AERKOMM INC. MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS. (Form 10-K)
The following discussion and analysis was prepared to supplement information contained in the accompanying financial statements and is intended to explain certain items regarding the Company's financial condition as of
December 31, 2021, and its results of operations for the years ended December 31, 2021and 2020.
The following discussion and analysis of our financial condition and result of operations should be read in conjunction with our financial statements and the notes thereto and the other financial information appearing elsewhere in this annual report. In addition to historical information, the following discussion contains certain forward-looking information. See "Special Note Regarding Forward Looking Statements" above for certain information concerning those forward-looking statements. Our financial statements are prepared in
U.S.dollars and in accordance with United Statesgenerally accepted accounting
principles. 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 air passengers free IFEC services. We plan to generate revenue through advertising and in-flight transactions. We believe this is an innovative approach that differentiates us from existing players in the market.
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 a 6.36 acre parcel of land in
Taiwanwhere we expect to build our first ground station. We are currently waiting for the title to this Taiwanland parcel to be transferred to us and once that process is completed, we intend to mortgage the property to finance the cost of the first ground station construction. Our total sales were $3,250,000and $0for the years ended December 31, 2021and 2020. Our total sales of $3,250,000for the year ended December 31, 2021consisted of a non-recurring sale of ground antenna units to a related party and sales of network hardware to a non-related party.
The expected impact of the COVID-19 pandemic on
Although we cannot predict with any degree of certainty the long-term impact on our business of the COVID-19 pandemic, we do not expect that the COVID-19 pandemic will have a material adverse effect on our business in 2020, in view of the fact that
Aerkommis a development stage company. Consequently, we do not have any contractual agreements with airlines that would result in a decrease or complete halt in revenue generation due to the grounding of aircraft and reduction in aircraft fleets and new aircraft purchases. Additionally, because we do not currently have any operational IFEC systems, we are not generating any recurrent operational expenses with satellite companies that provide bandwidth connectivity for operational IFEC systems. We expect that we will acquire certification of our Aerkomm K++ System by the first quarter of 2023, and we are currently targeting the commencement of the initial installations of our AerkommK++ System by the end of the first quarter of 2023, although these target dates could get pushed back due to various factors, including the ongoing impact of the COVID-19 pandemic. While according to the current IATA data, the recovery in 2021 is expected to be slow, this could work to our advantage as it will provide the opportunity to have more aircraft on the ground available for the retrofit installation of our Aerkomm K++ System equipment. That is, we will not have to wait for a prospective airline customer to cycle through its scheduled grounding of aircraft for major maintenance checks to be able to install our K++ System retrofit solution. Of course, there can be no assurance that a grounded airline fleet would make it more probable that an airline company would contract for our Aerkomm K++ System installation. Because under our innovative business model we will be providing the AERKOMM K++ System free of charge to commercial airlines, we believe that the COVID-19 economic environment may provide us with a competitive advantage in relation to airlines that need to upgrade IFEC solutions to better serve their passengers, but because of drastically reduced revenues, will not be able to afford to purchase IFEC equipment in the foreseeable future. Additionally, as the impact of the COVID-19 pandemic begins to become more manageable and air travel begins to increase once again, airlines will need to attract passengers. Our revenue sharing model may incentivize airlines to install our AERKOMM K++ System in expectation that they may be able to generate additional revenues from passengers who will not be required to pay for connectivity. With respect to our AirCinema Cube, which we are developing for installation on Hong Kong Airlinesand Vietjet aircraft and which is expected to be ready for installation by the third quarter of 2022, we believe we will still be able to begin installations on schedule. However, due to the COVID-19 pandemic, even if we can install the AirCinema Cube on schedule, revenue from the AirCinema Cube will, most likely, be delayed until the fleet of Vietjetand Hong Kong Airlinesre-commences its full schedule which, we expect, will be third quarter of 2022 and late in the fourth quarter of 2022, respectively.
Due to the unpredictability of future developments from the COVID-19 pandemic, we cannot be sure that any of our development, certification, installation or revenue generation expectations, with respect to the schedule or otherwise, will be satisfied.
