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 Asia Pacific region;
? our ability to attract and retain customers;
? our dependence on growth in our customers' businesses;
? the effects of changing customer needs in our market;
? the effects of market conditions on our stock price and operating results;
? our ability to successfully complete the development, testing and initial
implementation of our product offerings;
? our ability to maintain our competitive advantages against competitors in
our industry;
? our ability to timely and effectively adapt our existing technology and
have our technology solutions gain market acceptance;
? our ability to introduce new product offerings and bring them to market in
a timely manner;
? our ability to obtain required telecommunications, aviation and other
licenses and approvals necessary for our operations
? our ability to maintain, protect and enhance our intellectual property;
? the effects of increased competition in our market and our ability to
compete effectively;
? our expectations concerning relationship with customers and other third
parties;
? the attraction and retention of qualified employees and key personnel;
? future acquisitions of our investments in complementary companies or
technologies; and
? our ability to comply with evolving legal standards and regulations.
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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 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.
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
We are a full-service development stage provider of IFEC solutions. With advanced technologies and a unique business model, we, as a service provider of IFEC solutions, 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 in seat-back displays, as well as on passengers' 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 revenue 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. We have purchased
an approximately 6.3-acre parcel of land in
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
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.
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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
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
In addition, in
Recent Events
On
On
Two of our current shareholders (the "Lenders") each committed to provide to us
a
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On
On
On
On
Principal Factors Affecting Financial Performance
We believe that our operating and business performance is 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:
? 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 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;
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? 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;
? 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 financial 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
Impact of the COVID-19 Coronavirus Pandemic
The coronavirus has a particular adverse impact on the airline industry. The
outbreak in
Recent Market Information
In the IATA (
? The Q1 2020 financial results reflected the initial industry-wide
deterioration in profitability following the impact of the COVID-19
outbreak on air travel. The adverse outcome was widespread across all
regions even though some markets were locked down relatively later in the
quarter. All regions posted negative net income figures in Q1.
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? Global airline share prices moved lower in Q1, before rallying in April,
driven by government support to the industry and the restart of airline
operations.
? Oil and jet fuel prices also recovered somewhat in May being that the
demand for fuel is expected to increase with the ease of lockdown
measures. Sharp production cuts from both OPEC and Russia also provided
price support.
? In April, air passenger demand posted its largest decline on record due to
the widespread lockdowns and border closures. Air cargo demand was
relatively more resilient but still saw volumes fall by 27.7% year-on-year
on the disruption in global manufacturing activity. While the passenger
load factor declined by 41 ppts versus last year, the cargo load factor
rose by 11.2 percentage points as a result of the decline in available
capacity with the grounding of the passenger fleet.
? In May 2020 , airlines started to return aircraft to service with the
relaxation of lockdown measures. An additional 2,444 aircraft re-joined
the in-service fleets in the same month. As a result, total seat capacity
improved by 25% compared to the previous month. However, total seat
capacity was still 49% below the level of a year ago.
? New global aircraft deliveries were limited (16 aircraft) in May as
airlines have been postponing or cancelling future deliveries in response
to the COVID-19 crisis. As travel demand is expected to recover only
gradually, airlines will likely remain cautious regarding capacity
increases.
Additionally, on
In general, because the progress of the COVID-19 pandemic is so unpredictable, the future of airline and air traffic recovery is extremely unpredictable as well.
The COVID-19 Pandemic Impact on
We do not expect that the COVID-19 pandemic will have a material effect on our
business in 2020, in view of the fact that
With respect to our AirCinema Cube, which we are developing exclusively for
installation on
In any case, because of the unpredictability of the future developments of the COVID-19 pandemic, we cannot be sure that any of our development, certification, installation or revenue generation expectations, with respect to timing or otherwise, will be met.
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Results of Operations
Comparison of Three Months Ended
The following table sets forth key components of our results of operations
during the three-month periods ended
Three Months Ended
March 31, Change
2020 2019 $ %
Sales $ - $ - $ - -
Cost of sales - - - -
Operating expenses 1,956,045 2,048,289 (92,244 ) (4.5 )%
Loss from operations (1,956,045 ) (2,048,289 ) 92,244 (4.5 )%Net non-operating income (expense) (407,197 ) (331,470 ) (75,727 ) 22.8 % Loss before income taxes
(2,363,242 ) (2,379,759 ) 16,517 (0.7 )%
Income tax expense 3,252 3,233 19 0.6 %
Net Loss (2,366,494 ) (2,382,992 ) 16,498 (0.7 )%
Other comprehensive income (loss) 343,775 343,596 179 0.1 %
Total comprehensive loss $ (2,022,719 ) $ (2,039,396 ) $ 16,677 (0.8 )%
Revenue. Our total revenue was
Cost of sales. Our cost of sales was
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 decreased 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
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The following table provides detailed information about our net cash flow:
Cash Flow
Three Months Ended
March 31,
2020 2019
Net cash provided by (used for) operating activities
(205,085 ) (1,275 )
Net cash provided by financing activity 2,116,573 182,500
Net increase (decrease) in cash and cash equivalents 933,479 (353,657 ) Cash at beginning of year
976,829 88,309
Foreign currency translation effect on cash 343,775 343,596
Cash at end of year $ 2,254,083 $ 78,248
Operating Activities
Net cash used for operating activities was
Investing Activities
Net cash used for investing activities for the three months ended
Financing Activities
Net cash provided by financing activities for the three months ended
The Company has not generated significant revenues, excluding non-recurring
revenues from affiliates in the second quarter of fiscal 2018, and will incur
additional expenses as a result of being a public reporting company. For the
three-month period ended
Subsequent Events
Paycheck Protection Program Loan
On
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€40 Million Public Offering
On
EESquare Loan
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
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
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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 major revenue for the three-month period
ended
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
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 our cash, accounts receivable, other receivable, short-term loans, accounts payable, and other payable approximated their fair value due to the short-term nature of these financial instruments.
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 stockholder's equity.
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Recent Accounting Pronouncements
Financial Instruments. In
Intangibles. In
Leases. In
Income Statement. In
Stock Compensation. In
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