws of Malta.
The purpose of Aerkomm Malta is to conduct Aerkomm’s business and operations and to engage with suppliers and potential airlines
customers in the European Union.
The Company’s organization structure
is as following:
On September 04, 2022, Aerkomm acquired
a wholly owned subsidiary, MEPA Labs Inc. (MEPA), a California corporation. The purpose of the acquisition is to extend business development
and operations related to the satellite products.
On September 28, 2023, Aerkomm acquired
a wholly owned subsidiary, Mixnet Technology Limited (Mixnet) and its wholly owned subsidiary, Mesh Technology Taiwan Limited (Mesh),
a Taiwan company. The purpose of the acquisition is to extend business development and operations related to the satellite products. Mixnet's
name changed to Mesh Technology Limited as of September 7, 2023.
Aerkomm and its subsidiaries (the “Company”)
are full-service, development stage providers of in-flight entertainment and connectivity solutions with their initial market in the Asian
Pacific region.
The Company has not generated significant
revenues, excluding non-recurring revenues, and will incur additional expenses as a result of being a public reporting company. Currently,
the Company has taken measures that management believes will improve its financial position by financing activities, including through
public offerings, private placements, short-term borrowings and equity contributions. Two of the Company’s current shareholders
(the “Lenders”) each committed to provide to the Company a $10 million bridge loan (together, the “Loans”) for
an aggregate principal amount of $20 million, to bridge the Company’s cash flow needs prior to its obtaining a mortgage loan to
be secured by a parcel of land (the “Land”) the Company purchased in Taiwan. The Lenders also agreed to an earlier closing
of up to 25% of the principal amounts of the Loans upon the Company’s request prior to the time that title to the Land is vested
in the Company’s subsidiary, Aerkomm Taiwan, to pay the outstanding payable to the Company’s vendors. On April 25, 2022, the
Lenders further amended the commitment and agreed to increase the percentage of earlier closing amount from 25% to 100% and the full $20
million is available to the Company.
With the $20 million in Loans committed
by the Lenders and our holdings of marketable securities in Ejectt, the Company believes its working capital will be adequate to sustain
its operations for the next sixteen months. However, there is no assurance that management will be successful in furthering the Company’s
business plan, especially if the Company is not able to raise additional funding from the above sources or from other sources. There are
a number of additional factors that could potentially arise that could result in shortfalls in the Company’s business plan, such
as general worldwide economic conditions, competitive pricing in the connectivity industry, the continuing impact of the COVID 19 pandemic,
the Company’s operating results continuing to deteriorate and the Company’s banks and shareholders not being able to provide
continued financial support.
The Company’s common stock is
quoted for trading on the OTC Markets Group Inc. OTCQX Market under the symbol “AKOM.” On July 17, 2019, the French Autorité
des Marchés Financiers (the “AMF”) granted visa number 19-372 on the prospectus relating to the admission of the
Company’s common stock to list and trade on the Professional Segment of the regulated market of Euronext Paris (“Euronext
Paris”). The Company’s common stock began trading on Euronext Paris on July 23, 2019 under the symbol “AKOM” and
is denominated in Euros on Euronext Paris. This listing did not alter the Company’s share count, capital structure, or current common
stock listing on the OTCQX, the Company’s primary trading market for its common stock.
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial
Statements
NOTE 2 - Summary of Significant Accounting Policies
Unaudited Interim Financial Information
The accompanying condensed consolidated
balance sheet as of September 30, 2023, and the condensed consolidated statements of operations and comprehensive loss and cash flows
for the nine months ended September 30, 2023 and 2022 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,
2023 and the results of operations and cash flows for the nine months ended September 30, 2023 and 2022. The financial data and other
information disclosed in these notes to the condensed consolidated financial statements related to these nine months periods are unaudited.
The results of operations for the nine months ended September 30, 2023 are not necessarily indicative of the results to be expected for
the year ending December 31, 2023 or for any other interim period or other future year.
Principle of Consolidation
Aerkomm consolidates the accounts of
its subsidiaries, Mixnet, Mesh, MEPA, Aircom, Aircom Seychelles, Aircom HK, Aircom Japan, Aircom Taiwan, Aerkomm Taiwan, Beijing Yatai
and Aerkomm Malta. All significant intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications of Prior Year Presentation
Certain prior year balance sheet, and
cash flow statement amounts have been reclassified for consistency with the current year presentation. These reclassifications had no
effect on the reported results of operations.
Use of Estimates
The preparation of 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 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. As of September 30, 2023 and December
31, 2022, the total balance of cash in bank exceeding the amount insured by the Federal Deposit Insurance Corporation (FDIC) for the Company
was approximately $0 and $6,153,000, respectively. The balance of cash deposited in foreign financial institutions exceeding
the amount insured by local insurance is approximately $3,153,000 and $3,134,000 as of September 30, 2023 and December 31, 2022, respectively.
The Company performs ongoing credit
evaluation of its customers and requires no collateral. An allowance for doubtful accounts is provided based on a review of the collectability
of accounts receivable. The Company determines the amount of allowance for doubtful accounts by examining its historical collection experience
and current trends in the credit quality of its customers as well as its internal credit policies. Actual credit losses may differ from
management’s estimates.
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial
Statements
NOTE 2 - Summary of Significant Accounting Policies - Continued
Investment in Equity Securities
According to FASB issued Accounting
Standards Updates 2016-01 (ASU 2016-01), it requires equity investments (except those accounted for under the equity method of accounting
or those that result in consolidation of the investee) to be measured at fair value with changes in fair value being recorded in current
period earnings, impacting the net income. For the investments in equity securities without readily determinable fair values, the investments
may be recorded at cost, subject to impairment, and adjusted through net income for observable price changes.
Holdings of marketable equity securities
with no significant influence over the investee are accounted for using cost method. Marketable equity security costs are initially recognized
at fair value plus transaction costs which are directly attributable to the acquisition. The cost of the securities sold is based on the
weighted average cost method. Stock dividends from the investment are included to recalculate the cost basis of the investment based on
the total number of shares.
Accounts receivable
The Company adopted ASU 2016-13, Financial
Instruments - Credit Losses (Topic 326), which requires the Company to estimate all expected credit losses for financial assets measured
at amortized cost basis, including trade receivables, based on historical experience, current market conditions and supportable forecasts.
The Company’s accounts receivable are carried at the amounts invoiced to customer. The risk of credit loss is mitigated by the Company’s
credit evaluation process. Receivables are presented as net of an allowance for credit losses. Allowances for expected credit losses are
determined based on an assessment of historical experience, the current economic conditions, future expectations of economic conditions,
future expectation regarding customer solvency, and other collection factors. The Company will apply adjustments for specific factors
and current economic conditions as needed at each reporting date. As of September 30, 2023 and December 31, 2022, the Company had $0 Account
Receivable. Therefore, allowances for expected credit losses were $0 as of September 30, 2023 and December 31, 2022.
Inventories
Inventories are recorded at the lower
of weighted-average cost or net realizable value. 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 write down
cost for losses.
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 methods over the following estimated service lives: ground station equipment – 5 years, computer
equipment - 3 to 5 years, furniture and fixtures - 5 years, satellite equipment – 5 years, vehicles – 5 to 6 years and lease
improvement – 5 years or remaining lease term, whichever is shorter.
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 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 years ended September 30, 2023 and December 31, 2022.
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial
Statements
NOTE 2 - Summary of Significant Accounting Policies - Continued
Right-of-Use Asset and Lease Liability
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 and finance leases under previous accounting standards and disclosing key information about leasing arrangements.
A lessee should recognize the lease
liability to make lease payments and the right-of-use asset representing its right to use the underlying asset for the lease term. For
operating leases and finance leases, a right-of-use asset and a lease liability are initially measured at the present value of the lease
payments by discount rates. The Company’s lease discount rates are generally based on its incremental borrowing rate, as the discount
rates implicit in the Company’s leases is readily determinable. Operating leases are included in operating lease right-of-use assets
and lease liabilities in the consolidated balance sheets. Finance leases are included in property and equipment and lease liability in
our consolidated balance sheets. Lease expense for operating expense payments is recognized on a straight-line basis over the lease term.
Interest and amortization expenses are recognized for finance leases on a straight-line basis over the lease term.
For the leases with a term of twelve
months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets
and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line
basis over the lease term.
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. 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 and restricted cash, short-term investment, accounts receivable, inventory, prepaid expenses, other receivable, accounts payable,
short-term loan, accrued expenses, and other payable approximated their fair value due to the short-term nature of these financial instruments. The
Company’s long-term bonds payable, long-term notes payable, long-term loan and lease payable approximated the carrying amount as
its interest rate is considered as approximate to the current rate for comparable loans and leases, respectively. There were no outstanding
derivative financial instruments as of September 30, 2023 and December 31, 2022.
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial
Statements
NOTE 2 - Summary of Significant Accounting Policies - Continued
Revenue Recognition
The Company recognizes revenue when
performance obligations identified under the terms of contracts with its customers are satisfied, which generally occurs upon the transfer
of control in accordance with the contractual terms and conditions of the sale. The Company’s revenue for the year ended December
31, 2021 composed of the sales of ground antenna units to a related party and sales of network hardware to a non-related party. The majority
of the Company’s revenue is recognized at a point in time when product is shipped, or service is provided to the customer. Revenue
is measured as the amount of consideration the Company expects to receive in exchange for transferring goods, which includes estimates
for variable consideration. The Company adopted the provisions of ASU 2014-09 Revenue from Contracts with Customers (Topic 606) and the
principal versus agent guidance within the new revenue standard. As such, the Company identifies a contract with a customer, identifies
the performance obligations in the contract, determines the transaction price, allocates the transaction price to each performance obligation
in the contract and recognizes revenue when (or as) the Company satisfies a performance obligation. Customers may make payments to the
Company either in advance or in arrears. If payment is made in advance, the Company will recognize a contract liability under prepayments
from customers until which point the Company has satisfied the requisite performance obligations to recognize revenue.
Stock-based Compensation
The Company adopted the modified prospective
method to measure stock-based compensation expense. Under the modified prospective method, stock-based compensation expense recognized
during the period is based on the portion of the share-based payment awards granted after the effective date and ultimately expected to
vest during the period. Stock-based compensation expense recognized in the Company’s statement of income is based on the vesting
terms and the estimated fair value of the award at grant date. As stock-based compensation expense recognized in the statement of income
is based on awards ultimately expected to vest, it is reduced for estimated forfeiture. Forfeitures are estimated at the time of grant
and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
The Company uses the Black-Scholes option
pricing model in its determination of fair value of share-based payment awards on the date of grant. Such option pricing model is affected
by assumptions based on a number of highly complex and subjective variables.
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. It is not subject to income tax examinations by US federal, state and local
tax authorities for years before 2018. 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.
Foreign Currency Transactions
Foreign currency transactions are recorded
in U.S. dollars at the exchange rates in effect when the transactions occur. Exchange gains or losses derived from foreign currency transactions
or monetary assets and liabilities denominated in foreign currencies are recognized in current income. At the end of each period, assets
and liabilities denominated in foreign currencies are revalued at the prevailing exchange rates with the resulting gains or losses recognized
in income for the period.
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial
Statements
NOTE 2 - Summary of Significant Accounting Policies - Continued
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 financial statements
into the reporting currency of the Company. Such adjustments are accumulated and reported under other comprehensive loss as a separate
component of stockholders’ equity.
Earnings (Loss) Per Share
Basic 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.
Diluted earnings per share is computed by dividing income available to common shareholders by the weighted-average number of shares of
common 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. The Company had 6,463,400 and 1,943,618 common
stock equivalents, primarily stock options and warrants, for the year ended September 30, 2023 and 2022, respectively. For the fiscal
years ended September 30, 2023 and 2022, the assumed exercise of the Company’s common stock equivalents were not included in the
calculation as the effect would be anti-dilutive.
NOTE 3 - Recent Accounting Pronouncements
Simplifying the Accounting for Debt
with Conversion and Other Options.
In June 2020, the FASB issued ASU 2020-06
to simplify the accounting in ASC 470, Debt with Conversion and Other Options and ASC 815, Contracts in Equity’s Own Entity. The
guidance simplifies the current guidance for convertible instruments and the derivatives scope exception for contracts in an entity’s
own equity. Additionally, the amendments affect the diluted EPS calculation for instruments that may be settled in cash or shares and
for convertible instruments. This ASU will be effective beginning in the first quarter of the Company’s fiscal year 2022. Early
adoption is permitted. The amendments in this update must be applied on either full retrospective basis or modified retrospective basis
through a cumulative-effect adjustment to retained earnings/(deficit) in the period of adoption. The adoption of ASU 2020-06 does not
have a significant impact on the Company’s consolidated financial statements as of and for the year ended September 30, 2023.
Financial Instruments
In June 2016, the FASB issued ASU 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. In February 2020, the FASB
issued ASU 2020-02 and delayed the effective date of ASU 2016-13 until fiscal year beginning after December 15, 2022. In March 2022, the
FASB issued ASU 2022-02 and eliminate the Troubled Debt Restructuring recognition and measurement guidance.
Earnings Per Share
In April 2021, the FASB issued ASU 2021-04,
which included Topic 260 “Earnings Per Share”. This guidance clarifies and reduces diversity in an issuer’s accounting
for modifications or exchanges of freestanding equity-classified written call options due to a lack of explicit guidance in the FASB Codification.
The ASU 2021-04 is effective for all entities for fiscal years beginning after December 15, 2021. The adoption of ASU 2021-04 does not
have a significant impact on the Company’s consolidated financial statements as of and for the year ended September 30, 2023.
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial
Statements
NOTE 4 - Short-term Investment
On September 9, 2019, the Company entered
into a liquidity agreement with a security company (“the Liquidity Provider”) in France, which is consistent with customary
practice in the French securities market. The liquidity agreement complies with applicable laws and regulations in France and authorizes
the Liquidity Provider to carry out market purchases and sales of shares of the Company’s common stock on the Euronext Paris market.
To enable the Liquidity Provider to carry out the interventions provided for in the contract, the Company contributed approximately $225,500
(200,000 euros) into the account. The transaction was initiated in the beginning of 2020, and the Company pays annual compensation of
20,000 euros to the Liquidity Provider in advance by semi-annual installments at the beginning of each semi-annual period under the agreement.
The liquidity agreement had an initial term of one year and is being renewed automatically unless otherwise terminated by either party.
As of September 30, 2023, the Company had purchased 5,361 shares of its common stock with the fair value of $13,831. The securities were
recorded as short-term investment with an accumulated unrealized loss of $5,839. In January 2022, the Liquidity Provider terminated the
agreement and the Company is determining whether to continue a similar program.
On December 3, 2020, the Company entered
into three separate stock purchase agreements (or “Stock Purchase Agreement”) from three individuals to purchase an aggregate
of 6,000,000 restricted shares of one of the Company’s related parties, YuanJiu Inc. (“YuanJiu”) in a total amount of
NT$141,175,000 (approximately US$5,027,600 as of December 31, 2020). YuanJiu is a listed company in Taipei Exchange and the stock title
transfer is subject to certain restrictions. Albert Hsu, a member of the Company’s board of directors, is the Chairman of YuanJiu.
On July 19, 2021, YuanJiu Inc. changed its name to “EJECTT INC” (“Ejectt”). On March 24, 2021, the Company purchased
additional 2,000 shares of Ejectt’s common stock for a total amount of $1,392 from a related party.
As of December 31, 2021, 5,000,000 shares
of Ejectt’s common stock were restricted and booked under long-term investment. (See Note 8) As of September 30, 2023 and December
31, 2022, this investment totaled approximately a 8% ownership of Ejectt.
On July 20th, 2023, the Taipei Stock
Exchange (the “Exchange”) announced that the securities of Ejectt Inc. would be suspended from trading on the Exchange as
of July 20, 2023, in accordance with Article 12-1 of the Business Rules of the Exchange. It is the Company’s understanding that
this suspension is temporary. If within six months of suspension and cessation of trading Ejectt can meet the relevant requirements of
Article 12-1, Paragraph 2 and Paragraph 4 of the Business Rules regarding profitability and the issuance of a special audit report on
the internal control system by an accountant, and has an underwriter evaluation report, Ejectt can apply to the Exchange to have trading
in its stock resume. Ejectt has announced that it will prepare all necessary documents and procedures and apply to the Exchange in December
2023 to have the temporary suspension removed. The Company’s management believes that this temporary trading suspension of the Eject
Inc. securities will have no impact on the value of its investment in the Ejectt stock.
On September 30, 2022, the Company entered
into a stock purchase agreement (or “Stock Purchase Agreement”) to purchase common stock of Shinbao in a total amount of NT$35,000,000
(approximately $1,085,608 as of September 30, 2023 and $1,138,952 as of December 31, 2022). Shinbao is a privately-held company in Taiwan.
As of January *, 2024, the stock title transfer is still under process.