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 commercial 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
in a timely manner, 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 have to commit ourselves 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) and other potential pandemics or contagious diseases
or the fear of such epidemics, on the global airline and tourism industries,
especially in the
? 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 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 are an "emerging growth company," as defined in the JOBS Act, and therefore we intend to take advantage of certain exemptions from various public company reporting requirements, including not being required to have our internal controls over financial reporting audited by our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and any golden parachute payments. We may take advantage of these exemptions until we are no longer an "emerging growth company." In addition, the JOBS Act provides that an "emerging growth company" can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to use the extended transition period for complying with new or revised accounting standards under the JOBS Act. This election allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates. We will remain an "emerging growth company" until the earlier of (1) the last day of the fiscal year: (a) following the fifth anniversary of the completion of our initial public offering; (b) in which we have total annual gross revenue of at least
$1.07 billion; or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeded $700 millionas of the prior June 30th, and (2) the date on which we have issued more than $1.0 billionin non-convertible debt during the prior three-year period. References herein to "emerging growth company" have the meaning associated with that term in the JOBS Act. 50 Results of Operations
The discussion below relates to our two fiscal years ended
Comparison of completed exercises
The following table shows the key elements of our results of operations during the years ended
Years Ended December 31, Change 2021 2020 $ % Sales
$ 3,250,000$ - $ 3,250,000100.0 % Cost of sales 3,050,978 - 3,050,978 100.0 % Operating expenses 10,103,543 8,335,598 1,767,945 21.2 % Loss from operations (9,904,521 ) (8,335,598 ) (1,568,923 ) 18.8 %
Net non-operating income (expense) 524,335 (773,262 ) 1,297,598 (167.8 )% Loss before income taxes (9,380,186 ) (9,108,860 )
(271,325 ) 3.0 % Income tax expense 3,239 3,286 (47 ) (1.4 )% Net Loss (9,383,425 ) (9,112,146 ) (271,278 ) 3.0 %
Other comprehensive loss (141,930 ) (1,271,589 ) 1,129,659 (88.8 )% Total comprehensive loss
$ (9,525,354 ) $ (10,383,735 )
$ 858,381(8.3 )%
Revenue. Our sales were
$3,250,000for the year ended December 31, 2021, as compared to the $0for the year ended December 31, 2020. Our total revenue of $3,250,000for the year ended December 31, 2021consisted of the sales of ground antenna units of $1,440,000to a related party and sales of network hardware of $1,810,000to a non-related party. Our total revenue for the year ended December 31, 2020was $0as we are still developing our core business in in-flight entertainment and connectivity and there was no non-recurring sale. Cost of sales. Our cost of sales includes the direct costs of our raw materials and component parts, as well as the cost of labor and overhead. Our cost of sales was $3,050,978and $0for the years ended December 31, 2021and 2020, respectively. The cost of sales for the year ended December 31, 2021was $3,050,978as we sold ground antenna units to a related party in the amount of $1,243,878and network hardware to a non-related party in the amount of $1,807,100, while the cost of sales for the year ended December 31, 2020was $0as we did not have any sales during the periods. Operating expenses. Our operating expenses consist primarily of compensation and benefits, professional advisor fees, cost of promotion, business development, business travel, transportation costs, and other expenses incurred in connection with general operations. Our operating expenses increased by $1,767,945to $10,103,543for the year ended December 31, 2021, from $8,335,598for the year ended December 31, 2020. Such increase was mainly due to the increase in stock-based compensation expense, payroll and related expenses, equipment leasing, accounting and auditing expenses, insurance expense and legal expense in the amount of $921,628, $419,932, $300,000, $253,148, $139,054and $132,615, respectively, which was offset by the decrease in travel expense and amortization expense in the amount of $236,037and $187,915, respectively. Net non-operating income (expense). We had $524,335in net non-operating income for the year ended December 31, 2021as compared to $773,262in net non-operating expense for the year ended December 31, 2020. Net non-operating income for the year ended December 31, 2021primarily consisted of unrealized gain from long-term investment of $972,722, gain on disposal of investment of $306,848, gain on foreign exchange of $188,020, which was offset by the financing cost from bonds issuance of $942,375and net interest expense of $79,297. Net non-operating expense for the year ended December 31, 2020primarily consisted of net interest expense of $39,494, other loss of $1,155,623due to a loss from allowance for other receivable (as explained under the Legal Proceedings section below), unrealized loss from investments of $868,064and gain on foreign exchange of $1,088,672, Covid-19 government subsidy of $38,763received by Aircom Japan and $15,085received by Aircom HK and forgiveness of PPP Loan of $163,200received by Aircom. Loss before income taxes. Our loss before income taxes is $9,380,186for the year ended December 31, 2021as compared to the loss before income taxes for the year ended December 31, 2020of $9,108,860, an increase of $271,326, or 3.0%, as a result of the factors described above. Income tax expense (benefit). Income tax expense decreased by $47to $3,239for the year ended December 31, 2021, from an income tax expense of $3,286for the year ended December 31, 2020. The income tax expenses were mainly due to Californiafranchise tax and foreign subsidiary's income tax expenses. Total comprehensive loss. As a result of the cumulative effect of the factors described above, our total comprehensive loss increased by $858,380, or 8.3%, to $9,525,355for the year ended December 31, 2021, from $10,383,735for the year ended December 31, 2020.
