Iveda Solutions, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2014. The filing is an annual report, not a standalone fourth-quarter filing. Comparisons are to fiscal year 2013. Filed March 16, 2015.
Business Context and Strategy
Iveda develops Sentir, a software-as-a-service video surveillance and cloud storage platform, together with Sentir-enabled Zee plug-and-play cameras and other surveillance solutions. In 2014, the company shifted from direct, project-based sales toward licensing Sentir and selling cameras through telecommunications companies, ISPs, data centers, cable companies, and other service providers.
The company operates through its U.S. business and Taiwan-based MEGAsys subsidiary. MEGAsys accounted for 56% of consolidated revenue in 2014, compared with 78% in 2013. Iveda had 47 employees at December 31, 2014, and its common stock traded on the OTC Bulletin Board under “IVDA.”
Financial Results and Key Metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Total revenue | $2.19 million | $3.35 million | Down 35% |
| Equipment sales | $1.56 million | $2.69 million | Down 42% |
| Service revenue | $579,940 | $608,157 | Down 5% |
| Gross profit | $573,530 | $615,867 | Down 7% |
| Gross margin | 26% | 18% | Up 8 percentage points |
| Operating loss | $4.96 million | $6.80 million | Improved 27% |
| Net loss | $5.66 million | $6.80 million | Improved 17% |
| Basic and diluted loss per share | $0.21 loss | $0.27 loss | Improved |
| Cash used in operating activities | $5.03 million | $3.61 million | Use increased |
| Cash and cash equivalents | $87,900 | $559,729 | Down 84% |
Recurring service revenue represented 27% of 2014 revenue, compared with 18% in 2013. Equipment sales and installation represented 71% of 2014 revenue, compared with 80% in 2013.
Operating expenses declined to $5.53 million from $7.42 million. The 2013 figure included an $841,000 goodwill impairment charge; excluding that charge, 2014 operating expenses declined approximately 16%. Research and development expense was $304,121, compared with $285,837 in 2013. Stock-based compensation was $373,000.
Balance Sheet, Debt, Liquidity, and Cash Flow
- Total assets were $3.48 million at December 31, 2014, compared with $3.68 million at December 31, 2013.
- Total current assets were $2.46 million, including $979,095 of restricted cash, $358,804 of net accounts receivable, and $387,918 of inventory.
- Total current liabilities were $3.97 million, producing negative working capital of approximately $1.5 million.
- Debt and related obligations included $1.08 million of short-term debt, $575,000 due to related parties, $34,610 of current long-term debt, and a $112,009 derivative liability.
- Stockholders’ equity was negative $756,392 at year-end, compared with positive equity of $521,809 at year-end 2013.
- Financing activities provided $4.83 million, primarily from short-term and long-term borrowings and related-party debt, but this was insufficient to offset operating and investing cash use.
- The company reported approximately $22.0 million of federal and $18.0 million of state net operating loss carryforwards, subject to expiration and potential limitations.
The independent auditor included a going-concern emphasis, stating that recurring losses, accumulated losses of approximately $27.4 million, and negative operating cash flows raise substantial doubt about the company’s ability to continue as a going concern. Management stated that additional capital would be required until positive operating cash flow is achieved.
Material Changes Versus 2013
- Revenue declined primarily because of lower MEGAsys equipment sales, while recurring service revenue was relatively stable.
- Gross margin improved substantially, mainly because of more favorable margins on MEGAsys equipment sales and installation revenue.
- Operating and net losses improved, partly because 2013 included the $841,000 goodwill impairment charge and because the company reduced direct sales, marketing, consulting, and research and development costs.
- Operating cash burn increased by approximately $1.4 million despite the lower net loss.
- The company converted $3.6 million of convertible debentures into 3.6 million shares of Series A Preferred Stock and converted an additional $400,000 of debentures plus accrued interest into 403,592 Series A Preferred shares. The transactions generated no cash and resulted in a $333,675 loss on debt conversion.
- Common shares outstanding increased to 27,308,357 from 26,722,012. At year-end, 5,953,227 options and 3,749,550 warrants were outstanding, creating substantial potential dilution.
- Management reported that internal control over financial reporting was not effective at December 31, 2014 because MEGAsys needed additional personnel knowledgeable in SEC accounting and reporting.
Outlook, Financing, Risks, and Unusual Items
Management’s strategy is to scale Sentir through service-provider distribution and generate two revenue streams: camera sales and recurring per-camera licensing fees. The company had agreements with four telecommunications companies and reported initial Zee camera shipments to the Philippines in 2014.
Subsequent to year-end, the company received a purchase order for approximately $1.3 million for 10,000 Zee cameras, plus future monthly licensing fees for activated cameras. It also entered into a framework agreement with a major Vietnamese telecommunications company and a collaboration agreement to integrate Sentir into Wolfcom body cameras.
In January through March 2015, the company sold 312.5 shares of Series B Preferred Stock for total proceeds of $3.125 million, against an approved private placement of up to $4.0 million. The Series B securities carry a 9.5% annual dividend, liquidation preference, conversion rights, and warrants. The financing is intended for working capital, inventory purchases, and general corporate purposes, but may substantially dilute common stockholders.
- Revenue and accounts receivable are concentrated among a small number of customers. Two U.S. customers represented approximately 34% of consolidated revenue, and two Taiwan customers represented approximately 46%.
- MEGAsys had approximately 79% of gross accounts receivable aged more than 180 days at year-end; the Taiwan segment allowance for doubtful accounts was $342,494.
- The company depends on third-party camera manufacturers and service providers and faces technology, cybersecurity, data privacy, regulatory, foreign currency, international operations, and competition risks.
- MEGAsys had potential exposure of approximately $1.5 million under after-project service obligations for certain Taiwan contracts.
- The company does not hold patents for its core technology and primarily relies on trade secrets, trademarks, software security, licenses, and nondisclosure agreements.
- Series A Preferred Stock accrues a 9.5% dividend, has liquidation preference and voting rights, and is convertible into common stock. Series B Preferred Stock ranks senior to Series A and common stock in liquidation preference.
Investor Verification Checklist
- Verify the going-concern qualification, available cash, negative working capital, debt maturities, and the company’s ability to raise additional capital.
- Reconcile the 2015 Series B financing proceeds, preferred-stock terms, warrants, registration obligations, and potential dilution.
- Assess whether the $1.3 million Philippines camera order converted into recognized revenue and recurring Sentir activations.
- Review customer concentration, aged receivables, allowance adequacy, and MEGAsys collection history.
- Evaluate the effectiveness and remediation status of internal controls at MEGAsys.
- Reconcile the fully diluted share count, including Series A and Series B conversion shares, options, warrants, and anti-dilution adjustments.
- Review the $1.5 million Taiwan contractual service exposure and other contingent liabilities.
- Determine whether the licensing model is generating material recurring revenue and whether it can reduce dependence on project-based equipment sales.