Iveda Solutions, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Iveda Solutions, Inc. filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2015. The company provides cloud-based video surveillance and data-management solutions, including the Sentir platform, ZEE cameras, IvedaMobile, and IvedaHome. Its operations comprise the U.S.-based Iveda segment and the Taiwan-based MEGAsys segment.
Management is transitioning from direct project-based sales toward licensing Sentir and selling cloud-enabled cameras through telecommunications companies, Internet service providers, data centers, cable companies, and other service providers.
Key Financial Metrics
| Metric | Three Months Ended September 30, 2015 | Three Months Ended September 30, 2014 | Nine Months Ended September 30, 2015 | Nine Months Ended September 30, 2014 |
|---|---|---|---|---|
| Total revenue | $823,374 | $489,009 | $2,124,758 | $1,215,135 |
| Gross profit | $189,448 | $91,836 | $497,280 | $293,561 |
| Gross margin | 23.0% | 18.8% | 23.4% | 24.2% |
| Operating loss | $(665,152) | $(1,128,296) | $(2,341,046) | $(3,985,383) |
| Net loss | $(953,706) | $(1,201,375) | $(2,673,439) | $(4,195,707) |
| Basic and diluted loss per share | $(0.03) | $(0.04) | $(0.10) | $(0.16) |
Equipment sales represented approximately 95% of quarterly revenue and 90% of nine-month revenue in 2015, while service revenue represented approximately 5% and 9%, respectively. Nine-month revenue was generated primarily by Taiwan, which contributed $1,923,726, compared with $201,032 from the United States.
At September 30, 2015, cash and cash equivalents were $242,796, restricted cash was $375,239, and total current assets were $2,273,456. Current liabilities were $3,020,491, including $1,957,575 of accounts and other payables, $798,440 due to related parties, $203,850 of short-term debt, and a $60,626 derivative liability. Total assets were $2,907,334, compared with total liabilities of approximately $3.6 million, resulting in stockholders’ equity of $(671,314).
For the nine months ended September 30, 2015, operating activities used $2,679,109 of cash, investing activities provided $3,868, and financing activities provided $2,835,195. Net cash increased by $154,896 from December 31, 2014. The company reported approximately $30.6 million of accumulated deficit and approximately $22.0 million of federal net operating loss carryforwards.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased 68% and nine-month revenue increased 75%, primarily because Taiwan-based revenue increased as long-term contracts progressed.
- U.S.-based revenue declined by $217,345 for the quarter and $590,878 for the nine-month period as the company reduced direct project-based activities and shifted toward its licensing model.
- Gross margin improved for the quarter to 23% from 19%, but declined for the nine-month period to 23% from 24%.
- Operating expenses declined 30% for the quarter and 35% for the nine-month period, reflecting lower personnel, direct project-based sales and marketing, consulting, and research and development costs.
- Operating loss narrowed 41% for both the quarter and nine-month period, while net loss narrowed 21% for the quarter and 36% for the nine-month period.
- Other expense increased to $288,674 for the quarter and $319,660 for the nine-month period, driven largely by interest expense and the prepayment discount on a stockholder note receivable.
- Short-term debt declined to $203,850 from $1,080,500 at December 31, 2014, while amounts due to related parties increased to $798,440 from $575,000.
- The company raised approximately $3.1 million through its Series B Preferred Stock private placement; financing cash inflows from the issuance totaled $2,811,667 after related costs.
Guidance, Outlook, Risks, and Unusual Items
The filing provides no formal revenue or earnings guidance. Management’s stated plan is to expand Sentir licensing, sell ZEE cameras and IvedaHome products through foreign telecommunications and manufacturing partners, and reduce U.S. operating costs. IvedaHome launched in August 2015.
Management states that a significant risk exists regarding the company’s ability to continue as a going concern. The company has sustained significant operating losses, used approximately $2.7 million of cash in operations during the first nine months of 2015, and has not established a stabilized revenue base sufficient to cover operating costs. Continued operations depend on increased sales and/or additional financing, which may be unavailable or dilutive.
A subsequent event disclosed in the filing is an agreement with Nguyen Business & Investment Co., Ltd. to serve as exclusive reseller in Vietnam. The company received a $50,000 deposit against a committed $1.0 million prepaid Sentir license due on or before December 15, 2015. The filing does not establish that the full payment was ultimately received.
Other notable items include cumulative 9.5% dividends on Series A and Series B preferred stock, $558,157 of long-term dividends payable, 5,814,004 outstanding stock options, and 7,610,303 outstanding warrants. Potential common-stock equivalents totaled 21,585,017 and were excluded from diluted loss per share because they were anti-dilutive.
Customer and receivables concentration is significant. For the nine months ended September 30, 2015, two U.S. customers represented approximately 28% of total revenue and three Taiwan customers represented approximately 79%. At September 30, 2015, four customers represented approximately 91% of U.S. accounts receivable and four represented approximately 96% of Taiwan accounts receivable. The Taiwan segment had 61% of gross accounts receivable aged over 180 days.
Management concluded that disclosure controls were effective, but identified a material weakness related to insufficient SEC accounting and reporting personnel at MEGAsys. Remediation plans included hiring additional financial personnel and using an independent Taiwan-based contractor. No material legal proceedings were reported.
Important Facts for Investors to Verify
- Whether the company can achieve positive operating cash flow before available cash and financing sources are exhausted.
- Whether the Vietnam reseller completes the committed $1.0 million prepaid Sentir license payment.
- The collectability and timing of concentrated, aged Taiwan accounts receivable.
- The terms, dividend accruals, conversion rights, and potential dilution associated with Series A and Series B preferred stock.
- The potential dilution from 5.8 million options, 7.6 million warrants, and other convertible securities.
- Whether revenue growth is recurring and licensing-driven or remains dependent on irregular equipment and project sales.
- Whether the identified MEGAsys internal-control weakness is remediated.
- The company’s ability to obtain future debt or equity financing on acceptable terms.