AERKOMM INC. Use of Terms
Except as otherwise indicated by the context and for the purposes of this report
only, references in this report to "we," "us," "our," or "our company" are to
the combined business of
Special Note Regarding Forward Looking Statements
Certain information contained in this report includes forward-looking statements. The statements herein which are not historical reflect our current expectations and projections about our future results, performance, liquidity, financial condition, prospects and opportunities and are based upon information currently available to us and our interpretation of what is believed to be significant factors affecting the businesses, including many assumptions regarding future events. The following factors, among others, may affect our forward-looking statements:
? our future financial and operating results;
? our intentions, expectations and beliefs regarding anticipated growth, market
penetration and trends in our business;
? the impact and effects of the global outbreak of the coronavirus (COVID-19)
pandemic, and other potential pandemics or contagious diseases or fear of such
outbreaks, on the global airline and tourist industries, especially in the
Pacific region;
? our ability to attract and retain customers;
? our dependence on growth in our customers' businesses;
? the effects of changing customer needs in our market;
? the effects of market conditions on our stock price and operating results;
? our ability to successfully complete the development, testing and initial
implementation of our product offerings;
? our ability to maintain our competitive advantages against competitors in our
industry;
? our ability to timely and effectively adapt our existing technology and have
our technology solutions gain market acceptance;
? our ability to introduce new product offerings and bring them to market in a
timely manner;
? our ability to obtain required telecommunications, aviation and other licenses
and approvals necessary for our operations
? our ability to maintain, protect and enhance our intellectual property;
? the effects of increased competition in our market and our ability to compete
effectively;
? our expectations concerning relationship with customers and other third
parties;
? the attraction and retention of qualified employees and key personnel;
? future acquisitions of our investments in complementary companies or
technologies; and
? our ability to comply with evolving legal standards and regulations.
Forward-looking statements, which involve assumptions and describe our future
plans, strategies, and expectations, are generally identifiable by use of the
words "may," "should," "expect," "anticipate," "estimate," "believe," "intend,"
or "project" or the negative of these words or other variations on these words
or comparable terminology. Actual results, performance, liquidity, financial
condition, prospects and opportunities could differ materially from those
expressed in, or implied by, these forward-looking statements as a result of
various risks, uncertainties and other factors, including the ability to raise
sufficient capital to continue our operations. Actual events or results may
differ materially from those discussed in forward-looking statements as a result
of various factors, including, without limitation, the risks outlined under
"Risk Factors" included in our Annual Report on Form 10-K for the year ended
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.
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The specific discussions herein about our company include financial projections and future estimates and expectations about our business. The projections, estimates and expectations are presented in this report only as a guide about future possibilities and do not represent actual amounts or assured events. All the projections and estimates are based exclusively on our management's own assessment of our business, the industry in which we work and the economy at large and other operational factors, including capital resources and liquidity, financial condition, fulfillment of contracts and opportunities. The actual results may differ significantly from the projections.
Potential investors should not make an investment decision based solely on our company's projections, estimates or expectations.
Overview
Our technology will have several uses including:
1. Aviation: Target customers will be Government UAVs, commercial airlines
and corporate jet operators. For Government UAVs we plan to generate
revenue from the product price and monthly subscription fee for
satellite bandwidth. We plan to generate revenue from e-commerce and
monthly subscription fee for satellite bandwidth from commercial
airlines. From corporate jet operators we plan to generate revenue from
the product price and monthly subscription fee for satellite bandwidth.
2. Vehicles and Autopilot Trucks: Target customers will be all autopilot
vehicles, using B5G, LEO satellites. We plan to generate revenue from
the product price and monthly subscription fee for satellite bandwidth.
3. Trains and Fixed Infrastructure: Target customers will be train
operators and associated infrastructure. We plan to generate revenue
from the product price and monthly subscription fee for satellite
bandwidth.
4. Remote Locations: Target customers will be remote islands and mountain
regions. We plan to generate revenue from the product price and monthly
subscription fee for satellite bandwidth.
5. Maritime: Target customers will be cruise liners, freighters, tankers,
ferry boats, yachts, and oilrigs. We plan to generate revenue from the
product price and monthly subscription fee for satellite bandwidth.