As of September 30, 2023 and December
31, 2022, the fair value of the investment was as follows:
| |
September 30, 2023 | | |
December 31, 2022 | |
| |
(Unaudited) | | |
| |
Investment – Ejectt – short-term | |
$ | 2,514,919 | | |
$ | 850,182 | |
Investment - Liquidity | |
| 13,831 | | |
| 20,104 | |
Prepaid investment | |
| 1,085,608 | | |
| 1,138,952 | |
Total Investment | |
| 3,614,358 | | |
| 2,009,238 | |
Appreciation in market value - Ejectt | |
| (1,917,318 | ) | |
| (223,216 | ) |
Investment cost – Ejectt – short-term | |
| 597,601 | | |
| 626,966 | |
Investment cost - Liquidity | |
| 13,831 | | |
| 20,104 | |
Prepaid investment | |
| 1,085,608 | | |
| 1,138,952 | |
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial
Statements
NOTE 5 - Inventories
As of September 30, 2023 and December
31, 2022, inventories consisted of the following:
| |
September 30, 2023 | | |
December 31, 2022 | |
| |
(Unaudited) | | |
| |
Satellite equipment for sale under construction | |
$ | 1,366,282 | | |
$ | 1,366,282 | |
NOTE 6 - Prepaid Expenses
As of September 30, 2023 and December 31, 2022, prepaid expenses
consisted of the following:
| |
September 30, 2023 | | |
December 31, 2022 | |
| |
(Unaudited) | | |
| |
Prepaid engineering expense | |
$ | 9,486,067 | | |
$ | 7,536,409 | |
Prepaid professional expense | |
| 105,786 | | |
| 79,954 | |
Others | |
| 2,641,850 | | |
| 410,090 | |
Total | |
$ | 12,233,703 | | |
$ | 8,026,453 | |
Prepaid expense - current | |
| 9,994,151 | | |
| 6,030,516 | |
Prepaid expense – non-current | |
| 2,239,552 | | |
| 1,995,937 | |
NOTE 7 - Property and Equipment
As of September 30, 2023 and December
31, 2022, the balances of property and equipment were as follows:
| |
September 30, 2023 | | |
December 31, 2022 | |
| |
(Unaudited) | | |
| |
Ground station equipment | |
$ | 1,854,027 | | |
$ | 1,854,027 | |
Computer software and equipment | |
| 1,502,285 | | |
| 1,419,697 | |
Satellite equipment | |
| 275,410 | | |
| 275,410 | |
Vehicle | |
| 324,340 | | |
| 342,646 | |
Leasehold improvement | |
| 83,721 | | |
| 83,721 | |
Furniture and fixture | |
| 38,522 | | |
| 36,382 | |
| |
| 4,078,306 | | |
| 4,011,883 | |
Accumulated depreciation | |
| (3,000,979 | ) | |
| (2,486,836 | ) |
Net | |
| 1,077,327 | | |
| 1,525,047 | |
Prepayments - land | |
| 34,074,113 | | |
| 35,748,435 | |
Prepaid equipment | |
| 308,542 | | |
| 458,998 | |
Total | |
$ | 35,459,982 | | |
$ | 37,732,480 | |
On July 10, 2018, the Company and Aerkomm
Taiwan entered into a real estate sale contract (the “Land Purchase Contract”) with Tsai Ming-Yin (the “Seller”)
with respect to the acquisition by Aerkomm Taiwan of a parcel of land located in Taiwan. The land is expected to be used to build a satellite
ground station and data center. Pursuant to the terms of the Land Purchase Contract, and subsequent amendments on July 30, 2018, September
4, 2018, November 2, 2018 and January 3, 2019, the Company paid to the seller in installments refundable prepayments of NT$1,098,549,407
(approximately $34,074,113 as of September 30, 2023 and $35,748,435 as of December 31, 2022) in total. The estimated commission payable
for the land purchase in the amount of NT$42,251,900 (approximately $1,310,543 as of September 30, 2023 and 1,374,940 as of December 31,
2022) was recorded to the cost of land. And the company is under the discussion of extending the commission payable to December 31,2023.
According to the amended Land Purchase Contract dated on November 10, 2020, the transaction may be terminated at any time by both the
buyer and the seller and agreed by all parties if the Company is unable to obtain the qualified satellite license issued by Taiwan authority
before July 31, 2021. As of January *, 2024, the qualified license applications are still in progress.
Depreciation expense was $525,796 and
$406,984 for the nine months periods ended September 30, 2023 and 2022, respectively.
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial
Statements
NOTE 8 - Long-term Investment
As of September 30, 2023 and December
31, 2022, 5,000,000 shares of Ejectt’s common stock were restricted.
Also on September 29, 2022, the Company
entered into a stock purchase agreement (or “Stock Purchase Agreement”) to purchase 2,670,000 shares of common stock of AnaNaviTek
Corp. (AnaNaviTek) in a total amount of NT$40,050,000 (approximately $1,303,287 as of December 31, 2022). AnaNaviTek is a privately-held
company in Taiwan. As of November 21, 2022, the Company has paid NT$10,005,000 (approximately $325,578 as of December 31, 2022) for 667,000
shares of AnaNaviTek stock and the stock title transfer for these shares has been completed.
In Q1 2023, the Company disposed AnaNaviTek
for amount of $325,578.
As of September 30, 2023 and December
31, 2022, the fair value of the long-term investment was as follows:
| |
September 30, 2023 | | |
December 31, 2022 | |
| |
(Unaudited) | | |
| |
Investment cost – Ejectt – long-term | |
$ | 4,047,767 | | |
$ | 4,246,665 | |
Investment cost – AnaNaviTek | |
| - | | |
| 325,578 | |
Net | |
$ | 4,047,767 | | |
$ | 4,572,243 | |
NOTE 9 - Intangible Asset, Net
As of September 30, 2023 and December
31, 2022, the cost and accumulated amortization for intangible asset were as follows:
| |
September 30, 2023 | | |
December 31, 2022 | |
| |
(Unaudited) | | |
| |
Satellite system software | |
$ | 4,950,000 | | |
$ | 4,950,000 | |
Accumulated amortization | |
| (3,918,750 | ) | |
| (3,547,500 | ) |
Net | |
$ | 1,031,250 | | |
$ | 1,402,500 | |
Amortization expense was $371,250 and
$371,250 for the nine-months periods ended September 30, 2023 and 2022.
Note
10 - Goodwill
The Company obtained the goodwill of
$1,475,334 from past various merge and acquisition events of all subsidiaries from year 2016 to 2022 described in Note 1.
On September 4, 2022, the Company acquired
100% of the ownership of MEPA Labs Inc. (MEPA) with total consideration of $100,000. The fair value of MEPA at acquisition date was $-2,985,703.
The excess of the purchase price over the tangible assets, identifiable intangible assets and assumed liabilities was $3,085,703, which
is recorded as goodwill.
On September 28, 2023, the Company acquired
100% of the ownership of Mixnet Technology Limited (Mixnet) and its subsidiary Mesh Technology Taiwan Limited (Mesh) with total consideration
of $16,500,000 by issuing 7,000,448 shares of the Company’s common stock valued at approximately $2.36 per share. The fair value
of Mixnet and Mesh at acquisition date was $-175,819. The excess of the purchase price over the tangible assets, identifiable intangible
assets and assumed liabilities was $16,675,819, which is recorded as goodwill.
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial
Statements
Note 10
- Goodwill - Continued
As of September 30, 2023 and December 31, 2022, the goodwill
were as follows:
| |
September 30, 2023 | | |
December 31, 2022 | |
| |
(Unaudited) | | |
| |
Gross amount | |
$ | 21,236,856 | | |
$ | 4,561,037 | |
Accumulated Impairment | |
| - | | |
| - | |
Net | |
$ | 21,236,856 | | |
$ | 4,561,037 | |
No impairment loss on goodwill were
recognized for nine-month period ended September 30, 2023 and the year ended December 31, 2022.
The following table summarizes the fair
values of the assets acquired and liabilities assumed at the date of acquisition. Goodwill as a result of the acquisition of MEPA is calculated
as follows;
Total purchase considerations | |
$ | 100,000 | |
Fair Value of tangible assets acquired: | |
| | |
Cash | |
| 482,247 | |
Loan receivable | |
| 500,000 | |
Prepaid expenses and other current assets | |
| 252,792 | |
Property and equipment | |
| 218,042 | |
Deposits | |
| 5,400 | |
Total identifiable assets acquired | |
| 1,458,481 | |
| |
| | |
Fair value of liabilities assumed: | |
| | |
Accounts payable | |
| 11,075 | |
Loan from stockholder | |
| (4,324,000 | ) |
Other payable | |
| (131,259 | ) |
Total liabilities assumed | |
| (4,444,184 | ) |
Net identifiable liabilities assumed | |
| (2,985,703 | ) |
Goodwill as a result of the acquisition | |
$ | 3,085,703 | |
Goodwill as a result of the acquisition of Mixnet
and its subsidiary is calculated as follows;
Total purchase considerations |
|
$ |
16,500,000 |
|
Fair Value of tangible assets acquired: |
|
|
|
|
Cash |
|
|
66,278 |
|
Other receivable |
|
|
3,513 |
|
Prepaid expenses and other current assets |
|
|
2,872 |
|
Total identifiable assets acquired |
|
|
72,663 |
|
|
|
|
|
|
Fair value of liabilities assumed: |
|
|
|
|
Loan payable – current |
|
|
(50,403 |
) |
Prepayment from customer |
|
|
(94,634 |
) |
Other payable |
|
|
(24,203 |
) |
Loan from stockholder – non-current |
|
|
(79,242 |
) |
Total liabilities assumed |
|
|
(248,482 |
) |
Net identifiable liabilities assumed |
|
|
(175,819 |
) |
Goodwill as a result of the acquisition |
|
$ |
16,675,819 |
|
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 11 - Operating and Finance Leases
|
A. |
Lease term and discount rate: |
The weighted-average remaining lease term and discount rate
related to the leases were as follows:
|
|
2023 |
|
|
2022 |
|
Weighted-average remaining lease term |
|
(Unaudited) |
|
|
|
|
Operating lease |
|
|
2.24 Year |
|
|
|
1.50 Years |
|
Finance lease |
|
|
1.10 Years |
|
|
|
1.85 Years |
|
Weighted-average discount rate |
|
|
|
|
|
|
|
|
Operating lease |
|
|
6.00 |
% |
|
|
6.00 |
% |
Finance lease |
|
|
3.82 |
% |
|
|
3.82 |
% |
|
B. |
The balances for the operating and finance leases are presented as follows within the unaudited condensed consolidated balance sheets as of September 30, 2023 and December 31, 2022: |
Operating Leases
| |
September 30, 2023 | | |
December 31, 2022 | |
| |
(Unaudited) | | |
| |
Right-of-use assets | |
$ | 245,498 | | |
$ | 92,451 | |
Lease liability – current | |
$ | 140,169 | | |
$ | 120,323 | |
Lease liability – non-current | |
$ | 141,228 | | |
$ | 22,547 | |
Finance Leases
| |
September 30, 2023 | | |
December 31, 2022 | |
| |
(Unaudited) | | |
| |
Property and equipment, at cost | |
$ | 56,770 | | |
$ | 56,770 | |
Accumulated depreciation | |
| (45,242 | ) | |
| (36,925 | ) |
Property and equipment, net | |
$ | 11,528 | | |
$ | 19,845 | |
| |
| | | |
| | |
Lease liability - current | |
$ | 10,649 | | |
$ | 10,858 | |
Lease liability – non-current | |
| 4,008 | | |
| 12,624 | |
Total finance lease liabilities | |
$ | 14,657 | | |
$ | 23,482 | |
The components of lease expense are
as follows within the unaudited condensed consolidated statements of operations and comprehensive loss for the three months periods and
nine months periods ended September 30, 2023 and 2022:
Operating Leases
| |
Three Months Ended | | |
Nine Months Ended | |
| |
September 30, 2023 | | |
September 30, 2022 | | |
September 30, 2023 | | |
September 30, 2022 | |
| |
(Unaudited) | | |
(Unaudited) | | |
(Unaudited) | | |
(Unaudited) | |
Lease expense | |
$ | 32,242 | | |
$ | 32,710 | | |
$ | 75,899 | | |
$ | 124,376 | |
Sublease rental income | |
| (2,069 | ) | |
| (19,200 | ) | |
| (6,519 | ) | |
| (52,858 | ) |
Net lease expense | |
$ | 30,172 | | |
$ | 13,510 | | |
$ | 69,380 | | |
$ | 71,518 | |
Finance Leases
| |
Three Months Ended | | |
Nine Months Ended | |
| |
September 30, 2023 | | |
September 30, 2022 | | |
September 30, 2023 | | |
September 30, 2022 | |
| |
(Unaudited) | | |
(Unaudited) | | |
(Unaudited) | | |
(Unaudited) | |
Amortization of right-of-use asset | |
$ | 2,745 | | |
$ | 2,845 | | |
$ | 8,235 | | |
$ | 8,840 | |
Interest on lease liabilities | |
| 163 | | |
| 274 | | |
| 567 | | |
| 932 | |
Total finance lease cost | |
$ | 2,908 | | |
$ | 3,119 | | |
$ | 8,801 | | |
$ | 9,772 | |
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial
Statements
NOTE 11 - Operating and Finance Leases - Continued
Supplemental cash flow information related
to leases for the nine months periods ended September 30, 2023 and 2022 is as follows:
| |
September 30, 2023 | | |
September 30, 2022 | |
| |
(Unaudited) | | |
(Unaudited) | |
Cash paid for amounts included in the measurement of lease liabilities: | |
| | |
| |
Operating cash outflows from operating leases | |
$ | 52,407 | | |
$ | 47,774 | |
Operating cash outflows from finance lease | |
$ | 8,052 | | |
$ | 8,321 | |
Financing cash outflows from finance lease | |
$ | 567 | | |
$ | 932 | |
Leased assets obtained in exchange for lease liabilities: | |
| | | |
| | |
Operating leases | |
$ | 244,495 | | |
$ | 74,795 | |
Maturity of lease liabilities:
Operating Leases
| |
Others | | |
Total | |
| |
(Unaudited) | | |
(Unaudited) | |
October 1, 2023 – September 30, 2024 | |
$ | 119,142 | | |
$ | 119,142 | |
October 1, 2023 – September 30, 2024 | |
| 89,256 | | |
| 89,256 | |
October 1, 2023 – September 30, 2024 | |
| 59,504 | | |
| 59,504 | |
Total lease payments | |
$ | 267,902 | | |
$ | 267,902 | |
Less: Imputed interest | |
| (19,328 | ) | |
| (19,328 | ) |
Present value of lease liabilities | |
$ | 248,574 | | |
$ | 248,574 | |
Current portion | |
| (107,346 | ) | |
| (107,346 | ) |
Non-current portion | |
$ | 141,228 | | |
$ | 141,228 | |
Finance Leases
| |
Total | |
| |
(Unaudited) | |
October 1, 2023 – September 30, 2024 | |
$ | 11,024 | |
October 1, 2024 – September 30, 2025 | |
| 4,020 | |
Total lease payments | |
$ | 15,045 | |
Less: Imputed interest | |
| (388 | ) |
Present value of lease liabilities | |
$ | 14,657 | |
Current portion | |
| (10,649 | ) |
Non-current portion | |
$ | 4,008 | |
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial
Statements
NOTE 12 - Short-term Loan
As of September 30, 2023, the outstanding
loan balance was $930,521 (NTD 30,000,000) under the loan (Note 1) from Well Thrive Limited (“WTL”) to pay off the previous
short-term loan with a non-related party.
NOTE 13 - Long-term Loan
The Company has a car loan credit line
of NT$1,500,000 (approximately US$46,526 as of September 30, 2023 and US$48,812 as of December 31, 2022), which matures on May 21, 2024,
from a Taiwan financing company with annual interest rate of 9.7%. The installment payment plan is 60 months to pay off the balance on
the 21st of each month. Future installment payments as of September 30, 2023 and December 31, 2022 are as follows:
Twelve months ending September 30, | |
(Unaudited) | |
2024 | |
| 7,854 | |
2025 | |
| - | |
Total installment payments | |
| 7,854 | |
Less: Imputed interest | |
| (278 | ) |
Present value of long-term loan | |
| 7,575 | |
Current portion | |
| (7,575 | ) |
Non-current portion | |
$ | - | |
Year ending December 31, | |
| |
2023 | |
$ | 12,359 | |
2024 | |
| 5,150 | |
Total installment payments | |
| 17,509 | |
Less: Imputed interest | |
| (1,211 | ) |
Present value of long-term loan | |
| 16,298 | |
Current portion | |
| (11,271 | ) |
Non-current portion | |
$ | 5,027 | |
NOTE 14 - Convertible Long-term Bonds Payable
and Restricted Cash
On December 3, 2020, the Company closed
a private placement offering consisting of US$10,000,000 in aggregate principal amount of its Credit Enhanced Zero Coupon Convertible
Bonds (the “Zero Coupon Bonds”) and US$200,000 in aggregate principal amount of its 7.5% convertible bonds (the “Coupon
Bonds”), both due on December 2, 2025 (collectively the “Bonds”). Unless previously redeemed, converted or repurchased
and cancelled, the Zero-Coupon Bonds will be redeemed on December 2, 2025 at 105.11% of their principal amount and the Coupon Bonds will
be redeemed on December 2, 2025 at 100% of their principal amount plus any accrued and unpaid interest. The Coupon Bonds will bear interest
from and including December 2, 2020 at the rate of 7.5% per annum. Interest on the Coupon Bonds is payable semi-annually in arrears on
June 1 and December 1 each year, commencing on June 1, 2021.
The Company has the option to redeem
the Bonds at a redemption amount equal to the Early Redemption Amount, as defined in the Offering Memorandum, at any time on or after
December 2, 2023 and prior to the Maturity Date, if the Closing Price of the Company’s Common Stock listed on the Euronext Paris
for 20 trading days in any period of 30 consecutive trading days, the last day of which occurs not more than fifteen trading days prior
to the date on which notice of such redemption is given, is greater than 130% of the Conversion Price on each applicable trading day or
(ii) in whole or in part of the Bonds on the second anniversary of the issue date or (iii) where 90% or more in principal amount of the
Bonds issued have been redeemed, converted or repurchased and cancelled.
Unless previously redeemed, converted
or repurchased and cancelled, the Bonds may be converted at any time on or after December 3, 2020 up to November 20, 2025 into shares
of Common Stock of the Company with a par value of $0.001 each. The initial conversion price for the Bonds is $13.30 per share and is
subject to adjustment in specified circumstances.
Holders of the Bonds may also require
the Company to repurchase all or part of the Bonds on the third anniversary of the Issue Date, at the Early Redemption Amount. Unless
the Bonds have been previously redeemed, converted or repurchased and cancelled, Holders of the Bonds will also have the right to require
the Company to repurchase the Bonds for cash at the Early Redemption Amount if an event of delisting or a change of control occurs.
