Use of terms
Except as otherwise indicated by the context and for the purposes of this report only, references in this report to "we," "us," "our," or "our company" are to the combined business of
Aerkomm Inc., a Nevadacorporation, and its consolidated subsidiaries, including Aircom Pacific, Inc., a Californiacorporation and wholly-owned subsidiary, or Aircom; Aircom Pacific Ltd., a Republic of Seychellescompany and wholly-owned subsidiary of Aircom; Aerkomm Pacific Limited, a Maltacompany and wholly owned subsidiary of Aircom Pacific Ltd.; Aircom Pacific Inc. Limited, a Hong Kongcompany 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 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 convictions 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 the fear of such epidemics, on the global air transport and tourism industries,
especially in the
Asia Pacificregion; ? 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 share price and results of operations;
? our ability to carry out the development, testing and
implementation of our product offerings;
? our ability to maintain our competitive advantages over our competitors
? our ability to quickly and efficiently 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 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. 27 Forward-looking statements, which involve assumptions and describe our future plans, strategies, and expectations, are generally identifiable by use of the words "may," "should," "expect," "anticipate," "estimate," "believe," "intend," or "project" or the negative of these words or other variations on these words or comparable terminology. Actual results, performance, liquidity, financial condition, prospects and opportunities could differ materially from those expressed in, or implied by, these forward-looking statements as a result of various risks, uncertainties and other factors, including the ability to raise sufficient capital to continue our operations. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under "Risk Factors" included in our Annual Report on Form 10-K for the year ended
December 31, 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 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 With advanced technologies and a unique business model, we, as a development stage 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 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.
We plan to partner with airlines and offer free IFEC services to air passengers. We plan to generate revenue through advertising and in-flight transactions. We believe this is an innovative approach that sets us apart 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
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 Airlinesof Maltaand Onur Airof 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 HighThroughput Satellites. The Ku-band system will, however, still be retained for the other applications such as remote locations and maritime use. 28 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.
Ka-band GEO (geostationary earth orbit) and LEO (low earth orbit) 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.
Sales of satellite ground systems
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
Completion of the preliminary prospectus with Euronext
April 1, 2021, we filed a preliminary draft prospectus (the "Prospectus") with Euronext in Paris, a regulated market of Euronext Paris S.A.("Euronext Paris"), in connection with our application for the listing and the admission to trading of our common stock, $0.001par value per share (the "Common Stock"), on the regulated market of Euronext Paris (Compartment C). The Common Stock is currently listed and traded on the Professional Segment of Euronext Paris and we now desire to upgrade the listing to the regulated market. Shares of the Common Stock will be offered in Europethrough a final Prospectus only after the Prospectus is filed with, and approved by, the Authorité des Marches Financiers (AMF) and Euronext. Shares of the Common Stock to be offered through the Prospectus will not be registered in the United Statesunder the U.S.Securities Act of 1933, as amended (the "Securities Act"), or with any state securities authorities and may not be offered and sold within the United Statesor to any U.S.person (as that term is defined in Regulation S under the Securities Act) except pursuant to an exemption from the registration requirements of the Securities Act and in compliance with applicable state
securities laws. Short-term Borrowing Two of our current shareholders (the "Lenders") each committed to provide to the Company a
$10 millionbridge loan (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 land (the "Land") we 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 our subsidiary, Aerkomm Taiwan, to pay the outstanding payable to our vendors. As of May 20, 2021, the Company borrowed approximately $1.5 million( NT$41,984,000) under the Loans from one of the
Lenders. 2021 YuanJiu MOU On
April 18, 2021, we entered into a memorandum of understanding with YuanJiu, which we refer to as the 2021 YuanJiu MOU, pursuant to which Yuanjiu will serve as the exclusive service provider to us in Asiawith respect to the installation and service of our Aerkomm AirCinema Cube ("AAC") product and the related software platform ("Rayfin") on which AAC will operate. The AAC is a portable inflight entertainment, or IFE, box intranet server which will provide to passengers' personal entertainment devices pre-loaded videos, news, music and games, on demand. According to the terms of the 2021 YuanJiu MOU, YuanJiu will purchase and pay for units of AAC, the related software and two and one-haft years of maintenance from third party manufacturers for installation on aircraft owned by airlines with which we contract for the sale of the AirCinema Cube. We will pay YuanJiu a to-be-determined share of the profits generated through the future operation of ACC. YuanJiu will perform it services under the 2021 YuanJiu MOU as an independent contractor until December 31, 2024, unless the 2021 YuanJiu MOU is terminated earlier according to its terms. Specific terms of the profit-sharing arrangement with YuanJiu are subjected to future negotiation. Albert Hsu, a member of our board of directors, is the Chairman of YuanJiu. 29
Impact of the COVID-19 pandemic
The COVID-19 pandemic is having a particularly adverse impact on the airline industry. The outbreak in
Chinaand throughout the world since December 2019has led to a precipitous decrease in the number of daily departures and arrivals for domestic and international flights.
