Iveda Solutions, Inc. — Form 10-Q Summary
Business context and reporting period
Iveda Solutions provides video surveillance equipment, installation, cloud video hosting, in-vehicle streaming, archiving, and remote surveillance services. Its MegaSys subsidiary in Taiwan delivers integrated surveillance systems, primarily through project-based equipment sales. The filing covers the unaudited three and six months ended June 30, 2013, compared with the prior-year periods, and the balance sheet is compared with December 31, 2012.
Key financial metrics
| Metric | Three months ended June 30, 2013 | Six months ended June 30, 2013 |
|---|---|---|
| Revenue | $794,166 | $1,409,388 |
| Gross profit | $166,232 | $216,506 |
| Gross margin | 21% | 15% |
| Operating loss | $(1,448,840) | $(2,669,649) |
| Net loss | $(1,506,921) | $(2,763,149) |
| Basic and diluted loss per share | $(0.06) | $(0.12) |
| Operating cash flow | Not provided for the quarter | $(1,909,123) |
At June 30, 2013, cash and cash equivalents were $1,436,054, including $1,130,717 in the domestic business and $305,337 in the foreign business. Restricted cash was $971,360. Accounts receivable were $997,774, net of a $358,905 allowance for doubtful accounts; inventory was $157,572.
Total liabilities were $2,596,610, consisting principally of $2,492,260 in current liabilities and $104,350 in long-term debt. Current liabilities included $439,052 of short-term debt, $197,714 of current long-term debt, $100,000 due to a related party, and $1,755,494 of accounts and other payables. The filing states that short-term bank loans bear interest from 3.24% to 5.82% and mature in September or December 2013. Total stockholders’ equity was $2,950,583.
Net cash used in investing activities was $68,597, primarily for property and equipment. Financing activities provided $3,304,248, including $3,996,594 from common-stock issuance, $184,574 from option exercises, and debt and related-party repayments. Cash and cash equivalents increased by $1,321,592 during the six months.
Material changes versus the prior comparable period
- Second-quarter revenue decreased 25% to $794,166 from $1,060,496. Six-month revenue decreased 20% to $1,409,388 from $1,771,320.
- Second-quarter service revenue declined to $157,823 from $454,253, while equipment sales increased to $621,989 from $596,099. For the six-month period, service revenue declined to $326,832 from $648,622 and equipment sales declined to $1,057,822 from $1,096,964.
- Management attributed the revenue decline primarily to lower large-project revenue in Taiwan, particularly at MegaSys. Taiwan revenue fell to $571,178 in the second quarter from $838,890, while U.S. revenue was substantially unchanged.
- Six-month gross margin declined to 15% from 21%, reflecting lower margins on large Taiwan equipment projects. Second-quarter gross margin improved to 21% from 18%.
- Operating expenses increased 57% in the second quarter and 45% for the six-month period. Management cited approximately $190,000 of technology trade-show marketing expense, approximately $95,000 of research and development expense, equity-raise costs, and increased marketing activity.
- Six-month operating loss increased 65% and net loss increased 68% from the prior-year period. Other expense increased to $93,500 from $21,785, including $44,000 of loss from debt conversion and higher interest expense.
- Cash and cash equivalents increased from $114,462 at December 31, 2012, primarily because of approximately $4.5 million raised through equity financing. Additional paid-in capital increased to $20,745,965 from $16,204,068, while accumulated deficit increased to $17,763,226 from $15,000,076.
Outlook, risks, contingencies, and unusual items
The filing provides no formal revenue, earnings, or margin guidance. Management believes cash on hand is sufficient for near-term working capital and capital expenditures, but states that the Company has limited liquidity and lacks a stabilized revenue base sufficient to cover operating costs over an extended period.
Management identifies a substantial doubt regarding the Company’s ability to continue as a going concern. Its plan includes raising additional equity or debt, expanding a commission-based independent representative network, increasing direct sales and marketing, continuing national-account relationships, and developing cloud video services through a strategic partnership with Taiwan’s Industrial Technology Research Institute. There is no assurance that these initiatives or additional financing will succeed.
Customer concentration is significant: two customers represented approximately 58% of six-month revenue and approximately 45% of accounts receivable at June 30, 2013. Approximately 74% of gross MegaSys accounts receivable was aged over 120 days; management recorded a 36%, or $358,905, allowance. Cash deposits may exceed applicable FDIC or Taiwan CDIC insurance limits.
The Company raised $4,544,500 in a private placement during the six months, issuing shares at $1.00 per share and incurring $491,150 of related costs. In July 2013, it issued an additional 520,000 shares for $520,000. At June 30, 2013, options and warrants representing 8,127,581 potential shares were excluded from diluted EPS because they were anti-dilutive.
The filing states that there were no off-balance-sheet arrangements, no defaults on senior securities, and no new legal proceedings disclosed in the quarterly report. The filing also states that disclosure controls were not effective, although the related discussion contains inconsistent dates referring to an evaluation as of September 30, 2012 and effectiveness as of June 30, 2012; this should be verified against the filed certification and the related annual report.
Important facts for investors to verify
- Whether additional financing will be required to fund continuing operating losses and when management expects to achieve operating profitability.
- The collectability and aging of MegaSys receivables, including the adequacy of the $358,905 allowance.
- The maturity, repayment, and refinancing requirements for short-term bank loans and other debt due in 2013.
- The sustainability of revenue following the decline in Taiwan project activity and the sharp reduction in recurring service revenue.
- The impact of equity issuances, options, warrants, and future financing on dilution.
- The effectiveness of disclosure controls and the apparent date inconsistency in Item 4 of the filing.
- The concentration of revenue and receivables among a small number of customers and the risk of uninsured cash deposits.