Iveda Solutions, Inc. 10-Q Summary
Reporting period: Three and six months ended June 30, 2016; filed August 16, 2016. The interim financial statements are unaudited. Iveda develops the Sentir cloud video-management platform, sells Sentir-enabled cameras and related equipment, and provides video-hosting and licensing services. Operations include the U.S. business and Taiwan-based MEGAsys.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2016 | Three Months Ended June 30, 2015 | Six Months Ended June 30, 2016 | Six Months Ended June 30, 2015 |
|---|---|---|---|---|
| Revenue | $338,624 | $775,561 | $751,141 | $1,301,384 |
| Gross profit | $82,372 | $140,704 | $164,479 | $307,832 |
| Gross margin | 24% | 18% | 22% | 24% |
| Operating loss | $(442,075) | $(827,084) | $(1,008,915) | $(1,675,895) |
| Net loss | $(476,709) | $(880,349) | $(1,059,553) | $(1,719,733) |
| Loss per share | $(0.02) | $(0.03) | $(0.04) | $(0.06) |
For the quarter, revenue declined 56%, while gross profit declined 41%. For the six-month period, revenue declined 42% and gross profit declined 47%. Operating expenses declined 46% in the quarter and 41% year to date, primarily from lower personnel, marketing, consulting and research and development costs. The company remained unprofitable.
- Revenue mix: Six-month equipment sales were $692,308, or approximately 92% of revenue; service revenue was $50,390, or approximately 7%.
- Geographic revenue: Six-month U.S. revenue was $247,621 versus $148,235 in the prior year; Taiwan revenue was $503,520 versus $1,153,149. Taiwan represented approximately 67% of current-year revenue.
- Cash: Cash and cash equivalents were $959,533 at June 30, 2016, compared with $206,925 at December 31, 2015. Restricted cash was $211,603.
- Cash flow: Six-month operating cash use was $314,092, compared with $2,437,022 in the prior-year period. Financing activities provided $1,060,026, including $813,999 from common-stock sales, $351,543 from short-term debt, and $8,969 from option exercises.
- Liquidity: Current assets were $1,921,703 versus current liabilities of $3,569,513, indicating a current ratio of approximately 0.54. Total liabilities exceeded assets, producing stockholders’ equity of $(2,039,304).
- Debt and obligations: Short-term debt was $409,200; current and long-term debt totaled $74,116. Due to related parties was $440,000, and long-term dividends payable was $836,655. The filing also reports a $54,229 derivative liability.
- Capitalization: Common shares outstanding at June 30 were 30,219,247, compared with 27,906,739 at year-end 2015; 31,301,080 shares were outstanding as of August 10, 2016. Options and warrants outstanding totaled approximately 5.8 million and 7.5 million, respectively.
Material Changes Versus the Prior Comparable Period
- Revenue weakened primarily because significant Taiwan long-term contracts experienced delays. U.S. revenue increased from equipment shipments to resellers, including the Vietnam reseller.
- Operating losses and net losses improved substantially because of cost reductions, despite lower revenue.
- Gross margin improved to 24% in the second quarter but declined to 22% for the six-month period.
- Operating cash burn decreased by approximately $2.1 million year over year, helped by approximately $624,000 of accounts-receivable collections.
- The company completed a $500,000 strategic investment from the new majority owner of Iveda Vietnam, issuing 628,571 unregistered common shares and warrants to purchase 800,000 shares at $0.35 per share. It also issued 60,000 shares as a referral fee.
- During the six months, the company issued common stock for warrant and option exercises, Series A preferred-stock conversions, Series B preferred dividends, the strategic investment, loan fees and other consideration, resulting in additional dilution.
Outlook, Risks and Unusual Items
Management provided no quantified revenue or earnings guidance. Its stated strategy is to shift from direct project-based sales toward licensing Sentir through telecommunications companies, ISPs, data centers, cable companies and other channel partners, together with sales of ZEE cameras and IvedaHome products. The company cited Vietnam expansion, including a committed $1 million prepaid Sentir-license arrangement and shipments to VNPT, as part of its growth plan.
- Going concern: The filing repeats a substantial doubt regarding the company’s ability to continue as a going concern. It has an accumulated deficit of approximately $33.3 million and has not established stable revenue sufficient to cover operating costs. Continued operations depend on increased sales and/or additional financing.
- Financing risk: Future equity or debt financing may be unavailable or unfavorable and could materially dilute existing stockholders or create securities senior to common stock.
- Customer concentration: A limited number of customers accounted for substantial portions of U.S. and Taiwan revenue and accounts receivable. Taiwan also had 34% of gross accounts receivable aged over 180 days.
- Control deficiency: Management identified a material weakness related to insufficient MEGAsys personnel knowledgeable in SEC accounting and reporting. Remediation plans depend on available resources and additional staffing.
- Preferred-stock obligations: Series A and Series B preferred stock accrue dividends at 9.5% annually and have preferential rights. Accrued dividends may be paid in cash or common stock, creating liquidity and dilution risks.
- Other unusual items: The quarter included a $7,313 gain on disposal of assets and a $4,272 derivative-related loss; these items were not central to operating performance.
- Legal matters: The company reported no legal proceedings believed to have a material adverse effect.
Investor Verification Checklist
- Verify whether delayed Taiwan contracts resume and whether Vietnam reseller activity converts into recurring Sentir licensing revenue.
- Reconcile cash availability with current liabilities, related-party obligations, dividend arrears and near-term debt maturities.
- Assess the company’s ability to fund operations without additional dilutive equity or higher-cost debt.
- Monitor customer concentration, aged Taiwan receivables and future allowance requirements.
- Track remediation of the MEGAsys SEC-reporting material weakness.
- Model dilution from preferred-stock conversions, accrued dividends, outstanding options and warrants.
- Confirm the terms and performance requirements of the Vietnam strategic investment and reseller arrangements.