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: SeptemberJune 30, 20172021

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: 333-192093000-55925

AERKOMM INC.

(Exact name of registrant as specified in its charter)

Nevada46-3424568

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

923 Incline Way, #39, Incline Village, NV 8945144043 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 classTrading Symbol(s)Name of each exchange on which
registered
NoneN/AN/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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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      (Do not check if a smaller reporting company)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 November 13, 2017,August 19, 2021, there were 41,076,3309,637,051 shares of the registrant’s common stock of the registrant issued and outstanding.

 

 

 

AERKOMM INC.

Quarterly Report on Form 10-Q

Period Ended SeptemberJune 30, 20172021

TABLE OF CONTENTS

PART I
FINANCIAL INFORMATION
Item 1.FINANCIAL INFORMATIONFinancial Statements1
Item 1.Financial Statements1
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations1827
Item 3.Quantitative and Qualitative Disclosures About Market Risk2638
Item 4.Controls and Procedures2638
PART II
OTHER INFORMATION
Item 1.PART IILegal Proceedings40
Item 1A.OTHER INFORMATIONRisk Factors40
Item 1.Legal Proceedings28
Item 1A.Risk Factors28
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds2940
Item 3.Defaults Upon Senior Securities2940
Item 4.Mine Safety Disclosures2940
Item 5.Other Information2940
Item 6.Exhibits2941

i

 

PART I

FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS.

ITEM 1. FINANCIAL STATEMENTS.

AERKOMM INC.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Page
Condensed Consolidated Balance SheetSheets as of SeptemberJune 30, 20172021 (unaudited) and December 31, 201620202
Condensed Consolidated Statements of Operations and Comprehensive Loss for the ThreeThree-Month and Nine MonthSix-Month Periods Ended SeptemberJune 30, 20172021 (unaudited) and 20162020 (unaudited)3
Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Six-Month Periods Ended June 30, 2021 (unaudited) and 2020 (unaudited)4
Condensed Consolidated Statements of Cash Flows for the Nine MonthSix-Month Periods Ended SeptemberJune 30, 20172021 (unaudited) and 20162020 (unaudited)45
Notes to Condensed Consolidated Financial Statements (unaudited)56

1

 

AERKOMM INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

June 30, 2021 and December 31, 2020

 

  September 30, 2017
(unaudited)
  December 31, 2016 
Assets      
Current Assets      
Cash $6,566  $312,173 
Inventories  208,674   209,729 
Prepaid expenses  482,390   11,784 
Other receivable  440,223   891 
Total Current Assets  1,137,853   534,577 
Prepaid investment  460,000   - 
Property and Equipment, Net  3,572,422   3,745,092 
Intangible asset, net  4,001,250   4,372,500 
Goodwill  1,105,942   1,105,942 
Other assets  126,497   806,371 
Total Assets $10,403,964  $10,564,482 
Liabilities and Equity        
Current Liabilities        
Short-term bank loan $10,000  $- 
Accrued expenses  498,106   71,978 
Other payable - related parties  899,268   2,955,575 
Other payable - others  2,286,068   1,671,269 
Total Current Liabilities  3,693,442   4,698,822 
Restricted stock deposit liability  453   3,342 
Total Liabilities  3,693,895   4,702,164 
Commitments and Contingency        
Stockholders’ Equity        
Preferred stock, $0.001 par value Authorized - 50,000,000 shares Issued and outstanding - none  -   - 
Common stock, $0.001 par value Authorized - 450,000,000 shares Issued and outstanding – 40,758,328 (excluding unvested restricted stock of 337,683) shares as of September 30, 2017  40,758   - 
Common stock, no par value Authorized – 210,000,000 shares Issued and outstanding - 98,720,060 (excluding unvested restricted stock of 6,683,340 shares) shares as of December 31, 2016 (See Note 1)  -   4,470,839 
Additional paid in capital  10,860,030   80,000 
Subscribed capital  544,913   1,862,643 
Accumulated deficits  (4,732,026)  (551,204)
Accumulated other comprehensive loss  (3,606)  (10)
Total Stockholders' Equity  6,710,069   5,862,268 
Non-controlling interest in subsidiary  -   50 
Total Equity  6,710,069   5,862,318 
Total Liabilities and Equity $10,403,964  $10,564,482 
  June 30,
2021
  December 31,
2020
 
  (Unaudited)    
Assets      
Current Assets      
Cash $40,487  $584,591 
Short-term investment  60,493   87,154 
Inventories, net  6,807,797   5,211,427 
Prepaid expenses and other current assets  1,992,959   1,637,195 
Total Current Assets  8,901,736   7,520,367 
Long-term Investment  3,709,042   4,305,556 
Property and Equipment        
Cost  2,787,510   2,806,420 
Accumulated depreciation  (1,681,178)  (1,414,191)
   1,106,332   1,392,229 
Prepayment for land  35,861,589   35,861,589 
Prepayment for equipment  86,617   86,617 
Net Property and Equipment  37,054,538   37,340,435 
Other Assets        
Restricted cash  3,210,000   3,210,000 
Intangible asset, net  2,145,000   2,392,500 
Goodwill  1,475,334   1,475,334 
Right-of-use assets, net  279,414   353,442 
Deposits  117,914   119,436 
Total Other Assets  7,227,662   7,550,712 
Total Assets $56,892,978  $56,717,070 
         
Liabilities and Stockholders’ Equity        
Current Liabilities        
Short-term loans $1,544,759  $527,066 
Accounts payable  1,874,339   1,874,339 
Accrued expenses and other current liabilities  6,621,781   4,695,000 
Prepayment from customer - current  1,611,357   - 
Long-term loan - current  10,732   10,171 
Lease liability – current  417,437   357,880 
Total Current Liabilities  12,080,405   7,464,456 
Long-term Liabilities        
Long-term bonds payable  9,313,753   9,218,094 
Long-term loan – non-current  23,713   29,034 
Lease liability – non-current  112,409   210,443 
Prepayment from customer – non-current  762,000   762,000 
Restricted stock deposit liability  1,000   1,000 
Total Long-Term Liabilities  10,212,875   10,220,571 
Total Liabilities  22,293,280   17,685,027 
Commitments        
Stockholders’ Equity        
Preferred stock, $0.001 par value, 50,000,000 shares authorized, none issued and outstanding as of June 30, 2021 and December 31, 2020  -   - 
Common stock, $0.001 par value, 90,000,000 shares authorized, 9,487,889 shares (excluding 149,162 unvested restricted shares) issued and outstanding as of June 30, 2021 and December 31, 2020  9,488   9,488 
Additional paid in capital  74,622,712   73,160,616 
Accumulated deficits  (38,147,860)  (32,383,833)
Accumulated other comprehensive loss  (1,884,642)  (1,754,228)
Total Stockholders’ Equity  34,599,698   39,032,043 
Total Liabilities and Stockholders’ Equity $56,892,978  $56,717,070 

See accompanying notes to the condensed consolidated financial statements.

2


 

AERKOMM INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)For the Three-Month and Six-Month Periods ended June 30, 2021 and 2020

 

  Three-Month Period
Ended June 30,
  Six-Month Period
Ended June 30,
 
  2021  2020  2021  2020 
  (Unaudited)  (Unaudited)  (Unaudited)  (Unaudited) 
             
Net Sales $72,000  $-  $72,000  $- 
                 
Cost of Sales  43,878   -   43,878   - 
                 
Gross Profit  28,122   -   28,122   - 
                 
Operating Expenses  1,996,515   2,686,549   5,167,514   4,642,594 
                 
Loss from Operations  (1,968,393)  (2,686,549)  (5,139,392)  (4,642,594)
                 
Non-Operating Income (Loss)                
                 
Foreign currency exchange gain  512,418   536,461   141,914   215,760 
Unrealized investment income (loss)  (18,742)  20,514   (643,480)  (60,170)
Other income (loss), net  (61,210)  8,379   (119,800)  2,567 
                 
Net Non-Operating Income (Loss)  432,466   565,354   (621,366)  158,157 
                 
Loss before Income Taxes  (1,535,927)  (2,121,195)  (5,760,758)  (4,484,437)
                 
Income Tax Expense  (26)  11   3,269   3,263 
                 
Net Loss  (1,535,901)  (2,121,206)  (5,764,027)  (4,487,700)
                 
Other Comprehensive Income (Loss)                
Change in foreign currency translation adjustments  (524,181)  (571,592)  (130,414)  (227,817)
                 
Total Comprehensive Loss $(2,060,082) $(2,692,798) $(5,894,441) $(4,715,517)
                 
Net Loss Per Common Share:                
                 
Basic $(0.1594) $(0.2223) $(0.5981) $(0.4704)
Diluted $(0.1594) $(0.2223) $(0.5981) $(0.4704)
                 
Weighted Average Shares Outstanding - Basic  9,637,051   9,540,891   9,637,051   9,540,891 
Weighted Average Shares Outstanding - Diluted  9,637,051   9,540,891   9,637,051   9,540,891 

  Three-Month Period Ended September 30,  Nine-Month Period Ended September 30, 
  2017  2016  2017  2016 
Net Sales $-  $-  $-  $- 
Operating expenses  1,398,590   680,836   4,735,979   3,255,855 
Loss from Operations  (1,398,590)  (680,836)  (4,735,979)  (3,255,855)
Net Non-Operating Income (Loss)  (998)  -   25,166   (89,557)
Loss before Income Taxes  (1,399,588)  (680,836)  (4,710,813)  (3,345,412)
Income Tax Expense (Benefit)  4,453   (249,000)  9,889   (816,000)
Net Loss  (1,404,041)  (431,836)  (4,720,702)  (2,529,412)
Less: Loss Attributed to Non-Controlling Interest  -   -   -   - 
Net Loss Attributable to the Company  (1,404,041)  (431,836)  (4,720,702)  (2,529,412)
Other Comprehensive Loss  -   -   -   - 
Change in foreign currency translation adjustments  (242)  -   (3,596)  - 
Total Comprehensive Loss $(1,404,283) $(431,836) $(4,724,298) $(2,529,412)
Net Loss Per Common Share:                
Basic $(0.0342) $(0.0110) $(0.1167) $(0.0644)
Diluted $(0.0342) $(0.0110) $(0.1167) $(0.0644)
Weighted Average Shares Outstanding - Basic  41,096,011   39,335,796   40,439,237   39,305,412 
Weighted Average Shares Outstanding - Diluted  41,096,011   39,335,796   40,439,237   39,305,412 

See accompanying notes to the condensed consolidated financial statements.

3


 

AERKOMM INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Stockholders’ Equity

For the Three-Month and Six-Month Periods ended June 30, 2021 and 2020

  Common Stock  Additional
Paid in
  Accumulated  Accumulated Other Comprehensive  Total Stockholders’ 
  Shares  Amount  Capital  Deficits  Income  Equity 
Balance as of January 1, 2020  9,391,729  $9,392  $69,560,529  $(23,271,687) $(482,639) $45,815,595 
Stock compensation expense  -   -   464,827   -   -   464,827 
Revaluation of stock warrant  -   -   (66,200)  -   -   (66,200)
Other comprehensive income  -   -   -   -   343,775   343,775 
Net loss for the period  -   -   -   (2,366,494)  -   (2,366,494)
Balance as of March 31, 2020 (Unaudited)  9,391,729  $9,392  $69,959,156  $(25,638,181) $(138,864) $44,191,503 
                         
Stock compensation expense  -   -   448,987   -   -   448,987 
Revaluation of stock warrant  -   -   455,500   -   -   455,500 
Other comprehensive loss  -   -   -   -   (571,592)  (571,592)
Net loss for the period  -   -   -   (2,121,206)  -   (2,121,206)
Balance as of June 30, 2020 (unaudited)  9,391,729  $9,392  $70,863,643  $(27,759,387) $(710,456) $42,403,192 

  Common Stock  Additional
Paid in
  Accumulated  Accumulated Other Comprehensive  Total Stockholders’ 
  Shares  Amount  Capital  Deficits  Income (Loss)  Equity 
Balance as of January 1, 2021  9,487,889  $9,488  $73,160,616  $(32,383,833) $(1,754,228) $39,032,043 
Stock compensation expense  -   -   1,680,365   -   -   1,680,365 
Revaluation of stock warrant  -   -   (355,600)  -   -   (355,600)
Other comprehensive income  -   -   -   -   393,767   393,767 
Net loss for the period  -   -   -   (4,228,126)  -   (4,228,126)
Balance as of March 31, 2021 (Unaudited)  9,487,889  $9,488  $74,485,381  $(36,611,959) $(1,360,461) $36,522,449 
                         
Stock compensation expense  -   -   179,331   -   -   179,331 
Revaluation of stock warrant  -   -   (42,000)  -   -   (42,000)
Other comprehensive loss  -   -   -   -   (524,181)  (524,181)
Net loss for the period  -   -   -   (1,535,901)  -   (1,535,901)
Balance as of June 30, 2021 (Unaudited)  9,487,889  $9,488  $74,622,712  $(38,147,860) $(1,884,642) $34,599,698 

See accompanying notes to the consolidated financial statements.


AERKOMM INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)For the Six-Month Period ended June 30, 2021 and 2020

 

  Nine-Month Period Ended September 30, 
  2017  2016 
Cash Flows from Operating Activities      
Net loss $(4,720,702) $(2,529,412)
Adjustments to reconcile net loss to net cash provided by (used for) operating activities:        
Depreciation and amortization  413,888   387,666 
Stock-based compensation  1,136,835   22,600 
Issuance of stock warrant  60,000   20,000 
Changes in operating assets and liabilities:        
Accounts receivable – related parties  -   3,478,900 
Inventories  1,055   (97,674)
Prepaid expenses  (470,606)  116,327 
Prepaid investment  (460,000)  - 
Other receivable – related parties  -   (425)
Other receivable – others  (29,332)  66,180 
Deposits  679,874   (387,500)
Accrued expenses  439,606   (25,888)
Other payable - related parties  (42,385)  (2,382,397)
Other payable - others  614,799   664,092 
Net Cash Used for Operating Activities  (2,376,968)  (667,531)
Cash Flows from Investing Activity        
Purchase of property and equipment  (279,968)  (3,677,337)
Net Cash Used for Investing Activity  (279,968)  (3,677,337)
Cash Flows from Financing Activity        
Proceed from short-term bank loan  10,000   - 
Proceeds from issuance of common stock  1,800,022   3,599,729 
Proceeds from subscribed capital  544,913   750,000 
Net Cash Provided by Financing Activity  2,354,935   4,349,729 
Net Increase (Decrease) in Cash  (302,001)  4,861 
Cash, Beginning of Period  312,173   19,498 
Foreign currency translation effect on cash  (3,606)  - 
Cash, End of Period $6,566  $24,359 
Supplemental Disclosures of Cash Flow Information:        
Non-cash operating and financing activities:        
Restricted stock deposit liability transferred to common stock $2,890  $3,979 
Other payable to related parties transferred to common stock $2,027,400  $- 
  Six Months Ended
June 30,
 
  2021  2020 
  (Unaudited)  (Unaudited) 
Cash Flows from Operating Activities      
Net loss $(5,764,027) $(4,487,700)
Adjustments to reconcile net loss to net cash used for operating activities:        
Depreciation and amortization  515,984   521,126 
Stock-based compensation  1,859,696   913,814 
Consulting expense adjustment from change in fair value of warrants  (397,600)  389,300 
Unrealized losses on trading security  643,480   60,170 
Amortization of bonds issuance costs  95,659   - 
Changes in operating assets and liabilities:        
Accounts receivable  -   451,130 
Inventories  (1,575,436)  (1,811,443)
Prepaid expenses and other current assets  (355,764)  90,401 
Deposits  1,522   (200)
Accounts payable  -   961,610 
Accrued expenses and other current liabilities  1,908,033   1,280,837 
Prepayment from customer  1,611,357   - 
Operating lease liability  38,715   107,020 
Net Cash Used for Operating Activities  (1,418,381)  (1,523,935)
         
Cash Flows from Investing Activities        
Purchase of trading security  (877)  (157,756)
Purchase of property and equipment  (3,521)  (28,924)
Purchase of long-term investment  (680)  - 
Net Cash Used for Investing Activities  (5,078  (186,680)
         
Cash Flows from Financing Activities        
Proceeds from short-term loans  1,017,693   1,385,411 
Payment on long-term loan  (4,760)  (3,568)
Payment on finance lease liability  (3,164)  (5,926)
Net Cash Provided by Financing Activities  1,009,769   1,375,917 
         
Net Decrease in Cash and Restricted Cash  (413,690)  (334,698)
         
Cash and Restricted Cash, Beginning of Period  3,794,591   976,829 
         
Foreign Currency Translation Effect on Cash  (130,414)  (227,817)
         
Cash and Restricted Cash, End of Period $3,250,487  $414,314 
         
Supplemental disclosures of cash flow information:        
Cash paid during the period for income taxes $3,269  $1,651 
Cash paid during the period for interest $18,679  $3,373 
         
Cash and Restricted Cash:        
Cash $40,487  $346,570 
Restricted cash  3,210,000   67,744 
Total $3,250,487  $414,314 

See accompanying notes to the condensed consolidated financial statements.