With our advanced technologies and a unique business model, our initial focus has been to become a service provider of IFEC solutions through which we intend to provide airline passengers with a broadband in-flight experience that encompasses a wide range of service options. Such options include Wi-Fi, cellular, movies, gaming, live TV, and music. We plan to offer these core services, which we are currently still developing, through both built-in in-flight entertainment systems, such as seat-back display, as well as on passengers' own personal devices. We also expect to provide content management services and e-commerce solutions related to our IFEC solutions.
Traditionally, providers of in-flight connectivity have focused primarily on the profit margin derived from the sale of hardware to airlines and of bandwidth to passengers. Both airlines and passengers must "pay to play," which results in low participation and usage rates.
We break away from this model and expect to set a new trend with our innovative business approach which, we believe, will set us apart from our competitors by our partnering with airlines and other strategic partners, such as online advertisers and content providers. We plan to offer a choice of different business models of our IFEC system to commercial airlines. We plan to offer the choice of free hardware while the airline will pay for the monthly connectivity cost. We will also offer the option of the airline paying for the hardware while we pay for the connectivity cost. Airlines will potentially be able to generate new revenues through participating in our different revenue sharing model depending on which model they select, while passengers will not be required to pay for connectivity. That is, for passengers, connectivity will be free. We believe that, taken together, this novel approach will create an incentive for airlines to work with us, and this collaboration should act to drive up passenger usage rates. We believe that this is an innovative approach that will differentiate us from most existing market players.
Our main source of revenue is expected to be derived from fees related to the content channeled through our IFEC network from selected partners including internet companies, content providers, advertisers, telecom service providers, e-commerce participants, and premium sponsors. In other words, we plan to use connectivity as a tool rather than as a commodity for sale, which we believe will allow us to achieve a greater return.
To complement and facilitate our planned IFEC service offerings, we intend to
build satellite ground stations and related data centers within the geographic
regions where we expect to be providing IFEC airline services. We expect that
our first such ground station will be built in
Additionally, we have developed and begun to market two internet connectivity systems, one for hotels primarily located in remote regions and the other for maritime use. Both systems operate through LEO/MEO satellite connectivity. We also expect to develop a remote connectivity system that will be applicable to the highspeed rail industry.
Our total sales were
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Business Development
We are actively working with prospective airline customers to provide them with the Airbus to-be-certified AERKOMM K++ system. We have entered into non-binding memoranda of understanding, or MOUs, including, most recently, with Thai Smile which operates a fleet of 20 Airbus A320 aircrafts. There can be no assurances, however, that any MOUs we entered into will lead to actual purchase agreements.
In view of the increasing demand by the airlines for a bigger data throughput, during the course of discussions between us and Airbus, we have revised our strategy to focus primarily on LEO/MEO connectivity IFEC solutions for airlines and have suspended work on our dual band (Ka/Ku) satellite inflight connectivity solution.
In connection with the Airbus project, we also identified owners of Airbus Corporate Jet, or ACJ, aircraft, as potential customers of our AERKOMM K++ system. ACJ customers, however, would not generate enough internet traffic to make our free-service business model viable. To capitalize on this additional market, we plan to sell our AERKOMM K++ system hardware for installation on ACJ corporate jets and provide connectivity through subscription-based plans. This new corporate jet market could generate additional revenue and income for our company.
Our AERKOMM K++ System
Our proprietary IFEC system, which is called the AERKOMM K++ system, will
contain a ultra-low-profile radome (that is, a dome or similar structure
protecting our radio equipment) containing two antennas, one for transmitting
and the other for receiving, and will comply with the ARINC 791 standard of
GEO (Geostationary Earth Orbiting) and NGSO (Non-Stationary Orbit) MEO (Medium Earth Orbiting) / LEO (Low Earth Orbiting) Satellites
Our initial AERKOMM K++ system will work with geostationary earth orbiting, or
GEO satellites. Performance of GEO satellites diminishes greatly in the areas
near the Earth's poles. One of the main advantages of NGSO satellites over GEO
satellites is considerably lower latency as well as worldwide coverage,
particularly over the poles. Whereas GEO satellites have roughly 550
milliseconds of round-trip latency time, LEO satellites boast a latency of 240
milliseconds, signifying a distinct advantage in the sphere of real-time
applications. Only LEO satellites can collect high quality data over the North
and South poles. We are developing technologies to work with MEO/LEO satellites
and plans to partner with Airbus to develop aircraft installation solutions. As
new MEO and LEO satellites are being regularly launched over the next few years,
which, we expect, will enable the provision of worldwide aircraft coverage, we
plan to have the necessary technology ready to take advantage of this new trend
in MEO/LEO satellite connectivity, although it cannot assure you that it will be
successful in this new area of endeavor. We have two cooperation agreements in
place with LEO/MEO satellite providers. On
Ground-based Satellite System Sales
Since our acquisition of Aircom Taiwan in
In addition, in
Recent Events
Changes in Company's Certifying Accountant
On
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On
On
In
Joint Venture Agreement
On
Through this Joint Venture, we intend to develop and commercialize a tile
antenna ("Tile Antenna"). The Joint Venture will be operated through
Moreover, according to the Agreement, SDPJ will invest €7.5 million in
In the event that the POC is not approved within 11 months following the signing of the Agreement, the Joint Venture will be terminated, at which time we will terminate the intellectual property license to Newco and Newco will remain 100% owned by SDPJ.