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial
Statements
NOTE 14 - Convertible Long-term Bonds Payable and Restricted Cash - Continued
Pursuant to the agreements of Bonds, Bank of Panhsin Co., Ltd. (the
“BG Bank”) committed to issue a bank guarantee for the benefit of the holders of the Bonds. The Bank Guarantee is intended
to provide a source of funds for the principal, premium, interest (if any) and any other payment obligations of the Company which shall
include the default interest under the Bonds upon the Company’s failure to pay amounts pursuant to the Indenture or upon the Bonds
being declared due and payable on the occurrence of an Event of Default pursuant to this Indenture. In order to obtain the guarantee from
BG Bank, the Company entered into a line of credit in the amount of $10,700,000 with BG Bank on December 1, 2020. The line of credit will
be expired on December 2, 2025. The annual fee is based on 1% of the line of credit amount and due quarterly. The line of credit is guaranteed
by one of the Company’s shareholders with his personal property, and the Company’s time deposit of $3,210,000 (the “Deposit”)
at BG Bank is pledged as collateral as of September 30, 2022 and December 31, 2022, and the Deposit was recorded as restricted cash.
Management has accounted for the convertible
bonds by assuming that they will be repaid and redeemed at maturity; accordingly, the Company has included the redemption premium as part
of the accretion tables and calculation of interest and issuance cost to be amortized over the life of the bond. Any value borne from
the conversion feature of the bond and or issuance costs related to the origination and distribution of these bonds have been accounted
for as debt discounts to be amortized using the effective interest method over the life of the bond.
As of September 30, 2023 and December
31, 2022, the long-term bonds payable consisted of the following:
| |
September 30, 2023 | | |
December 31, 2022 | |
| |
(Unaudited) | | |
| |
Credit Enhanced Zero Coupon Convertible Bonds | |
$ | 10,000,000 | | |
$ | 10,000,000 | |
Coupon Bonds | |
| 200,000 | | |
| 200,000 | |
| |
| 10,200,000 | | |
| 10,200,000 | |
Unamortized loan fee | |
| (682,309 | ) | |
| (1,062,994 | ) |
Net | |
$ | 9,517,691 | | |
$ | 9,137,006 | |
Bond issuance cost was $ 380,684 and $360,089 for the nine
months ended September 30, 2023 and 2022, respectively.
NOTE 15 - Convertible Long-term notes Payable
and Restricted Cash
On December 7, 2022, Aerkomm Inc. (the
“Company”) entered into an investment conversion and note purchase agreement (the “Agreement”) with World Praise
Limited, a Samoa registered company (“WPL”). Pursuant to the terms of this agreement, (i) a subscription for the common stock
of the Company in the amount of $3,175,200 which was entered into between WPL and the Company on June 28, 2022 and funded (the “June
Subscription”), (ii) a subscription for the common stock of the Company in the amount of $5,674,000 which was entered into between
WPL and the Company on September 15, 2022 and funded (the “September Subscription”), and (iii) a subscription for the capital
stock of MEPA Labs, Inc. (“MEPA”), a wholly owned subsidiary of the Company, in the amount of $4,324,000 which was entered
into between MEPA and the Company on June 28, 2022 and funded (the “MEPA Subscription,” and together with the June Subscription
and the September Subscription, the “WPL Subscriptions”), the WPL Subscriptions in the aggregate totaling $13,173,200, were
converted into loans to the Company evidenced by that certain convertible bond of the Company in favor of WPL and dated December 7, 2022
(the “Convertible Bond”)
In addition, and as indicated in the
Agreement, WPL agreed to lend an additional $10,000,000 to the Company under the Convertible Note (the “New Loan”) and to
cap the aggregate amount of loans to the Company under the Convertible Note, including the New Loan, the WPL Subscriptions and any future
advances under the Convertible Note, at $30,000,000.
The Convertible Note allows for loans to the Company up to an aggregate
principal amount of $30,000,000 and acknowledges an aggregate principal amount of $23,173,200 in loans under the Convertible Bond outstanding
as of December 31, 2022. The Convertible Note carries an annual interest rate of four percent (4%) which is due and payable, along with
the then principal amount outstanding, on the Convertible Note maturity date, December 7, 2024. The Convertible Note is pre-payable in
whole or in part at any time without penalty, on five days’ prior written notice to WPL. In the event of a change of control of
the Company (as that term is defined in the Convertible Note), the Convertible Note shall become immediately payable in full. The Convertible
Note along with accrued interest $751K as of September 30, 2023, is convertible in whole or in part by WPL at any time into shares of
common stock of the Company at a conversion price of $6.00 per share.
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial
Statements
NOTE 16 - Contract Liability
On March 9, 2015, the Company entered
into a 10-year purchase agreement with Klingon Aerospace, Inc. (“Klingon”), which was formerly named as Luxe Electronic Co.,
Ltd. In accordance with the terms of this agreement, Klingon agreed to purchase from the Company an initial order of onboard equipment
comprising an onboard system for a purchase price of $909,000, with payments to be made in accordance with a specific milestones schedule.
As of September 30, 2023 and December 31, 2022, the Company received $762,000 from Klingon in milestone payments towards the equipment
purchase price. As of September 30, 2023, the project is still ongoing.
NOTE 17 - Income Taxes
Income tax expense for the three months
and nine months periods ended September 30, 2023 and 2022 consisted of the following:
| |
Three Months Ended September 30, | | |
Nine Months Ended September 30, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| |
(Unaudited) | | |
(Unaudited) | | |
(Unaudited) | | |
(Unaudited) | |
Current: | |
| | |
| | |
| | |
| |
Federal | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
State | |
| - | | |
| - | | |
| 2,400 | | |
| 1,600 | |
Foreign | |
| - | | |
| - | | |
| - | | |
| - | |
Total | |
$ | - | | |
$ | - | | |
$ | 2,400 | | |
$ | 1,600 | |
The following table presents a reconciliation
of the Company’s income tax at statutory tax rate and income tax at effective tax rate for the three months and nine months periods
ended September 30, 2023 and 2022.
| |
Three Months Ended September 30, | | |
Nine Months Ended September 30, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| |
(Unaudited) | | |
(Unaudited) | | |
(Unaudited) | | |
(Unaudited) | |
Tax benefit at statutory rate | |
$ | (702,089 | ) | |
$ | (1,089,179 | ) | |
$ | (2,409,671 | ) | |
$ | (2,495,186 | ) |
Net operating loss carryforwards (NOLs) | |
| 747,003 | | |
| 1,870,676 | | |
| 2,306,417 | | |
| 3,443,193 | |
Foreign investment losses (gains) | |
| (497,670 | ) | |
| (445,209 | ) | |
| (341,500 | ) | |
| (818,077 | ) |
Stock-based compensation expense | |
| 139,800 | | |
| 12,500 | | |
| 179,500 | | |
| 214,000 | |
Amortization expense | |
| 65,500 | | |
| 24,600 | | |
| 151,200 | | |
| 68,200 | |
Accrued payroll | |
| 99,700 | | |
| (83,400 | ) | |
| 214,000 | | |
| 72,000 | |
Unrealized exchange losses (gains) | |
| 144,156 | | |
| 252,712 | | |
| (92,846 | ) | |
| 557,470 | |
Others | |
| 3,600 | | |
| (542,700 | ) | |
| (4,700 | ) | |
| (1,040,000 | ) |
Tax expense at effective tax rate | |
$ | - | | |
$ | - | | |
$ | 2,400 | | |
$ | 1,600 | |
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial
Statements
NOTE 17 - Income Taxes - Continued
Deferred tax assets (liability) as of
September 30, 2023 and December 31, 2022 consist approximately of:
| |
September 30, 2023 | | |
December 31, 2022 | |
| |
(Unaudited) | | |
| |
Net operating loss carryforwards (NOLs) | |
$ | 14,341,000 | | |
$ | 10,694,000 | |
Stock-based compensation expense | |
| 3,337,000 | | |
| 3,098,000 | |
Accrued expenses and unpaid expense payable | |
| 747,000 | | |
| 412,000 | |
Tax credit carryforwards | |
| 68,000 | | |
| 68,000 | |
Unrealized exchange losses (gain) | |
| 187,000 | | |
| 311,000 | |
Excess of tax amortization over book amortization | |
| (285,000 | ) | |
| (344,000 | ) |
Others | |
| 19,000 | | |
| (97,000 | ) |
Gross | |
| 18,414,000 | | |
| 14,142,000 | |
Valuation allowance | |
| (18,414,000 | ) | |
| (14,142,000 | ) |
Net | |
$ | - | | |
$ | - | |
Management does not believe the deferred
tax assets will be utilized in the near future; therefore, a full valuation allowance is provided. The net change in deferred tax assets
valuation allowance was an increase of approximately $4,272,000 for the nine months ended September 30, 2023.
As of September 30, 2023 and December
31, 2022, the Company had federal NOLs of approximately $8,243,000 available to reduce future federal taxable income, expiring in 2037,
and additional federal NOLs of approximately $29,116,000 and $28,545,000, respectively, were generated and will be carried forward indefinitely
to reduce future federal taxable income. As of September 30, 2023 and December 31, 2022, the Company had State NOLs of approximately $44,422,000
and $37,662,000 respectively, available to reduce future state taxable income, expiring in 2042.
As of September 30, 2023 and December
31, 2022, the Company has Japan NOLs of approximately $251,000 and $326,000, respectively, available to reduce future Japan taxable income,
expiring in 2031.
As of September 30, 2023 and December
31, 2022, the Company has Taiwan NOLs of approximately $5,564,000 and $3,452,000, respectively, available to reduce future Taiwan taxable
income, expiring in 2031.
As of September 30, 2023 and December
31, 2022, the Company had approximately $37,000 and $37,000 of federal research and development tax credit, available to offset future
federal income tax. The credit begins to expire in 2034 if not utilized. As of September 30, 2023 and December 31, 2022, the Company had
approximately $39,000 and $39,000 of California state research and development tax credit available to offset future California state
income tax. The credit can be carried forward indefinitely.
The Company’s ability to utilize
its federal and state NOLs to offset future income taxes is subject to restrictions resulting from its prior change in ownership as defined
by Internal Revenue Code Section 382. The Company does not expect to incur the limitation on NOLs utilization in future annual usage.
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial
Statements
NOTE 18 - Capital Stock
The Company is authorized to issue 50,000,000
shares of preferred stock, with par value of $0.001. As of September 30, 2023 and December 31, 2022, there were no preferred stock shares
outstanding. The 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 90,000,000
shares of common stock as of September 30, 2023 and December 31, 2022.
| |
September 30, 2023 | | |
December 31, 2022 | |
| |
(Unaudited) | | |
| |
Restricted stock - vested | |
| 1,802,373 | | |
| 1,802,373 | |
Restricted stock - unvested | |
| 149,162 | | |
| 149,162 | |
Total restricted stock | |
| 1,951,535 | | |
| 1,951,535 | |
The unvested shares of restricted stock
were recorded under a deposit liability account awaiting future conversion to common stock when they become vested.
On June 16, 2022, the Company issued
4,114 shares of common stock to Bevilaqua PLLC for the legal services rendered.
On September 28, 2023, the Company issued
7,000,448 shares of common stock to Kevin Wong to acquire Mixnet Technology Limited and its subsidiary (Mixnet).
On October 31, 2021, following approval
by the Board of Directors, the Company issued a warrant to Mr. Sheng-Chun Chang for the purchase of up to 751,879 shares of the Company’s
common stock, exercisable at a price of $2.60 per share, the closing price of the common stock on the OTC Markets, Inc. QX tier on October
21, 2021. The issuance of the warrant is (i) in recognition of Mr. Chang’s support of the Company through his previous personal
guarantee of the Company’s $10,000,000 line of credit with the Panhsin Bank (the “Bank”) in relation to the private
placement offering of $10,000,000 credit enhanced zero coupon convertible bonds and (ii) in exchange for Mr. Chang’s agreement to
renew his guarantee with the Bank for so long as the guarantee would be required by the Bank. The warrant will vest 20% on issuance. On
each anniversary of the issue date, beginning with December 3, 2021 and ending with December 3, 2025, the warrant will vest with respect
to 20% of the number of shares of the Company’s common stock issuable upon conversion of the principal amount of the credit enhanced
bonds still required to be guaranteed by the Panhsin Bank.
For the years ended December 31, 2022,
the Company recorded an increase of $1,252,029 in additional paid-in capital as adjustment for the issuance costs of these stock warrants.
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial
Statements
NOTE 19 - Significant Related Party Transactions
In addition to the information disclosed
in other notes, the Company has significant related party transactions as follows:
| A. | Name of related parties and relationships with the Company: |
Related Party |
|
Relationship |
Well Thrive Limited (“WTL”) |
|
Major stockholder |
Ejectt Inc. (“Ejectt”) |
|
Stockholder; Albert Hsu, a Director of Aerkomm, is the Chairman |
STAR JEC INC. (“StarJec”) |
|
Stockholder; Albert Hsu, a Director of Aerkomm, is the Chairman |
AA Twin Associates Ltd. (“AATWIN”) |
|
Georges Caldironi, COO of Aerkomm, is sole owner |
EESquare Japan (“EESquare JP”) |
|
Yih Lieh (Giretsu) Shih, President Aircom Japan, is the Director |
Kevin Wong |
|
Stockholder of Mixnet |
|
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, 2023 and December 31, 2022: |
| |
September 30, 2023 | | |
December 31, 2022 | |
| |
(Unaudited) | | |
| |
Other receivable from: | |
| | |
| |
EESquare JP 1 | |
$ | 91,682 | | |
$ | 11,380 | |
StarJec2 | |
| - | | |
| 282,073 | |
Ejectt3 | |
| 16,081 | | |
| - | |
WTL4 | |
| 1,295,884 | | |
| - | |
Others7 | |
| 36,721 | | |
| 15,092 | |
Total | |
$ | 1,440,368 | | |
$ | 308,545 | |
| |
| | | |
| | |
Rent deposit to Ejectt3 | |
$ | 1,303 | | |
$ | 1,367 | |
| |
| | | |
| | |
Loan from WTL4 | |
$ | 930,521 | | |
$ | 337,357 | |
Loan from Kevin Wong6 | |
| 76,201 | | |
| - | |
Total | |
$ | 1,006,722 | | |
$ | 337,357 | |
| |
| | | |
| | |
Prepayment from Ejectt3 | |
$ | 2,163,034 | | |
$ | 1,258,786 | |
| |
| | | |
| | |
Other payable to: | |
| | | |
| | |
AATWIN5 | |
$ | 35,047 | | |
$ | 35,047 | |
Interest payable to WTL4 | |
| 56,056 | | |
| 58,810 | |
StarJec2 | |
| 136,920 | | |
| - | |
Others7 | |
| 656,359 | | |
| 246,610 | |
Total | |
$ | 884,382 | | |
$ | 340,467 | |
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial
Statements
NOTE 19 - Significant Related Party Transactions
- Continued
| b. | For the three months and nine months periods ended September 30, 2023 and 2022: |
| |
Three Months Ended September 30, | | |
Nine Months Ended September 30, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| |
(Unaudited) | | |
(Unaudited) | | |
(Unaudited) | | |
(Unaudited) | |
Purchase from Ejectt1 | |
$ | - | | |
$ | - | | |
$ | 446,367 | | |
$ | - | |
Service income from Ejectt1 | |
| 66,093 | | |
| - | | |
| 98,395 | | |
| - | |
Service income from Star Jec2 | |
| - | | |
| 2,855 | | |
| 2,805 | | |
| 6,073 | |
Interest expense charged by WTL3 | |
| - | | |
| - | | |
| - | | |
| 10,155 | |
Rental income from EESqaure JP4 | |
| 2,173 | | |
| 2,149 | | |
| 6,519 | | |
| 7,023 | |
Other income from WTL3 | |
| 10,865 | | |
| - | | |
| 10,865 | | |
| - | |
Other income from Others5 | |
| 2,158 | | |
| - | | |
| 3,977 | | |
| - | |
NOTE 20 - Stock Based Compensation
In March 2014, Aircom’s Board
of Directors adopted the 2014 Stock Option Plan (the “Aircom 2014 Plan”). The Aircom 2014 Plan provided for the granting of
incentive stock options and non-statutory stock options to employees, consultants and outside directors of Aircom. 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 1,088,882
shares to Aircom’s stock option holders.
One-third of stock 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 Aircom 2014 Plan
became effective upon its adoption by the Board and shall continue in effect for a term of 10 years unless sooner terminated under the
terms of Aircom 2014 Plan.
On May 5, 2017, the Board of Directors
of Aerkomm adopted the Aerkomm Inc. 2017 Equity Incentive Plan (the “Aerkomm 2017 Plan” and together with the Aircom 2014
Plan, the “Plans”) and the reservation of 1,000,000 shares of common stock for issuance under the Aerkomm 2017 Plan. The Aerkomm
2017 Plan has been adopted by the Board and shall continue in effect for a term of 10 years unless sooner terminated under the terms.
On June 23, 2017, the Board of Directors voted to increase the number of shares of common stock reserved for issuance under the Aerkomm
2017 Plan to 2,000,000 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 the Company, as determined by the Compensation Committee of the Board of Directors
(or, prior to the establishment of the Compensation Committee on January 23, 2018, the Board of Directors). The Aerkomm 2017 Plan was
approved by the Company’s stockholders on March 28, 2018. On October 21, 2021, the Board of Directors voted to increase the number
of shares of common stock reserved for issuance under the Aerkomm 2017 Plan to 2,400,000 shares.
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial
Statements
NOTE 20 - Stock Based Compensation - Continued
On June 23, 2017, the Board of Directors
agreed to issue options for an aggregate of 291,000 shares under the Aerkomm 2017 Plan to certain officers and directors of the Company.