4


 

AERCOMMAERKOMM INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 1 - Organization

(Unaudited)

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.

On December 28, 2016, Aircom Pacific IncInc. (“Aircom”) purchased 700,000 shares of Aerkomm’s common stock, representing approximately 86.3% of Aerkomm’s issued and outstanding common stock as of the closing.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 (or 87.81% on a fully-diluted basis).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.

Aircom was incorporated on September 29, 2014 under the laws of the State of California.

On December 31, 2014, Aircom acquired a newly incorporated subsidiary, Aircom Pacific Ltd. (“Aircom Seychelles”), a corporation formed under the laws of the Republic of Seychelles. Aircom Seychelles was formed to facilitate Aircom’s global corporate structure for both business operations and tax planning. Presently, Aircom Seychelles has no operation.operations. Aircom is working with corporate and tax advisers in finalizing its global corporate structure and has not yet concluded its final plan.

On October 17, 2016, Aircom acquired a wholly owned subsidiary, Aircom Pacific Inc. Limited (“Aircom HK”), a corporation formed under the laws of Hong Kong. The purpose of Aircom HK is to conduct Aircom’s business and operations in Hong Kong and China.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 and China.Kong. Aircom HK is also actively seeking strategic partnerships whom Aircom may leverage in order to provide more and better services to its customers. Aircom also plans to provide local supports to Hong Kong-based airlines via Aircom HK and teleports located in the Hong Kong and China regions.Kong.

On December 15, 2016, Aircom acquired a wholly owned subsidiary, Aircom Japan, Inc. (“Aircom Japan”), a corporation formed under the laws of Japan. The purpose of Aircom Japan is to conduct business development and operations located within Japan. Aircom Japan is in the process of applying for, and will be the holder of, Satellite Communication Blanket License in Japan, which is necessary for Aircom to provide services within Japan. Aircom Japan will also provide local supports to airlines operateoperating 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 new 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 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 Condensed Consolidated Financial Statements

NOTE 1 - Organization - Continued

On October 31, 2019, Aircom Seychelles 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 Aircom’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:

Aerkomm and its subsidiaries (the “Company”) are full servicefull-service, development stage providers of in-flight entertainment and connectivity solutions with their initial market in the Asian Pacific region.

Aerkomm and its subsidiaries (“the Company”) haveThe Company has not generated significant revenues, excluding non-recurring revenues, from affiliates in 2015, and will incur additional expenses as a result of being a public reporting company. If the Company is unable to obtain additional working capital, the Company’s business may fail. As of September 30, 2017, the Company generated a net loss of $4,724,298 and had working capital deficiency of $2,555,589, which raises substantial doubt about its ability to continue as a going concern. Currently, the Company has taken measures that management believes will improve its financial position by financing activities, including through ongoing public offerings, 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.

5

On July 29, 2020, the Company filed an amendment to the Registration Statement on Form S-1, originally filed on April 30, 2020, with the Securities and Exchange Commission, or the SEC, pursuant to Section 5 of the Securities Act of 1933 to issue and sell up to 1,951,219 shares (approximately $47,276,000) of the Company’s common stock, at a per share price of €20.50 (approximately $24.23). The Form S-1 is subsequently amended on July 29, 2020, October 21, 2020 and November 5, 2020, and was declared effective on November 6, 2020. As of December 31, 2020, the Company closed a public offering with net proceeds of $1,667,080.

With the $20 million in Loans committed by the Lenders and the remaining amount of €38 million (not including the 15% over-subscription) to be raised from the effective S-1 and future fund raising, the Company believes its working capital will be adequate to sustain its operations for the next twelve 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 capital in its registered public offering 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.


 

AERKOMM INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements - Continued

(Unaudited)

NOTE 2 –Summary of Significant Accounting Policies

NOTE 2 - Summary of Significant Accounting Policies

Unaudited Interim Financial Information

The accompanying condensed consolidated balance sheet as of SeptemberJune 30, 2017,2021, and the condensed consolidated statements of operations and comprehensive loss and cash flows for the nine-month periodssix months ended SeptemberJune 30, 20162021 and 2017 and the consolidated statement of changes in equity for the nine-month periods ended September 30, 20172020 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 SeptemberJune 30, 20172021 and the results of operations and cash flows for the nine-month periodssix months ended SeptemberJune 30, 20162021 and 2017.2020. The financial data and the other information disclosed in these notes to the condensed consolidated financial statements related to these nine-monththree-month periods are unaudited. The results of operations for the nine-month periodssix months ended SeptemberJune 30, 2016 and 20172021 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 20172021 or for any other interim period or other future year.

Reverse Acquisition

On February 13, 2017, Aerkomm completed the reverse acquisition of Aircom pursuant to the Exchange Agreement. As a result of the reverse acquisition, Aircom became Aerkomm’s wholly-owned subsidiary. For accounting purposes, the share exchange transaction with Aircom was treated as a reverse acquisition, with Aircom as the acquirer and Aerkomm as the acquired party. Unless the context suggests otherwise, “the Company” referred to for the periods prior to the consummation of the reverse acquisition is Aircom and its consolidated subsidiaries.

Principle of Consolidation

Aerkomm consolidates the accounts of its subsidiaries, Aircom, Aircom Seychelles, Aircom HK, Aircom Japan, Aircom Taiwan, Aerkomm Taiwan, Beijing Yatai and Aircom Japan.Aerkomm Malta. All significant intercompany accounts and transactions have been eliminated in consolidation.

All of the entities in these condensed consolidated financial statements have adopted fiscal year end of December 31.

Reclassifications of Prior Year Presentation 

Certain prior year balance sheet amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results may differ from these estimates.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash in banks and accounts receivable.banks. As of SeptemberJune 30, 20172021 and December 31, 2016,2020, the total balancesbalance of cash in banks werebank was fully insured by the Federal Deposit Insurance Corporation (FDIC) and. The balance of cash deposited in foreign financial institution deposits insurance.institutions exceeding the amount insured by local insurance is approximately $3,107,000 and $3,514,000 as of June 30, 2021 and December 31, 2020, respectively.

Short-term investment

Inventories

The Company’s short-term investment securities are classified as trading security. The securities are stated at fair value within current assets on the Company’s condensed balance sheets. Fair value is calculated based on publicly available market information or other estimates determined by the Company. Changes in fair value are recorded in current income. 

Inventories

Inventories are recorded at the lower of weighted-average cost or market.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 allowance for losses.

 

6

Long-term Investment

Long-term investment includes holdings of marketable equity securities with less than 20% of ownership of the investee. Marketable equity securities include equity securities which are initially recognized at fair value plus transaction costs that are directly attributable to the acquisition. Changes in fair value from subsequent remeasurement are reported under non-operating income in the Company’s statement of income. 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.

Investments are considered to be impaired when a decline in fair value is judged to be other than temporary. If the cost of an investment exceeds its fair value, the Company evaluates, among other factors, general market conditions, the duration and extent to which the fair value is less than cost, as well as its intent and ability to hold the investment, for recording an impairment loss.


 

AERKOMM INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements – Continued

(Unaudited)

NOTE 2 –Summary of Significant Accounting Policies - Continued

NOTE 2 - Summary of Significant Accounting Policies - Continued

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. When value impairment is determined, the related assets are stated at the lower of fair value or book value. Significant additions, renewals and betterments are capitalized. Maintenance and repairs are expensed as incurred.

Depreciation is computed by using the straight-line and double declining methodmethods 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 years and satellite equipmentlease 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 non-operating income in the period of sale or disposal.

The Company reviews the carrying amount of property and equipment for impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. It determined that there was no impairment loss for the nine-month periodssix-month period ended SeptemberJune 30, 20172021 and 2016.2020.

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. The Company adopted ASU 2016-02 effective January 1, 2019.

Goodwill and Purchased Intangible Assets

The Company’s goodwill represents the amount by which the total purchase price paid exceeded the estimated fair value of net assets acquired from acquisition of subsidiaries. The Company tests goodwill for impairment on an annual basis, or more often if events or circumstances indicate that there may be impairment.

Purchased intangible assets with finite life are amortized on the straight-line basis over the estimated useful lives of respective assets. Purchased intangible assets with indefinite life are evaluated for impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. As of September 30, 2017 and December 31, 2016, purchasedPurchased 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.


 

AERKOMM INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 2 - Summary of Significant Accounting Policies - Continued

Fair Value of Financial Instruments-Continued

Level 2 - Inputs to the valuation methodology are quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active or inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the instrument.

Level 3 - Inputs to the valuation methodology are unobservable inputs based upon management’s best estimate of inputs market participants could use in pricing the asset or liability at the measurement date, including assumptions.

The carrying amounts of the Company’s cash other receivable,and restricted cash, accounts payable, short-term bank loan and other payable approximated their fair value due to the short-term nature of these financial instruments. The Company’s short-term investment and long-term investment are classified within Level 1 of the fair value hierarchy on June 30, 2021. 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 June 30, 2021.

7

Revenue Recognition

AERKOMM INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements – Continued

(Unaudited)

NOTE 2 –Summary of Significant Accounting Policies - Continued

ResearchThe Company adopted the provisions of ASU 2014-09 Revenue from Contract with Customers (Topic 606) and Development Costs

Research and development costs are charged to operating expenses as incurred. For the nine-month periods ended September 30, 2017 and 2016,principal versus agent guidance within the new revenue standard. As such, the Company incurred approximately $0identifies 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 $1,579,000 in research and development costs, respectively.recognizes revenue when (or as) the Company satisfies a performance obligation.

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 2016. 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 condensed financial statements into the reporting currency of the Company. Such adjustments are accumulated and reported under other comprehensive income (loss) as a separate component of stockholder’sstockholders’ equity.


 

AERKOMM INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 2 - Summary of Significant Accounting Policies - Continued

Earnings (Loss) Per Share

Basic and diluted earnings (loss) per share (EPS) areis computed by dividing income available to common shareholders by the weighted-averageweighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include stock warrants and outstanding stock options, shares to be purchased by employees under the Company’s employee stock purchase plan. Basic

Subsequent Events

The Company has evaluated events and diluted earnings (loss) per common share presented fortransactions after the nine-monthreported period ended Septemberup to August [*], 2021, the date on which these consolidated financial statements were available to be issued. All subsequent events requiring recognition as of June 30, 2016 has taken into account the stock split2021 have been included in June 2016 and share exchange for reverse acquisition on February 13, 2017 (see Note 1).

these consolidated financial statements.

8

AERKOMM INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements - Continued

(Unaudited)

NOTE 3 –Recent Accounting Pronouncements

NOTE 3 - Recent Accounting Pronouncements

Financial Instruments

Simplifying the Accounting for Debt with Conversion and Other Options.

In January 2016,June 2020, the FASB issued ASU No. 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition2020-06 to simplify the accounting in ASC 470, Debt with Conversion and Measurement of Financial AssetsOther Options and Financial Liabilities” (“ASU 2016-01”), which updates certain aspects of recognition, measurement, presentationASC 815, Contracts in Equity’s Own Entity. The guidance simplifies the current guidance for convertible instruments and disclosure of financialthe 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 2016-01 will be effective for fiscal years beginning after March 15, 2017, including interim periods within those fiscal years and forin the Company in its first quarter of 2018.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 Company is currently evaluating the impact of adopting ASU 2016-012020-06 on its consolidated financial statements.statements and related disclosures, as well as the timing of adoption.

Financial Instruments

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 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. The Company is currently evaluating the impact of adopting ASU 2016-13 on its consolidated financial statements.

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 the Company’s consolidated financial statements as of and for the six-month period ended June 30, 2021.

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 MarchDecember 15, 2020, including interim periods within those fiscal years and for the Company in its first quarter of 2021, and early2021. Early adoption is permitted. The Company is currently evaluating the impact of adopting ASU 2016-13on its consolidated financial statements.

Intangibles

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other” (Topic 350): Simplifying the Test for Goodwill Impairment, which goodwill shall be tested at least annually for impairment at a level of reporting referred to as a reporting unit. ASU 2017-04 will be effective for annual periods beginning after March 15, 2019, and interim periods within annual periods beginning after March 15, 2020, and early adoption is permitted. The Company is currently evaluating the impact of adopting ASU 2017-042021-04 on its consolidated financial statements.

Stock Compensation

In March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation” (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which simplifies certain aspects of the accounting for share-based payment transactions, including income taxes, classification of awards and classification on the statement of cash flows. ASU 2016-09 will be effective for annual periods beginning after March 15, 2017, and interim periods within annual periods beginning after March 15, 2018 and for the Company in its first quarter of 2019, and early adoption is permitted. The Company is currently evaluating the impact of adopting ASU 2016-09 on its consolidated financial statements.

Revenue Recognition

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (Topic 606) (“ASU 2014-09”), which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers. ASU 2014-09 will be effective for annual periods beginning after March 15, 2017, and interim periods within annual periods beginning after March 15, 2018 and for the Company in its first quarter of 2019, and early adoption is permitted. 

Subsequently, the FASB issued the following standards related to ASU 2014-09: ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations” (“ASU 2016-08”); ASU No. 2016-10, “Revenue from Contracts with Customers” (Topic 606): Identifying “Performance Obligations and Licensing” (“ASU 2016-10”); and ASU No. 2016-12, “Revenue from Contracts with Customers” (Topic 606): “Narrow-Scope Improvements and Practical Expedients” (“ASU 2016-12”). The Company must adopt ASU 2016-08, ASU 2016-10 and ASU 2016-12 with ASU 2014-09 (collectively, the “new revenue standards”). 

The new revenue standards may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company currently expects to adopt the new revenue standards in its first quarter of 2019 utilizing the full retrospective transition method. The Company is currently evaluating the impact of adopting the new revenue standards on its consolidated financial statements.

9


 

AERKOMM INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements - Continued

NOTE 4 – Short-term Investment

(Unaudited)

NOTE 3 –Recent Accounting Pronouncements – Continued

Leases

In February 2016, the FASB issued ASU No. 2016-02, “Leases” (Topic 842) (“ASU 2016-02”), which modifies lease accounting for both lessees and lessors to increase transparency and comparability by recognizing lease assets and lease liabilities by lessees for those leases classified as operating leases under previous accounting standards and disclosing key information about leasing arrangements. ASU 2016-02 will be effective for fiscal years beginning after March 15, 2018, including interim periods within those fiscal years and forOn September 9, 2019, the Company entered into a liquidity agreement with a security company (“the Liquidity Provider”) in its first quarterFrance, 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 2019,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 early adoptionthe 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 permitted. Thebeing renewed automatically unless otherwise terminated by either party. As of June 30, 2021, the Company is currently evaluating the timinghad purchased 11,604 shares (unaudited) of its adoption andcommon stock with the impactfair value of adopting ASU 2016-02 on its consolidated financial statements.$60,493 (unaudited). The securities were recorded as short-term investment with an accumulated unrealized loss of $168,767.