Main 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 trade agreements
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;
? the associated costs 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 need to commit well in advance and comply with regulations;
? the costs associated with running a rapidly growing business;
? the impact and effects of the global coronavirus epidemic
(COVID-19) Pandemic and other potential pandemics or contagious diseases
or the fear of such epidemics, on the global air transport and tourism industries,
especially in the
? the number of aircraft in service in our markets, including the 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 enabled Wi-Fi
devices, including smartphones, tablets and laptops;
? our ability to obtain 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 audit report on our internal controls over financial reporting
pursuant to Section 404(b) of the Sarbanes-Oxley Act;
? comply with any requirements that may be adopted by the
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 shareholders for their opinion
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. 30 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
$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 millionas of the last business day of our most recently completed second fiscal quarter or (iii) the date on which we have issued more than $1 billionin non-convertible debt during the preceding three year period. Recent Market Information
In IATA (
? 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.
? Early Q4 2020 earnings announcements indicate airlines continued to
burn liquidity as the recovery in demand stagnated. However, the news of vaccines
fact that IATA believes airlines could break even
end of 2021.
? The global airline stock price index rose in
has fallen behind in broader equity markets as the virus resurgence weighed on the
resumption of travel demand.
? For the future, the wide availability of vaccines and
the implementation of successful test regimes will be the key to recovery
in travel demand and airline share prices.
In general, because the future of the COVID-19 pandemic is so unpredictable, the future of the airline and air traffic recovery is also extremely unpredictable.
Results of Operations
Comparison of three completed months
The following table presents the key elements of our operating results during the three-month periods ended.
Three Months Ended March 31, Change 2021 2020 $ % Sales $ - $ - $ - - Cost of sales - - - - Operating expenses 3,170,999 1,956,045 1,214,954 62.1 % Loss from operations (3,170,999 ) (1,956,045 ) (1,214,954 ) 62.1 %
Net non-operating expense (1,053,832 ) (407,197 ) (646,635 ) 158.8 % Loss before income taxes (4,224,831 ) (2,363,242 )
(1,861,589 ) 78.8 % Income tax expense 3,295 3,252 43 1.3 % Net Loss (4,228,126 ) (2,366,494 ) (1,861,632 ) 78.7 %
Other comprehensive income (loss) 393,767 343,775 49,992 14.5 % Total comprehensive loss
$ (3,834,359 ) $ (2,022,719 )
$ (1,811,640 )89.6 % 31 Revenue. Our total revenue was $0for both the three-month periods ended March 31, 2021and 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
Cost of sales. Our cost of sale 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 increased by
$1,214,954, or 62.1%, to $3,170,999for the three-month period ended March 31, 2021, from $1,956,045for the three-month period ended March 31, 2020. Such increase was mainly due to an increase in stock-based compensation expense, accounting and auditing fees, payroll and related expense and director and officer insurance expense of $1,215,538, $214,570, $149,840and $75,820, respectively, which was offset by the decreases in consulting fee and amortization expense of $325,905and $34,066. Net non-operating expense. We had $1,053,832in net non-operating expense for the three-month period ended March 31, 2021, as compared to net non-operating expense of $407,197for the three-month period ended March 31, 2020. Net non-operating expense in the three-month period ended Mach 31, 2021 represents loss on foreign exchange translation of $370,504, unrealized loss from the transactions of our liquidity contract and prepaid investment of $624,738, other financing cost due to amortization of convertible bonds issuing cost of $47,566and net interest expense of $24,019, which was offset by the employment subsidy from Japanese government of $11,178. The net non-operating expense in the three-month period ended March 31, 2020includes a foreign exchange translation loss of $320,701, unrealized loss from the transactions of our liquidity contract of $80,684and interest expense of $5,821. Loss before income taxes. Our loss before income taxes increased by $1,861,589, or 78.8%, to $4,224,831for the three-month period ended March 31, 2021, from a loss of $2,363,242for the three-month period ended March 31, 2020, as a result of the factors described above. Income tax expense. Income tax expense was $3,295for the three-month period ended March 31, 2021, as compared to the income tax expense of $3,252for the three-month period ended March 31, 2020. Total comprehensive loss. As a result of the cumulative effect of the factors described above, our total comprehensive loss increased by $1,811,640, or 89.6%, to $3,834,359for the three-month period ended March 31, 2021, from $2,022,719for the three-month period ended March 31, 2020.