Cash and capital resources
The following table provides detailed information about our net cash flow:
Cash Flow Years Ended December 31, 2021 2020 Net cash used in operating activities
$ (1,963,824 ) $ (1,912,091 )Net cash used in investing activities (76,950 ) (5,376,667 ) Net cash provided by financing activities 1,676,926 11,378,109 Net increase (decrease) in cash and restricted cash (363,848 ) 4,089,351 Cash and restricted cash at beginning of year 3,794,591 976,829 Foreign currency translation effect on cash and restricted cash (141,930 ) (1,271,589 ) Cash and restricted cash at end of year $ 3,288,813 $ 3,794,591Operating Activities Net cash used in operating activities was $1,963,824for the year ended December 31, 2021, as compared to $1,912,091for the year ended December 31, 2020. In addition to the net loss of $9,383,425, the increase in net cash used in operating activities during the year ended December 31, 2021was mainly due to increase in accounts receivable and prepaid expense and decrease in accounts payable and other payable - others of $136,800, $388,828, $309,712and $281,535, respectively, offset by the decrease in inventories, increase in accrued expenses and other payable - related parties of $1,824,273, $1,322,637and $243,214, respectively. In addition to the net loss of $9,112,146, the increase in net cash used in operating activities during the year ended December 31, 2020was mainly due to the increase in inventory of $2,172,863, offset by the decrease in accounts receivable, decrease in prepaid expenses, increase in accounts payable, accrued expenses, other payable - related parties and other payable - others of $451,130, $1,345,956, $961,610, $886,319, $420,215and
$1,311,246, respectively. Investing Activities
Net cash used in investing activities for the year ended
December 31, 2021was $76,950as compared to $5,376,667for the year ended December 31, 2020. The net cash used in investing activities for the year ended December 31, 2021was mainly due to purchase of property and equipment of $163,862, which was offset by proceeds from disposal of trading security of $101,547. The net cash used in investing activities for the year ended December 31, 2020was mainly due to the prepayment on long-term investment of $5,027,600, purchase of trading securities of $233,174, prepayment for equipment of $86,617and purchase of property and equipment of $29,276. Our $5,027,600purchase of long-term investment in 2020 was made to purchase 6,000,000 shares of Ejectt, one of our business partners and a related party. This purchase was made for business purposes in Taiwanrelating to local operations. Financing Activities
Net cash provided by financing activities for the years ended
December 31, 2021and 2020 was $1,676,926and $11,378,109, respectively. Net cash provided by financing activities for the year ended December 31, 2021was mainly attributable to proceeds from short-term loan of $1,106,666and issuing of common stock for warrants exercise of $592,800. Net cash provided by financing activities for the year ended December 31, 2020was mainly attributable to the net proceeds from issuance of common stock of $1,667,080, net proceeds from issuance of convertible bonds of $9,218,094and proceeds from short-term loan - related party of $527,066. 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 our Taiwanland parcel which we 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 Taiwan contracted 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 our satellite ground station licensing 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. On April 25, 2022, the Lenders amended the commitment and agreed to increase the percentage of earlier closing amount from 25% to 100%. As of the date of this annual report, drawn down approximately $60,000(approximately NTD 2,620,000) under the Loans from one of the Lenders. 52 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 agreement with MIGL, we agreed to pay this commission no later than 90 days following payment in full of the Taiwanland parcel purchase price. In May 2019and December 2021, we amended the binding letter of commitment with MIGL to extend the payment to be paid after the full payment of the Land acquisition price until no later than June 30, 2022. If there is a delay in payment, we shall be responsible for punitive liquidated damages at the rate of one tenth of one percent (0.1%) of the commission per day of delay with a maximum cap to these damages of five percent (5%). Under applicable Taiwanese law, the commission was due and payable upon signing of the letter of commitment even if the contract is cancelled for any reason and the acquisition is not completed. We have recorded the estimated commission to the cost of land and will be paying the amount no later than