Private Placement Investment
On
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Impact of the COVID-19 Pandemic
The COVID-19 pandemic was unprecedented notably because of the policy response
which involved the shutdown of much economic activity including the halt to
airline traffic. It produced the sharpest global recession since the Great
Depression. However, in its wake, the macro-economic performance has generally
speaking been less dire than initially feared. It produced the shortest
recession in US history, for instance, limited to two months. US unemployment
spiked to 14.7% in
Principal Factors Affecting Financial Performance
We believe that our operating and business performance will be driven by various factors that affect the commercial airline industry, including trends affecting the travel industry and trends affecting the customer bases that we target, as well as factors that affect wireless Internet service providers and general macroeconomic factors. Key factors that may affect our future performance include:
? our ability to enter into and maintain long-term business arrangements with
airline partners, which depends on numerous factors including the real or
perceived availability, quality and price of our services and product
offerings as compared to those offered by our competitors;
? the extent of the adoption of our products and services by airline partners
and customers;
? costs associated with implementing, and our ability to implement on a timely
basis, our technology, upgrades and installation technologies;
? costs associated with and our ability to execute our expansion, including
modification to our network to accommodate satellite technology, development
and implementation of new satellite-based technologies, the availability of
satellite capacity, costs of satellite capacity to which we may have to commit
well in advance, and compliance with regulations;
? costs associated with managing a rapidly growing company;
? the impact and effects of the global outbreak of the coronavirus (COVID-19)
pandemic, and other potential pandemics or contagious diseases or fear of such
outbreaks, on the global airline and tourist industries, especially in the
Asia Pacific region;
? the number of aircraft in service in our markets, including consolidation of
the airline industry or changes in fleet size by one or more of our commercial
airline partners;
? the economic environment and other trends that affect both business and
leisure travel;
? continued demand for connectivity and proliferation of Wi-Fi enabled devices,
including smartphones, tablets and laptops;
? our ability to obtain required telecommunications, aviation and other licenses
and approvals necessary for our operations; and
? changes in laws, regulations and interpretations affecting telecommunications
services and aviation, including, in particular, changes that impact the
design of our equipment and our ability to obtain required certifications for
our equipment.
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Smaller Reporting Company Although we no longer qualify as an
Recent Market Information
In the IATA (
? The global economy is facing two simultaneous and wholly global systemic
crises: climate change and the COVID-19 pandemic. On top of that, war in
Europe adds to human suffering and economic challenges. These all
constitute important headwinds for the global economy and for aviation
? Nevertheless, 2022 testifies to the resilience of the air transport
industry. After the largest shock in aviation's history, recovery is well
underway and forecast to continue through 2022 and beyond.
? The recovery in industry Revenue per Kilometers (RPKs) is expected to
gather pace this year as vaccine rollouts continue, travel restrictions
are lifted, and more routes are re-opened. Even so, global RPKs are
forecast to remain below their pre-pandemic 2019 level until 2024.
? Cost pressures will be a focus for airlines this year as oil and fuel
prices have risen sharply, contributing to the global rise in inflation
and pushing central banks to lift interest rates.
? Airline financial performance is expected to improve in all regions in
2022, with North America the only region expected to return to
profitability this year.