Liquidity and capital resources
March 31, 2021, we had cash and cash equivalents of $33,632and restricted cash of $3,211,511. To date, we have financed our operations primarily through cash proceeds from financing activities, including from our completed 2018/2019 public offering and 2020 ongoing public offering, issuance of convertible bonds, short-term borrowings and equity contributions by our stockholders. The following table provides detailed information about our net cash flow:
Cash Flow Three Months Ended
March 31, 20212020
Net cash provided by (used for) operating activities
Net cash provided by (used for) investing activity
2,581 (205,085 ) Net cash provided by financing activity 2,208,961
Net increase (decrease) in cash and cash equivalents (943,215) 933,479 Cash at beginning of year
Foreign currency translation effect on cash 393,767
343,775 Cash at end of year
$ 3,245,143 $ 2,254,08332 Operating Activities
Net cash used for operating activities was
$3,154,757for the three months ended March 31, 2021, as compared to $978,009for the three months ended March 31, 2020. In addition to the net loss of $4,249,653, the increase in net cash used for operating activities during the three-month period ended March 31, 2021was mainly due to increase in inventory and prepaid expenses and other current assets of $1,445,680and $622,495, respectively, offset by the increase in accrued expense and other current liabilities of $834,818. In addition to the net loss of $2,366,494, the increase in net cash used for operating activities during the three-month period ended March 31, 2020was mainly due to increase in inventory and prepaid expenses and other current assets of $1,256,423and $537,262, respectively, offset by the decrease in accounts receivable and increase in accounts payable and accrued expense and other current liabilities of $451,130, $862,932and $1,041,102, respectively. Investing Activities
Net cash provided by investing activities for the three months ended
March 31, 2021was $2,581as compared to net cash used by investing activities of $205,085for the three months ended March 31, 2020. The net cash provided by investing activities for the three months ended March 31, 2021was mainly for the proceeds from disposal of trading security of $6,102, which was offset by the purchase of property and equipment of $3,521. The net cash used for investing activities for the three months ended March 31, 2020was mainly for the purchase of trading securities and the purchase of property and equipment. Financing Activities
Net cash provided by financing activities for the three months ended
March 31, 2021and 2020 was $2,208,961and $2,116,573, respectively. Net cash provided by financing activities for the three months ended March 31, 2021were mainly attributable to proceeds from the increase in short-term loans in the amount of $2,215,105. Net cash provided by financing activities for the three months ended March 31, 2020were mainly attributable to net proceeds from the borrowing of short-term loan from an affiliate in the amount of $2,119,669. On May 9, 2019, two of our current shareholders, whom we refer to as the Lenders, each committed to provide us with a $10 millionbridge 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 Taiwanland parcel which we have recently purchased. The Taiwanland parcel consists of approximately 6.36 acres of undeveloped land located at the Taishui Grottoes in the Xinyi Districtof Keelung City, Taiwan. Aerkomm Taiwancontracted to purchase the Taiwanland parcel for NT$1,056,297,507, or US$34,474,462, and as of July 3, 2019we completed payment of the purchase price for the Taiwanland parcel in full. We are now waiting for title to the Taiwanland 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 Taiwanland 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 Taiwanland 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 Rateplus 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 Taiwanland parcel with a principal amount of not less than $20 millionand (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 Taiwanland 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 Taiwanland 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 Taiwanland 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 Taiwanland 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 Taiwanland 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$10,000,000in aggregate principal amount of its Credit Enhanced Zero Coupon Convertible Bond due 2025 (the "Credit Enhanced Bonds") and US$200,000in aggregate principal amount of its 7.5% convertible bonds due 2025 (the "Coupon Bonds," and together with the Credited Enhanced