NOTE 5 - Inventories

Income Taxes

In October 2016, FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfer of Assets Other than Inventory” (“ASU 2016-16”), which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. ASU 2016-06 will be effective for annual reporting periods beginning after March 15, 2017 and for the Company in its first quarter of 2018. The Company is currently evaluating the impact of adopting ASU 2016-16 on its consolidated financial statements.

Business Combinations

In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations” (Topic 805): Clarifying the Definition of a Business, which a business is an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to investors or other owners, members, or participants. ASU 2017-01 will be effective for annual periods beginning after March 15, 2017, and interim periods within annual periods beginning after March 15, 2018, and early adoption is permitted. The Company is currently evaluating the impact of adopting ASU 2017-01 on its consolidated financial statements.

NOTE 4 –Inventories

As of SeptemberJune 30, 20172021 and December 31, 2016,2020, inventories consisted of the following:

   September 30, 2017  December 31, 2016 
 Satellite equipment for sale under construction $197,645  $197,645 
 Parts  15,953   11,029 
 Supplies  722   6,437 
    214,320   215,111 
 Allowance for inventory loss  (5,646)  (5,382)
 Net $208,674  $209,729 
  June 30,
2021
  December 31,
2020
 
  (Unaudited)    
Satellite equipment for sale under construction $6,476,397  $4,669,297 
Supplies  5,192   5,317 
   6,481,589   4,674,614 
Allowance for inventory loss  (5,192)  (5,317)
Net  6,476,397   4,669,297 
Prepayment for inventory  331,400   542,130 
Total $6,807,797  $5,211,427 

NOTE 5 –Prepaid Investment

NOTE 6 - Property and Equipment

As of SeptemberJune 30, 2017, the Company had paid $460,000 to Aircom Telecom, LLC (Aircom Taiwan), a Taiwan company not affiliated with the Company, as the pre-payment of subscribed capital. As of November 10, 2017, the investment transaction has not been finalized as it is subject to the approval of Taiwan government, which approval may not be granted.

10

AERKOMM INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements - Continued

(Unaudited)

NOTE 6 –Property and Equipment, Net

As of September 30, 20172021 and December 31, 2016,2020, the balances of property and equipment were as follows:

   September 30, 2017  December 31, 2016 
 Computer software and equipment $123,667  $125,524 
 Furniture and fixture  10,001   3,393 
 Satellite equipment  275,410   - 
    409,078   128,917 
 Accumulated depreciation  (86,656)  (43,825)
 Net  322,422   85,092 
 Construction in progress  3,250,000   3,660,000 
 Net $3,572,422  $3,745,092 
  June 30,
2021
  December 31,
2020
 
  (Unaudited)     
Ground station equipment $1,854,027  $1,876,458 
Computer software and equipment  339,229   335,708 
Satellite equipment  275,410   275,410 
Vehicle  198,741   198,741 
Leasehold improvement  83,721   83,721 
Furniture and fixture  36,382   36,382 
   2,787,510   2,806,420 
Accumulated depreciation  (1,681,178)  (1,414,191)
Net  1,106,332   1,392,229 
Prepayments - land  35,861,589   35,861,589 
Prepaid equipment  86,617   86,617 
Net $37,054,538  $37,340,435 

NOTE 7 –Intangible Asset, Net

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 $34,474,462 in total. As of SeptemberJune 30, 20172021 and December 31, 2016,2020, the estimated commission payable for the land purchase in the amount of $1,387,127 was recorded to the cost of land and the payment to be paid after the full payment of the Land acquisition price no later than December 31, 2021. 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 August 20, 2021, the license applications are still in progress.

Depreciation expense was $133,919 (unaudited) and $136,587 (unaudited) for the three-month periods ended June 30, 2021 and 2020, respectively, and $268,484 (unaudited) and $273,626 (unaudited) for the six-month periods ended June 30, 2021 and 2020, respectively.


AERKOMM INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 7 – Long-term Investment

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. YuanJiu is a listed company in Taiwan Stock 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.”

In the Stock Purchase Agreement, there was a restriction on the stock title transfer until May 13, 2021. As of August 12, 2021, this restriction on the stock transfer was released and the stock title transfer process has been completed. As of June 30, 2021 and December 31, 2020, this investment totaled approximately a 10% ownership of YuanJiu. The Company intends to hold this investment for long-term purposes.

On March 24, 2021, the Company purchased additional 1,000 shares of YuanJiu’s common stock for a total amount of $694 (unaudited) from a related party.

As of June 30, 2021 and December 31, 2020, the fair value of the investment was as follows:

  June 30,
2021
  December 31,
2020
 
  (Unaudited)     
Investment cost $5,058,917  $5,027,600 
Less: Allowance for value decline  (1,349,875)  (722,044)
Net $3,709,042  $4,305,556 

NOTE 8 - Intangible Asset, Net

As of June 30, 2021 and December 31, 2020, the cost and accumulated amortization for intangible asset were as follows:

  June 30,
2021
  December 31,
2020
 
  (Unaudited)     
Satellite system software $4,950,000  $4,950,000 
Accumulated amortization  (2,805,000)  (2,557,500)
Net $2,145,000  $2,392,500 

Amortization expense was $123,750 (unaudited) and $123,750 (unaudited) for the three-month periods ended June 30, 2021 and 2020, respectively, and $247,500 (unaudited) and $247,500 (unaudited) for the six-month periods ended June 30, 2021 and 2020, respectively.

NOTE 9 - 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:

  2021  2020 
Weighted-average remaining lease term (Unaudited)     
Operating lease  1.03 Years   2.01 Years 
Finance lease  3.35 Years   3.84 Years 
Weighted-average discount rate        
Operating lease  6.00%  6.00%
Finance lease  3.82%  3.82%


AERKOMM INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 9 - Operating and Finance Leases - Continued

B.The balances for the operating and finance leases are presented as follows within the consolidated balance sheets as of June 30, 2021 and December 31, 2020:

Operating Leases

  June 30,
2021
  December 31,
2020
 
  (Unaudited)    
Right-of-use assets $279,414  $353,442 
         
Lease liability – current $406,146  $346,870 
Lease liability – non-current  80,746   173,308 
Total operating lease liabilities $486,892  $520,178 

Finance Leases

 

   September 30, 2017  December 31, 2016 
 Satellite system software $4,950,000  $4,950,000 
 Accumulated amortization  (948,750)  (577,500)
 Net $4,001,250  $4,372,500 
  June 30,
2021
  December 31,
2020
 
  (Unaudited)     
Property and equipment, at cost $56,770  $56,770 
Accumulated depreciation  (19,156)  (13,098)
Property and equipment, net $37,615  $43,672 
         
Lease liability - current $11,291  $11,010 
Lease liability – non-current  31,663   37,135 
Total finance lease liabilities $42,954  $48,145 

The components of lease expense are as follows within the consolidated statements of operations and comprehensive loss for the six-month periods ended June 30, 2021 and 2020:

Operating Leases

  Three Months Ended  Six Months Ended 
  June 30,
2021
  June 30,
2020
  June 30,
2021
  June 30,
2020
 
  (Unaudited)  (Unaudited)  (Unaudited)  (Unaudited) 
Lease expense $54,658  $108,348  $112,590  $220,345 
Sublease rental income  (2,737)  (2,791)  (5,563)  (5,545)
Net lease expense $51,921  $105,557  $107,027  $214,800 

Finance Leases

  Three Months Ended  Six Months Ended 
  June 30,
2021
  June 30,
2020
  June 30,
2021
  June 30,
2020
 
  (Unaudited)  (Unaudited)  (Unaudited)  (Unaudited) 
Amortization of right-of-use asset $3,034  $2,841  $6,057  $5,932 
Interest on lease liabilities  429   496   880   1,012 
Total finance lease cost $3,463  $3,337  $6,937  $6,944 


 

NOTE 8 –Short-term Bank Loan

AERKOMM INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 9 - Operating and Finance Leases - Continued

Supplemental cash flow information related to leases for the six-month periods ended June 30, 2021 and 2020 is as follows:

  June 30,
2021
  June 30,
2020
 
  (Unaudited)  (Unaudited) 
Cash paid for amounts included in the measurement of lease liabilities:        
Operating cash outflows from operating leases $64,517  $93,689 
Operating cash outflows from finance lease $5,462  $5,926 
Financing cash outflows from finance lease $878  $1,012 
Leased assets obtained in exchange for lease liabilities:        
Operating leases $28,197  $261,781 

Maturity of lease liabilities:

Operating Leases

  Related
Party
  Others  Total 
  (Unaudited)  (Unaudited)  (Unaudited) 
July 1, 2021 – June 30, 2022 $55,757  $361,327  $417,084 
July 1, 2022 – June 30, 2023  -   83,155   83,155 
July 1, 2023 – June 30, 2024  -   -   - 
Total lease payments $55,757  $444,482  $500,239 
Less: Imputed interest  (1,521)  (11,826)  (13,347)
Present value of lease liabilities $54,236  $432,656  $486,892 
Current portion  (54,236)  (351,910)  (406,146)
Non-current portion $-  $80,746  $80,746 

Finance Leases

  Total 
  (Unaudited) 
July 1, 2021 – June 30, 2022 $12,735 
July 1, 2022 – June 30, 2023  12,735 
July 1, 2023 – June 30, 2024  12,735 
July 1, 2024 – June 30, 2025  7,828 
Total lease payments $46,033 
Less: Imputed interest  (3,079)
Present value of lease liabilities $42,954 
Current portion  (11,291)
Non-current portion $31,663 

NOTE 10 - Short-term Loans

In 2020, the Company entered into a loan agreement in the amount of $423,225 with the Company’s insurance service provider in order to pay the Company’s insurance premium. The Company has an unsecured short-term bank credit line of $10,000 from a local bankloan matures on September 25, 2021 with an annual interest rate of 4.25%3.3%. Under this loan agreement, the Company is required to make the installment payment monthly. The installment liability as of SeptemberJune 30, 2017.

2021 was $111,582.

 

NOTE 9 –Income Taxes

Additionally, in June 2021, the Company entered into a loan agreement in the amount of $1,433,177 (NT $40,000,000) (unaudited) with a non-related party. This loan, which carries no interest, originally matured on July 16, 2021 and the Company agreed to put 4,000,000 shares of Yuanjiu stocks as collateral. As of August 20, 2021, the Company has repaid $179,147 (NT $5,000,000) (unaudited) of the outstanding loan and the two parties signed the amendment agreement to extend the loan repayment date to September 16, 2021.


 

AERKOMM INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 11 - Long-term Loan

The Company has a car loan credit line of NT$1,500,000 (approximately US$48,371), 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 June 30, 2021 are as follows:

Twelve months ending June 30, (Unaudited) 
2022 $13,608 
2023  13,608 
2024  12,474 
Total installment payments  39,690 
Less: Imputed interest  (5,244)
Present value of long-term loan  34,446 
Current portion  (10,732)
Non-current portion $23,714 

NOTE 12 – 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.

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 June 30, 2021 and December 31, 2020, and the Deposit was recorded as restricted cash.


AERKOMM INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 12 – Long-term Bonds Payable and Restricted Cash - Continued

As of June 30, 2021 and December 31, 2020, the long-term bonds payable consisted of the following:

  June 30,
2021
  December 31,
2020
 
  (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  (886,247)  (981,906)
Net $9,313,753  $9,218,094 

NOTE 13 - Prepayment from Customer

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 June 30, 2021 and December 31, 2020, the Company received $762,000 from Klingon in milestone payments towards the equipment purchase price. As of June 30, 2021, the project is still ongoing.

On April 25, 2021, the Company entered into a Product Supply Agreement with a customer. As of June 30, 2021, the Company received $1,611,357 from the customer as a prepayment towards the equipment purchase price.

NOTE 14 - Income Taxes

Income tax expense (benefit) for the three-month and nine-monthsix-month periods ended SeptemberJune 30, 20172021 and 20162020 consisted of the following:

   Three Months Ended
September 30,
  Nine Months Ended
September 30,
 
   2017  2016  2017  2016 
 Current:            
 Federal $-  $(249,000) $3,033  $(816,000)
 State  -   -   800   - 
 Foreign  4,453   -   6,056   - 
 Total $4,453  $(249,000) $9,889  $(816,000)
  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
  2021  2020  2021  2020 
Current: (Unaudited)  (Unaudited)  (Unaudited)  (Unaudited) 
Federal $                   -  $                   -  $                  -  $                   - 
State  -   -   1,600   1,600 
Foreign  (26)  11   1,669   1,663 
Total $(26) $11  $3,269  $3,263 

The following table presents a reconciliation of the Company’s income tax at statutory tax rate and the Company’s income tax at effective tax rate for the three-month and nine-monthsix-month periods ended SeptemberJune 30, 20172021 and 2016.2020.

   Three Months Ended
September 30,
  Nine Months Ended
September 30,
 
   2017  2016  2017  2016 
 Tax benefit at statutory rate $(472,974) $(181,000) $(1,541,054) $(651,000)
 Net operating loss carryforwards (NOLs)  385,320   -   1,255,500   (345,000)
 Stock-based compensation expense  116,900   8,000   386,500   8,000 
 Amortization expense  4,500   (70,000)  (8,400)  (182,000)
 Prepayment from related parties  -   -   -   383,000 
 Others  (29,293)  (6,000) ��(82,657)  (29,000)
 Tax at effective tax rate $4,453  $(249,000) $9,889  $(816,000)
  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
  2021  2020  2021  2020
  (Unaudited)  (Unaudited)  (Unaudited)  (Unaudited) 
Tax benefit at statutory rate $(332,734) $(388,531) $(1,424,074) $(1,003,820)
Foreign investment losses (gains)  (8,497)  (37,148)  443,037   98,290 
Stock-based compensation expense  33,100   94,300   390,500   191,900 
Amortization expense  23,425   12,617   46,055   25,333 
Accrued payroll  73,800   30,800   130,700   75,900 
Unrealized exchange losses (gains)  (98,807)  (108,870)  200,896   (28,194)
Others  23,574   65,211   43,269   74,563 
Valuation allowance  286,113   331,632   172,886   569,291 
Tax expense at effective tax rate $(26) $11  $3,269  $3,263 

11

 

AERKOMM INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 14 - Income Taxes – Continued

(Unaudited)

NOTE 9 –Income Taxes – Continued

Deferred tax assets (liability)(liabilities) as of SeptemberJune 30, 20172021 and December 31, 20162020 consist approximately of:

   September 30, 2017  December 31, 2016 
 Net operating loss carryforwards (NOLs) $2,079,000  $519,000 
 R&D expenses  359,000   63,000 
 Stock-based compensation expense  387,000   8,000 
 Excess of tax amortization over book amortization  (926,000)  (230,000)
 Others  233,000   35,000 
    2,132,000   395,000 
 Valuation allowance  (2,132,000)  (395,000)
 Net $-  $- 
  June 30,
2021
  

December 31,
2020

 
  (Unaudited)    
Net operating loss carryforwards (NOLs) $8,931,000  $8,018,000 
Stock-based compensation expense  2,544,000   2,024,000 
Accrued expenses and unpaid expense payable  500,000   309,000 
Tax credit carryforwards  68,000   68,000 
Unrealized investment loss  -   144,000 
Unrealized exchange losses  (18,000)  (193,000)
Excess of tax amortization over book amortization  (475,000)  (577,000)
Others  155,000   (173,000)
Gross  11,705,000   9,620,000 
Valuation allowance  (11,705,000)  (9,620,000)
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 $2,085,000 (unaudited) for the six months ended June 30, 2021.

As of SeptemberJune 30, 20172021 and December 31, 2016,2020, the Company had federal NOLs of approximately $4,926,000 and $843,000, respectively,$8,243,000 available to reduce future federal taxable income, expiring in 2037.2037, and additional federal NOLs of approximately $18,245,000 (unaudited) and $16,743,000, respectively, were generated and will be carried forward indefinitely to reduce future federal taxable income. As of SeptemberJune 30, 20172021 and December 31, 2016,2020, the Company had State NOLs of approximately $5,121,000$27,363,000 (unaudited) and $1,836,000,$27,461,000, respectively, available to reduce future Statestate taxable income, expiring in 2037. 2041.