The option agreements are classified into three types of vesting schedule, which includes, 1) 1/6 of the shares subject to the option
shall be vested commencing on the vesting start date and the remaining shares shall be vested 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 be vested commencing on the vesting
start date and the remaining shares shall be vested 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 be vested 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.
On July 31, 2017, the Board of Directors
approved to issue options for an aggregate of 109,000 shares under the Aerkomm 2017 Plan to 11 of its employees. 1/3 of these 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.
On December 29, 2017, the Board of Directors
approved to issue options for an aggregate of 12,000 shares under the Aerkomm 2017 Plan to three of the Company’s independent directors,
4,000 shares each. All of these options were vested immediately upon issuance.
On June 19, 2018, the Compensation Committee
approved to issue options for 32,000 and 30,000 shares under the Aerkomm 2017 Plan to two of the Company executives. One-fourth of the
32,000 shares subject to the option shall vest on May 1, 2019, 2020, 2021 and 2022, respectively. One-third of the 30,000 shares subject
to the option shall vest on May 29, 2019, 2020 and 2021, respectively.
On September 16, 2018, the Compensation
Committee approved to issue options for 4,000 shares under the Aerkomm 2017 Plan to one of the Company’s independent directors.
These options shall be vested immediately.
On December 29, 2018, the Compensation
Committee approved to issue options for an aggregate of 12,000 shares under the Aerkomm 2017 Plan to three of the Company’s independent
directors, 4,000 shares each. All of these options were vested immediately upon issuance.
On July 2, 2019, the Board of Directors
approved the grant of options to purchase an aggregate of 339,000 shares under the Aerkomm 2017 Plan to 22 of its directors, officers
and employees. 25% of the shares vested on the grant date, 25% of the shares vested on July 17, 2019, 25% of the shares shall be vested
on the first anniversary of the grant date, and 25% of the shares will vest upon the second anniversary of the grant date.
On October 4, 2019, the Board of Directors
approved the grant of options to purchase an aggregate of 85,400 shares under the Aerkomm 2017 Plan to three (3) of its employees. 25%
of the shares are vested on the grant date, and 25% of the shares shall be vested on each of October 4, 2020, October 4, 2021 and October
4, 2022, respectively.
On December 29, 2019, the Board of Directors
approved to issue options for an aggregate of 12,000 shares under the Aerkomm 2017 Plan to three of the Company’s independent directors,
4,000 shares each. All of these options shall be vested at the date of 1/12th each month for the next 12 months on the same day of December
2019.
On February 19, 2020, the Board of Directors
approved to issue options for 2,000 shares under the Aerkomm 2017 Plan to one of the Company’s consultants for service provided
in 2019. These options shall be vested immediately.
On September 17, 2020, the Board of
Directors approved to issue options for 4,000 shares under the Aerkomm 2017 Plan to one of the Company’s independent directors.
These options shall be vested at the date of 1/12th each month for the next 12 months on the same day of September 2020.
On December 11, 2020, the Board of Directors
approved the grant of options to purchase an aggregate of 284,997 shares under the Aerkomm 2017 Plan to 37 of its directors, officers,
employees and consultants. Shares shall be vested in full on the earlier of the filing date of the Company’s Form 10-K for the year
ended December 31, 2020 or March 31, 2021.
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial
Statements
NOTE 20 - Stock Based Compensation - Continued
On January 23, 2021, the Board of Directors
approved to issue options for an aggregate of 12,000 shares under the Aerkomm 2017 Plan to three of the Company’s independent directors,
4,000 shares each. All of these options shall vest 1/12th each month for the next 12 months at the end of each month up to December 2021.
On January 23, 2021, the Board of Directors approved to issue options for 2,000 shares under the Aerkomm 2017 Plan to one of the Company’s
consultants for service provided in 2020. These options vested immediately.
On September 1, 2021, the Board of Directors
approved to issue options for 18,750 shares under the Aerkomm 2017 Plan to one of the Company’s officers. These options shall be
vested immediately.
On September 17, 2021, the Board of
Directors approved to issue options for 4,000 shares under the Aerkomm 2017 Plan to one of the Company’s independent directors.
These options shall be vested at the rate of 1/12th each month for the next 12 months on the same day of September 2021.
On October 21, 2021, the Board of Directors
approved to issue options for 150,000 shares under the Aerkomm 2017 Plan to one of the Company’s officers. These options shall be
vested immediately.
On December 1, 2021, the Board of Directors
approved to issue options for 18,750 shares under the Aerkomm 2017 Plan to one of the Company’s officers. These options shall be
vested immediately.
On December 29, 2021, the Board of Directors
approved to issue options for an aggregate of 8,000 shares under the Aerkomm 2017 Plan to two of the Company’s independent directors,
4,000 shares each. All of these options shall be vested at the date of 1/12th each month for the next 12 months on the same day of December
2021.
On December 31, 2021, the Board of Directors
approved to issue options for 2,000 shares under the Aerkomm 2017 Plan to one of the Company’s consultants for service provided
in 2020. These options vested immediately.
On March 1, 2022, the Board of Directors
approved to issue options for 18,750 shares under the Aerkomm 2017 Plan to one of the Company’s officers. These options shall be
vested immediately.
On June 1, 2022, the Board of Directors
approved to issue options for 18,750 and 75,000 shares under the Aerkomm 2017 Plan to two of the Company’s officers, respectfully.
These options shall be vested immediately.
On September 1, 2022, the Board of Directors
approved to issue options for 18,750 shares under the Aerkomm 2017 Plan to one of the Company’s officers. These options shall be
vested immediately.
On September 17, 2022, the Board of
Directors approved to issue options for 4,000 shares under the Aerkomm 2017 Plan to one of the Company’s independent directors.
These options shall be vested at the rate of 1/12th each month for the next 12 months on the same day of September 2022.
On December 1, 2022, the Board of Directors
approved to issue options for 18,750 shares under the Aerkomm 2017 Plan to one of the Company’s officers. These options shall be
vested immediately.
On December 29, 2022, the Board of Directors
approved to issue options for an aggregate of 8,000 shares under the Aerkomm 2017 Plan to two of the Company’s independent directors,
4,000 shares each. All of these options shall be vested at the date of 1/12th each month for the next 12 months on the same day of December
2022.
On March 1, 2023, the Board of Directors
approved to issue options for 18,750 shares under the Aerkomm 2017 Plan to one of the Company’s officers. These options shall be
vested immediately.
On May 5, 2023, the Board of Directors
approved to issue options for 786,356 shares under the Aerkomm 2017 Plan to eight company’s employees. These options shall be vested
on an annually basis for the next 4 years.
On May 5, 2023, the Board of Directors
of Aerkomm adopted the Aerkomm Inc. 2023 Equity Incentive Plan (the “Aerkomm 2023 Plan” and together with the Aerkomm 2017
Plan, and Aircom 2014 Plan, the “Plans”) and the reservation of 3,683,929 shares of common stock for issuance under the Aerkomm
2023 Plan. The Aerkomm 2023 Plan has been adopted by the Board and shall continue in effect for a term of 10 years unless sooner terminated
under the terms.
On June 1, 2023, the Board of Directors
approved to issue options for 18,750 shares under the Aerkomm 2023 Plan to one of the Company’s officers. These options shall be
vested immediately.
On June 13, 2023, the Board of Directors
agreed to issue options for an aggregate 3,627,679 shares under the Aerkomm 2023 Plan to certain company’s employees. The shares
subject to the option shall be vested commencing on the vesting start date and the remaining shares shall be vested at the rate of 1/48
for the next 48 months on the same day of the month as the vesting start date.
On September 1, 2023, the Board of Directors
approved to issue options for 18,750 shares under the Aerkomm 2023 Plan to one of the Company’s officers. These options shall be
vested immediately.
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial
Statements
NOTE 20 - Stock Based Compensation - Continued
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 $854,739 and $959,340 for the nine months periods ended September 30,
2023 and 2022, 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, it used the calculated value method which substitutes the historical volatility of a public company in the same industry to
estimate the expected volatility of the Company’s share price to measure the fair value of options granted under the Plans.
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 the Plans.
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 nine months period ended September 30, 2023 and year ended December 31, 2022 under the
Plans as follows:
Assumptions | |
| |
Expected term | |
5-10 years | |
Expected volatility | |
| 45.79% - 72.81 | % |
Expected dividends | |
| 0 | % |
Risk-free interest rate | |
| 0.69% - 2.99 | % |
Forfeiture rate | |
| 0% - 5 | % |
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial
Statements
NOTE 20 - Stock Based Compensation - Continued
Aircom 2014 Plan
Activities related to options for the
Aircom 2014 Plan for the nine months ended September 30, 2023 and the year ended December 31, 2022 are as follows:
| |
Number of Shares | | |
Weighted Average Exercise Price Per Share | | |
Weighted Average Fair Value Per Share | |
Options outstanding at January 1, 2022 | |
| 111,871 | | |
$ | 3.3521 | | |
$ | 1.0539 | |
Granted | |
| - | | |
| - | | |
| - | |
Exercised | |
| - | | |
| - | | |
| - | |
Forfeited/Cancelled | |
| - | | |
| - | | |
| - | |
Options outstanding at December 31, 2022 | |
| 111,871 | | |
| 3.3521 | | |
| 1.0539 | |
Granted | |
| - | | |
| - | | |
| - | |
Exercised | |
| - | | |
| - | | |
| - | |
Forfeited/Cancelled | |
| - | | |
| - | | |
| - | |
Options outstanding at September 30, 2023 (unaudited) | |
| 111,871 | | |
| 3.3521 | | |
| 1.0539 | |
There are no unvested stock awards under
Aircom 2014 Plan for the nine months period ended September 30, 2023 and the year ended December 31, 2022.
Of the shares covered by options outstanding
as of September 30, 2023, 111,871 are now exercisable. Information related to stock options outstanding and exercisable at September 30,
2023, is as follows:
| | |
Options Outstanding (Unaudited) | | |
Options Exercisable (Unaudited) | |
Range of Exercise Prices | | |
Shares Outstanding at 9/30/2023 | | |
Weighted Average Remaining Contractual Life (years) | | |
Weighted Average Exercise Price | | |
Shares Exercisable at 9/30/2023 | | |
Weighted Average Remaining Contractual Life (years) | | |
Weighted Average Exercise Price | |
$ | 3.3521 | | |
| 111,871 | | |
| 2.75 | | |
| 3.3521 | | |
| 111,871 | | |
| 2.75 | | |
| 3.3521 | |
As of September 30, 2023, there was
no unrecognized stock-based compensation expense for the Aircom 2014 Plan. No option was exercised during the nine months periods ended
September 30, 2023 and 2022.
Aerkomm 2017 Plan
Activities related to options outstanding
under Aerkomm 2017 Plan for the nine months ended September 30, 2023 and the year ended December 31, 2022 are as follows:
| |
Number of Shares | | |
Weighted Average Exercise Price Per Share | | |
Weighted Average Fair Value Per Share | |
Options outstanding at January 1, 2022 | |
| 1,207,897 | | |
| 11.2537 | | |
| 7.5309 | |
Granted | |
| 162,000 | | |
| 8.1566 | | |
| 6.3320 | |
Exercised | |
| - | | |
| - | | |
| - | |
Forfeited/Cancelled | |
| (90,209 | ) | |
| 11.9003 | | |
| 8.3775 | |
Options outstanding at December 31, 2022 | |
| 1,279,688 | | |
| 10.8161 | | |
| 7.3194 | |
Granted | |
| 805,103 | | |
| 2.5605 | | |
| 1.9779 | |
Exercised | |
| - | | |
| - | | |
| - | |
Forfeited/Cancelled | |
| - | | |
| - | | |
| - | |
Options outstanding at September 30, 2023 (unaudited) | |
| 2,084,791 | | |
| 7.6279 | | |
| 5.2566 | |
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial
Statements
NOTE 20 - Stock Based Compensation - Continued
Activities related to unvested stock
awards under Aerkomm 2017 Plan for the nine months period ended September 30, 2023 and the year ended December 31, 2022 are as follows:
| |
Number of Shares | | |
Weighted Average Fair Value Per Share | |
Options unvested at January 1, 2022 | |
| 40,194 | | |
| 8.9422 | |
Granted | |
| 162,000 | | |
| 6.3320 | |
Vested | |
| (183,194 | ) | |
| 6.7206 | |
Forfeited/Cancelled | |
| (8,000 | ) | |
| 14.4305 | |
Options unvested at December 31, 2022 | |
| 11,000 | | |
| 3.5070 | |
Granted | |
| 805,103 | | |
| 1.9779 | |
Vested | |
| (95,279 | ) | |
| 2.2208 | |
Forfeited/Cancelled | |
| - | | |
| - | |
Options unvested at September 30, 2023 (unaudited) | |
| 720,824 | | |
| 1.9691 | |
Of the shares covered by options outstanding
under the Aerkomm 2017 Plan as of September 30, 2023, 1,363,967 are now exercisable; 720,824 shares will be exercisable for the twelve-month
period ending September 30, 2024. Information related to stock options outstanding and exercisable at September 30, 2023, is as follows:
|
|
|
Options Outstanding (Unaudited) |
|
|
Options Exercisable (Unaudited) |
|
Range of
Exercise
Prices |
|
|
Shares
Outstanding at
9/30/2023 |
|
|
Weighted
Average
Remaining
Contractual
Life (years) |
|
|
Weighted
Average
Exercise
Price |
|
|
Shares
Exercisable at
9/30/2023 |
|
|
Weighted
Average
Remaining
Contractual
Life (years) |
|
|
Weighted
Average
Exercise
Price |
|
$ |
2.55 – 4.30 |
|
|
|
1,310,353 |
|
|
|
8.52 |
|
|
$ |
3.0799 |
|
|
|
589,529 |
|
|
|
7.20 |
|
|
$ |
3.7279 |
|
|
6.00 – 10.00 |
|
|
|
419,288 |
|
|
|
7.61 |
|
|
|
8.3356 |
|
|
|
419,288 |
|
|
|
7.61 |
|
|
|
8.3356 |
|
|
11.00 – 14.20 |
|
|
|
126,150 |
|
|
|
6.50 |
|
|
|
11.4688 |
|
|
|
126,150 |
|
|
|
6.50 |
|
|
|
11.4688 |
|
|
20.50 – 27.50 |
|
|
|
109,000 |
|
|
|
4.03 |
|
|
|
25.4982 |
|
|
|
109,000 |
|
|
|
4.03 |
|
|
|
25.4982 |
|
|
30.00 – 35.00 |
|
|
|
120,000 |
|
|
|
3.80 |
|
|
|
34.5479 |
|
|
|
120,000 |
|
|
|
3.80 |
|
|
|
34.5479 |
|
|
|
|
|
|
2,084,791 |
|
|
|
|
|
|
|
7.6279 |
|
|
|
1,363,967 |
|
|
|
|
|
|
|
10.3115 |
|
As of September 30, 2023, total unrecognized
stock-based compensation expense related to stock options was approximately $1,346,000, which is expected to be recognized on a straight-line
basis over a weighted average period of approximately 3.60 year. No option was exercised during the nine months period ended September
30, 2023 and the year ended December 31, 2022.
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial
Statements
NOTE 20 - Stock Based Compensation - Continued
Aerkomm 2023 Plan
Activities related to options outstanding
under Aerkomm 2023 Plan for the nine months ended September 30, 2023 is as follows:
| |
Number of Shares | | |
Weighted Average Exercise Price Per Share | | |
Weighted Average Fair Value Per Share | |
Options outstanding at December 31, 2022 | |
| - | | |
| - | | |
| - | |
Granted | |
| 3,665,179 | | |
| 2.5915 | | |
| 2.0099 | |
Exercised | |
| - | | |
| - | | |
| - | |
Forfeited/Cancelled | |
| - | | |
| - | | |
| - | |
Options outstanding at September 30, 2023 (unaudited) | |
| 3,665,179 | | |
| 2.5915 | | |
| 2.0099 | |
Activities related to unvested stock
awards under Aerkomm 2017 Plan for the nine months period ended September 30, 2023 is as follows:
| |
Number of Shares | | |
Weighted Average Fair Value Per Share | |
Options unvested at December 31, 2022 | |
| - | | |
| - | |
Granted | |
| 3,665,179 | | |
| 2.0099 | |
Vested | |
| (264,230 | ) | |
| 2.0247 | |
Forfeited/Cancelled | |
| - | | |
| - | |
Options unvested at September 30, 2023 (unaudited) | |
| 3,400,949 | | |
| 2.0087 | |
Of the shares covered by options outstanding
as of September 30, 2023, 264,230 shares are now exercisable. Information related to stock options outstanding and exercisable at September
30, 2023, is as follows:
| |
Options Outstanding (Unaudited) | | |
Options Exercisable (Unaudited) | |
Range of Exercise Prices | |
Shares Outstanding at 9/30/2023 | | |
Weighted Average Remaining Contractual Life (years) | | |
Weighted Average Exercise Price | | |
Shares Exercisable at 9/30/2023 | | |
Weighted Average Remaining Contractual Life (years) | | |
Weighted Average Exercise Price | |
$ | |
| 2.58-2.89 | |
| 3,665,179 | | |
| 9.70 | | |
| 2.5915 | | |
| 264,230 | | |
| 9.72 | | |
| 2.6106 | |
As of September 30, 2023, total unrecognized
stock-based compensation expense related to stock options was approximately $6,490,000, which is expected to be recognized on a straight-line
basis over a weighted average period of approximately 3.70 year. No option was exercised during the nine months period ended September
30, 2023.
