Iveda Solutions, Inc. — Form 10-Q Summary
Business context and reporting period
Iveda provides cloud-based video management, hosting, remote surveillance, and video equipment and installation services. Its Taiwan subsidiary, MegaSys, primarily delivers project-based surveillance systems. The filing covers the unaudited three and nine months ended September 30, 2014, compared with the corresponding 2013 periods. The company is a smaller reporting company and had 27,308,357 common shares outstanding as of November 7, 2014.
Financial performance and position
| Metric | Three months ended Sept. 30, 2014 | Three months ended Sept. 30, 2013 | Nine months ended Sept. 30, 2014 | Nine months ended Sept. 30, 2013 |
|---|---|---|---|---|
| Revenue | $489,009 | $568,918 | $1,215,135 | $1,978,306 |
| Gross profit | $91,836 | $96,926 | $293,561 | $310,641 |
| Gross margin | 19% | 17% | 24% | 16% |
| Operating loss | $(1,128,296) | $(1,548,637) | $(3,985,383) | $(4,221,077) |
| Net loss | $(1,201,375) | $(1,573,469) | $(4,195,707) | $(4,339,409) |
| Basic and diluted loss per share | $(0.04) | $(0.06) | $(0.16) | $(0.18) |
Service revenue was $162,966, or 33% of third-quarter revenue, and $465,604, or 38% of nine-month revenue. Equipment sales were $305,489 in the quarter and $707,505 year to date. The company reported no profit and has an accumulated deficit of approximately $26.0 million at September 30, 2014.
| Balance-sheet item | Sept. 30, 2014 | Dec. 31, 2013 |
|---|---|---|
| Cash and cash equivalents | $275,700 | $559,729 |
| Restricted cash | $1,138,050 | $1,160,688 |
| Total current assets | $2,727,508 | $2,719,646 |
| Total current liabilities | $3,705,981 | $2,722,953 |
| Stockholders’ equity (deficit) | $(3,448,518) | $521,809 |
Working capital was negative $978,473. Debt included $972,285 of short-term debt, $70,275 of current long-term debt, $3,402,352 of long-term debt and convertible debentures, and $160,832 due to a related party, net of discount. The company’s $3.6 million convertible debenture financing bears 9.5% interest, is generally convertible at $1.50 per share, and includes warrants and anti-dilution provisions.
Net cash used in operating activities was $4,230,581 for the first nine months of 2014, compared with $2,835,549 in 2013. Investing cash use was $244,145, primarily for property and equipment. Financing activities provided $4,192,615, including proceeds from short-term and long-term debt. Ending cash decreased by $284,029 from year-end 2013.
Material changes versus the prior comparable period
- Nine-month revenue declined 39%, primarily because of an anticipated reduction in large, project-driven Taiwan revenue. Third-quarter revenue declined 14%; U.S. revenue increased while MegaSys revenue decreased.
- Gross margin improved to 24% from 16% for the nine-month period and to 19% from 17% for the quarter, reflecting a greater mix of recurring services and less reliance on lower-margin equipment sales.
- Operating expenses declined 6% for the nine months and 26% for the quarter, largely due to lower direct sales, personnel, advertising, financial consulting, and research and development costs.
- Despite lower operating losses, interest and other expense increased because of interest accrued on convertible debentures. A derivative and debt-conversion gain of $101,444 for the nine months partially offset these costs.
- Long-term debt increased substantially from $364,370 at December 31, 2013 to $3,402,352 at September 30, 2014, while stockholders’ equity moved from positive $521,809 to a deficit of $3,448,518.
- Common shares outstanding increased from 26,722,012 at year-end 2013 to 27,308,357 at September 30, 2014. Options, warrants, and convertible debt represented significant additional potential dilution.
Outlook, risks, contingencies, and unusual items
Management stated that the company has limited liquidity, has not established stable revenue sufficient to cover operating costs, and must raise capital to continue as a going concern. The filing notes the prior-year going-concern qualification and identifies a significant risk that the company may not continue as a going concern. Management engaged an investment banker to evaluate financing and planned to seek up to $30 million of long-term financing. No assurance was provided that financing would be obtained or obtained on favorable terms.
Management is pursuing recurring licensing revenue from installations of its cloud platform with telecommunications companies, international distribution channels, industry trade shows, and new products. The company subsequently announced three Taiwan projects totaling $3.7 million over the following twelve months, but the filing does not establish the timing, profitability, or collectability of those projects.
Customer and collection concentration is material. Two U.S. customers represented approximately 41% of nine-month revenue and approximately 92% of U.S. accounts receivable. Three Taiwan customers represented approximately 67% of nine-month Taiwan revenue and approximately 64% of Taiwan accounts receivable. Approximately 92% of Taiwan gross receivables were more than 120 days old, and management recorded a 57% allowance for doubtful accounts, or $357,064.
The company disclosed that its disclosure controls and procedures were not effective as of September 30, 2014 because of limited oversight of MegaSys operations. Management stated that the deficiency could result in a material misstatement of interim or annual financial statements. The company also has limited staff and incomplete segregation of duties.
During the quarter, directors provided $330,000 of short-term related-party debentures. Subsequent to quarter-end, the company entered into $235,000 of additional debentures with directors and unrelated parties. Potential dilution included 9,282,521 shares underlying options and warrants and 2,452,573 shares potentially issuable upon conversion of debentures as of September 30, 2014.
Most important facts for investors to verify
- Whether the company can obtain additional financing and continue as a going concern given $275,700 of unrestricted cash, negative working capital, recurring operating losses, and substantial debt maturities.
- The terms, maturity dates, conversion provisions, anti-dilution features, and potential dilution from convertible debentures, options, and warrants.
- The collectability of aged Taiwan and U.S. receivables and whether the recorded allowance is adequate.
- Whether the announced $3.7 million Taiwan projects are contracted, funded, timely deliverable, and expected to generate positive margins and cash flow.
- Whether recurring service and licensing revenue can offset the anticipated decline in project-driven equipment revenue.
- Remediation of the MegaSys disclosure-control deficiency and the effect of any resulting audit adjustments or restatements.
- The company’s ability to reduce its cash burn, meet short-term debt obligations, and convert financing proceeds into sustainable operating performance.