As of SeptemberJune 30, 2017,2021 and December 31, 2020, the Company has Japan NOLs of approximately $340,000$373,000 (unaudited) and $392,000, respectively, available to reduce future Japan taxable income, expiring in 2019.2031.

As of SeptemberJune 30, 20172021 and December 31, 2016,2020, the Company has Taiwan NOLs of approximately $1,687,000 (unaudited) and $2,405,000, respectively, available to reduce future Taiwan taxable income, expiring in 2031.

As of June 30, 2021 and December 31, 2020, the Company had approximately $37,000 (unaudited) and $37,000 of federal research and development tax credit, respectively, available to offset future federal income tax. The credit begins to expire in 2034 if not utilized. As of SeptemberJune 30, 20172021 and December 31, 2016,2020, the Company had approximately $39,000 (unaudited) and $39,000 of California state research and development tax credit respectively, available to offset future California state income tax. The credit can be carried forward indefinitely.

The Company’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.

NOTE 15 - Capital Stock

NOTE 10 –Capital Stock1)Preferred Stock:

1)Preferred Stock:

The Company is authorized to issue 50,000,000 shares of preferred stock, with par value of $0.001. As of SeptemberJune 30, 2017,2021, 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.


 

AERKOMM INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 15 - Capital Stock – Continued

2)Common Stock:

The Company is authorized to issue 450,000,00090,000,000 shares of common stock with par value of $0.001.

Aircom had restricted stock purchase agreements with certain employees or consultants with 2,890,000 shares granted on February 2, 2015. The restricted shares were issued at fair values determined by the board of directors at the grant date. According to the agreements, in the event of the voluntary termination of purchaser’s continuous service status, Aircom shall have the exclusive option to repurchase all or any portion of the unvested shares held by purchaser at the original purchase price per share and the vested shares held by purchaser at the fair market value per share as of the termination date. In February and June 2016, Aircom purchased back 133,333 unvested shares of restricted stock at $0.005 per share from terminated employees before the stock split. In June 2016, the restricted stock was split to 27,566,670 shares. On February 13, 2017, all of Aircom’s restricted stock of 27,566,670 shares were converted to Aerkomm’s restricted stock of 10,279,738 shares at the ratio of 2.68165 to 1, pursuant to the Exchange Agreement (see Note 1).

12

AERKOMM INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements - Continued

(Unaudited)

NOTE 10 –Capital Stock – Continued

As of SeptemberJune 30, 20172021 and December 31, 2016,2020, the restricted stock shares (after share exchange) consisted of the following:

  June 30,
2021
  December 31,
2020
 
  (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 

   September 30, 2017  December 31, 2016 
 Restricted stock - vested  9,942,050   7,787,490 
 Restricted stock - unvested  337,688   2,492,248 
 Total restricted stock  10,279,738   10,279,738 

The unvested shares of restricted stock were recorded under a deposit liability account awaiting future conversion to common stock when they become vested.

3)Stock Warrant:

On March 31, 2017,

In connection with the Underwriting Agreement with Boustead Securities, LLC, or Boustead, the Company completed its private placement offering of 500,000 common shares at a price of $3 per share for the aggregate amount of $1,500,000.

On June 6, 2017, the Company completed its private placement offering 60,000 common shares at a price of $5.00 per share for the aggregate amount of $300,000. Additionally, on June 6, 2017, pursuantagreed to a settlement and release agreement with Priceplay Taiwan Inc. (“PPTW”) dated March 31, 2017, among the Company, PPTW and Aircom, the Company issued 163,860 shares of its common stockissue to PPTW in settlement of an outstanding $819,300 obligation of Aircom to PPTW. Additionally, pursuant to a similar settlement and release agreement with Priceplay.com, Inc. (“PPUS”) dated March 31, 2017, the Company issued 147,400 shares of its common stock to PPUS in settlement of an outstanding $737,000 obligation of Aircom to PPUS, and pursuant to a third similar settlement and release agreement with Aircom and dMobile System Co. Ltd. (“dMobile”), it issued 94,220 shares of its common stock to dMobile in settlement of an outstanding $471,100 obligation of Aircom to dMobile. In the aggregate, the Company has issued 405,480 of shares to the three settlement recipients at a price of $5.00 per share for a total value of $2,027,400. Including the 60,000 Shares sold to individuals in the Offering, the Company issued 465,480 shares in total for an aggregate value of $2,327,400.

On July 5, 2017, the Company completed its first closing of a private placement offering in which it sold 5,000 shares of its common stock to Daniel Shih, the Company’s founder, at a price of $5.50 per share for a total of $27,500. The Company conducted additional closings for a total of $1,424,973. The Company is offering a total of 461,819 shares of its common stock at a price of $5.50 per share in this offering for the aggregate amount of $2,540,000 and may conduct additional closings up to that aggregate amount.

3)Stock Warrant:

As of December 31, 2016, Aircom had issued stockBoustead warrants exercisable for $60,000 in value of its common stock to a service provider as payment for services. The stock warrants allow the service provider to purchase a number of the Company’s shares of Aircom common stock equal to $60,000 divided by 85%6% of the gross proceeds of the public offering, which shall be exercisable, in whole or in part, commencing on April 13, 2018 and expiring on the five-year anniversary at an initial exercise price of $53.125 per share, which is equal to 125% of the offering price paid by investors for Aircom’s common stock ininvestors. As of December 31, 2019, the first subsequent qualifying equity financing event, at an exercise priceCompany issued total warrants to Boustead to purchase 77,680 shares of $0.01 per share. On February 13, 2017, these stock warrants were converted to Aerkomm’s stock warrants pursuant to the Exchange Agreement (see Note 1). Company’s stock. 

For the nine-month periodsix-month periods ended on SeptemberJune 30, 2017, Aerkomm issued additional stock warrants exercisable for $60,000 in value of Aerkomm common stock to the service provider as payment for additional services. As of September 30, 2017,2021 and 2020, the Company cumulatively recorded $120,000 asdecrease of $397,600 and an increase of $389,300, respectively, in additional paid-in capital inas adjustment for the issuance costs of these stock warrants.

NOTE 16 - Major Vendors

The Company has two unrelated major vendors, which represents 10% or more of the total with respect topurchases of the Company for the six-month periods ended June 30, 2021 and 2020. Purchase from these warrants.vendors for the six-month periods ended June 30, 2021 and 2020, and accounts payable as of June 30, 2021 and December 31, 2020 were as follows:

 

  Purchase  Accounts Payable 
Vendor June 30,
2021
  June 30,
2020
  June 30,
2021
  December 31,
2020
 
A $22,906  $-  $-  $- 
B  -   1,592,239   1,874,339   1,874,339 
Total $22,906  $1,592,239  $1,874,339  $1,874,339 

NOTE 17 - Significant Related Party Transactions

In addition to the information disclosed in other notes, the Company has significant related party transactions as follows:

NOTE 11 –Related Party Transactions

A.A.Name of related parties and relationships with the Company:

Related PartyRelationship
Well Thrive Limited (“WTL”)Daniel Shih (“Daniel”)Founder/promoter and shareholder; Aircom’s CEO and Director between February 13, 2017 and April 27, 2017; CFO of Aircom between February 13, 2017 and May 5, 2017Major stockholder
Yuanjiu Inc. (“Yuanjiu”)Bummy WuShareholderStockholder; Albert Hsu, a Director of Aerkomm, is the Chairman
AA Twin Associates Ltd. (“AATWIN”)GiretsuGeorges Caldironi, COO of Aerkomm, is the sole owner
EESquare Japan (“EESquare JP”)Yih Lieh (Giretsu) Shih,President of Aircom Japan, is the Director
Wealth Wide Int’l Ltd. (“WWI”)Bummy Wu, a stockholder, is the Chairman
dMobile System Co. Ltd. (“dMobile”)(dMobile)DanielSheng-Chun Chang, major stockholder, is the Chairman
Klingon Aerospace, Inc. (“Klingon”)Daniel was the Chairman from February 2015 to February 2016
Law Office of Jan Yung Lin100% owned by Jan
Priceplay.com, Inc. (“PPUS”)Daniel is the Chairman
Priceplay Taiwan Inc. (“PPTW”)Parent company of PPUS
Wealth Wide International Ltd. (“WWI”)Bummy Wu is the Chairman

13B.

AERKOMM INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements - Continued

(Unaudited)

NOTE 11 –Related Party Transactions - Continued

B.Significant related party transactions:

The Company has extensive transactions with its related parties. It is possible that the terms of these transactions are not the same as those which would result from transactions among wholly unrelated parties.


 

AERKOMM INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 17 - Significant Related Party Transactions – Continued

a.As of SeptemberJune 30, 20172021 and December 31, 20162020:

 

   September 30, 2017  December 31, 2016 
 Rental deposit to Daniel $2,397  $4,966 
 Other payable to:        
 PPTW $-  $819,300 
 Klingon  762,000   762,000 
 dMobile  -   471,100 
 PPUS  -   737,000 
 Giretsu Shih  2,131   69,385 
 Daniel  79,602   49,500 
 Bummy Wu     32,149 
 W W I  1,800   - 
 Others  53,735   15,141 
 Total $899,268  $2,955,575 
  June 30,
2021
  December 31,
2020
 
  (Unaudited)    
Inventory prepayment to:      
dMobile1 $331,400  $- 
Yuanjiu2  -   542,130 
Total $331,400  $542,130 
         
Loan from WTL3 $-  $527,066 
Other payable to:        
AATWIN4 $255,741  $146,673 
Interest payable to WTL3  44,825   7,623 
Others5  404,005   296,890 
Total $704,571  $451,186 
Lease liability to WWI6 $54,236  $68,661 

 

 b.1.For

In June 2021, the three-month and nine-month periods ended SeptemberCompany ordered antenna equipment of $331,400 (NT $9,500,000) (unaudited) from dMobile. As of June 30, 2021, the Company had prepaid $331,400 (NT$9,500,000) (unaudited) to dMobile as prepayment on the equipment purchase.

 

2.Represents inventory prepayment paid to Yuanjiu. On May 11, 2020, the Company entered into a product purchase agreement (PO1) with Yuanjiu to purchase 100 sets of the AirCinema Cube to be installed on aircraft of commercial airline customers. The total purchase amount under this agreement was $1,807,100 (unaudited) and the Company paid 20% of the total amount, or $361,420 (unaudited), as an initial deposit. On July 15, 2020, the Company signed a second product purchase agreement (PO2) of $1,807,100 (unaudited) with Yuanjiu for an additional 100 sets of the AirCinema Cube for the same purchase amount and paid a 10% initial deposit of $180,710 (unaudited) on this agreement as well. In February 2021, the Company paid the remaining balance of the PO1 and received the inventory with aggregate value of $1,807,100 (unaudited). The deposit on PO2 was refunded by Yuanjiu on June 1, 2021.

   Three Months Ended
September 30,
  Nine Months Ended
September 30,
 
   2017  2016  2017  2016 
 Legal expense paid to Law Office of Jan-Yung Lin $-  $10,000  $-  $10,000 
 Rent expense charged by Daniel $30,690   -  $37,901   - 
 Rent expense charged by WWI $1,800  $-  $1,800  $- 
3.The Company borrowed funds to meet operational needs from WTL under the Loans (discussed in Note 1). The original loan amount was approximately $2.64 million (NT$80,000,000). The loan agreement, which allows the Company to borrow additional funds and which carries an interest rate of 5% per annum, will terminate on December 31, 2021. The Company had fully repaid the outstanding loan amount as of June 30, 2021.

4.Represents payable to AATWIN due to a consulting agreement dated January 1, 2019. The monthly consulting fee is EUR 15,120 (approximately $17,000). This agreement will expire on December 31, 2021.

5.Represents payables to employees as a result of regular operating activities.

6.

Aircom Hong Kong has a lease agreement with WWI for warehouse space with a monthly rental cost of $450. The lease term on this property is from July 1, 2020 to June 30, 2022. Aircom Hong Kong has another lease agreement with WWI for its office space in Hong Kong. The original lease term was from June 28, 2018 to June 27, 2020 with a monthly rental cost of HKD 29,897 (approximately $3,847). The Company renewed this lease on June 27, 2020 and the current lease term is from June 28, 2020 to June 27, 2022 with a monthly rental cost of HKD 30,000 (approximately $3,829).


 

Aircom Japan entered into a lease agreement with Daniel between August 1, 2014 and July 31, 2016, which was renewed

AERKOMM INC. AND SUBSIDIARIES

Notes to expire on July 31, 2018. Pursuant to the terms of this lease agreement, Aircom Japan pays Daniel a rental fee of approximately $1,215 per month.Condensed Consolidated Financial Statements

NOTE 17 - Significant Related Party Transactions – Continued

b.For the six-month periods ended June 30, 2021 and 2020:

 

  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
  2021  2020  2021  2020 
  (Unaudited)  (Unaudited)  (Unaudited)  (Unaudited) 
Purchase from Yuanjiu1 $-  $-  $1,807,100  $- 
Consulting expense charged by AATWIN2  54,388   50,110   109,068   100,221 
Interest expense charged by WTL3  17,951   9,067   38,778   9,067 
Rental expense charged by WWI4  11,988   -   2,396   - 
Sales to YuanJiu5  72,000   -   72,000   - 
Rental income from EESqaure JP6  2,826   -   5,563   - 

1.

Represents inventory prepayment paid to Yuanjiu. On May 11, 2020, the Company entered into a product purchase agreement (PO1) with Yuanjiu to purchase 100 sets of the AirCinema Cube to be installed on aircraft of commercial airline customers. The total purchase amount under this agreement was $1,807,100 (unaudited) and the Company paid 20% of the total amount, or $361,420 (unaudited), as an initial deposit. On July 15, 2020, the Company signed a second product purchase agreement (PO2) of $1,807,100 (unaudited) with Yuanjiu for an additional 100 sets of the AirCinema Cube for the same purchase amount and paid a 10% initial deposit of $180,710 (unaudited) on this agreement as well. In February 2021, the Company paid the remaining balance of PO1 and received the inventory with aggregate value of $1,807,100 (unaudited).

2.

Represents payable to AATWIN due to a consulting agreement dated January 1, 2019. The monthly consulting fee is EUR 15,120 (approximately $17,000). This agreement will expire on December 31, 2021.

3.

The Company borrowed funds to meet operational needs from WTL under the Loans (discussed in Note 1). The original loan amount was approximately $2.64 million (NT$80,000,000). The loan agreement, which allows the Company to borrow additional funds and which carries an interest rate of 5% per annum, will terminate on December 31, 2021. The Company had fully repaid the outstanding loan amount as of June 30, 2021.

4.

Aircom Hong Kong has a lease agreement with WWI for warehouse space with a monthly rental cost of $450. The lease term on this property is from July 1, 2020 to June 30, 2022. Aircom Hong Kong has another lease agreement with WWI for its office space in Hong Kong. The original lease term was from June 28, 2018 to June 27, 2020 with a monthly rental cost of HKD 29,897 (approximately $3,847). The Company renewed this lease on June 27, 2020 and the current lease term is from June 28, 2020 to June 27, 2022 with a monthly rental cost of HKD 30,000 (approximately $3,829).

5.

On April 18, 2021, the Company entered into a memorandum of understanding with YuanJiu pursuant to which YuanJiu will serve as the exclusive service provider to the Company in Asia with respect to the installation and service of the Company’s Aerkomm AirCinema Cube (“ACC”) product and the related software platform (“Rayfin”) on which AAC will operate. In 2021, the Company sold ground antenna equipment to YuanJiu for the cooperation purpose.

6.Aircom Japan entered into a sublease agreement with EESquare JP for the period between March 5, 2019 and March 4, 2021. Pursuant to the terms of this lease agreement, EESquare JP pays Aircom Japan a rental fee of approximately $920 per month.