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial
Statements
NOTE 21 - Commitments
As of September 30, 2023, the Company’s significant commitment
is summarized as follows:
| | Airbus SAS Agreement: On November 30, 2018, in furtherance of a memorandum of understanding signed in March 2018, the Company entered into an agreement with Airbus SAS (“Airbus”), pursuant to which Airbus will develop and certify a complete retrofit solution allowing the installation of the Company’s “AERKOMM K++” system on Airbus’ single aisle aircraft family including the Airbus A319/320/321, for both Current Engine Option (CEO) and New Engine Option (NEO) models. Airbus will also apply for and obtain on the Company’s behalf a Supplemental Type Certificate (STC) from the European Aviation Safety Agency, or EASA, as well as from the U.S. Federal Aviation Administration or FAA, for the retrofit AERKOMM K++ system. The EU-China Bilateral Aviation Safety Agreement, or BASA, went into effect on September 3, 2020, giving a boost to the regions’ aviation manufacturers by simplifying the process of gaining product approvals from the European Union Aviation Safety Agency, or EASA, and the Civil Aviation Administration of China, or CAAC, while also ensuring high safety and environment standards will continue to be met. Pursuant to the terms of our Airbus agreement, Airbus agreed to provides the Company with the retrofit solution which will include the Service Bulletin and the material kits including the update of technical and operating manuals pertaining to the aircraft and provision of aircraft configuration control. The timeframe for the completion and testing of this retrofit solution, including the certification, is expected to be in the fourth quarter of 2024, although there is no guarantee that the project will be successfully completed in the projected timeframe. |
| | |
| | Airbus Interior Service Agreement: On July 24, 2020, Aerkomm Malta, entered into an agreement with Airbus Interior Services, a wholly-owned subsidiary of Airbus. This new agreement follows the agreement that Aircom signed with Airbus on November 30, 2018 pursuant to which Airbus agreed to develop, install and certify the Aerkomm K++ System on a prototype A320 aircraft to EASA and FAA certification standards. |
| | |
| | Hong Kong Airlines Agreement: On January 30, 2020, Aircom signed an agreement with Hong Kong Airlines Ltd. (HKA) to provide to Hong Kong Airlines both of its Aerkomm AirCinema and AERKOMM K++ IFEC solutions. Under the terms of this new agreement, Aircom will provide HKA its Ka-band AERKOMM K++ IFEC system and its AERKOMM AirCinema system. HKA will become the first commercial airliner launch customer for Aircom. |
| | |
| | Vietjet Air: On October 25, 2021, the Company signed an agreement with Vietjet Air (“Vietjet”) to provide them with our Aerkomm AirCinema In-Flight Entertainment and Connectivity (“IFEC”) solutions. Under the terms of the agreement, the Company will provide to Vietjet our Aerkomm AirCinema Cube IFEC system for installation on Vietjet’s fleet of Airbus A320, A321 and Airbus A330-300 aircraft. |
| | |
| | Republic Engineers Complaint: On October 15, 2018, Aircom Telecom entered into a product purchase agreement, or the October 15th PPA, with Republic Engineers Maldives Pte. Ltd., a company affiliated with Republic Engineers Pte. Ltd., or Republic Engineers, a Singapore based, private construction and contracting company. On November 30, 2018, the October 15th PPA was re-executed with Republic Engineers Pte. Ltd. as the signing party. The Company refers to this new agreement as the November 30th PPA and, together with the October 15th PPA, the PPA. Under the terms of the PPA, Republic Engineers committed to the purchase of a minimum of 10 shipsets of the AERKOMM K++ system at an aggregate purchase price of $10 million. Additionally, under the terms of the PPA, the Executive Director of Republic Engineers, C. A. Raja, agreed to sign an agreement, or the Guarantee, to guarantee all of the obligations of Republic Engineers under the PPA. Republic Engineers had submitted a purchase order, or PO, dated October 15, 2018 for the 10 shipsets and was supposed to have made payments to Aircom Telecom against the purchase order shortly thereafter. Republic Engineers made no payments against the purchase order and the Company did not begin any work on the ordered shipsets. On July 7, 2020, Republic Engineers and Mr. Raja filed a complaint against Aerkomm, Aircom and Aircom Telecom (the “Aircom Parties”) in the Superior Court of the State of California for the County of Almeda, or the Court, seeking declaratory relief only and no money damages, alleging that the PPA and the PO were not executed or authorized by Republic Engineers and that the Guarantee was not executed or authorized by Mr. Raja. Republic Engineers and C. A. Raja requested from the Court (i) orders that the PPA, the PO and the Guarantee be declared null and void and (ii) the payment of their reasonable attorney’s fees. On July 29, 2020, Aircom Telecom provided notice to Republic Engineers that the PPA and the PO was terminated according to their terms as a result of the non-performance of Republic Engineers and the Failure of Mr. Raja to provide the Guarantee. The Aircom Parties filed a motion for judgment on the pleadings in August 2021, asking the Court to find the Complaint for Declaratory Relief to be moot, because the contracts that are the subject of the Complaint have been terminated. On September 22, 2021, the Court granted that motion, and dismissed the complaint. At the request of Republic Engineers, the Court granted Republic Engineers leave to amend its complaint to attempt to allege a viable claim. On May 10, 2022, Republic Engineers and Aircom Parties entered into a settlement and mutual release agreement, which included, among other things, a denial of wrongdoing by both parties, a requirement that Republic Engineering file a motion with the Court to dismiss its lawsuit against the Aircom Parties and a mutual release by each party of any and all claims against the other party relating to this dispute. On May 17, 2022, Republic Engineers filed with the Court a motion to dismiss with prejudice, its lawsuit against the Aircom Parties and on that same day the Court officially dismissed the lawsuit. |
AERKOMM INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial
Statements
NOTE 21 - Commitments - Continued
| | Shenzhen Yihe: On June 20, 2018, the Company entered into that certain Cooperation Framework Agreement, as supplemented on July 19, 2019, with Shenzhen Yihe Culture Media Co., Ltd., or Yihe, the authorized agent of Guangdong Tengnan Internet, or Tencent Group, pursuant to which Yihe agreed to assist the Company with public relations, advertising, market and brand promotion, as well as with the development of a working application of the Tencent Group WeChat Pay payment solution and WeChat applets applicable for Chinese users and relating to cell phone and WiFi connectivity on airplanes. As compensation under this Yihe agreement, the Company paid Yihe RMB 8 million (approximately US$1.2 million). On October 16, 2020, in accordance with the provisions of the agreement with Yihe, as supplemented, the Company filed an arbitration action with the Shenzhen International Arbitration Court, or the Arbitration Court, claiming that Yihe failed to perform under the terms of the supplemented agreement and seeking a complete refund of its RMB 8 million payment to Yihe. The Company received notice from the Arbitration Court on October 16, 2020 of receipt of its arbitration filing and the requirement to pay the Arbitration Court RMB 190,000 in fees relating to the arbitration. These fees were paid on October 28, 2020. The Company intends to aggressively pursue this matter. As of September 30, 2021, the prepayment was reclassified to other receivable and full allowance was reserved. On March 25, 2022, the Shenzhen International Arbitration Court issued a judgment in our favor. The Court deemed the Company’s agreement with Yihe terminated as of November 24, 2020, the date of the Company’s filing with the Court, and held that Yihe is required to promptly repay us RMB 7.5 million and reimburse the Company RMB 178,125 in court costs. The Company will make every effort to collect these amounts from Yihe. |
| | |
| | US trademark: On December 1, 2020, the United States Patent and Trademark Office (the “USPTO”) issued a Final Office Action relating to Aerkomm Inc. indicating that the Company’s US trademark application (Serial No. 88464588) for the name “AERKOMM,” which was originally filed with the USPTO on June 7, 2019, was being rejected because of a likelihood of confusion with a similarly sounding name trademarked at, and in use from, an earlier date. The Company successfully appealed this USPTO action and the USPTO issued to the Company a trademark registration for the service mark AERKOMM under Trademark Class 38 (telecommunications) on November 2, 2021 and Trademark Class 41 (entertainment services) on November 23, 2021. Equity Contract: On December 29, 2022, Aerkomm Inc. (the “Company” or the
“Seller”) and dMobile System Co., Ltd. (the “Buyer”) entered into an equity sales contract (the “Equity
Sales Contract”). Pursuant to the terms of the Equity Sales Contract, (i) the Company will sell 25,500,000 shares (the “Shares”)
of Aerkomm Taiwan Inc., the Company’s wholly-owned subsidiary (the “Aerkomm Taiwan”), to dMobile System Co., Ltd. (the
“Buyer”) for NT$255,000,000 (approximately US $9,023,354 as of December 31, 2022), and (ii) the Buyer is required to pay the
full amount to the Seller within 180 days of signing the Equity Sales Contract. If the Buyer fails to make the payment, the Seller has
the right to claim the compensation from the Buyer due to the Buyer’s breach of the Equity Sales Contract. Furthermore, Mr. Albert
Hsu who is designated by the seller as the pledgee of the Shares in the Equity Sales Contract will execute all the rights of the pledgee
under the instruction from the Seller. The parties agree to be bound by the laws of the Republic of China and agree that the Taipei District
Court in Taiwan is the court of jurisdiction for initial trial. The Buyer, dMobile System Co., Ltd., is owned by Sheng-Chun Chang, a more than 10% equity owner of the Company. The purpose of this transaction was to have Aerkomm Taiwan become a qualified company to apply for a telecommunication license in Taiwan. |
NOTE 22 - Subsequent Events
On December 5th, 2023, the Company signed
a non-binding Letter of Intent with a US-listed SPAC, a publicly traded special purpose acquisition company, regarding a business combination
which would see AERKOMM transitioning its listing to a major US stock market exchange. Based on the agreement, a business combination
between the Company and the SPAC pursuant to which the SPAC would acquire 100% of the outstanding equity and equity equivalents of the
Company or all of the Company’s business, in exchange for the a number of shares of capital stock of the SPAC based on a total pre-money
enterprise value of the Company of US $300 million to US $400 million, inclusive of US $150 million to US $200 million of contingent value,
also in stock, tied to earn-out provisions. The non-binding Letter of Intent contemplates a pre-closing private placement (PIPE) by the
Company in order that the Company raise sufficient capital to be able to fund the operations and development of the post-closing company
for a period of 12 months following the closing.
On December 21, 2023, the Company received
the amount of $5,004,000 in its Panshin Bank account from two separate investors under a Common Stock Subscription Agreement. The Company
will be using the funds for operational matters.
ITEM 2. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Use of Terms
Except as otherwise indicated by the context and
for the purposes of this report only, references in this report to “we,” “us,” “our,” or “our
company” are to the combined business of Aerkomm Inc., a Nevada corporation, and its consolidated subsidiaries, including Aircom
Pacific, Inc., a California corporation and wholly-owned subsidiary, or Aircom; Aircom Pacific Ltd., a Republic of Seychelles company
and wholly-owned subsidiary of Aircom; Aerkomm Pacific Limited, a Malta company and wholly owned subsidiary of Aircom Pacific Ltd.; Aircom
Pacific Inc. Limited, a Hong Kong company and wholly-owned subsidiary of Aircom; Aircom Japan, Inc., a Japanese company and wholly-owned
subsidiary of Aircom; and Aircom Telecom LLC, a Taiwanese company and wholly-owned subsidiary of Aircom, Aircom Taiwan, or Aircom Beijing;
MEPA Labs, Inc., a California corporation and wholly-owned subsidiary, or Mepa; Mixnet Technology Limited (changed to Mesh Technology
Limited), a Seychelles company and wholly-owned subsidiary of Aerkomm, or Mixnet; Mesh Technology Taiwan Limited, a Taiwan company and
wholly-owned subsidiary of Mixnet, or Mesh.
Special Note Regarding Forward Looking Statements
Certain information contained in this report includes
forward-looking statements. The statements herein which are not historical reflect our current expectations and projections about our
future results, performance, liquidity, financial condition, prospects and opportunities and are based upon information currently available
to us and our interpretation of what is believed to be significant factors affecting the businesses, including many assumptions regarding
future events. The following factors, among others, may affect our forward-looking statements:
| ● | our
future financial and operating results; |
| ● | our
intentions, expectations and beliefs regarding anticipated growth, market penetration and trends in our business; |
| ● | the
impact and effects of the global outbreak of the coronavirus (COVID-19) pandemic, and other potential pandemics or contagious diseases
or fear of such outbreaks, on the global airline and tourist industries, especially in the Asia Pacific region; |
| ● | our
ability to attract and retain customers; |
| ● | our
dependence on growth in our customers’ businesses; |
| ● | the
effects of changing customer needs in our market; |
| ● | the
effects of market conditions on our stock price and operating results; |
| ● | our
ability to successfully complete the development, testing and initial implementation of our product offerings; |
| ● | our
ability to maintain our competitive advantages against competitors in our industry; |
| ● | our
ability to timely and effectively adapt our existing technology and have our technology solutions gain market acceptance; |
| ● | our
ability to introduce new product offerings and bring them to market in a timely manner; |
| ● | our
ability to obtain required telecommunications, aviation and other licenses and approvals necessary for our operations |
| ● | our
ability to maintain, protect and enhance our intellectual property; |
| ● | the
effects of increased competition in our market and our ability to compete effectively; |
| ● | our
expectations concerning relationship with customers and other third parties; |
| ● | the
attraction and retention of qualified employees and key personnel; |
| ● | future
acquisitions of our investments in complementary companies or technologies; and |
| ● | our
ability to comply with evolving legal standards and regulations. |
Forward-looking statements, which involve assumptions
and describe our future plans, strategies, and expectations, are generally identifiable by use of the words “may,” “should,”
“expect,” “anticipate,” “estimate,” “believe,” “intend,” or “project”
or the negative of these words or other variations on these words or comparable terminology. Actual results, performance, liquidity, financial
condition, prospects and opportunities could differ materially from those expressed in, or implied by, these forward-looking statements
as a result of various risks, uncertainties and other factors, including the ability to raise sufficient capital to continue our operations.
Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including,
without limitation, the risks outlined under “Risk Factors” included in our Annual Report on Form 10-K for the year ended
December 31, 2022, and matters described in this report generally. In light of these risks and uncertainties, there can be no assurance
that the forward-looking statements contained in this report will in fact occur.
Potential investors should not place undue reliance
on any forward-looking statements. Except as expressly required by the federal securities laws, there is no undertaking to publicly update
or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason.
The specific discussions herein about our company
include financial projections and future estimates and expectations about our business. The projections, estimates and expectations are
presented in this report only as a guide about future possibilities and do not represent actual amounts or assured events. All the projections
and estimates are based exclusively on our management’s own assessment of our business, the industry in which we work and the economy
at large and other operational factors, including capital resources and liquidity, financial condition, fulfillment of contracts and opportunities.
The actual results may differ significantly from the projections.
Potential investors should not make an investment
decision based solely on our company’s projections, estimates or expectations.
Overview
Aerkomm Inc., is a development stage Non-Geostationary
Orbit NGSO Low Earth Orbit and Medium Earth Orbit (LEO/MEO) satellite communication technology provider, focusing on B5G / 6G communications.
With our advanced technology, we intend to provide our partners the benefits of E / V / Ka / Ku and X band unique solutions that encompasses
a wide range of service options. Such options include connectivity solutions (IVI) on Vehicles (RVs, EVs….etc), Internet of Things
(IOT) scenarios, internet in rural and remote sites to complement mobile communication weakness, maritime market and aviation market,
including Government UAVs, as well as the provision of in-flight broadband entertainment and connectivity (IFEC) for commercial airlines
and corporate jets.
Our technology will have several uses including:
|
1. |
Aviation: Target customers will be Government
UAVs, commercial airlines and corporate jet operators. For Government UAVs we plan to generate revenue from the product price and monthly
subscription fee for satellite bandwidth. We plan to generate revenue from e-commerce and monthly subscription fee for satellite bandwidth
from commercial airlines. From corporate jet operators we plan to generate revenue from the product price and monthly subscription fee
for satellite bandwidth.
|
|
2. |
Vehicles and Autopilot Trucks: Target customers will be all autopilot vehicles, using B5G, LEO satellites. We plan to generate revenue from the product price and monthly subscription fee for satellite bandwidth. |
| 3. | Trains
and Fixed Infrastructure: Target customers will be train operators and associated infrastructure. We plan to generate revenue from
the product price and monthly subscription fee for satellite bandwidth. |
| 4. | Remote
Locations: Target customers will be remote islands and mountain regions. We plan to generate revenue from the product price and monthly
subscription fee for satellite bandwidth. |
| 5. | Maritime:
Target customers will be cruise liners, freighters, tankers, ferry boats, yachts, and oilrigs. We plan to generate revenue from the product
price and monthly subscription fee for satellite bandwidth. |
With our advanced technologies and a unique business
model, our initial focus has been to become a service provider of IFEC solutions through which we intend to provide airline passengers
with a broadband in-flight experience that encompasses a wide range of service options. Such options include Wi-Fi, cellular, movies,
gaming, live TV, and music. We plan to offer these core services, which we are currently still developing, through both built-in in-flight
entertainment systems, such as seat-back display, as well as on passengers’ own personal devices. We also expect to provide content
management services and e-commerce solutions related to our IFEC solutions.
Traditionally, providers of in-flight connectivity
have focused primarily on the profit margin derived from the sale of hardware to airlines and of bandwidth to passengers. Both airlines
and passengers must “pay to play,” which results in low participation and usage rates.
We break away from this model and expect to set
a new trend with our innovative business approach which, we believe, will set us apart from our competitors by our partnering with airlines
and other strategic partners, such as online advertisers and content providers. We plan to offer a choice of different business models
of our IFEC system to commercial airlines. We plan to offer the choice of free hardware while the airline will pay for the monthly connectivity
cost. We will also offer the option of the airline paying for the hardware while we pay for the connectivity cost. Airlines will potentially
be able to generate new revenues through participating in our different revenue sharing model depending on which model they select, while
passengers will not be required to pay for connectivity. That is, for passengers, connectivity will be free. We believe that, taken together,
this novel approach will create an incentive for airlines to work with us, and this collaboration should act to drive up passenger usage
rates. We believe that this is an innovative approach that will differentiate us from most existing market players.