June 30, 2022. 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"). 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 Offering"), issuance and sale of up to 1,951,219 shares of our 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 December 31, 2020, pursuant to the Underwriting Agreement-Invest Securities, we had completed a closing and issued an aggregate of 96,160 shares of our common stock for gross proceeds of €1.97 million (approximately $2.41 million), or net proceeds of €1.4 million (approximately $1.7 million). This offering has terminated. The Company has not generated significant revenues, excluding non-recurring revenues in 2021 and 2019, and will incur additional expenses as a result of being a public reporting company. Currently, we have taken measures that management believes will improve our financial position by financing activities, including having successfully completed our Bond Offering, 2020 Offering, short-term borrowings and other private loan commitments, including the Loans from our investors, discussed above. With our current available cash, the $20 millionin loan commitments from the Lenders and our expectations for our ability to raise funds in the near term, we believe our working capital will be adequate to sustain our operations for the next twelve months. However, even if we successfully raise sufficient capital to satisfy our needs over the next twelve months, following that period we will require additional cash resources for the implementation of our strategy to expand our business or for other investments or acquisitions we may decide to pursue. If our internal financial resources are insufficient to satisfy our capital requirements, we will need seek to sell additional equity or debt securities or obtain additional credit facilities, although there can be no assurances that we will be successful in these efforts. The sale of additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that would restrict our operations. Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, could limit our ability to expand our business operations and could harm our overall business prospects.
June 28, 2022, we entered into a subscription agreement with an investor who agreed to purchase 550,000 shares of our common stock for 6.00 Eurosper share for an aggregate purchase price of 3,300,000 Euros(the "Purchase Price"). This transaction closed on June 29, 2022and we received the Purchase Price equivalent to U.S. $3,175,200.77from this investor. Despite the fact that we have received the investor's funds, the subscription agreement is subject to a cooling off period pursuant to which it may be terminated prior to July 29, 2022by either party at any time and for any reason. If the subscription agreement is terminated by the investor, we will be required to return the Purchase Price funds to the investor, without interest. Because of the wording of the subscription agreement, we cannot assure you at this time that we will not be required to return the Purchase Price funds to the investor. 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, construction, network equipment and installation costs.
Capital expenditures for years ended
53 We anticipate an increase in capital spending in fiscal year 2022 and estimate that capital expenditures will range from
$10 millionto $40 millionas we will begin airborne equipment installations and continue to execute our expansion strategy. 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
Historically, our operating results and operating cash flows have not been subject to significant seasonal variations. However, this trend may change due to new market opportunities or the introduction of new products.
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, 2021and 2020, the total balance of cash in bank exceeding the amount insured by the Federal Deposit Insurance Corporation(FDIC) for the Company was approximately $0and $233,000, respectively. The balance of cash deposited in foreign financial institutions exceeding the amount insured by local insurance is approximately $3,106,000and $3,514,000as of December 31, 2021and December 31, 2020, respectively. We perform ongoing credit evaluation of our 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 its inventory on hand and writes off inventories that are considered obsolete. Estimated losses on scrap and slow-moving items are recognized in the allowance for losses. Property and Equipment Property and equipment are stated at cost less accumulated depreciation. When value impairment is determined, the related assets are stated at the lower of fair value or book value. Significant additions, renewals and betterments are capitalized. Maintenance and repairs are expensed as incurred. Depreciation is computed by using the straight-line and double declining methods over the following estimated service lives: ground station equipment - 5 years, computer equipment - 3 to 5 years, furniture and fixtures - 5 years, satellite equipment - 5 years, vehicles - 5 to 6 years and lease improvement - 5 years or remaining lease term, whichever is shorter.