NOTE 12 –Stock Based Compensation

NOTE 18 - Stock Based Compensation

In March 2014, Aircom’s Board of Directors adopted the 2014 Stock Option Plan (the “Aircom 2014 Plan”), which. 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. Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock Options, as determined by the Administrator at the time of grant of an Option. On February 13, 2017, pursuant to the Exchange Agreement, Aerkomm assumed the options of Aircom 2014 Plan and agreed to issue options for an aggregate of 5,444,4071,088,882 shares to Aircom’s stock option holders.

One-third of the totalstock 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 has been adoptedbecame 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.

14

AERKOMM INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements - Continued

(Unaudited)

NOTE 12 –Stock Based Compensation - Continued

On May 5, 2017, the Board of Directors of Aerkomm adopted the Aerkomm Inc. 2017 Equity Incentive Plan (the “Aerkomm 2017 Plan” or,and together with the “Plan”Aircom 2015 Plan, the “Plans”) and the reservation of 5,000,0001,000,000 shares of the Company’s common stock for issuance under the Aerkomm 2017 Plan. On June 23, 2017, the Board of Directors voted to increase the number of shares of the Company’s common stock reserved for issuance under the Aerkomm 2017 Plan to 10,000,0002,000,000 shares. The Aerkomm 2017 Plan provides for the granting of incentive stock options and non-statutory stock options to employees, consultants and outside directors of Aircom. Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock Options,Company, as determined by the Administrator atCompensation Committee of the timeBoard of grantDirectors (or, prior to the establishment of an Option. the Compensation Committee on January 23, 2018, the Board of Directors).


AERKOMM INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 18 - Stock Based Compensation – Continued

On June 23, 2017, the Board of Directors agreed to issue options for an aggregate of 1,455,000291,000 shares under the Aerkomm 2017 Plan to certain officers and directors of Aerkomm.

the Company. The option agreements granted on June 23, 2017 are classified into three types of vesting schedule, which includes, 1) 1/6 of the shares subject to the option shall vest commencing on the vesting start date and the remaining shares shall vest at the rate of 1/60 for the next 60 months on the same day of the month as the vesting start date; 2) 1/4 of the shares subject to the option shall vest commencing on the vesting start date and the remaining shares shall vest at the rate of 1/36 for the next 36 months on the same day of the month as the vesting start date; 3) 1/3 of the shares subject to the option shall vest commencing on the first anniversary of vesting start date and the remaining shares shall vest at the rate of 50% each year for the next two years on the same day of the month as the vesting start date.

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 will vest 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 vested on the grant date, and 25% of the shares will vest 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 vest 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.

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.

Option price is determined by the Board of Directors.Compensation Committee. 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 of Aerkomm 2017 Plan. The Aerkomm 2017 Plan has not yet beenwas approved by Aerkomm’s stockholders.the Company’s stockholders on March 28, 2018. 


 

AERKOMM INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 18 - 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 $343,835$1,859,696 and $22,600$913,814 for the three-monthsix-month periods ended SeptemberJune 30, 20172021 and 2016, respectively, and $1,136,835 and $22,600 for the nine-month periods ended September 30, 2017,2020, respectively, related to such employee stock options.

Determining Fair Value

Valuation and amortization method

The Company uses the Black-Scholes option-pricing-model to estimate the fair value of stock options granted on the date of grant or modification and amortizes the fair value of stock-based compensation at the date of grant on a straight-line basis for recognizing stock compensation expense over the vesting period of the option.

Expected term

The expected term is the period of time that granted options are expected to be outstanding. The Company uses the SEC’s simplified method for determining the option expected term based on the Company’s historical data to estimate employee termination and options exercised.

Expected dividends

The Company does not plan to pay cash dividends before the options are expired. Therefore, the expected dividend yield used in the Black-Scholes option valuation model is zero.

Expected volatility

Since the Company has no historical volatility, the Companyit used the calculated value method which utilizessubstitutes the historical volatility of a publicly listedpublic company in the same industry asto estimate the expected volatility forof the Company, in calculatingCompany’s share price to measure the fair value of options granted under Aircom 2014 Plan and Aerkomm 2017 Plan.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 Aircom 2014 Plan and Aerkomm 2017 Plan.the Plans.

15

Forfeitures

AERKOMM INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements - Continued

(Unaudited)

NOTE 12 –Stock Based Compensation - Continued

Forfeitures

The Company is required to estimate forfeitures at the time of grant and revises those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate option forfeitures and records share-based compensation expense only for those awards that are expected to vest.

The Company used the following assumptions to estimate the fair value of options granted in 2015six-month period ended June 30, 2021 and 2016year ended December 31, 2020 under Aircom 2014 Plan and Aerkomm 2017 Planthe Plans as follows:

AssumptionsAssumptions
Expected term3 - 55-10 years
Expected volatility40.11 - 59.1845.79% – 72.81%
Expected dividends0%
Risk-free interest rate0.710.69% - 2.302.99%
Forfeiture rate0 - 5%

Aircom 2014 Plan

A summary of the number of shares, weighted average exercise price and estimated fair value of options granted under the Aircom 2014 Plan as of September 30, 2017 and December 31, 2016 was as follows:

   Number of Shares  Weighted Average Exercise Price Per Share  Weighted Average Fair Value Per Share 
 Options outstanding at January 1, 2016  4,139,241  $0.0013  $0.0004 
 Granted  1,305,166   0.6704   0.2108 
 Exercised  -   -   - 
 Forfeited/Cancelled  -   -   - 
 Options outstanding at December 31, 2016  5,444,407   0.1617   0.0508 
 Granted  -   -   - 
 Exercised  (19,681)  0.0013   0.0004 
 Forfeited/Cancelled  (763,418)  0.6550   0.2059 
 Options outstanding at September 30, 2017  4,661,307   0.0816   0.0256 

A summary of the status of nonvested shares under Aircom 2014 Plan as of September 30, 2017 and December 31, 2016 was as follows:

   Number of Shares  Weighted Average Fair Value Per Share 
 Options nonvested at January 1, 2016  4,139,241  $0.0004 
 Granted  1,305,166   0.2108 
 Vested  (2,066,858)  0.0004 
 Forfeited/Cancelled  -   - 
 Options nonvested at December 31, 2016  3,377,549   0.0817 
 Granted  -   - 
 Vested  (920,522)  0.0537 
 Forfeited/Cancelled  (763,418)  0.2059 
 Options nonvested at September 30, 2017  1,693,609   0.0409 

Aerkomm 2017 Plan

A summary of the number of shares, weighted average exercise price and estimated fair value of options Aerkomm 2017 Plan as of September 30, 2017 was as follows:

   Number of Shares  Weighted Average Exercise Price Per Share  Weighted Average Fair Value Per Share 
 Options outstanding at January 1, 2017  -  $-  $- 
 Granted  2,000,000   5.9129   3.5246 
 Exercised  -   -   - 
 Forfeited/Cancelled  -   -   - 
 Options outstanding at September 30, 2017  2,000,000  $5.9129  $3.5246 

16

 

AERKOMM INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 18 - Stock Based Compensation – Continued

(Unaudited)

NOTE 12 –Stock Based Compensation – Continued

A summary

Aircom 2014 Plan

Activities related to options for the Aircom 2014 Plan for the three months ended June 30, 2021 and the year ended December 31, 2020 are as follows:

  Number of
Shares
  Weighted
Average
Exercise
Price Per
Share
  Weighted
Average Fair
Value Per
Share
 
Options outstanding at January 1, 2020  932,262  $       0.4081  $       0.1282 
Granted  -   -   - 
Exercised  -   -   - 
Forfeited/Cancelled  -   -   - 
Options outstanding at December 31, 2020        932,262   0.4081   0.1282 
Granted  -   -   - 
Exercised  -   -   - 
Forfeited/Cancelled  -   -   - 
Options outstanding at June 30, 2021 (unaudited)  932,262   0.4081   0.1282 

There are no unvested stock awards under Aircom 2014 Plan for the six-month period ended June 30, 2021 and the year ended December 31, 2020.

Of the shares covered by options outstanding as of June 30, 2021, 932,262 are now exercisable. Information related to stock options outstanding and exercisable at June 30, 2021, is as follows:

   Options Outstanding (Unaudited)  Options Exercisable (Unaudited) 

Range of
Exercise
Prices

  Shares
Outstanding at
6/30/2021
  Weighted
Average
Remaining
Contractual
Life (years)
  Weighted
Average
Exercise
Price
  Shares
Exercisable at
6/30/2021
  Weighted
Average
Remaining
Contractual
Life (years)
  Weighted
Average
Exercise
Price
 
$0.0067   820,391   3.67  $0.0067   820,391   3.67  $0.0067 
 3.3521   111,871   5.00   3.3521   111,871   5.00   3.3521 
     932,262   3.83   0.4081   932,262   3.83   0.4081 

As of June 30, 2021, there was no unrecognized stock-based compensation expense for the status of nonvested sharesAircom 2014 Plan. No option was exercised during the three-month periods ended June 30, 2021 and 2020.

Aerkomm 2017 Plan

Activities related to options outstanding under Aerkomm 2017 Plan for the six months ended June 30, 2021 and the year ended December 31, 2020 are as follows:

  Number of
Shares
  Weighted
Average
Exercise
Price Per
Share
  Weighted
Average Fair
Value Per
Share
 
Options outstanding at January 1, 2020        719,400  $   14.4889  $       9.2431 
Granted  290,997   8.3880   6.3769 
Exercised  -   -   - 
Forfeited/Cancelled  (18,000)  11.8067   7.3457 
Options outstanding at December 31, 2020  992,397   12.7486   8.4370 
Granted  14,000   7.2465   5.5352 
Exercised  -   -   - 
Forfeited/Cancelled  -   -   - 
Options outstanding at June 30, 2021 (unaudited)  1,006,397   12.6721   8.3967 


AERKOMM INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 18 - Stock Based Compensation – Continued

Activities related to unvested stock awards under Aerkomm 2017 Plan for the six-month period ended June 30, 2021 and the year ended December 31, 2020 are as follows:

  Number of
Shares
  

Weighted
Average
Fair Value 

Per Share

 
Options unvested at January 1, 2020  340,128  $     7.8313 
Granted  290,997   6.3769 
Vested  (186,209)  9.3191 
Forfeited/Cancelled  (6,625)  4.0779 
Options unvested at December 31, 2020  438,291   6.2904 
Granted  14,000   5.5352 
Vested  (312,997)  6.7790 
Forfeited/Cancelled  -   - 
Options unvested at June 30, 2021 (unaudited)  139,294   5.1164 

Of the shares covered by options outstanding under the Aircom 2017 Plan as of SeptemberJune 30, 2017 was2021, 953,517 (unaudited) are now exercisable; 117,944 (unaudited) shares will be exercisable for the twelve-month period ending June 30, 2022; 21,350 shares will be exercisable for the twelve-month period ending June 30, 2023. Information related to stock options outstanding and exercisable at June 30, 2021, is as follows:

   Number of Shares  Weighted Average Fair Value Per Share 
 Options nonvested at January 1, 2017  -     
 Granted  2,000,000  $3.5246 
 Vested  (303,125) $3.2922 
 Forfeited/Cancelled  -   - 
 Options nonvested at September 30, 2017  1,696,875  $3.5661 
   Options Outstanding (Unaudited)  Options Exercisable (Unaudited) 
Range of
Exercise
Prices
  Shares
Outstanding at
6/30/2021
  

Weighted
Average
Remaining
Contractual
Life (years)

 Weighted
Average
Exercise
Price
  Shares
Exercisable at
6/30/2021
  Weighted
Average
Remaining
Contractual
Life (years)
 Weighted
Average
Exercise
Price
 
$3.96   327,000  8.01 $3.9600   245,250  8.01 $3.9600 
 7.00 – 9.00   310,997  9.42  8.2766   304,997  9.41  8.2968 
 11.00 – 14.20   103,400  8.22  11.4426   59,856  8.17  11.9196 
 20.50 – 27.50   141,000  6.41  24.3638   133,000  6.38  24.5962 
 30.00 – 35.00   124,000  6.00  34.4012   124,000  6.00  34.4012 
     1,006,397  7.99  12.6721   867,103  7.98  13.5534 

As of SeptemberJune 30, 2017 and December 31, 2016, there were approximately $3,630,000 and $94,000, respectively, of2021, total unrecognized stock-based compensation costexpense related to nonvested share-based compensation arrangements granted under the Aircom 2014 Plan and the Aerkomm 2017 Plan. Total unrecognized compensation cost willstock options was approximately $334,000 (unaudited), which is expected to be adjusted for future changes in estimated forfeitures. The Company expects to recognize that costrecognized on a straight-line basis over a weighted average period of 1 - 5approximately 1.05 years. No option was exercised during the six-month period ended June 30, 2021 and the year ended December 31, 2020.

NOTE 19 – Commitments

NOTE 13 –Commitments and Contingency

As of SeptemberJune 30, 2017,2021, the Company’s significant commitments and contingency arecommitment is summarized as follows:

Commitments

1)The Company has one lease for its Fremont, California office expiredAirbus SAS Agreement: On November 30, 2018, in May 2017 and renewed to expirefurtherance of a memorandum of understanding signed in May 2020. Rental expense for the three-month and nine-month periods ended September 30, 2017 and 2016 were $19,338 and $51,814, $15,618 and $46,854, respectively. As of September 30, 2017, future minimum lease payment is $77,352 for the next twelve-month period ending September 30, 2018.

2)The company has another lease for its Japan office expiring July 2018. Rental expenses were approximately $8,658 and $25,974 for the three-month and nine-month period ended September 30, 2017, respectively. As of September 30, 2017, future minimum lease payment obligation is $37,400, including the 8% Japan consumption tax, for the next twelve-month ending September 30, 2018.

3)In March 2017,2018, the Company entered into a satellites servicean agreement with Airbus SAS (“Airbus”), pursuant to which Airbus will develop and certify a Japanese company (Company J).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 effective on March 15, 2017 andexpected to be in the third quarter of 2021, although there is no guarantee that the project will be expiredsuccessfully completed in the projected timeframe.


AERKOMM INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 19 – Commitments - Continued

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 SeptemberNovember 30, 2018. According2018 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.

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. To date, Republic Engineers has made no payments against the purchase order and the Company has not begun any work on the ordered shipsets. On July 7, 2020, Republic Engineers and Mr. Raja filed a complaint against Aerkomm, Aircom and Aircom Telecom 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 have 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 have been 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. Aerkomm denies the allegations in the complaint and believes that the claims filed by Republic Engineers and Mr. Raja have no merit. Aerkomm has retained special litigation counsel and intends to vigorously defend against the claims. Aerkomm does not expect that this proceeding will have a material adverse effect on its results of operations or cash flows.

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 prepaidpaid 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 totalcomplete 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 June 30, 2021, the Company reclassified this prepayment to Other Receivable and provided an allowance for the full amount of $285,300$1,155,623.

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 depositCompany’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 $95,100a likelihood of confusion with a similarly sounding name trademarked at, and in April 2017.use from, an earlier date. The prepaymentCompany is appealing this USPTO Final Office Action but there can be no guarantee that the USPTO will find on appeal in favor of $285,300 shall be appliedthe Company. The Company is actively considering changing the name and may determine to monthly service chargedo so prior to any appeal decision by Company J based on the term defined in the agreement.USPTO.

Contingency

The Company entered into a 3-year digital transmission service agreement with Asia Satellite Telecommunication Company Limited (“Asia Sat”) on July 25, 2015. As of March 31, 2017, Asia Sat stipulates that the Company is in debt of $8,013,495 to Asia Sat, which includes unpaid service fees, a default payment in the form of liquidated sum and interest. The default payment includes total future payments of $7,411,616 due through March 31, 2018, subtracting the deposit of $775,000 made to Asia Sat. The Company disagreed with the payable balance of $8,013,495 and had recorded $1,376,879 payable to Asia Sat as of March 31, 2017. On July 25, 2016, Asia Sat commenced arbitration against the Company. On November 21, 2016, the Hong Kong International Arbitration Centre appointed a sole arbitrator to hear the dispute. On January 12, 2017, the Company introduced a counterclaim for misrepresentations made to induce entry into the Agreement. Aircom and AsiaSat reached a settlement with respect to the Agreement as of July 25, 2017, with an effective date of July 20, 2017. As of September 30, 2017, the Company has accrued the settlement liability and accounted for the net impact of the settlement.