Our main source of revenue is expected to be derived
from fees related to the content channeled through our IFEC network from selected partners including internet companies, content providers,
advertisers, telecom service providers, e-commerce participants, and premium sponsors. In other words, we plan to use connectivity as
a tool rather than as a commodity for sale, which we believe will allow us to achieve a greater return.
To complement and facilitate our planned IFEC
service offerings, we intend to build satellite ground stations and related data centers within the geographic regions where we expect
to be providing IFEC airline services. We expect that our first such ground station will be built in Taiwan, on land that we have acquired,
to service our East Asia market.
Additionally, we have developed and begun to market
two internet connectivity systems, one for hotels primarily located in remote regions and the other for maritime use. Both systems operate
through LEO/MEO satellite connectivity. We also expect to develop a remote connectivity system that will be applicable to the highspeed
rail industry.
Our total sales were $507,949 and $0 for the nine
months ended September 30, 2023 and the year ended December 31, 2022.
Business Development
We are actively working with prospective airline
customers to provide them with the Airbus to-be-certified AERKOMM K++ system. We have entered into non-binding memoranda of understanding,
or MOUs, including, most recently, with Thai Smile which operates a fleet of 20 Airbus A320 aircrafts. There can be no assurances, however,
that any MOUs we entered into will lead to actual purchase agreements.
In view of the increasing demand by the airlines
for a bigger data throughput, during the course of discussions between us and Airbus, we have revised our strategy to focus primarily
on LEO/MEO connectivity IFEC solutions for airlines and have suspended work on our dual band (Ka/Ku) satellite inflight connectivity solution.
In connection with the Airbus project, we also
identified owners of Airbus Corporate Jet, or ACJ, aircraft, as potential customers of our AERKOMM K++ system. ACJ customers, however,
would not generate enough internet traffic to make our free-service business model viable. To capitalize on this additional market, we
plan to sell our AERKOMM K++ system hardware for installation on ACJ corporate jets and provide connectivity through subscription-based
plans. This new corporate jet market could generate additional revenue and income for our company.
Our AERKOMM K++ System
Our proprietary IFEC system, which is called the
AERKOMM K++ system, will contain a ultra-low-profile radome (that is, a dome or similar structure protecting our radio equipment) containing
two antennas, one for transmitting and the other for receiving, and will comply with the ARINC 791 standard of Aeronautical Radio, Incorporated.
Our AERKOMM K++ system also meets Airbus Design Organisation Approval.
GEO (Geostationary Earth Orbiting) and NGSO
(Non-Stationary Orbit) MEO (Medium Earth Orbiting) / LEO (Low Earth Orbiting) Satellites
Our initial AERKOMM K++ system will work with
geostationary earth orbiting, or GEO satellites. Performance of GEO satellites diminishes greatly in the areas near the Earth’s
poles. One of the main advantages of NGSO satellites over GEO satellites is considerably lower latency as well as worldwide coverage,
particularly over the poles. Whereas GEO satellites have roughly 550 milliseconds of round-trip latency time, LEO satellites boast a latency
of 240 milliseconds, signifying a distinct advantage in the sphere of real-time applications. Only LEO satellites can collect high quality
data over the North and South poles. We are developing technologies to work with MEO/LEO satellites and plans to partner with Airbus to
develop aircraft installation solutions. As new MEO and LEO satellites are being regularly launched over the next few years, which, we
expect, will enable the provision of worldwide aircraft coverage, we plan to have the necessary technology ready to take advantage of
this new trend in MEO/LEO satellite connectivity, although it cannot assure you that it will be successful in this new area of endeavor.
We have two cooperation agreements in place with LEO/MEO satellite providers. On June 23, 2020, we entered into a cooperation agreement
with Telesat LEO Inc., a wholly owned subsidiary of Telesat Canada. Telesat is one of the world’s largest and most successful satellite
operators providing critical connectivity solutions that tackle complex communications challenges. Through this agreement, Aircom and
Telesat will jointly collaborate to develop a test program for the Telesat low-Earth-orbit (LEO) Network, Telesat’s network of low-earth
orbit satellites for aircraft connectivity, to assess the technical and commercial viability of incorporating the Telesat LEO Network
capacity into Aircom’s IFEC product portfolio and network. Aircom and Telesat will collaborate in both technical and commercial
activity. On January 10, 2022, Aerkomm entered into a cooperation agreement with New Skies Satellites B.V., a Dutch company with its principal
offices located at Rooseveltplantsoen The Hague, Netherlands (“SES”). SES is one of the world leaders in satellite operations
and is operating a constellation of satellites in medium-earth orbit (MEO) and geostationary-earth orbit (GEO) with a multi-terabit, high-throughput,
low-latency network infrastructure (the “SES Satellite Network”), used for the global mobility market, including aviation,
maritime, and the global fixed location market, including equipment, mobile back haul, teleport and data center co-location. SES has launched
SES-17, a GEO satellite, and a series of MEO satellites (O3b), and will launch additional MEO satellites (“O3b mPOWER”) as
part of the SES Satellite Network. Through this agreement, Aerkomm and SES will jointly collaborate both technically and commercially.
Ground-based Satellite System Sales
Since our acquisition of Aircom Taiwan in December
2017, this wholly owned subsidiary has been developing ground-based satellite connectivity components which have an application in remote
regions that lack regular affordable ground-based communications. In September 2018, Aircom Taiwan consummated its first sale of such
a component, a small cell server terminal, in the amount of $1,730,000. This server terminal will be utilized by the purchaser in
the construction of a satellite-based ground communication system which will act as a multicast service extension of existing networks.
The system is designed to extend local existing networks, such as ISPs and mobile operators, into rural areas and create better coverage
and affordable connectivity in these areas. Aircom Taiwan expects to sell additional satellite connectivity components, systems and services
to be used in ground mobile units in the future, although there can be no assurances that it will be successful in these endeavors.
In addition, in September 2018, Aircom Taiwan
provided installation and testing services of a satellite-based ground connectivity system to a remote island resort and received service
income related to this project in the amount of $15,000. Upon the completion of this system’s testing phase, and assuming that the
system operates satisfactorily, Aircom Taiwan expects to begin to sell this system to multiple, remotely located resorts. We can make
no assurances at this time however, that this system will operate satisfactorily, that we will be successful in introducing this system
as a viable product offering or that we will be able to generate any additional revenue from the sale and deployment of this system.
Recent Events
Overview
Our current business plan reflects the impact
created as a result of the global COVID 19 pandemic, and how it afforded Aerkomm the development time needed to shift its focus to becoming
a multi-orbit LEO/MEO/GEO/HEO space technology provider. With air travel for the most part being halted during the pandemic, a negative
impact in the inflight entertainment and connectivity, or IFEC, market was experienced globally, Aerkomm at that time identified these
weaknesses in marketing and business expectations, and, thus, we saw the opportunity to utilize LEO/MEO satellites to address overwhelmed
networks as usage skyrocketed globally.
As the IFEC market is expected to experience a
slow recovery, Aerkomm expects to be able to create new business opportunities and new revenue streams, to address past business scope
endeavors while the IFEC market recovers. Prior to the global pandemic, connectivity was primarily offered via fiber line, creating bottlenecks
in most networks as traffic increased over time. With the increased desire to utilize LEO satellite systems for connectivity, intensified
by the ongoing conflict in Ukraine, Aerkomm is positioning itself to provide solutions with what we believe to be never seen before resilience.
This sudden and globally experienced impact of the pandemic as well as increasing international tensions has created the opportunity for
Aerkomm to develop our proprietary Full-Dominance-Glass-Semiconductor Antenna, or FGSA, technology.
New FGSA Antenna Development
From Aerkomm’s experience preparing to service
the IFEC markets and focusing on delivering Ka/Ku connectivity, we have been able to utilize our industry expertise and engineering capabilities
to develop a state-of-the-art technology to apply across multiple sectors of satellite communications. Aerkomm has successfully invented
a proprietary Full-Dominance Glass Semiconductor Antenna (FGSA) technology which, we believe, is a game changer in the current
satellite ecosystem. During our proof-of-concept stage, which we expect to exit during the next six to nine months, we have been able
to design our new FGSA antenna using multilayered panel display glass with a semiconductor process and integrated circuit, or IC, designed
by Aerkomm and intended to be manufactured by Taiwan Semiconductor Manufacturing Company Limited, or TSMC, and WIN Semiconductor Corp.
The results of our proof-of-concept testing phase, in laboratory, show that our FGSA antenna is able to successfully connect to LEO/MEO/GEO
satellite beams.
FGSA technology revolutionizes the way phased
array antenna technology is applied, taking it from PCB-based systems to semiconductor-based. This innovation is far ahead of industry
standards and the most unique technology utilizing semiconductor scale-down capabilities to create a new era of full-functioned satellite
mobile communications.
FGSA can be installed on satellites and used in
ground equipment. By utilizing this high-efficiency antenna, we believe that current satellite operators can significantly reduce their
capital expenditures, or CAPEX, and offer lower cost antennas to customers by increasing the effective bandwidth capacity of each satellite
to provide services. FGSA can achieve simultaneous multi-orbit tracking of satellite communication links. This ability paves the way for
AERKOMM to innovate the broadcast TV market by offering this unique antenna for versatile satellite services catering to the existing
and expanding global customer base.
Satellite License Awards
On April 27th, 2023, Aerkomm was awarded
a regional satellite operator license by the Taiwan Ministry of Digital Affairs.
We believe that with this satellite operator license
along with our proprietary FGSA technology, Aerkomm has created a much stronger position to define specifications for satellite communications
and that will enable us to create a revenue stream from FGSA related satellite services. This now positions Aerkomm as not only a hardware
supplier, but also a value-added service and ISP provider, and expands the markets in which we can participate in.
As a licensed operator in Taiwan, AERKOMM is legally
authorized to provide satellite services in mobile backhaul market, aero/maritime markets, automotive, and numerous network resiliency
contracts.
With this license, Aerkomm will be able to offer
high-throughput, ultra-flexible and carrier-grade connectivity services delivered via O3b mPOWER, SES’s second-generation MEO communications
system, from even the most remote regions across Taiwan.
Board of Director Changes
On May 5, 2023, Mr. Jan-Yueng Lin resigned from
his position as a member of our board of directors, effective as of that date. Also on May 5, 2023, our board of directors appointed Mr.
Jeff T. C. Hsu to become a member of the board of directors effectively immediately, to fill the vacancy created by the resignation of
Mr. Lin.
Sale of Equity Securities
On July 20, 2023, we entered into a subscription
agreement with one investor (the “Investor”) who agreed to purchase an aggregate of 800,000 shares of the Company’s
common stock, $0.001 par value per share, at a price of $12.50 per share (the “Shares”) for an aggregate purchase of $10,000,000.
The Shares were offered and sold by the Company in a private placement offering (the “Offering”) under Regulation S promulgated
under the Securities Act of 1933, as amended (the “Securities Act”). The investor represented in its subscription agreement
that it not a resident of the United States or otherwise a “U.S. Person,” as that term is defined in Rule 501(a) of Regulation
D promulgated under the Securities Act.
Pursuant to the terms of the subscription agreement,
the parties have agreed that if the Company has not met the following conditions relating to the development of its new Full-Dominance
Glass Semiconductor Antenna (the “FGSA Antenna”) by the end of business on June 30, 2024, the Subscriber shall have the
right to sell the Shares back to the Company for the full amount the Subscriber originally paid for the Shares:
| i. | The
Company shall have completed a “Design Release” meaning that it shall have an engineering sample of the FGSA Antenna publicly
available and ready for sale; |
| ii. | The
Company shall have passed the “small batch market test” meaning that it shall have sold 5,000 sample units of the designed
released FGSA Antenna; and |
| iii. | The
Company shall be ready for the “commercial release” of the FGSA Antenna meaning that the Company shall be ready to take orders
for the mass production of the FGSA Antenna. |
The Company and the Investor will separately agree
on the timing of the Investor’s cash payments to the Company under the subscription agreement and the related issuances upon payment
of the Shares to the Investor.
Letter of Intent with Ejectt, Inc.
On July 28, 2023, we and Ejectt, Inc. (“Ejectt”),
a publicly traded Taiwan company, signed a non-binding letter of intent (the “LOI”) with respect to a possible merger between
Aerkomm and Ejectt.
The LOI signing marks a decisive step towards
consolidation and growth in Taiwan’s satellite communication industry. We and Ejectt are committed to synergizing our strengths
and expertise to maximize our impact in the market and strengthen our joint position in the satellite communications sector.
Mesh Tech Acquisition
On July 31, 2023, we entered into a share purchase
agreement (the “Share Purchase Agreement”) with Mesh Technology Taiwan Limited (“Mesh Tech”) and Mixnet Technology
Limited (“Mixnet”). Mesh Tech is a Taiwan based company that creates products to accelerate data transfer and distribution
across different geographical locations through its hybrid CDN technology.
Pursuant to the terms of the Share Purchase Agreement,
the Company will acquire all of the outstanding capital stock of Mesh Tech and Mixnet. The shares of Mesh Tech will be held through Mixnet,
a Seychelles organized company. As consideration for this acquisition the Company will issue to the shareholders of Mesh Tech (the “Sellers”)
7,000,448 shares of its common stock (the “Consideration Shares”) valued at approximately $2.36 per share for an aggregate
valuation of $16,500,000. The Company has agreed to register the Consideration Shares for resale under a Form S-1 registration statement
(the “Resale Registration Statement”) and the Sellers have given the Chief Executive Officer of the Company an irrevocable
proxy to vote the Consideration Shares on behalf of the Sellers until the Consideration Shares are sold through the Resale Registration
Statement.
The 7,000,448 Consideration Shares have been issued
to Kevin Wong as of September 29, 2023 after the acquisition closed on September 28, 2023.
Taiwan Telecommunications Project Bid
On August 9, 2023, our Taiwan based subsidiary,
Aerkomm Taiwan Inc., and its exclusive agent in Taiwan, Ejectt, successfully obtained a first-stage bid for the verification project of
“Emerging Technology Application for Enhancing Communication Network Resilience in Emergencies or War” (the “Verification
Project”) from the Taiwan Telecom Technology Center (TTC). The Ministry of Digital Affairs (MoDA) in Taiwan has actively promoted
the Verification Project in recent months. MoDA is dedicated to building a diverse and robust satellite communication system in Taiwan
to ensure seamless communication during emergencies.
To fortify the resilience of communication networks,
Taiwan’s MODA has initiated the two-year Verification Project. This initiative is being carried out by the TTC, a government-funded
foundation in Taiwan. The project’s goal is to establish a total of 773 sites both domestically and internationally by the end of
2024. This comprehensive network setup aims to validate the effectiveness of a heterogeneous resilient network architecture.
In this first-stage winning bid, titled “Asynchronous
Satellite Network Leasing and Transmission Service Procurement Project,” Aerkomm Taiwan and Ejectt will collaborate with SES, utilizing
SES’s O3b Medium Earth Orbit satellite constellation. We expect that this ongoing collaboration will continue to strengthen the
partnership between us and SES in the Taiwan market. Our joint effort aims to expand and deepen our satellite communication business in
Taiwan, capture new business opportunities, and solidify our positions as key players in the satellite communications landscape.
Principal Factors Affecting Financial Performance
We believe that our operating and business performance
will be driven by various factors that affect the commercial airline industry, including trends affecting the travel industry and trends
affecting the customer bases that we target, as well as factors that affect wireless Internet service providers and general macroeconomic
factors. Key factors that may affect our future performance include:
|
● |
our ability to enter into and maintain long-term business arrangements with airline partners, which depends on numerous factors including the real or perceived availability, quality and price of our services and product offerings as compared to those offered by our competitors; |
|
|
|
|
● |
the extent of the adoption of our products and services by airline partners and customers; |
|
|
|
|
● |
costs associated with implementing, and our ability to implement on a timely basis, our technology, upgrades and installation technologies; |
|
|
|
|
● |
costs associated with and our ability to execute our expansion, including modification to our network to accommodate satellite technology, development and implementation of new satellite-based technologies, the availability of satellite capacity, costs of satellite capacity to which we may have to commit well in advance, and compliance with regulations; |
|
|
|
|
● |
costs associated with managing a rapidly growing company; |
|
|
|
|
● |
the impact and effects of the global outbreak of the coronavirus (COVID-19) pandemic, and other potential pandemics or contagious diseases or fear of such outbreaks, on the global airline and tourist industries, especially in the Asia Pacific region; |
|
|
|
|
● |
the number of aircraft in service in our markets, including consolidation of the airline industry or changes in fleet size by one or more of our commercial airline partners; |
|
|
|
|
● |
the economic environment and other trends that affect both business and leisure travel; |
|
|
|
|
● |
continued demand for connectivity and proliferation of Wi-Fi enabled devices, including smartphones, tablets and laptops; |
|
|
|
|
● |
our ability to obtain required telecommunications, aviation and other licenses and approvals necessary for our operations; and |
|
|
|
|
● |
changes in laws, regulations and interpretations affecting telecommunications services and aviation, including, in particular, changes that impact the design of our equipment and our ability to obtain required certifications for our equipment. |
Smaller Reporting Company
Although we no longer qualify as an Emerging Growth
Company, or EGC, we continue to qualify as a smaller reporting company, which allows us to take advantage of many of the same exemptions
from disclosure requirements, including reduced disclosure obligations regarding executive compensation that are available to an EGC.
In addition, as a smaller reporting company with less than $100 million in annual revenue, we are not required to comply with the auditor
attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002. In reliance on these exemptions, we have taken advantage of
reduced reporting obligations in this quarterly report on Form 10-Q.