On the sale or disposal of property, plant and equipment, the related cost and accumulated amortization are removed from the related accounts, with any gain or loss being credited or charged to income during 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. It determined that there was no impairment loss for the years ended
December 31, 2021and 2020.
Right-of-use asset and rental liability
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.
Our goodwill represents the amount by which the total purchase price paid exceeded the estimated fair value of net assets acquired from acquisition of subsidiaries. We test goodwill for impairment on an annual basis, or more often if events or circumstances indicate that there may be impairment. Purchased intangible assets with finite life are amortized on the straight-line basis over the estimated useful lives of respective assets. Purchased intangible assets with indefinite life are evaluated for impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Purchased intangible asset consists of satellite system software and is amortized over 10 years.
Fair value of financial instruments
We use the three-level valuation hierarchy for accounting and disclosing fair value measurements. The categorization of assets and liabilities within this hierarchy is based on the lowest level of entry that is significant for the measurement of fair value. The three levels of the hierarchy are:
Level 1 – Inputs to the valuation methodology are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has access to on the valuation 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 and restricted cash, accounts receivable, other receivable, accounts payable, short-term loan and other payable approximated their fair value due to the short-term nature of these financial instruments. Our long-term bonds payable, long-term loan and lease payable approximated the carrying amount as its interest rate is considered as approximate to the current rate for comparable loans and leases, respectively. There were no outstanding derivative financial instruments as of
December 31, 2021and 2020. Revenue Recognition
During 2019, we adopted the provisions of ASU 2014-09 Revenue from Contract with Customers (Topic 606) and the principal versus agent guidance within the new revenue standard. As such, we identify a contract with a customer, identifies the performance obligations in the contract, determines the transaction price, allocates the transaction price to each performance obligation in the contract and recognizes revenue when (or as) the Company satisfies a performance obligation. Our revenue for the year ended
December 31, 2021was the sales of ground antenna units to a related party and sales of network hardware to a non-related party.
Research and development costs
Research and development costs are charged to operating expenses as incurred. For the years ended
December 31, 2021and 2020, the Company incurred $0and $0of research and development costs, respectively. 55 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. We follow 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. We file income tax returns in the US federal, state and foreign jurisdictions where it conducts business. It is not subject to income tax examinations by US federal, state and local tax authorities for years before 2016. We believe 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. We do not expect unrecognized tax benefits to change significantly over the next twelve months. Our policy for recording interest and penalties associated with any uncertain tax positions is to record such items as a component of income before taxes. Penalties and interest paid or received, if any, are recorded as part of other operating expenses in the consolidated statement of operations.
Foreign currency transactions
Foreign currency transactions are recorded in
U.S.dollars at the exchange rates in effect when the transactions occur. Exchange gains or losses derived from foreign currency transactions or monetary assets and liabilities denominated in foreign currencies are recognized in current income. At the end of each period, assets and liabilities denominated in foreign currencies are revalued at the prevailing exchange rates with the resulting gains or losses recognized in
income for the period. Translation Adjustments If a foreign subsidiary's functional currency is the local currency, translation adjustments will result from the process of translating the subsidiary's financial statements into the reporting currency of the 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 our employee stock purchase plan.
Recent accounting pronouncements
Simplified 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. We are currently evaluating the impact of ASU 2020-06 on our consolidated financial statements and related disclosures, as well as the timing of adoption.
Simplify income tax accounting
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. We are currently evaluating the impact this ASU will have on our consolidated financial statements and related disclosures, as well as the timing of adoption. 56 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 Topic 326 until fiscal year beginning after December 15, 2022. We are currently evaluating the impact of adopting ASU 2016-13 on our 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, under 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 adopted ASU 2017-04 as of December 31, 2020and the adoption does not have significant impact on our consolidated financial statements as of and for the year ended December 31, 2021and 2020.
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