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ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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,to “we, “us,” “our,” or “our company” are to the combined business of Aerkomm Inc., a Nevada corporation, and its consolidated subsidiaries;

“Aircom” are to Aircom Pacific, Inc., a California corporation and wholly-owned subsidiary of our company;

“Aircom Seychelles” are to Aircom Pacific Ltd., a Republic of Seychelles company and wholly-owned subsidiary of Aircom;

“Aircom HK” are to Aircom Pacific Inc. Limited, a Hong Kong company and wholly-owned subsidiary of Aircom;

“Aircom Japan” are to Aircom Japan, Inc., a Japanese company and wholly-owned subsidiary of Aircom;

“SEC” are to the U.S. Securities and Exchange Commission;

“Exchange Act” are to the Securities Exchange Act of 1934, as amended; and

“Securities Act” are to the Securities Act of 1933, as amended.

On January 10, 2017, we completed a 1-for-10 reverse splitNevada corporation, and its consolidated subsidiaries, including Aircom Pacific, Inc., a California corporation and wholly-owned subsidiary, or Aircom; Aircom Pacific Ltd., a Republic of our issuedSeychelles company and outstanding common stock. All sharewholly-owned subsidiary of Aircom; Aerkomm Pacific Limited, a Malta company and per share information in this report has been adjusted to give retroactive effect to such reverse split.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.

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 company’s future results, performance, liquidity, financial condition, prospects and opportunities and are based upon information currently available to our company and our managementus 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 enter intoattract 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;retain customers;

the extent of the adoption of our products and services by airline partners and customers;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 implementsuccessfully complete the development, testing and initial implementation of our technology and upgrades on a timely basis;product offerings;

our ability to executemaintain our expansion, including modification tocompetitive advantages against competitors in 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;industry;

our ability to managetimely 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 rapidly growing company;timely manner;

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;

the 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; andoperations

changesour ability to maintain, protect and enhance our intellectual property;

the effects of increased competition in laws, regulations and interpretations affecting telecommunications services and aviation, including, in particular, changes that impact the design of our equipmentmarket and our ability to obtain required certifications for our equipment.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.

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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 company’s 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 Registration StatementAnnual Report on Form S-1, as amended (file no. 333-218995),10-K for the year ended December 31, 2019, 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 company’s 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

We are a full-service provider of in-flight entertainment and connectivity, or IFEC, solutions. With advanced technologies and a unique business model, we, planas a development stage service provider of IFEC solutions, intend to provide airline passengers with a true broadband in-flight experience that encompasses a wide range of service options. Such options will include Wi-Fi, cellular, networks, movies, gaming, live TV, and music. We expectplan to offer these core services, which we are currently still developing, through both built-in in-flight entertainment systems, such as a seatbackseat-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.

We plan to partner with airlines and offer airline passengers free IFEC services. We expect to generate revenuesrevenue through advertising and in-flight transactions. We believe that this is an innovative approach that differentiates us from existing market players.

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.

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 a Ku/Ku high throughput satellite, or HTS. We also expect to develop a remote connectivity system that will be applicable to the highspeed rail industry.

Our total sales were $35,523 and $0 for the six months ended June 30, 2021 and the year ended December 31, 2020.

Business Development

We are actively working with prospective airline customers to provide services to their passengers utilizing the Airbus certified AERKOMM K++ system. We have entered into non-binding memoranda of understanding with a number of airlines, including Air Malta Airlines of Malta and Onur Air of Turkey. There can be no assurances, however, that these 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 Ka-band IFEC solutions for airlines and have suspended work on our dual band (Ka/Ku) satellite inflight connectivity solution. The Ku-band system will, however, still be retained for other product applications such as remote locations and maritime use.

In connection with the Airbus project, we also identified owners of 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 would generate additional revenue and income for our company. We are currently in advanced discussions with a number of ACJ customers, some of whom have more than one aircraft in their fleets.


 

Our AERKOMM K++ System

Following the course of discussions between us and Airbus and in view of the increasing demand by the airlines for a bigger data throughput, we have revised our strategy to focus primarily on Ka-band satellite connectivity solutions for aviation customers and have suspended work on our dual band satellite connectivity solution. Our AERKOMM K++ system will operate through Ka/Ka High Throughput Satellites. The Ku-band system will, however, still be retained for the other applications such as remote locations and maritime use.

Our AERKOMM K++ system will contain a low-profile radome (that is, a dome or similar structure protecting our radio equipment) containing two Ka-band 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 Organization Approval.

GEO (Geostationary Earth Orbiting) and LEO (Low Earth Orbiting) Ka-band Satellites

Our initial AERKOMM K++ system will work only with geostationary earth orbiting, or GEO, Ka-band satellites. Performance of GEO satellites diminishes greatly in the areas near the Earth’s poles. Only low earth orbiting, or LEO, satellites can collect high quality data over the North and South poles. We are developing technologies to work with LEO satellites and plans to partner with Airbus to develop aircraft installation solutions. As new GEO and LEO Ka-band 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 Ka-band aviation connectivity, although it cannot assure you that it will be successful in this new area of endeavor.

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

Short Term Loan

In June 2021, we entered into a loan agreement in the amount of $1,433,177 (NT $40,000,000) with a non-related party. This loan, which carries no interest, originally matured on July 16, 2021. As of August 20, 2021, the loan is still outstanding we and the lender signed an amendment agreement to extend the loan repayment date to September 16, 2021.

Product Supply Agreement

On April 25, 2021, we entered into a product supply agreement with a customer. As of June 30, 2017,2021, we had advancedreceived $1,611,357 from the customer towards the purchase price of this equipment.

Definitive Agreement with YuanJiu

On June 1, 2021, we entered into a totaldefinitive contractor agreement with YuanJiu pursuant to the terms of $425,000which YuanJiu will serve the exclusive service provider to us in Asia with respect to the installation and service of our Aerkomm AirCinema Cube (“ACC”) product and the related Rayfin software platform on which AAC will operate.

Taiwan Land Acquisition

On July 10, 2018, our Company and Aerkomm Taiwan entered into a real estate sale contract (the “Prepayment”“Land Purchase Contract”) with Tsai Ming-Yin (the “Seller”) with respect to Aircom Telecom, LLC, athe acquisition by Aerkomm Taiwan limited liability company that is not currently affiliated with us (“Aircom Taiwan”), for working capital, as part of a planned $1,500,000 aggregate equity investment (the “Equity Investment”) in Aircom Taiwan. It is proposed that Aircom Taiwan will act as our agent and operating companyparcel of land located in Taiwan. Before Aircom Taiwan can issue equityThe land is expected to us, because we arebe used to build a “foreign national” under Taiwan law, the Equity Investment must be approved by the Investment Review Committee of the Ministry of Economic affairs of Taiwan (the “Committee”). We entered into an Equity Pre-Subscription Agreement with Aircom Taiwan dated as of August 13, 2017,satellite ground station and data center. Pursuant to memorialize the terms of the Equity Investment. SubsequentLand Purchase Contract, and subsequent amendments on July 30, 2018, September 4, 2018, November 2, 2018 and January 3, 2019, we paid to the seller in installments refundable prepayments of $34,474,462 in total. As of June 30, 2017,2021 and December 31, 2020, the estimated commission payable for the land purchase in the amount of $1,387,127 was recorded to the cost of land and the payment to be paid after the full payment of the Land acquisition price no later than December 31, 2021. According to the amended Land Purchase Contract dated on November 10, 2020, the transaction may be terminated any time by both the buyer and the seller and agreed by all parties if we advancedare unable to obtain the qualified satellite license issued by Taiwan authority before July 31, 2021. As of August 20, 2021, the license applications are still in progress.


Employment Agreement with Louis Giordimaina

On May 25, 2021, we entered into an additional $35,000 (the “Additional Prepayment”employment agreement with Mr. Giordimaina, pursuant to which Mr. Giordimaina was hired to serve as our Chief Executive Officer. Pursuant to the employment agreement, Mr. Giordimaina will receive an annual salary of €540,000, approximately $636,984. Mr. Giordimaina will also receive signing bonus of €60,000, approximately $70,776, and together with the Initial Prepayment, the “Prepayments”)150,000 shares of our stock options to Aircom Taiwan for working capital purposes. If the Committee approves Aircom Taiwan’s application to accept the Equity Investment, Aircom Taiwanbe issued as soon as a new equity incentive plan has been authorized by our shareholders. A bonus will be authorizedconsidered, comparable to issue equitythose that may be offered to usother executives once a satisfactory revenue stream is established at Aerkomm as a result of Mr. Giordimaina’s efforts. Mr. Giordimaina will be granted an option to purchase 18,750 shares of our common stock each calendar quarter in arrears on the last working day of the three-month period starting on June 1, 2021 and vest when issued. We will cover and pay any premium up to a maximum of €2,500, approximately $2,949, per annum for any international private health insurance which Mr. Giordimaina may have in place from time to time covering Mr. Giordimaina and his wife; we will recommend board approval for life insurance coverage for Mr. Giordimaina comparable with our other executives; we will pay Mr. Giordimaina the sum of €6,000, approximately $7,078, per year to any private pension fund scheme/s designated by Mr. Giordimaina, we will pay Mr. Giordimaina €18,000, approximately $21,233, per annum as an allowance for a leased car and fuel expenses, to be paid in equal monthly instalments, we will provide Mr. Giordimaina with a mobile telephone for his business use, as well as a lap top computer and an iPad, and we will becomereimburse Mr. Giordimaina for all actual, necessary and reasonable expenses incurred by him in the controlling membercourse of Aircom Taiwan. If the Committee rejects Aircom Taiwan’s application, Aircom Taiwan will not be allowed to issue equity to us in exchangehis performance of services for the Prepayments,Company. The employment agreement contains customary confidentiality provisions and covenants prohibiting Mr. Giordimaina from competing with us during his employment, and from soliciting any of our employees or consultants for a period of one year after his employment end. If Mr. Giordimaina’s employment is terminated by us without cause, he shall be entitled to one-half of his full salary for the remainder of the initial three-year term of his agreement.

Impact of the COVID-19 Pandemic

The COVID-19 pandemic is having a particularly adverse impact on the airline industry. The outbreak in this case, Aircom Taiwan, most likely, will not be able repay or returnChina and throughout the Prepaymentsworld since December 2019 has led to us.

a precipitous decrease in the number of daily departures and arrivals for domestic and international flights.

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Principal Factors Affecting Financial Performance

We believe that our operating and business performance iswill 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.

Emerging Growth Company

We qualify as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As a result, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements. For so long as we are an emerging growth company, we will not be required to:

have an auditor report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act;


 

Going Concern Opinion

comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (i.e., an auditor discussion and analysis);

submit certain executive compensation matters to shareholder advisory votes, such as “say-on-pay” and “say-on-frequency;” and

disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the CEO’s compensation to median employee compensation.

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards.

In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period. Our auditorsfinancial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards.

We will remain an “emerging growth company” for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our total annual gross revenues exceed $1 billion, (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act of 1934, as amended, or the Exchange Act, which would occur if the market value of our shares of common stock that are held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter or (iii) the date on which we have issued a going concern opinion. This means that our auditors believe theremore than $1 billion in non-convertible debt during the preceding three year period.

Recent Market Information

In the IATA (International Air Transportation Association) Airlines Financial Monitor dated November - December 2020, published on January 21, 2021, the following key points were highlighted:

The final Q3 2020 financial results show that airlines continued to suffer from very weak travel demand and burnt cash, albeit at a slower rate compared to Q2 with the help of cost cutting measures and robust cargo revenues.
Initial Q4 2020 earnings announcements indicate that airlines continued to burn cash as the recovery in demand stalled. However, the vaccine news makes IATA estimate that airlines could achieve cash break-even towards the end of 2021.
The global airline share price index rose in December 2020 but still lagged wider equity markets as the resurgence of the virus weighed on the travel demand recovery.
Looking forward, the widespread availability of vaccines and implementation of successful testing regimes will be key for the recovery in travel demand and airline share prices.

In general, because the future of the COVID-19 pandemic is substantial doubt that we can continueso unpredictable, the future of airline and air traffic recovery is extremely unpredictable as an on-going business for the next twelve months unless we obtain additional capital to pay our bills. This is because we have not generated significant revenues and will incur additional expenses as a result of being a public reporting company. If we are unable to obtain additional working capital, our business may fail. Accordingly, we must raise cash from sources other than operations. To date, we have financed our operations primarily through cash flow from limited operations, augmented by cash proceeds from financing activities, short-term borrowings and equity contributions by our stockholders. We must raise cash to implement our projected plan of operations.well.

Results of Operations

Comparison of Three Months Ended SeptemberJune 30, 20172021 and 20172020

The following table sets forth key components of our results of operations during the three-month periods ended SeptemberJune 30, 20172021 and 2016.

  

Three Months Ended

September 30,

  Change 
  2017  2016  $  % 
Sales $-  $-  $-   - 
Cost of sales  -   -   -   - 
Operating expenses  1,398,590   680,836   717,754   105.4%
Loss from operations  (1,398,590)  (680,836)  (717,754)  105.4%
Net non-operating income (loss)  (998)  -   (998)  100.0%
Loss before income taxes  (1,399,588)  (680,836)  (718,752)  105.6%
Income tax expense (benefit)  4,453   (249,000)  244,547   (98.2%)
Net Loss  (1,404,041)  (431,836)  (972,205)  225.1%
Other comprehensive loss  (242)  -   (242)  100.0%
Total comprehensive loss $(1,404,283) $(431,836) $(972,447)  225.2%

2020.

20

  Three Months Ended
June 30,
  Change 
  2021  2020  $  % 
Sales $72,000  $-  $72,000   100.0%
Cost of sales  43,878   -   43,878   100.0%
Operating expenses  1,996,515   2,686,549   (690,034)  (25.7)%
Loss from operations  (1,968,393)  (2,686,549)  718,156   (26.7)%
Net non-operating income (expense)  432,466   565,354   (132,888)  (23.5)%
Loss before income taxes  (1,535,927)  (2,121,195)  585,268   (27.6)%
Income tax expense  (26)  11   (37)  (336.4)%
Net Loss  (1,535,901)  (2,121,206)  585,305   (27.6)%
Other comprehensive income (loss)  (524,181)  (571,592)  47,411   (8.3)%
Total comprehensive loss $(2,060,082) $(2,692,798) $632,716   (23.5%

SalesRevenue.Our sales weretotal revenue was $72,000 and $0 for both the three-month periods ended SeptemberJune 30, 20172021 and 20162020, respectively. Our total revenue was $72,000 for the three-month period ended June 30, 2021 due to our sale of ground antenna units to one of our related parties. Our total revenue of $0 for the three-month period ended June 30, 2020 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 periods.period.


 

Cost of sales. Our cost of sales includeswas $43,878 and $0 for the direct costs of our raw materialsthree-month periods ended June 30, 2021 and component parts, as well as the cost of labor and overhead. Our2020, respectively. The cost of sales was $0 for both the three-month period ended SeptemberJune 30, 2017 and 20162021 was $43,878 was the costs of our sale of ground antenna units to one of our related parties. The cost of sales for the three-month period ended June 30, 2020 was $0 as we did not have any sales during the periods.