Recent Market Information
The IATA (International Air Transport Association)
in August 2023 issued the report entitled Passenger Market Analysis.
| ● | Industry-wide
revenue passenger-kilometers (RPKs) increased 28.4% year-on-year (YoY) in August. Compared to 2019 levels, passenger traffic recovered
to 95.7%. |
| ● | Available
seat-kilometers (ASKs) rose at a slower annual pace of 24.9%, lifting passenger load factors (PLFs) close to pre-pandemic levels. The
PLF in August was 84.6%, 1.1 ppts lower than the PLF for the same month in 2019. |
| ● | Domestic
passenger traffic grew 9.2% over pre-pandemic levels. Most monitored markets saw stable growth in domestic traffic, while Japan experienced
disruptions due to Typhoon Khanun. |
| ● | The
recovery of international RPKs remained at 88.5% of 2019 levels. Regions experienced different outcomes while Asia Pacific carriers continued
to restore international traffic. |
| ● | Ticket
sales data signaled unwinding domestic demand while international bookings remained on the same positive trend. |
Passenger traffic expanded further in August 2023,
with industry-wide revenue passenger kilometers (RPKs) growing 28.4% year-on-year (YoY) and reaching 95.7% of August 2019 levels. In seasonally-adjusted
terms, passenger traffic increased 1.0% month-on-month (MoM), indicating a slowing but still positive trend globally.
Results of Operations
Comparison of Three Months Ended September
30, 2023 and 2022
The following table sets forth key components
of our results of operations during the three months periods ended September 30, 2023 and 2022.
|
|
Three Months Ended
September 30, |
|
|
Change |
|
|
|
2023 |
|
|
2022 |
|
|
$ |
|
|
% |
|
Revenue |
|
$ |
61,582 |
|
|
$ |
2,855 |
|
|
$ |
58,727 |
|
|
|
2057.0 |
% |
Cost of sales |
|
|
26,666 |
|
|
|
- |
|
|
|
26,666 |
|
|
|
100.0 |
% |
Operating expenses |
|
|
4,303,845 |
|
|
|
2,380,851 |
|
|
|
1,922,994 |
|
|
|
80.8 |
% |
Loss from operations |
|
|
(4,268,929 |
) |
|
|
(2,377,996 |
) |
|
|
(1,890,933 |
) |
|
|
79.5 |
% |
Net non-operating gain(loss) |
|
|
(2,155,116 |
) |
|
|
(1,428,543 |
) |
|
|
(726,573 |
) |
|
|
50.9 |
% |
Loss before income taxes |
|
|
(6,424,045 |
) |
|
|
(3,806,539 |
) |
|
|
(2,617,506 |
) |
|
|
68.8 |
% |
Income tax expense |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
% |
Net Loss |
|
|
(6,424,045 |
) |
|
|
(3,806,539 |
) |
|
|
(2,617,506 |
) |
|
|
68.8 |
% |
Other comprehensive income |
|
|
(569,911 |
) |
|
|
1,290,912 |
|
|
|
(1,860,823 |
) |
|
|
(144.1 |
)% |
Total comprehensive loss |
|
$ |
(6,993,956 |
) |
|
$ |
(2,515,627 |
) |
|
$ |
(4,478,329 |
) |
|
|
178.0 |
% |
Revenue. We have $61,582 of service income for the three-month period ended
September 30, 2023 and $2,855 service income for the three-month period ended September 30, 2022, respectively. Our sales for the three
months ended September 30, 2023 was $0 as we are still developing our core business in in-flight entertainment and connectivity and there
was no non-recurring sale of equipment to related parties during the period. Our total revenue was $2,855 for the three months ended September
30, 2022 for providing satellite service to one of our related parties.
Cost of revenue. Our cost of revenue
was $26,666 and $0 for the three-month periods ended September 30, 2023 and 2022, respectively. The cost of revenue for the three months
ended September 30, 2023 was $26,666 as it was a small product provided to one of our related parties.
Operating expenses. Our operating
expenses consist primarily of compensation and benefits, professional advisor fees, research and development expenses, cost of promotion,
business development, business travel, transportation costs, and other expenses incurred in connection with general operations. Our
operating expenses increased by $1,922,994, or 80.8% to $4,303,845 for the three-month period ended September 30, 2023, from $2,380,851
for the three-month period ended September 30, 2022. Such increase was mainly due to increases in salary expenses, stock compensation
expenses and professional fees of $1,234,452, $530,011 and $361,759, respectively, which was offset by the decreases in R&D expense
and Payroll taxes of $330,887 and 230,402.
Net non-operating expense. We had
$2,155,116 in net non-operating loss for the three-month period ended September 30, 2023, as compared to net non-operating expense of
$1,428,543 for the three-month period ended September 30, 2022. Net non-operating expense in the three-month period ended September 30,
2023 represents loss on foreign exchange translation of $806,619, unrealized loss from the transactions of our liquidity contract and
prepaid investment of $1,320,206, other financing cost due to amortization of convertible bonds issuing cost of $128,663 and net other
loss of $100,372. Net non-operating loss in the three months ended September 30, 2022 represents a loss of $1,318,614 in foreign exchange
translation and financing cost of $121,703 from the amortization of bond issuing costs, which was offset by a net other income of $11,799.
Loss before income taxes. Our
loss before income taxes decreased by $2,617,506, or 68.8%, to $6,424,045 for the three-month period ended September 30, 2023, from a
loss of $3,806,539 for the three-month period ended September 30, 2022, as a result of the factors described above.
Income tax expense. Income
tax expense was $0 for the three-month period ended September 30, 2023, as compared to the income tax expense of $0 for the three-month
period ended September 30, 2022.
Total comprehensive loss. As
a result of the cumulative effect of the factors described above, our total comprehensive loss decreased by $4,478,329, or 178.0%, to
$6,993,956 for the three-month period ended September 30, 2023, from $2,515,627 for the three-month period ended September 30, 2022.
Comparison of Nine Months Ended September
30, 2023 and 2022
The following table sets forth key components
of our results of operations during the nine-month periods ended September 30, 2023 and 2022.
| |
Nine Months Ended September 30, | | |
Change | |
| |
2023 | | |
2022 | | |
$ | | |
% | |
Net Sales– related party | |
$ | 446,367 | | |
$ | - | | |
$ | 446,367 | | |
| 100.0 | % |
Service income – related party | |
| 61,582 | | |
| 6,073 | | |
| 55,509 | | |
| 914.0 | % |
Cost of sales | |
| 472,115 | | |
| - | | |
| 472,115 | | |
| 100.0 | % |
Operating expenses | |
| 11,577,414 | | |
| 6,075,775 | | |
| 5,501,639 | | |
| 90.6 | % |
Loss from operations | |
| (11,541,580 | ) | |
| (6,069,702 | ) | |
| (5,471,878 | ) | |
| 90.2 | % |
Net non-operating gain (loss) | |
| (1,408 | ) | |
| (2,949,378 | ) | |
| 2,947,970 | | |
| (100.0 | )% |
Loss before income taxes | |
| (11,542,988 | ) | |
| (9,019,080 | ) | |
| (2,523,908 | ) | |
| 28.0 | % |
Income tax expense | |
| 2,400 | | |
| 1,600 | | |
| 800 | | |
| 50.0 | % |
Net Loss | |
| (11,545,388 | ) | |
| (9,020,680 | ) | |
| (2,524,708 | ) | |
| 28.0 | % |
Other comprehensive income (loss) | |
| (852,301 | ) | |
| 2,482,003 | | |
| (3,334,304 | ) | |
| (134.3 | )% |
Total comprehensive loss | |
$ | (12,397,689 | ) | |
$ | (6,538,677 | ) | |
$ | (5,859,012 | ) | |
| 89.6 | % |
Revenue. Our total revenue was $507,949
and $6,073 for the nine months periods ended September 30, 2023 and 2022, respectively. As we are still developing our core business in
in-flight entertainment and connectivity and there was non-recurring sale of equipment to related parties during the period. Our total
revenue was $6,073 for the nine months period ended September 30, 2022 represents an income from providing satellite service to one of
our related parties.
Cost of Sales. Our cost of sales
was $472,115 and $0 for the nine-month periods ended September 30, 2023 and 2022, respectively. The cost of sales for the nine months
ended September 30, 2023 was $472,115 as the cost directly associated with equipment that we sold to one of our related parties. The cost
of sales for the nine months ended September 30, 2022 was $0 as there is no cost directly associated with providing satellite service
to one of our related parties.
Operating expenses. Our operating
expenses consist primarily of compensation and benefits, professional advisor fees, research and development expenses, cost of promotion,
business development, business travel, transportation costs, and other expenses incurred in connection with general operations. Our
operating expenses increased by $5,501,639, or 90.6%, to $11,577,414 for the nine months ended September 30, 2023, from $6,075,775 for
the nine months ended September 30, 2022. This decrease was mainly due to the decrease in non-cash stock-based compensation expense and
auditing expense of $164,443 and $245,685, which was offset by the increase in payroll, R&D expenses, and interest expense of $3,337,195,
$1,230,031, and $693,646, respectively.
Net non-operating loss. We had $1,408
in net non-operating loss for the nine months ended September 30, 2023, as compared to net non-operating loss of $2,949,378 for the nine
months ended September 30, 2022. Net non-operating income in the nine months ended September 30, 2023 represents loss on foreign exchange
translation of $1,126,762, amortization of financing cost of $380,684, unrealized gain on investment of $1,770,888 and net other loss
of $264,850. Net non-operating income in the nine months ended September 30, 2022 represents loss on foreign exchange translation of $2,602,872,
amortization of financing cost of $360,089, unrealized loss in investment of $21,157 and net other income of $34,740.
Loss before income taxes. Our loss before income taxes increased by $2,523,908, or 28.0%, to
$11,542,988 for the nine months ended September 30, 2023, from a loss of $9,019,080 for the nine months ended September 30, 2022, as a
result of the factors described above.
Income tax expense. Income tax expense
was $2,400 and $1,600 for the nine-month periods ended September 30, 2023 and 2022, respectively, mainly due to a California franchise
tax and foreign subsidiary’s income tax expenses.
Total comprehensive loss. As
a result of the cumulative effect of the factors described above, our total comprehensive loss increased by $5,859,012, or 89.6%, to $12,397,689
for the nine months ended September 30, 2023, from $6,538,677 for the nine months ended September 30, 2022.
Liquidity and Capital Resources
As of September 30, 2023, we had cash and cash
equivalents of $253,278 and restricted cash of $3,224,355. We have financed our operations primarily through cash proceeds from financing
activities, including from our 2020 Offering, the issuance of convertible bonds, short-term borrowings and equity contributions by our
stockholders.
The following table provides detailed information
about our net cash flow:
Cash Flow
| |
Nine Months Ended September 30, | |
| |
2023 | | |
2022 | |
Net cash used for operating activities | |
$ | (7,372,317 | ) | |
$ | (7,379,758 | ) |
Net cash used by investing activity | |
| (53,550 | ) | |
| (1,419,781 | ) |
Net cash (used) provided by financing activity | |
| (394,531 | ) | |
| 8,995,017 | |
Net decrease in cash and cash equivalents | |
| (7,820,398 | ) | |
| 195,478 | |
Cash at beginning of year | |
| 10,101,920 | | |
| 3,288,813 | |
Foreign currency translation effect on cash | |
| 1,196,111 | | |
| 2,482,003 | |
Cash at end of year | |
$ | 3,477,633 | | |
$ | 5,966,294 | |
Operating Activities
Net cash used for operating activities was
$7,372,317 for the nine months ended September 30, 2023, as compared to $7,379,758 for the nine months ended September 30, 2022.
In addition to the net loss of $11,545,388, the increase in net cash used for operating activities during the nine-month period ended
September 30, 2023 was mainly due to increase in prepaid expenses, deposits, and accounts payable, of $5,263,981, $223,550, and $386,312,
respectively, offset by the increase in accrued expenses and other current liabilities of $9,622,337. In addition to the net loss of $9,020,680,
the increase in net cash used for operating activities during the nine months ended September 30, 2022 was mainly due to an increase in
prepaid expenses and other current assets of $2,216,352 and a decrease in operating lease liability of $195,544, which was offset by a
decrease in accounts receivable of $75,180, increase in accounts payable of $262,419 and increase in accrued expense and other current
liabilities of $1,526,171.
Investing Activities
Net cash used by investing activities for the
nine months ended September 30, 2023 was $53,550 as compared to net cash provided by investing activities of $1,419,781 for the nine
months ended September 30, 2022. The net cash provided by investing activities for the nine months ended September 30, 2023 was mainly
for the proceeds from disposal of long-term investment of $325,578, which was offset by the purchase of property and equipment of $379,128. The
net cash used for investing activities for the nine months ended September 30, 2022 was mainly due to the acquisition of short-term investment
of $1,416,142 and acquisition of property and equipment of $11,462, which was offset by proceeds from disposal of trading security of
$7,823.
Financing Activities
Net cash used by financing activities for the
nine months ended September 30, 2023 was $394,531 and net cash provided by financing activities for the nine months ended September 30,
2022 was $8,995,017, respectively. Net cash used by financing activities for the nine months ended September 30, 2023 were mainly attributable
to repayment of short-term loans in the amount of $384,189. Net cash provided by financing activities for the nine months ended September
30, 2022 was mainly attributable to net proceeds from short-term loans of $9,015,361, which was offset by the repayment on long-term
loan and finance lease liability of $11,065 and $9,279, respectively.
On May 9, 2019, two of our current shareholders, whom we refer to
as the Lenders, each committed to provide us with a $10 million bridge loan, or together, the Loans, for an aggregate principal amount
of $20 million, to bridge our cash flow needs prior to our obtaining a mortgage loan to be secured by our Taiwan land parcel which we
recently purchased. The Taiwan land parcel consists of approximately 6.36 acres of undeveloped land located at the Taishui Grottoes in
the Xinyi District of Keelung City, Taiwan. Aerkomm Taiwan contracted to purchase the Taiwan land parcel for NT$1,056,297,507, or US$34,474,462,
and as of July 3, 2019 we completed payment of the purchase price for the Taiwan land parcel in full. We are now waiting for title to
the Taiwan land parcel to be transferred to us pending the completion of our satellite ground station licensing process. The Loans will
be secured by the Taiwan land parcel with the initial closing date of the Loans to be a date, designated by us, within 30 days following
the date that the title for the Taiwan land parcel is fully transferred to and vested in our subsidiary, Aerkomm Taiwan. The Loans will
bear interest, non-compounding, at the Bank of America Prime Rate plus 1%, annually, calculated on the actual number of days the Loans
are outstanding and based on a 365-day year and will be due and payable upon the earlier of (1) the date of our obtaining a mortgage loan
secured by the Taiwan land parcel with a principal amount of not less than $20 million and (2) one year following the initial closing
date of the Loans. The Lenders also agreed to an earlier closing of up to 25% of the principal amounts of the Loans upon our request prior
to the time that title to the Taiwan land parcel is transferred to our subsidiary, Aerkomm Taiwan, provided that we provide adequate evidence
to the Lenders that the proceeds of such an earlier closing would be applied to pay our vendors. We, of course, cannot provide any assurances
that we will be able to obtain a mortgage on the Taiwan land parcel once the acquisition is completed. On April 25, 2022, the Lenders
amended the commitment and agreed to increase the percentage of earlier closing amount from 25% to 100%.
On July 10, 2018, in conjunction with our agreement
to acquire the Taiwan land parcel, we entered into a binding letter of commitment with Metro Investment Group Limited, or MIGL, pursuant
to which we agreed to pay MIGL an agent commission of four percent (4%) of the full purchase price of the Taiwan land parcel, equivalent
to approximately US$1,387,127, for MIGL’s services provided with respect to the acquisition. Under the terms of the initial agreement
with MIGL, we agreed to pay this commission no later than 90 days following payment in full of the Taiwan land parcel purchase price.
On May 2019 and December 2021, we amended the binding letter of commitment with MIGL to extend the payment to be paid after the full payment
of the Land acquisition price until no later than June 30, 2022. If there is a delay in payment, we shall be responsible for punitive
liquidated damages at the rate of one tenth of one percent (0.1%) of the commission per day of delay with a maximum cap to these damages
of five percent (5%). Under applicable Taiwanese law, the commission was due and payable upon signing of the letter of commitment even
if the contract is cancelled for any reason and the acquisition is not completed. We have recorded the estimated commission to the cost
of land and will be paying the amount no later than June 30, 2022. We are currently negotiating with MIGL to amend the agreement to further
extend the payment term.
On December 3, 2020, the Company closed a private
placement offering (the “Bond Offering”) consisting of US$10,000,000 in aggregate principal amount of its Credit Enhanced
Zero Coupon Convertible Bond due 2025 (the “Credit Enhanced Bonds”) and US$200,000 in aggregate principal amount of its 7.5%
convertible bonds due 2025 (the “Coupon Bonds,” and together with the Credited Enhanced Bonds, the “Bonds”).
Payments of principal, premium, interest and any
payments thereof in respect of the Credit Enhanced Bonds will have the benefit of a bank guarantee denominated in U.S. dollars and issued
by Bank of Panhsin Co., Ltd., based in Taiwan. Unless previously redeemed, converted or repurchased and canceled, the Credit Enhanced
Bonds will be redeemed on December 2, 2025 at 105.11% of their principal amount and the Coupon Bonds will be redeemed on December 2, 2025
at 100% of their principal amount plus any accrued and unpaid interest. The Coupon Bonds will bear interest from and including December
2, 2020 at the rate of 7.5% per annum. Interest on the Coupon Bonds is payable semi-annually in arrears on June 1 and December 1 each
year, commencing on June 1, 2021. Unless previously redeemed, converted or repurchased and cancelled, the Bonds may be converted at any
time on or after December 3, 2020 up to November 20, 2025 into shares of Common Stock of the Company with a par value US$0.001 each (such
shares of Common Stock, the “Conversion Shares”). The initial conversion price for the Bonds is US$13.30 per Conversion Share
and is subject to adjustment in specified circumstances. Please refer to our Current Report on Form 8-K filed with SEC on December 4,
2020.
