Iveda Solutions, Inc. — Form 10-Q Summary
Business context and reporting period
This quarterly report covers the three and six months ended June 30, 2011. Iveda provides video surveillance equipment installation, video hosting, archiving, and real-time remote surveillance services using its proprietary DSR reporting system and cloud-computing infrastructure. On April 30, 2011, the company acquired Taiwan-based Sole Vision Technologies, doing business as MegaSys; its results were consolidated from May 1, 2011.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $575,168 | $193,501 | $859,071 | $306,183 |
| Gross profit | $109,011 | $70,918 | $220,408 | $84,575 |
| Gross margin | 19% | 37% | 26% | 27% |
| Operating loss | $(1,177,659) | $(409,172) | $(1,603,868) | $(940,852) |
| Net loss | $(1,177,637) | $(413,549) | $(1,618,154) | $(951,464) |
| Loss per share | $(0.08) | $(0.03) | $(0.11) | $(0.07) |
- Q2 revenue increased 197%, and six-month revenue increased 181%, primarily because of the MegaSys acquisition. Equipment sales and installation represented 80% of Q2 revenue and 73% of six-month revenue, compared with 43% and 31%, respectively, in the prior-year periods.
- Operating expenses increased to $1.29 million in Q2 and $1.82 million for the six months, driven principally by acquisition-related professional fees and non-cash stock compensation. Six-month stock compensation expense was $665,702.
- Cash and cash equivalents were $594,760 at June 30, 2011, compared with $355,343 at December 31, 2010. Total current assets were $2.04 million and total current liabilities were $722,351.
- Net cash used in operating activities was $1.27 million for the six months, compared with $1.19 million in the prior-year period. Investing cash flow included $740,561 of cash acquired in the MegaSys acquisition; capital expenditures were $8,964.
- Financing activities provided $790,560, including $891,750 from common stock issuance, partially offset by payments to related parties and capital lease obligations.
- Short-term bank loans totaled $195,476, bearing interest at 3.2% and 3.6% and due in October and December 2011. Capital lease obligations totaled $35,541, including current and long-term portions. A $197,000 related-party line of credit was repaid in April 2011.
- Total assets increased to $4.48 million from $1.05 million at December 31, 2010, primarily reflecting the MegaSys acquisition, including $1.80 million of goodwill and $322,333 of intangible assets.
Material changes versus the prior comparable period
- Revenue growth was substantial, but the mix shifted toward lower-margin equipment sales and installation, reducing Q2 gross margin to 19% from 37%.
- Q2 operating loss increased 188% and six-month operating loss increased 70%, as operating expenses grew faster than gross profit.
- Six-month net loss increased 70% to $1.62 million. The company reported an accumulated deficit of approximately $8.3 million at June 30, 2011.
- The MegaSys transaction involved a preliminary purchase price of $3.302 million, consisting principally of 1.7 million issued common shares valued at $1.666 million, assumed liabilities of $633,198, acquired cash of $740,561, intangible assets of $330,000, and goodwill of $1.797 million. An additional 2.0 million shares, valued at $1.636 million, may be issued if specified financial goals are achieved.
- The company issued 2,954,972 common shares during the first six months, including shares issued in private placements and in connection with the acquisition. It also had 2,921,562 options outstanding and 45,000 additional warrants issued during the period.
Guidance, outlook, risks, contingencies, and unusual items
- Management stated that cash on hand was insufficient for anticipated short-term working capital and capital expenditure needs and that additional debt or equity financing would be required. Failure to obtain financing could require reducing or ceasing operations.
- The financial statements include a going-concern uncertainty due to continuing operating losses, an accumulated deficit of approximately $8.3 million, and $1.3 million of operating cash use during the first six months.
- Management’s plan includes seeking additional financing, developing distributor and reseller networks, and evaluating potential merger or acquisition opportunities. No quantitative earnings or revenue guidance was provided.
- Two customers represented approximately 43% of six-month revenue, and approximately 40% of accounts receivable was concentrated with those customers. Substantially all cash was held at one financial institution and may exceed FDIC insurance limits.
- Disclosure controls and procedures were assessed as ineffective as of June 30, 2011. Management identified a material weakness resulting from having only one employee knowledgeable in SEC accounting and reporting, creating inadequate segregation of duties. Management planned to add financial personnel and was still evaluating MegaSys internal controls.
- The company is defending two patent-infringement lawsuits involving its real-time remote video surveillance system. The complaints seek damages and permanent injunctions, but the company stated that it could not assess the likelihood of an unfavorable outcome.
- In July 2011, the company issued 170,000 shares at $1.00 per share. It also extended its office lease for five years while increasing space from 3,667 to 5,779 square feet at a more favorable rate. A Controller was hired on August 1, 2011.
Most important facts for investors to verify
- Whether the company can obtain sufficient financing to fund ongoing losses and working capital requirements.
- Whether MegaSys can deliver the financial goals that could trigger issuance of the additional 2.0 million shares.
- The sustainability and margins of the substantial increase in equipment sales, compared with recurring surveillance-service revenue.
- The collectibility of concentrated accounts receivable and the company’s exposure to its two largest customers.
- The status, potential financial impact, and insurance coverage of the two patent-infringement lawsuits.
- Remediation of the material weakness in financial reporting controls, including controls over the newly acquired MegaSys operations.
- The filing presents differing share counts: 16,619,229 common shares are shown in the cover-page data, while the balance sheet refers to 18,619,229 shares including 2.0 million reserved for issuance. Investors should verify the actual issued and outstanding share count and fully diluted capitalization.