? Immediately prior to the onset of the COVID-19 pandemic, there were,
according to Airbus and Boeing, more than 23,000 commercial aircraft
flying globally, a number that was expected to more than double in the
next 20 years. Both Airbus and Boeing had estimated that the global fleet
of commercial aircraft would increase from 23,000 planes in 2019 to more
than 45,000 in 2040, according to their respective 2021 reports, "Global
Market Forecast report 2021 - 2040" and "Commercial Market Outlook 2021 -
2040." The Global Market Forecast report 2021 - 2040 predicted that the
increase would include 40% for aircraft replacement and 60% for growth,
with Asia-Pacific (excluding Peoples Republic of China ) accounting for 25%
of deliveries.
? For March 2022 , the global aircraft fleet size stands at 28,394 aircraft,
with 22,798 aircraft active and 5,596 grounded. When March 2022 is
compared to March 2021 , there is a 15% increase in the active global
active fleet.
? The global capacity figures are steadily rising.
? Having reached 91.6 million weekly scheduled seats, global capacity
figures peaked at the end of March 2022
? There is a 46% increase compared to the same week in March 2021 and an 86%
increase compared to March 2020 .
? In February 2022 compared to the same month in 2021, there is a 25%
increase in worldwide aircraft deliveries
Results of Operations
Comparison of Three Months Ended
The following table sets forth key components of our results of operations
during the three months periods ended
Three Months Ended
March 31, Change
2022 2021 $ %
Service income - related party $ 2.953 $ - $ 2,953 100.0 %
Operating expenses 1,780,438 3,170,999 (1,390,561 ) (43.9 )%
Loss from operations (1,777,485 ) (3,170,999 ) 1,393,514 (43.9 )%
Net non-operating expense (700,128 ) (1,053,832 ) 353,704 (33.6 )%
Loss before income taxes (2,477,613 ) (4,224,831 ) 1,747,218 (41.4 )%
Income tax expense 1,600 3,295 (1,695 ) (51.4 )%
Net Loss (2,479,213 ) (4,228,126 ) 1,748,913 (41.4 )%
Other comprehensive income 518,027 393,767 124,260 31.6 %
Total comprehensive loss $ (1,961,186 ) $ (3,834,359 ) $ 1,873,173 (48.9 )%
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Revenue. We have
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 decreased by
Net non-operating expense. We had
Loss before income taxes. Our loss before income taxes increased by
Income tax expense. Income tax expense was
Total comprehensive loss. As a result of the cumulative effect of the factors
described above, our total comprehensive loss decreased by
Liquidity and Capital Resources
As of
The following table provides detailed information about our net cash flow:
Cash Flow
Three Months Ended
March 31,
2022 2021
Net cash used for operating activities
6,658 2,581
Net cash provided by financing activity 154,585 2,208,961
Net decrease in cash and cash equivalents (518,308 ) (943,215 ) Cash at beginning of year
3,288,813 3,794,591
Foreign currency translation effect on cash 518,027 393,767
Cash at end of year $ 3,288,532 $ 3,245,143
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Operating Activities
Net cash used for operating activities was
Investing Activities
Net cash provided by investing activities for the three months ended
Financing Activities
Net cash provided by financing activities for the three months ended
On
On
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On
Payments of principal, premium, interest and any payments thereof in respect of
the Credit Enhanced Bonds will have the benefit of a bank guarantee denominated
in
We have not generated significant revenues, excluding non-recurring revenues in
2021 and 2019, and will incur additional expenses as a result of being a public
reporting company. Currently, we have taken measures that management believes
will improve our financial position by financing activities, including having
successfully completed our Bond Offering, 2020 Offering, short-term borrowings
and other private loan commitments, including the Loans from our investors,
discussed above. With our current available cash, the
However, even if we successfully raise sufficient capital to satisfy our needs over the next twelve months, following that period we will require additional cash resources for the implementation of our strategy to expand our business or for other investments or acquisitions we may decide to pursue. If our internal financial resources are insufficient to satisfy our capital requirements, we will need seek to sell additional equity or debt securities or obtain additional credit facilities, although there can be no assurances that we will be successful in these efforts. The sale of additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that would restrict our operations. Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, could limit our ability to expand our business operations and could harm our overall business prospects.
On
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 months ended
We anticipate an increase in capital spending in our fiscal year ended
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Inflation
Inflation and changing prices have not had a material effect on our business and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future. However, our management will closely monitor price changes in our industry and continually maintain effective cost control in operations.