Bonds, the "Bonds"). 33 Payments of principal, premium, interest and any payments thereof in respect of the Credit Enhanced Bonds will have the benefit of a bank guarantee denominated in
U.S.dollars and issued by Bank of Panhsin Co., Ltd., based in Taiwan. Unless previously redeemed, converted or repurchased and canceled, the Credit Enhanced Bonds will be redeemed on December 2, 2025at 105.11% of their principal amount and the Coupon Bonds will be redeemed on December 2, 2025at 100% of their principal amount plus any accrued and unpaid interest. The Coupon Bonds will bear interest from and including December 2, 2020at the rate of 7.5% per annum. Interest on the Coupon Bonds is payable semi-annually in arrears on June 1and December 1each 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, 2020up to November 20, 2025into shares of Common Stock of the Company with a par value US$0.001each (such shares of Common Stock, the "Conversion Shares"). The initial conversion price for the Bonds is US$13.30per Conversion Share and is subject to adjustment in specified circumstances. Please refer to our Current Report on Form 8-K filed with SECon December 4, 2020. On December 31, 2020, we entered into an underwriting agreement (the "Underwriting Agreement-Invest Securities") with Invest Securities SA(" Invest-Securities") in connection with the public offering ("2020/2021 Offering"), issuance and sale of up to 1,951,219 shares of the Company's common stock on a best-efforts basis at the public 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). As of May 20, 2021, pursuant to the Underwriting Agreement-Invest Securities, we had completed our first closing and issued an aggregate of 96,160 shares of 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 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 March 31, 2021, the Company incurred a comprehensive loss of $3,855,886and had a negative working capital of $1,508,978as of March 31, 2021. Currently, the Company has taken measures, as discussed above, that management believes will improve its financial position by financing activities, including through our ongoing public offering, short-term and long-term borrowings and fund raisings. However, there is no assurance that management will be successful in their plan. There are a number of factors that could potentially arise that could result in shortfalls to our plan, such as the economic conditions, the competitive pricing in the connectivity industry, our operating results not continuing to deteriorate and our bank and shareholders being able to provide continued supports. 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 expenditure for the three months ended
We anticipate an increase in capital spending in our fiscal year ended
December 31, 2021and estimate that capital expenditures will range from $10 millionto $50 millionas we begin airborne equipment installations and continue to execute our expansion strategy. We expect to raise these funds through our planned public offering, the registration statement for which is currently under review by the SEC, and/or through other sources of equity or debt financings. There can be no assurance, however, that our planned public offering will proceed successfully, if at all, or that we will be able to raise the required funds through other means on acceptable terms to us, if at all. Inflation Inflation and changing prices have not had a material effect on our business and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future. However, our management will closely monitor price changes in our industry and continually maintain effective cost control in operations.
Off-balance sheet arrangements
We do not have any off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity or capital expenditures or capital resources that is material to an investor in our securities. Seasonality
Our results of operations and our cash flow from operations have not historically been subject to significant seasonal variations. However, this pattern may change due to new market opportunities or the introduction of new products.