 

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 increaseddecreased by $718,752$690,034, or 25.7%, to $1,399,588$1,996,515 for the three-month period ended SeptemberJune 30, 2017,2021, from $680,836$2,686,549 for the three-month period ended SeptemberJune 30, 2016. Such increase2020. This decrease was mainly due to increase stock based compensation, payroll and related expenses,a decrease in consulting fees go-publicas the result of warrant re-valuation, non-cash stock-based compensation expense, travel expense and satellite service feeaccounting and auditing related expense and insurance expense of $321,325, $44,877, $107,378, $50,198$535,152, $269,657, $93,133 and $152,821,$61,760, respectively, which was offset by the decreaseincrease in outsourcing expensespayroll and payroll related expense, legal expense, insurance expense and amortization expense of $129,391.$93,032, $76,199, $40,605 and $38,872, respectively. The increase in insurance expense was mainly related to the amortization of D&O insurance during the period.

 

Net non-operating income (expense)expense. We had $998$432,466 in net non-operating income for the three-month period ended SeptemberJune 30, 2017,2021, as compared to net non-operating expense of $0for$565,354 for the three-month period ended SeptemberJune 30, 2016.2020. Net non-operating income in the three-month period ended SeptemberJune 30, 2017 includes2021 represents a gain of $512,418 in foreign exchange translation, a net interest expense of $29,791, financing cost of $48,094 from the amortization of bond issuing costs and unrealized loss in investment of $18,741. The net non-operating expense in the three-month period ended June 30, 2020 was mainly due to a gain on foreign exchange translation of $929.$536,461, unrealized gain from the transactions of our liquidity contract of $20,514 and a Covid-19 subsidy that Aircom Japan received from the Japanese government in the amount of $18,482.

 

Loss before income taxes. Our loss before income taxes increaseddecreased by $718,752$585,268, or 27.6%, to $1,399,588$1,535,927 for the three-month period ended SeptemberJune 30, 2017,2021, from a loss of $680,836$2,121,195 for the three-month period ended SeptemberJune 30, 2016,2020, as a result of the factors described above.

 

Income tax expense.Income tax expense increased to $4,453 for the three-month period ended September 30, 2017, from the income taxes benefit of $249,000 for the three-month period ended September 30, 2016. The income tax expense for the three-month period ended September 30, 2017 was mainly due to foreign subsidiary’s income tax expenses. The income tax benefit for the three-month period ended September 30, 2016 was because the operating loss reduced the taxable income carried over from December 31, 2015.

Total comprehensive loss. As a result of the cumulative effect of the factors described above, our total comprehensive loss increaseddecreased by $972,447$632,716, or 23.5%, to $1,404,283$2,060,082 for the three-month period ended SeptemberJune 30, 2017,2021, from a total comprehensive loss of $431,836$2,692,798 for the three-month period ended SeptemberJune 30, 2016.2020.

 

Comparison of NineSix Months Ended SeptemberJune 30, 20172021 and 20172020

The following table sets forth key components of our results of operations during the nine-monththree-month periods ended SeptemberJune 30, 20172021 and 2016.2020.

 

  

Nine Months Ended

September 30,

  Change 
  2017  2016  $  % 
Sales $-  $-  $-   - 
Cost of sales  -   -   -   - 
Operating expenses  4,735,979   3,255,855   1,480,124   45.5%
Loss from operations  (4,735,979)  (3,255,855)  (1,480,124)  45.5%
Net non-operating income (loss)  25,166   (89,557)  114,723   (128.1%)
Loss before income taxes  (4,710,813)  (3,345,412)  (1,365,401)  (40.8%)
Income tax expense (benefit)  9,889   (816,000)  806,111   (98.8%)
Net Loss  (4,720,702)  (2,529,412)  (2,1,91,290)  86.6%
Other comprehensive loss  (3,596)  -   (3,596)  100.0%
Total comprehensive loss $(4,724,298) $(2,529,412) $(2,194,886)  86.8%
  Six Months Ended
June 30,
  Change 
  2021  2020  $  % 
Sales $72,000  $-  $72,000   100.0%
Cost of sales  43,878   -   43,878   100.0%
Operating expenses  5,167,514   4,642,594   524,920   11.3%
Loss from operations  (5,139,392)  (4,642,594)  (496,798)  10.7%
Net non-operating income (expense)  (621,366)  158,157   (779,523)  (492.9)%
Loss before income taxes  (5,760,758)  (4,484,437)  (1,276,321)  28.5%
Income tax expense  3,269   3,263   6   0.2%
Net Loss  (5,764,027)  (4,487,700)  (1,276,327)  28.4%
Other comprehensive income (loss)  (130,414)  (227,817)  97,403   (42.8)%
Total comprehensive loss $(5,894,441) $(4,715,517) $(1,178,924)  25.0%

Sales

Revenue. Our sales weretotal revenue was $72,000 and $0 for both the nine-monthsix-month periods ended SeptemberJune 30, 20172021 and 20162020, respectively. Our total revenue was $72,000 for the six-month period ended June 30, 2021 because due to our sale of ground antenna units to one of our related parties. Our total revenue was $0 for the six-month period ended June 30, 2020 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 periods.period.

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Cost of sales. Our cost of sales was $43,878 and $0 for both the nine-monthsix-month periods ended June 30, 2021 and 2020, respectively. The cost of sales for the six-month period ended SeptemberJune 30, 2017 and 20162021 was $43,878 which was the cost of our sale of ground antenna units to one of our related parties. The cost of sales for the six-month period ended June 30, 2020 was $0 as we did not have any sales during the periods.that period.

 

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 $1,480,124$524,920, or 11.3%, to $4,736,779$5,167,514 for the nine-monthsix-month period ended SeptemberJune 30, 2017,2021, from $3,255,855$4,642,594 for the nine-monthsix-month period ended SeptemberJune 30, 2016. Such2020. This increase was mainly due to the increase in stock basednon-cash stock-based compensation satellite service fees,expense, payroll and payroll related expenses, legal expense, accounting and audit fees travel expenses and consulting feeinsurance expense of $1,114,235, $651,168, $350,800, $275,743, $304,025, $163,015$945,881, $242,871, $152,810 and $225,840,$116,424, respectively, which was offset by the decrease in R&Dconsulting fees as the result of warrant re-valuation and outsourcing expensestravel expense of $1,578,659$861,056 and $190,000, respectively.$106,772. The increase in insurance expense was mainly related to the amortization of D&O insurance during the period.

 


Net non-operating income (expense)expense. We had $25,166$621,366 in net non-operating incomeexpense for the nine-monthsix-month period ended SeptemberJune 30, 2017,2021, as compared to net non-operating expenseincome of $89,557$158,157 for the nine-monthsix-month period ended SeptemberJune 30, 2016.2020. Net non-operating income (loss) in the nine-month period ended September 30, 2017 represents the cancellation of debt from a related party of $26,213, while net non-operating expense in the nine-monthsix-month period ended SeptemberJune 30, 2016 consisted2021 represents an unrealized loss in investment of $89,559$643,480, amortization of financing cost of $95,660 from bond issuing, net interest expense.expense of $53,810, gain in foreign exchange translation of $141,914 and government subsidies of $29,669 from the Japanese and Hong Kong governments. Net non-operating income in the six-month period ended June 30, 2020 represents gain on foreign exchange translation of $215,760 and a Covid-19 subsidy Aircom Japan received from the Japanese government in the amount of $18,482, which was offset by the unrealized loss from the transactions of our liquidity contract of $60,170.

 

Loss before income taxes. Our loss before income taxes increased by $1,365,401$1,276,321, or 28.5%, to $4,710,813$5,760,758 for the nine-monthsix-month period ended SeptemberJune 30, 2017,2021, from a loss of $3,345,412$4,484,437 for the nine-monthsix-month period ended SeptemberJune 30, 2016,2020, as a result of the factors described above.

 

Income tax expense.Income tax expense increased to $9,889was $3,269 and $3,263 for the nine-monthsix-month period ended SeptemberJune 30, 2017, from the income taxes benefit of $816,000 for the nine-month period ended September 30, 2016. The income tax expense for the nine-month period ended September 30, 2017 was2021 and 2020, respectively, mainly due to a California franchise tax and foreign subsidiary’s income tax expenses. The income tax benefit for the nine-month period ended September 30, 2016 was because the operating loss reduced the taxable income carried over from December 31, 2015.

 

Total comprehensive loss. As a result of the cumulative effect of the factors described above, our total comprehensive loss increased by $2,194,886$1,178,924, or 25.0%, to $4,724,298$5,894,441 for the nine-monthsix-month period ended SeptemberJune 30, 2017,2021, from a total comprehensive loss of $2,509,412$4,715,517 for the nine-monthsix-month period ended SeptemberJune 30, 2016.2020.

 

Liquidity and Capital Resources

 

As of SeptemberJune 30, 2017,2021, we had cash and cash equivalents of $6,566.$3,250,487. To date, we have financed our operations primarily through cash flow from operations, augmented by cash proceeds from financing activities, including through our completed public offering, short-term borrowings and equity contributions by our stockholders.

 

The following table provides detailed information about our net cash flow for all financial statement periods presented in this report:flow:

 

Cash Flow

 

  Nine Months Ended September 30, 
  2017  2016 
Net cash used for operating activities $(2,376,968) $(667,531)
Net cash used for investing activity  (279,968)  (3,677,337)
Net cash provided by financing activity  2,354,935   4,349,729 
Net increase (decrease) in cash and cash equivalents  (302,001)  4,861 
Cash at beginning of period  312,173   19,498 
Foreign currency translation effect on cash  (3,606)  - 
Cash at end of period $6,566  $24,359 
  

Six Months Ended

June 30,

 
  2021  2020 
Net cash used for operating activities $(1,418,381) $(1,523,935)
Net cash used for investing activity  (5,078)  (186,680)
Net cash provided by financing activity  1,009,769   1,375,917 
Net decrease in cash and cash equivalents  (413,690)  (334,698)
Cash at beginning of year  3,794,591   976,829 
Foreign currency translation effect on cash  (130,414)  (227,817)
Cash at end of the periods $3,250,487  $414,314 

Operating Activities

 

Net cash used for operating activities was $2,376,968$1,418,381 for the nine-month periodsix months ended SeptemberJune 30, 2017,2021, as compared to $667,531$1,523,935 for the nine-month periodsix months ended SeptemberJune 30, 2016. The2020. In addition to the net loss of $5,764,027, the increase in net cash used for operating activities during the six-month period ended June 30, 2021 was mainly due to net operating loss, increase in inventory and prepaid expenses prepaid investment,and other receivablecurrent assets of $1,575,436 and decrease in other payable related parties of $4,720,702, $470,606, $460,000, $29,332 and $42,385,$355,764, respectively, offset by the increase in accrued expense and other current liabilities and prepayment from a customer of $1,908,033 and $1,611,357, respectively.In addition to the net loss of $4,487,700, the increase in net cash used for operating activities during the six-month period ended June 30, 2020 was mainly due to an increase in inventory of $1,811,443, which was offset by a decrease in deposits,accounts receivable of $451,130 and increase in accounts payable and accrued expenses,expense and other payablecurrent liabilities of $679,874, $439,606,$961,610 and $614,799,$1,280,837, respectively.

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Investing Activities

 

Net cash used by investing activities for the six months ended June 30, 2021 was $5,078 as compared to net cash used by investing activities of $186,680 for the six months ended June 30, 2020. The net cash provided by investing activities for the six months ended June 30, 2020 was mainly due to the purchase of property and equipment of $3,521. The net cash used for investing activities for the nine-month periodsix months ended SeptemberJune 30, 20172020 was $279,968, as compared to $3,677,337mainly for the nine-month period ended September 30, 2016. The decrease was mainly attributable topurchase of trading securities of $157,756 and the purchase of property and equipment during the nine-month period ended September 30, 2016. of $28,924.

 


Financing Activities

Net cash provided by financing activities for the nine-month periodsix months ended SeptemberJune 30, 20172021 and 2020 was $2,354,935, as compared to $4,349,729$1,009,769 and $1,375,917 respectively. Net cash provided by financing activities for the nine-month periodsix months ended SeptemberJune 30, 2016. The increase2021 was mainly attributable to moreproceeds from short-term loan of $1,017,693. Net cash provided by financing activities for the six months ended June 30, 2020 was mainly attributable to net proceeds from the borrowing of a short-term bank loan under the PPP program in the amount of $163,200 and short-term loans of $1,221,211.

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 a parcel of our Taiwan land parcel which we have 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 a local governmental land office re-titling 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. As of the date of this annual report, we have not drawn down any portion of the Loans.

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 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 9, 2019, 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 December 31, 2020. 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 December 31, 2021.

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 in respect of the Credit Enhanced Bonds are protected by 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.

On December 31, 2020, we entered into an underwriting agreement (the “Underwriting Agreement”) with Invest Securities SA (“Invest Securities”) in connection with our public offering (the “2020/2021 Offering”), issuance and sale of up to 1,951,219 shares of our common stock duringon a best-efforts basis at the nine-monthpublic offering price of €20.50 (approximately $25.07) per share, less underwriting discounts, for up to a maximum of €40 million (approximately $48.9 million). On December 31, 2020, we completed our first closing of the 2020/2021 Offering and issued an aggregate of 96,160 shares of our common stock for gross proceeds of €1.97 million (approximately $2.41 million), or net proceeds of €1.4 million (approximately $1.7 million). The Underwriting Agreement with Invest Securities has expired and we are currently exploring whether to attempt to extend the Underwriting Agreement with Invest Securities or engage a different investment banker to assist us in proceeding with the 2020/2021 Offering. We can provide no assurances, however, that we will be successful in these efforts.


We have not generated significant revenues, excluding non-recurring revenues from affiliates in the second quarter of fiscal 2021, and we will incur additional expenses as a result of being a public reporting company. For the six-month period ended SeptemberJune 30, 2017.

Currently available2021, we incurred a comprehensive loss of $5,868,162 and had a negative working capital of $3,169,689 as of June 30, 2021. Currently, we have taken measures, as discussed above, that management believes will not be adequate to sustainimprove our operations atfinancial position by financing activities, including through our current levels for the next twelve months. We expect to satisfy our working capital requirements over the next twelve months through the sale of equity or debt securities.ongoing public offering, short-term and long-term borrowings and fund raisings. However, we do not have any commitment from any third party to invest in our company or otherwise acquire any of our equity or debt securities. Furthermore, even if we successfully raise sufficient capital to satisfy our needs over the next twelve months, in the future,there is no assurance that we will require additional cash resources due to changedbe successful in achieving our financial and business conditions, implementationobjectives. There are a number of our strategy to expand our business or other investments or acquisitions we may decide to pursue. If our own financial resources are insufficient to satisfy our capital requirements, we may seek to sell additional equity or debt securities or obtain additional credit facilities. The sale of additional equity securitiesfactors that could potentially arise that could result in dilution to our stockholders. The incurrence of indebtedness would resultshortfalls 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 availableachieving the objectives 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 operationsplan, such as general, worldwide economic conditions, the competitive pricing in the connectivity industry, the ongoing impact of the COVID-19 pandemic, our operating results continuing to deteriorate and could harm our overall business prospects.bank and shareholders not being able to provide continued financial support.

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 three-month periodssix months ended SeptemberJune 30, 20172021 and 20162020 were $193$5,078 and $1,704$186,680, respectively. The decrease in capital expenditures was mainly due to construction in progress during the three-month ended September 30, 2016.

We anticipate an increase in capital spending in our fiscal year 2017ended December 31, 2021 and estimate that capital expenditures for the year ending December 31, 2017 will range from $6$10 million to $20$50 million as we increase the number ofbegin 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 balanceoff-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.

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Seasonality

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:


 

Revenue RecognitionConcentrations of Credit Risk.. Financial instruments that potentially subject to significant concentrations of credit risk consist primarily of cash in banks. As of December 31, 2020 and 2019, 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 $0, respectively. The balance of cash deposited in foreign financial institutions exceeding the amount insured by local insurance is approximately $3,107,000 and $3,514,000 as of June 30, 2021 and December 31, 2020, respectively. We recognize sales whenperform ongoing credit evaluation of its customers and requires no collateral. An allowance for doubtful accounts is provided based on a review of the earning process is completed, as evidencedcollectability of accounts receivable. We determine the amount of allowance for doubtful accounts by an arrangement withexamining its historical collection experience and current trends in the customer, transfercredit quality of title and acceptance, if applicable, has occurred,its customers as well as its internal credit policies. Actual credit losses may differ from our estimates.