Off Balance Sheet Arrangements
We do not have any off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity or capital expenditures or capital resources that is material to an investor in our securities.
Seasonality
Our operating results and operating cash flows historically have not been subject to significant seasonal variations. This pattern may change, however, as a result of new market opportunities or new product introductions.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles
generally accepted in
Concentrations of Credit Risk. Financial instruments that potentially subject to
significant concentrations of credit risk consist primarily of cash in banks. As
of
Inventories. Inventories are recorded at the lower of weighted-average cost or net realizable value. We assess the impact of changing technology on our inventory on hand and writes off inventories that are considered obsolete. Estimated losses on scrap and slow-moving items are recognized in the allowance for losses.
Research and Development Costs. Research and development costs are charged to
operating expenses as incurred. For the three-month periods ended
Property and Equipment. Property and equipment are stated at cost less
accumulated depreciation. When value impairment is determined, the related
assets are stated at the lower of fair value or book value. Significant
additions, renewals and betterments are capitalized. Maintenance and repairs are
expensed as incurred. Depreciation is computed by using the straight-line and
double declining method over the following estimated service lives: computer
equipment - 3 to 5 years, furniture and fixtures - 5 years, satellite equipment
- 5 years, vehicles - 5 years and lease improvement - 5 years. Construction
costs for on-flight entertainment equipment not yet in service are recorded
under construction in progress. Upon sale or disposal of property and equipment,
the related cost and accumulated depreciation are removed from the corresponding
accounts, with any gain or loss credited or charged to income in the period of
sale or disposal. We review the carrying amount of property and equipment for
impairment when events or changes in circumstances indicate that the carrying
amount of such assets may not be recoverable. We determined that there was no
impairment loss for the three-month periods ended
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Right-of-Use Asset and Lease Liability. In
Fair Value of Financial Instruments. We utilize the three-level valuation hierarchy for the recognition and disclosure of fair value measurements. The categorization of assets and liabilities within this hierarchy is based upon the lowest level of input that is significant to the measurement of fair value. The three levels of the hierarchy consist of the following:
Level 1 - Inputs to the valuation methodology are unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date.
Level 2 - Inputs to the valuation methodology are quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active or inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the instrument.
Level 3 - Inputs to the valuation methodology are unobservable inputs based upon management's best estimate of inputs market participants could use in pricing the asset or liability at the measurement date, including assumptions.
The carrying amounts of the Company's cash and restricted cash, accounts
payable, short-term loan and other payable approximated their fair value due to
the short-term nature of these financial instruments. The Company's short-term
investment and long-term investment are classified within Level 1 of the fair
value hierarchy on
Revenue Recognition. We recognize revenue when performance obligations
identified under the terms of contracts with our customers are satisfied, which
generally occurs upon the transfer of control in accordance with the contractual
terms and conditions of the sale. Our revenue for the three months ended
Income Taxes. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. Adjustments to prior period's income tax liabilities are added to or deducted from the current period's tax provision.
The Company follows FASB guidance on uncertain tax positions and has analyzed its filing positions in all the federal, state and foreign jurisdictions where it is required to file income tax returns, as well as all open tax years in those jurisdictions. The Company files income tax returns in the US federal, state and foreign jurisdictions where it conducts business. It is not subject to income tax examinations by US federal, state and local tax authorities for years before 2017. The Company believes that its income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material adverse effect on its consolidated financial position, results of operations, or cash flows. Therefore, no reserves for uncertain tax positions have been recorded. The Company does not expect its unrecognized tax benefits to change significantly over the next twelve months.
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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
Translation Adjustments. If a foreign subsidiary's functional currency is the local currency, translation adjustments will result from the process of translating the subsidiary's financial statements into the reporting currency of our company. Such adjustments are accumulated and reported under other comprehensive income (loss) as a separate component of stockholders' equity.
Earnings (Loss) Per Share. Basic earnings (loss) per share is computed by dividing income available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing income available to common shareholders by the weighted-average number of shares of common outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include stock warrants and outstanding stock options, shares to be purchased by employees under the Company's employee stock purchase plan.
Subsequent Events. The Company has evaluated events and transactions after the
reported period up to
Recent Accounting Pronouncements
Simplifying the Accounting for Debt with Conversion and Other Options.
In
Financial Instruments
In
Simplifying the Accounting for Income Taxes
In
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Earnings Per Share
In
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