We have not generated significant revenues, excluding
non-recurring revenues in 2021 and 2019, and will incur additional expenses as a result of being a public reporting company. Currently,
we have taken measures that management believes will improve our financial position by financing activities, including having successfully
completed our Bond Offering, 2020 Offering, short-term borrowings and other private loan commitments, including the Loans from our investors,
discussed above. With our current available cash, the $20 million in loan commitments from the Lenders and our expectations for our ability
to raise funds in the near term, we believe our working capital will be adequate to sustain our operations for the next twelve months.
However, even if we successfully raise sufficient
capital to satisfy our needs over the next twelve months, following that period we will require additional cash resources for the implementation
of our strategy to expand our business or for other investments or acquisitions we may decide to pursue. If our internal financial resources
are insufficient to satisfy our capital requirements, we will need seek to sell additional equity or debt securities or obtain additional
credit facilities, although there can be no assurances that we will be successful in these efforts. The sale of additional equity securities
could result in dilution to our stockholders. The incurrence of indebtedness would result in increased debt service obligations and could
require us to agree to operating and financial covenants that would restrict our operations. Financing may not be available in amounts
or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, could limit
our ability to expand our business operations and could harm our overall business prospects.
On December 7, 2022, Aerkomm Inc. (the “Company”)
entered into an investment conversion and note purchase agreement (the “Agreement”) with World Praise Limited, a Samoa registered
company (“WPL”). Pursuant to the terms of this agreement, (i) a subscription for the common stock of the Company in the amount
of $3,175,200 which was entered into between WPL and the Company on June 28, 2022 and funded (the “June Subscription”), (ii)
a subscription for the common stock of the Company in the amount of $5,674,000 which was entered into between WPL and the Company on September
15, 2022 and funded (the “September Subscription”), and (iii) a subscription for the capital stock of MEPA Labs, Inc. (“MEPA”),
a wholly owned subsidiary of the Company, in the amount of $4,324,000 which was entered into between MEPA and the Company on June 28,
2022 and funded (the “MEPA Subscription,” and together with the June Subscription and the September Subscription, the “WPL
Subscriptions”), the WPL Subscriptions in the aggregate totaling $13,173,200, were converted into loans to the Company evidenced
by that certain convertible bond of the Company in favor of WPL and dated December 7, 2022 (the “Convertible Bond”)
In addition, and as indicated in the Agreement,
WPL agreed to lend an additional $10,000,000 to the Company under the Convertible Note (the “New Loan”) and to cap the aggregate
amount of loans to the Company under the Convertible Note, including the New Loan, the WPL Subscriptions and any future advances under
the Convertible Note, at $30,000,000.
The Convertible Note allows for loans to the Company
up to an aggregate principal amount of $30,000,000 and acknowledges an aggregate principal amount of $23,173,200 in loans under the Convertible
Bond outstanding as of December 31, 2022.
Capital Expenditures
Our operations continue to require significant
capital expenditures primarily for technology development, equipment and capacity expansion. Capital expenditures are associated with
the supply of airborne equipment to our prospective airline partners, which correlates directly to the roll out and/or upgrade of service
to our prospective airline partners’ fleets. Capital spending is also associated with the expansion of our network, ground stations
and data centers and includes design, permitting, network equipment and installation costs.
Capital expenditures for the nine months ended
September 30, 2023 and 2022 were $379,128 and $11,462, respectively.
We anticipate an increase in capital spending
in our fiscal year ended December 31, 2023 and estimate that capital expenditures will range from $10 million to $50 million as we begin
airborne equipment installations and continue to execute our expansion strategy. We expect to raise these funds through our planned public
offering, the registration statement for which is currently under review by the SEC, and/or through other sources of equity or debt financings.
There can be no assurance, however, that our planned public offering will proceed successfully, if at all, or that we will be able to
raise the required funds through other means on acceptable terms to us, if at all.
Inflation
Inflation and changing prices have not had a material
effect on our business and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future.
However, our management will closely monitor price changes in our industry and continually maintain effective cost control in operations.
Off Balance Sheet Arrangements
We do not have any off balance sheet arrangements
that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues
or expenses, results of operations, liquidity or capital expenditures or capital resources that is material to an investor in our securities.
Seasonality
Our operating results and operating cash flows
historically have not been subject to significant seasonal variations. This pattern may change, however, as a result of new market opportunities
or new product introductions.
Critical Accounting Policies
The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires our management to make assumptions, estimates and judgments
that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We have
identified certain accounting policies that are significant to the preparation of our financial statements. These accounting policies
are important for an understanding of our financial condition and results of operation. Critical accounting policies are those that are
most important to the portrayal of our financial condition and results of operations and require management’s difficult, subjective,
or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may
change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements
and because of the possibility that future events affecting the estimate may differ significantly from management’s current judgments.
We believe the following critical accounting policies involve the most significant estimates and judgments used in the preparation of
our financial statements:
Concentrations of Credit Risk. Financial instruments that potentially subject to significant concentrations
of credit risk consist primarily of cash in banks. As of September 30, 2023 and December 31, 2022, the total balance of cash in bank exceeding
the amount insured by the Federal Deposit Insurance Corporation (FDIC) for the Company was approximately $0 and $6,153,000, respectively.
The balance of cash deposited in foreign financial institutions exceeding the amount insured by local insurance is approximately $3,153,000
and $3,460,000 as of September 30, 2023 and December 31, 2022, respectively. We perform ongoing credit evaluation of its customers and
requires no collateral. An allowance for doubtful accounts is provided based on a review of the collectability of accounts receivable.
We determine the amount of allowance for doubtful accounts by examining its historical collection experience and current trends in the
credit quality of its customers as well as its internal credit policies. Actual credit losses may differ from our estimates.
Inventories. Inventories are recorded
at the lower of weighted-average cost or net realizable value. We assess the impact of changing technology on our 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.
Research and Development Costs.
Research and development costs are charged to
operating expenses as incurred. For the nine-month periods ended September 30, 2023 and 2022, we incurred approximately $1,271,651 and
$0 of research and development costs, respectively.
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, satellite equipment – 5 years, vehicles – 5 years and
lease improvement – 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 income in the period of sale or disposal. We review 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.
We determined that there was no impairment loss for the nine-month periods ended September 30, 2023 and 2022.
Right-of-Use Asset and Lease Liability.
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 and finance leases under previous accounting standards and disclosing key information
about leasing arrangements. A lessee should recognize the lease liability to make lease payments and the right-of-use asset representing
its right to use the underlying asset for the lease term. For operating leases and finance leases, a right-of-use asset and a lease liability
are initially measured at the present value of the lease payments by discount rates. The Company’s lease discount rates are generally
based on its incremental borrowing rate, as the discount rates implicit in the Company’s leases is readily determinable. Operating
leases are included in operating lease right-of-use assets and lease liabilities in the consolidated balance sheets. Finance leases are
included in property and equipment and lease liability in our consolidated balance sheets. Lease expense for operating expense payments
is recognized on a straight-line basis over the lease term. Interest and amortization expenses are recognized for finance leases on a
straight-line basis over the lease term. For the leases with a term of twelve months or less, a lessee is permitted to make an accounting
policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it
should recognize lease expense for such leases generally on a straight-line basis over the lease term. We adopted ASU 2016-02 effective
January 1, 2019.
Goodwill and Purchased Intangible Assets.
Goodwill represents the amount by which the total purchase price paid exceeded the estimated fair value of net assets acquired from acquisition
of subsidiaries. We test 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. Purchased intangible asset consists of satellite system software
and is amortized over 10 years.
Fair Value of Financial Instruments.
We utilize 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 we have 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
and restricted cash, accounts payable, short-term loan and other payable approximated their fair value due to the short-term nature of
these financial instruments. The Company’s short-term investment is classified within Level 1 of the fair value hierarchy on September
30, 2023. The Company’s long-term investment is classified within Level 2 of the fair value hierarchy on September 30, 2023 due
to its restricted nature. The Company’s long-term bonds payable, long-term loan and lease payable approximated the carrying amount
as its interest rate is considered as approximate to the current rate for comparable loans and leases, respectively. There were no outstanding
derivative financial instruments as of September 30, 2023.
Revenue Recognition. We recognize
revenue when performance obligations identified under the terms of contracts with our customers are satisfied, which generally occurs
upon the transfer of control in accordance with the contractual terms and conditions of the sale. Our revenue for the nine months ended
September 30, 2023 composed of the service income and equipment sold to one of our related parties. The majority of our revenue is recognized
at a point in time when product is shipped or service is provided to the customer. Revenue is measured as the amount of consideration
we expect to receive in exchange for transferring goods, which includes estimates for variable consideration. We adopted the provisions
of ASU 2014-09 Revenue from Contract with Customers (Topic 606) and the principal versus agent guidance within the new revenue standard.
As such, the Company identifies a contract with a customer, identifies the performance obligations in the contract, determines the transaction
price, allocates the transaction price to each performance obligation in the contract and recognizes revenue when (or as) we satisfy a
performance obligation. Customers may make payments to the Company either in advance or in arrears. If payment is made in advance, the
Company will recognize a contract liability under prepayments from customers until which point the Company has satisfied the requisite
performance obligations to recognize revenue.
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. It is not subject to income tax examinations by US federal, state and local tax authorities
for years before 2017. 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.
Foreign Currency Transactions. Foreign
currency transactions are recorded in U.S. dollars at the exchange rates in effect when the transactions occur. Exchange gains or losses
derived from foreign currency transactions or monetary assets and liabilities denominated in foreign currencies are recognized in current
income. At the end of each period, assets and liabilities denominated in foreign currencies are revalued at the prevailing exchange rates
with the resulting gains or losses recognized in income for the period.
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 financial statements into the reporting currency of our company. Such adjustments are accumulated and reported
under other comprehensive income (loss) as a separate component of stockholders’ equity.
Earnings (Loss) Per Share. Basic
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. Diluted earnings per share is computed by dividing income available to common shareholders
by the weighted-average number of shares of common 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.
Subsequent Events. The Company
has evaluated events and transactions after the reported period up to January *, 2024, the date on which these consolidated
financial statements were available to be issued. All subsequent events requiring recognition as of September 30, 2023 have been
included in these consolidated financial statements.
Recent Accounting Pronouncements
Simplifying the Accounting for Debt with Conversion
and Other Options.
In June 2020, the FASB issued ASU 2020-06 to simplify
the accounting in ASC 470, Debt with Conversion and Other Options and ASC 815, Contracts in Equity’s Own Entity. The guidance simplifies
the current guidance for convertible instruments and the derivatives scope exception for contracts in an entity’s own equity. Additionally,
the amendments affect the diluted EPS calculation for instruments that may be settled in cash or shares and for convertible instruments.
This ASU will be effective beginning in the first quarter of the Company’s fiscal year 2022. Early adoption is permitted. The amendments
in this update must be applied on either full retrospective basis or modified retrospective basis through a cumulative-effect adjustment
to retained earnings/(deficit) in the period of adoption. We adopted ASU 2020-06 as of September 30, 2023 and the adoption does not have
significant impact on our consolidated financial statements and related disclosures as of and for the three months period ended September
30, 2023.
Financial Instruments – Credit Losses
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. In March 2022, the FASB issued ASU 2022-02
and eliminate the Troubled Debt Restructuring recognition and measurement guidance.
The adoption of this standard did not have a material
effect on the Company’s operating results.
Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued ASU 2019-12
to simplify the accounting in ASC 740, Income Taxes. This guidance removes certain exceptions related to the approach for intra-period
tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for
outside basis differences. This guidance also clarifies and simplifies other areas of ASC 740. This ASU will be effective beginning in
the first quarter of the Company’s fiscal year 2021. Early adoption is permitted. Certain amendments in this update must be applied
on a prospective basis, certain amendments must be applied on a retrospective basis, and certain amendments must be applied on a modified
retrospective basis through a cumulative-effect adjustment to retained earnings/(deficit) in the period of adoption. The adoption of ASU
2019-12 does not have a significant impact on our unaudited condensed consolidated financial statements as of and for the nine months
period ended September 30, 2023.
Earnings Per Share
In April 2021, the FASB issued ASU 2021-04, which
included Topic 260 “Earnings Per Share”. This guidance clarifies and reduces diversity in an issuer’s accounting for
modifications or exchanges of freestanding equity-classified written call options due to a lack of explicit guidance in the FASB Codification.
The ASU 2021-04 is effective for all entities for fiscal years beginning after December 15, 2021. Early adoption is permitted. we adopted
ASU 2021-04 as of September 30, 2023 and the adoption does not have significant impact on our condensed consolidated financial statements
as of and for the nine months period ended September 30, 2023.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures
(as defined in Rule 13a-15(e) under the Exchange Act). Disclosure controls and procedures refer to controls and other procedures designed
to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated
to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding
required disclosure.
As required by Rule 13a-15(e) of the Exchange
Act, our management has carried out an evaluation, with the participation and under the supervision of our chief executive officer and
chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as of September 30,
2023.
Based upon, and as of the date of this evaluation, our chief executive
officer and chief financial officer determined that, because of the material weaknesses described in Item 9A “Controls and Procedures”
of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC on July 10, 2023, and further referenced
below, which we are still in the process of remediating as of September 30, 2023, our disclosure controls and procedures were not effective.
Changes in Internal Control Over Financial
Reporting
We regularly review our system of internal control
over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that
we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems,
consolidating activities, and migrating processes.
During its evaluation of the effectiveness of
our internal control over financial reporting as of September 30, 2023, our management identified the following material weaknesses:
| ● | We
do not have sufficient and skilled accounting personnel with an appropriate level of technical accounting knowledge and experience in
the application of accounting principles generally accepted in the United States commensurate with our financial reporting requirements.
To mitigate the current limited resources and limited employees, we rely heavily on the use of external legal and accounting professionals. |
In order to cure the foregoing material weakness,
we have taken or plan to take the following remediation measures:
| ● | On
November 5, 2018, we added a staff accountant with a CPA and technical accounting expertise to further support our current accounting
personnel. As necessary, we will continue to engage consultants or outside accounting firms in order to ensure proper accounting for
our consolidated financial statements. |
We intend to complete the remediation of the material
weakness discussed above as soon as practicable, but we can give no assurance that we will be able to do so. Designing and implementing
an effective disclosure controls and procedures is a continuous effort that requires us to anticipate and react to changes in our business
and the economic and regulatory environments and to devote significant resources to maintain a financial reporting system that adequately
satisfies our reporting obligations. The remedial measures that we have taken and intend to take may not fully address the material weakness
that we have identified, and material weaknesses in our disclosure controls and procedures may be identified in the future. Should we
discover such conditions, we intend to remediate them as soon as practicable. We are committed to taking appropriate steps for remediation,
as needed.
All internal control systems, no matter how well
designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with
respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.
Other than in connection with the implementation
of the remedial measures described above, there were no changes in our internal controls over financial reporting during quarter ended
September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There were no material developments during the
quarter ended September 30, 2023 to the legal proceedings previously disclosed in Item 3 “Legal Proceedings” of our Annual
Report on Form 10-K filed on July 14, 2023.
ITEM 1A. RISK FACTORS.
For information regarding additional risk factors,
please refer to our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on July 14, 2023.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES
AND USE OF PROCEEDS.
We have not sold any equity securities during
the quarter ended September 30, 2023 that were not previously disclosed in a current report on Form 8-K that was filed during the quarter.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
We have no information to disclose that was required
to be in a report on Form 8-K during the quarter ended September 30, 2023 but was not reported. There have been no material changes to
the procedures by which security holders may recommend nominees to our board of directors.
ITEM 6. EXHIBITS
Exhibit No. |
|
Description |
|
|
|
2.1 |
|
Agreement and Plan of Merger, dated September 26, 2013, between Aerkomm Inc. and Maple Tree Kids LLC (incorporated by reference to Exhibit 2.1 to the Registration Statement on Form S-1 filed on November 5, 2013) |
2.2 |
|
Form of Share Exchange Agreement, dated February 13, 2017, among Aerkomm Inc., Aircom Pacific, Inc. and the shareholders of Aircom Pacific, Inc. (incorporated by reference to Exhibit 2.2 to the Current Report on Form 8-K filed on February 14, 2017) |
3.1 |
|
Restated Articles of Incorporation of the registrant (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on May 4, 2017) |
3.2 |
|
Certificate of Change Pursuant to NRS 78.209 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on January 16, 2019) |
3.3 |
|
Amended and Restated Bylaws of the registrant (incorporated by reference to Exhibit 3.3 to the Annual Report on Form 10-K filed on March 30, 2020) |
10.1 |
|
Share Purchase Agreement dated July 31, 2023 by and among Aerkomm Inc., Mesh Technology Taiwan Limited and Mixnet Technology Limited (incorporated by reference to Exhibit 10.1 to the Current Report of Form 8-K filed on August 2, 2023) |
31.1* |
|
Certifications of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2* |
|
Certifications of Principal Financial and Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1* |
|
Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32.2* |
|
Certification of Principal Financial and Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
101.INS |
|
Inline XBRL Instance Document |
101.SCH |
|
Inline XBRL Taxonomy Extension Schema Document |
101.CAL |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB |
|
Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104 |
|
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
SIGNATURES
Pursuant to the requirements
of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Date: January 19, 2024 |
AERKOMM INC. |
|
|
|
/s/ Louis Giordimaina |
|
Name: |
Louis Giordimaina |
|
Title: |
Chief Executive Officer |
|
|
(Principal Executive Officer) |
|
|
|
/s/ Louis Giordimaina |
|
Name: |
Louis Giordimaina |
|
Title: |
Interim Chief Financial Officer |
|
|
(Principal Financial and Accounting Officer) |
50
NONE
false
--12-31
Q3
0001590496