34 Critical Accounting Policies The preparation of financial statements in conformity with accounting principles generally accepted in
the United Statesrequires our management to make assumptions, estimates and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our financial statements. These accounting policies are important for an understanding of our financial condition and results of operation. Critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations and require management's difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management's current judgments. We believe the following critical accounting policies involve the most significant estimates and judgments used in the preparation of our financial statements: Concentrations of Credit Risk. Financial instruments that potentially subject to significant concentrations of credit risk consist primarily of cash in banks. As of December 31, 2020and 2019, the total balance of cash in bank exceeding the amount insured by the Federal Deposit Insurance Corporation(FDIC) for the Company was approximately $0and $0, respectively. The balance of cash deposited in foreign financial institutions exceeding the amount insured by local insurance is approximately $3,108,000and $3,514,000as of March 31, 2021and December 31, 2020, respectively. We perform ongoing credit evaluation of its customers and requires no collateral. An allowance for doubtful accounts is provided based on a review of the collectability of accounts receivable. We determine the amount of allowance for doubtful accounts by examining its historical collection experience and current trends in the credit quality of its customers as well as its internal credit policies. Actual credit losses may differ from our estimates. Inventories. Inventories are recorded at the lower of weighted-average cost or net realizable value. We assess the impact of changing technology on our inventory on hand and writes off inventories that are considered obsolete. Estimated losses on scrap and slow-moving items are recognized in the allowance for losses.
Research and Development Costs. Research and development costs are charged to operating expenses as incurred. For the three-month periods ended
March 31, 2021and 2020, we incurred approximately $0and $0of research and development costs, respectively. Property and Equipment. Property and equipment are stated at cost less accumulated depreciation. When value impairment is determined, the related assets are stated at the lower of fair value or book value. Significant additions, renewals and betterments are capitalized. Maintenance and repairs are expensed as incurred. Depreciation is computed by using the straight-line and double declining method over the following estimated service lives: computer equipment - 3 to 5 years, furniture and fixtures - 5 years, satellite equipment - 5 years, vehicles - 5 years and lease improvement - 5 years. Construction costs for on-flight entertainment equipment not yet in service are recorded under construction in progress. Upon sale or disposal of property and equipment, the related cost and accumulated depreciation are removed from the corresponding accounts, with any gain or loss credited or charged to income in the period of sale or disposal. We review the carrying amount of property and equipment for impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We determined that there was no impairment loss for the three-month periods ended March 31, 2021and 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. Goodwilland Purchased Intangible Assets. Goodwillrepresents the amount by which the total purchase price paid exceeded the estimated fair value of net assets acquired from acquisition of subsidiaries. We test goodwill for impairment on an annual basis, or more often if events or circumstances indicate that there may be impairment. Purchased intangible assets with finite life are amortized on the straight-line basis over the estimated useful lives of respective assets. Purchased intangible assets with indefinite life are evaluated for impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Purchased intangible asset consists of satellite system software and is amortized over 10 years.
35 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 values of our cash, accounts receivable, other accounts receivable, short-term loans, accounts payable and other accounts 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.
Recent accounting statements
Simplification of debt accounting with conversion and other options.
June 2020, the FASB issued ASU 2020-06 to simplify the accounting in ASC 470, Debt with Conversion and Other Options and ASC 815, Contracts in Equity's Own Entity. The guidance simplifies the current guidance for convertible instruments and the derivatives scope exception for contracts in an entity's own equity. Additionally, the amendments affect the diluted EPS calculation for instruments that may be settled in cash or shares and for convertible instruments. This ASU will be effective beginning in the first quarter of the Company's fiscal year 2022. Early adoption is permitted. The amendments in this update must be applied on either full retrospective basis or modified retrospective basis through a cumulative-effect adjustment to retained earnings/(deficit) in the period of adoption. The Company is currently evaluating the impact of ASU 2020-06 on its consolidated financial statements and related disclosures, as well as the timing of adoption.
Simplify the accounting for income taxes
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 Company is currently evaluating the impact this ASU will have on the financial 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. Intangibles In January 2017, the FASB issued ASU No. 2017-04, "Intangibles - Goodwilland 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 December 15, 2019. The Company is currently evaluating the impact of ASU 2017-04 on its consolidated financial statements. 36
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