Short-term investment. The Company’s short-term investment securities are classified as trading security. The securities are stated at fair value within current assets on the priceCompany’s condensed balance sheets. Fair value is fixedcalculated based on publicly available market information or determinable, and collection is reasonably assured. Salesother estimates determined by the Company. Changes in fair value are recorded net of returns, discounts and allowances.in current income. 

Inventories. Inventories are recorded at the lower of weighted-average cost or market.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 CostsLong-term Investment. Research and development costs are charged to operating expenses as incurred. For both Long-term investment includes holdings of marketable equity securities with less than 20% of ownership of the three-month periods ended September 30, 2017investee. Marketable equity securities include equity securities which are initially recognized at fair value plus transaction costs that are directly attributable to the acquisition. Changes in fair value from subsequent remeasurement are reported under non-operating income in the statement of income. The accumulated gains or losses are recognized in earnings when the securities are derecognized from the balance sheet. The cost of the securities sold is based on the weighted average cost method. Stock dividend from the investee is included to recalculate the cost basis of the investment based on the total number of shares. Investments are considered to be impaired when a decline in fair value is judged to be other than temporary. If the cost of an investment exceeds its fair value, the Company evaluates, among other factors, general market conditions, the duration and 2016, we did not incur any researchextent to which the fair value is less than cost, as well as its intent and development costs.ability to hold the investment, for recording an impairment loss.

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 furniture and fixtureslease improvement – 5 years. Construction costs for on-flight entertainment equipment not yet in service are recorded tounder construction in progress. Upon sale or disposal of property and equipment, the related cost and accumulated depreciation are removed from the corresponding accounts, with any gain or loss credited or charged to non-operating income in the period of sale or disposal. 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 three-monthsix-month periods ended SeptemberJune 30, 20172021 and 2016.2020.

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 AssetAssets. IntangibleGoodwill 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 on the straight-line basis 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.

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The carrying amounts of ourthe Company’s cash and restricted cash, accounts receivable, other receivable,payable, short-term loans, accounts payable,loan and other payable approximated their fair value due to the short-term nature of these financial instruments. The Company’s short-term investment and long-term investment are classified within Level 1 of the fair value hierarchy on June 30, 2021. 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 June 30, 2021.

  

Revenue Recognition. The Company 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) the Company satisfies a performance obligation.

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 2016. 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 TranslationTransactions.. The accompanying consolidated financial statements Foreign currency transactions are reportedrecorded in U.S. dollars. The financial position and results of operations of our subsidiariesdollars at the exchange rates in effect when the PRC are measured using the Renminbi, which is the local and functionaltransactions occur. Exchange gains or losses derived from foreign currency of these entities. Assetstransactions or monetary assets and liabilities denominated in foreign currencies are recognized in current income. At the end of the subsidiarieseach period, assets and liabilities denominated in foreign currencies are translatedrevalued at the prevailing exchange raterates with the resulting gains or losses recognized in effect at each period end. Revenuesincome 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 expenses are translated atreported under other comprehensive income (loss) as a separate component of stockholder’s equity. 

Earnings (Loss) Per Share. Basic earnings (loss) per share is computed by dividing income available to common shareholders by the weighted average ratenumber of exchangeshares of common stock outstanding during the period. Translation adjustments areDiluted 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 August [*], 2021, the date on which these consolidated financial statements were available to be issued. All subsequent events requiring recognition as of June 30, 2021 have been included in other comprehensive income (loss).these consolidated financial statements.


 

Recent Accounting Pronouncements

Going Concern. Simplifying the Accounting for Debt with Conversion and Other Options.

In August 2014,June 2020, the Financial Accounting Standards Board, or FASB issued ASU 2014-15 - “Presentation of Financial Statements - Going Concern Disclosure of Uncertainties about an Entity’s Ability2020-06 to Continue as a Going Concern,” or ASU 2014-15, requiring management to assesssimplify 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 ability to continue as a going concern,own equity. Additionally, the amendments affect the diluted EPS calculation for instruments that may be settled in cash or shares and to provide related footnote disclosures in certain circumstances.for convertible instruments. This ASU 2014-15 is effective for annual periods, and interim periods within those annual periods, ending after December 15, 2016 and will apply to our first quarter after October 1, 2016.

Income Taxes. In October 2016, FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfer of Assets Other than Inventory,” or ASU 2016-16, which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. ASU 2016-06 will be effective for annual reporting periods beginning after December 15, 2017 and for us in ourthe first quarter of 2018. We arethe 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 Company is currently evaluating the impact of adopting ASU 2016-162020-06 on ourits consolidated financial statements.statements and related disclosures, as well as the timing of adoption.

 

Simplifying the Accounting for Income Taxes

Financial Instruments.

In January 2016,December 2019, the FASB issued ASU No. 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition2019-12 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 Measurementthe recognition of Financial Assetsdeferred tax liabilities for outside basis differences. This guidance also clarifies and Financial Liabilities,” orsimplifies other areas of ASC 740. This ASU 2016-01, which updates certain aspects of recognition, measurement, presentation and disclosure of financial instruments. ASU 2016-01 will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years and for us in ourthe first quarter of 2018. We do not believe 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 Company is currently evaluating the impact this ASU 2016-01 will have a material impact on our consolidatedthe financial statements.statements and related disclosures, as well as the timing of adoption.

Financial Instruments

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” or Instruments” (“ASU 2016-13,2016-13”), 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 will beuntil fiscal year beginning after December 15, 2022. The Company is currently evaluating the impact of adopting ASU 2016-13 on its consolidated financial statements. 

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, 2020, including interim periods within those fiscal years and for us in our first quarter of 2021, and early adoption is permitted. We do not believe the adoption of ASU 2016-13 will have a material impact on our consolidated financial statements.

Leases. In February 2016, the FASB issued ASU No. 2016-02, “Leases” (Topic 842), or ASU 2016-02, which modifies lease accounting for both lessees and lessors to increase transparency and comparability by recognizing lease assets and lease liabilities by lessees for those leases classified as operating leases under previous accounting standards and disclosing key information about leasing arrangements. ASU 2016-02 will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years and for us in our first quarter of 2019, and early adoption is permitted. We are currently evaluating the timing of its adoption and the impact of adopting ASU 2016-02 on our consolidated financial statements.

Stock Compensation. In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation” (Topic 718): Improvements to Employee Share-Based Payment Accounting, or ASU 2016-09, which simplifies certain aspects of the accounting for share-based payment transactions, including income taxes, classification of awards and classification on the statement of cash flows. ASU 2016-09 will be effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018 and for us in our first quarter of 2019, and early adoption is permitted. We are currently evaluating the impact of adopting ASU 2016-09 on our consolidated financial statements.

Revenue Recognition. In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (Topic 606), or ASU 2014-09, which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers. ASU 2014-09 will be effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018 and for us in our first quarter of 2019, and early adoption is permitted.

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Subsequently, the FASB issued the following standards related to ASU 2014- 09: ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations,” or ASU 2016-08; ASU No. 2016-10, “Revenue from Contracts with Customers” (Topic 606): Identifying “Performance Obligations and Licensing,” or ASU 2016-10; and ASU No. 2016-12, “Revenue from Contracts with Customers” (Topic 606): “Narrow-Scope Improvements and Practical Expedients,” or ASU 2016-12. We must adopt ASU 2016- 08, ASU 2016-10 and ASU 2016-12 with ASU 2014-09 (collectively referred to as the new revenue standards.

The new revenue standards may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. We currently expect to adopt the new revenue standards in our first quarter of 2019 utilizing the full retrospective transition method. We do not expect adoption of the new revenue standards to have a material impact on its consolidated financial statements.

Business Combinations. In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations” (Topic 805): Clarifying the Definition of a Business, which a business is an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to investors or other owners, members, or participants. ASU 2017-01 will be effective for annual periods beginning after March 15, 2017, and interim periods within annual periods beginning after March 15, 2018, and early2021. Early adoption is permitted. The Company is currently evaluating the impact of adopting ASU 2017-012021-04 on its consolidated financial statements.

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

ITEM 4.CONTROLS AND PROCEDURES.

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 SeptemberJune 30, 2017.2021.

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 Part I, Item 49A “Controls and Procedures” of our QuarterlyAnnual Report on Form 10-Q10-K for the fiscal quarteryear ended December 31, 2020, filed with the SEC on March 31, 201724, 2021, and further referenced below, which we are still in the process of remediating as of SeptemberJune 30, 2017,2021, 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.

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During its evaluation of the effectiveness of our internal control over financial reporting as of SeptemberJune 30, 2017,2021, 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.

Our management has identifiedIn order to cure the steps necessaryforegoing material weakness, we have taken or plan to address the material weaknesses, and in the third quarter of fiscal 2017, we continued to implementtake the following remedial procedures:remediation measures:

In April 2017,On November 5, 2018, we retained Mr. Y. Tristan Kuo as our Chief Financial Officer, who will oversee the improvement of our disclosure controlsadded a staff accountant with a CPA and procedures, as well as internal control over financial reporting.

In addition, we will look to hire additional personnel with 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 weaknessesweakness 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 weaknessesweakness 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 the third quarter of fiscal 2017ended June 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II

OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS.

ITEM 1. LEGAL PROCEEDINGS.

From time

There were no material developments during the quarter ended June 30, 2021 to time, we may become involved in various lawsuits andthe legal proceedings which arise,previously disclosed in the ordinary courseItem 3 “Legal Proceedings” of business. However, litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may harm our business. Except as set forth below, we are currently not aware of any such legal proceedings or claims that we believe will have a material adverse effectAnnual Report on our business, financial condition or operating results.Form 10-K filed on March 24, 2021.

On or about July 27, 2016, AsiaSat initiated an arbitration proceeding in the Hong Kong International Arbitration Centre against Aircom, claiming a breach under the Digital Transmission Service Agreement dated July 25, 2015 between AsiaSat and Aircom. AsiaSat claims that Aircom owes it approximately $8.1 million in unpaid service fees, default payments and liquidated damages. Aircom disagrees with the payable balance and believes that it owes AsiaSat approximately $1.3 million in services fees. Aircom has paid AsiaSat $875,000 as security deposit. Aircom further alleges misrepresentation from AsiaSat in entering into the agreement and is actively defending the matter. On November 21, 2016, the Hong Kong International Arbitration Centre appointed a sole arbitrator to hear the dispute. On January 12, 2017, Aircom asserted a counterclaim against AsiaSat for misrepresentations made to induce entry into the agreement. Aircom and AsiaSat reached a settlement with respect to the Agreement as of July 25, 2017, with an effective date of July 20, 2017. As of September 30, 2017, we have accrued the settlement liability and accounted for the net impact of the settlement.

ITEM 1A.RISK FACTORS.

One of our suppliers has failed to deliver a key component of our IFEC System and we have terminated our satellite services agreement with another. We cannot be sure that we will be able to find alternative source for this component or for the required satellite services and, as a result, we may not be able to implement our business plan.ITEM 1A. RISK FACTORS.

The implementation of the Hong Kong Airlines project is conditioned upon VSTC approval from the HKCAD. We and our equipment supplier have submitted the VSTC application to HKCAD but the application process is presently on hold due to the supplier’s failure to deliver a key component of the IFEC system. We do not expect this supplier to be able to delivery this key component and we are actively seeking alternative options to implement the Hong Kong Airline project, including developing necessary equipment or components thereof with other strategic partners. Because we cannot be sure when and if we will be able to obtain the IFEC component for the VSTC approval, we cannot be sure when we will receive approval for the Hong Kong Airlines project, if at all. If we are not able to source this necessary IFEC component, our current agreement with Hong Kong Airlines will not become executable and we will not be able to implement our business plan as currently envisioned.

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Additionally, our satellite services agreement with AsiaSat was recently terminated. If we are not able to find a replacement satellite services provider, we will not be able to deliver our service offerings to Hong Kong Airlines even once we receive the VSTC approval from HKCAD. Such a failure would have a negative impact on our business prospects.

For additional information regarding additional risk factors, please refer to our Registration StatementAnnual Report on Form S-110-K for the year ended December 31, 2020 filed with the SEC on June 27, 2017, which may be accessed via EDGAR through the Internet at www.sec.gov.March 24, 2021.

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

On July 5, 2017, we entered into a subscription agreement with Daniel Shih, the founder and an affiliate of the Company, who agreed to purchase an aggregate of 5,000 shares of our common stock, $0.001 par value per share, at a price of $5.50 per share, for an aggregate purchase of $27,500. During

We have not sold any equity securities during the quarter ended SeptemberJune 30, 2017, we entered into additional subscription agreements with shareholders who agreed to purchase an aggregate of 254,086 shares of our common stock at a price of $5.50 per share, for an aggregate purchase of $1,424,973, or $1,452,473 including Mr. Shih’s purchase. These shares2021 that were soldnot previously disclosed in a private placement offering of our common stock, which terminatedcurrent report on October 31, 2017.

The sales ofForm 8-K that was filed during the shares in this offering were exempt from the registration requirements of the Securities Act of 1933 by virtue of Section 4(a)(2) thereof and Regulation D promulgated thereunder, as transactions by an issuer not involving a public offering. The purchasers of the securities in this offering represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate restrictive legends were affixed to the certificates evidencing the shares issued in this offering. All purchasers of the securities represented and warranted, among other things, that they were “accredited investors” within the meaning of Rule 501 of Regulation D, that they had the knowledge and experience in financial and business matters necessary to evaluate the merits and risks of an investment in the Company, that they had the ability to bear the economic risks of the investment, and that they had adequate access to information about the Company. quarter.

During the three-month period ended September 30, 2017, we did not repurchase any of our common stock.

ITEM 3.DEFAULTS UPON SENIOR SECURITIES.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4.MINE SAFETY DISCLOSURES.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5.OTHER INFORMATION.

ITEM 5. OTHER INFORMATION.

We have no information to disclose that was required to be in a report on Form 8-K during the third quarter of fiscal year 2017,ended June 30, 2021 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.

The list of exhibits in the Exhibit Index to this report is incorporated herein by reference.

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ITEM 6. EXHIBITS

Exhibit No.

Description
2.1Agreement 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)
2.2Form 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)
3.1Restated 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)
3.2Certificate 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)
3.3Amended 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*Product Supply Agreement dated April 25, 2021
10.2*Contractor Agreement dated June 1, 2021 by and between Aerkomm Inc. and Yuanjiu Inc. (portions of the exhibit have been omitted)
10.3*†Employment Agreement dated May 25, 2021 by and between Aerkomm Inc. and Louis Giordimaina
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.INSInline XBRL Instance Document
101.SCHInline XBRL Taxonomy Extension Schema Document
101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document
101.LABInline XBRL Taxonomy Extension Label Linkbase Document
101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

*Filed herewith

Executive Compensation Plan or Agreement

 

SIGNATURES


 

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: November 20, 2017August 23, 2021AERKOMM INC.
/s/ Peter ChiouLouis Giordimaina
Name: Peter ChiouLouis Giordimaina
Title:   Chief Executive Officer
(Principal Executive Officer)
/s/ Y. Tristan Kuo
Name: Y. Tristan Kuo
Title:   Chief Financial Officer
(Principal Financial and Accounting Officer)

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42

EXHIBIT INDEX

Exhibit No.Description
2.1Form of Share Exchange Agreement, dated February 13, 2017, among the Registrant, Aircom Pacific, Inc. and the shareholders of Aircom Pacific, Inc. (incorporated by reference to Exhibit 2.2 to the Company’s Current Report on Form 8-K filed with the SEC on February 14, 2017)
3.1Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit 2.2 to the Company’s Current Report on Form 8-K filed with the SEC on May 4, 2017)
3.2Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1 filed with the SEC on November 5, 2013)
10.1Form of Common Stock Subscription Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 6, 2017)
31.1Certification filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2Certification filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1/32.2Certification furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INSXBRL Instance Document
101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
101.LABXBRL Taxonomy Extension Label Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document

31