Iveda Solutions, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2011; filed November 14, 2011. The interim financial statements are unaudited. Iveda provides video surveillance equipment, installation, video hosting, archiving, and remote surveillance services. MegaSys was acquired effective April 30, 2011, and its results are included from May 1, 2011.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Revenue | $588,339 | $182,416 | $1,447,410 | $488,600 |
| Gross profit | $116,128 | $66,599 | $336,535 | $151,175 |
| Gross margin | 20% | 37% | 23% | 31% |
| Operating loss | $(662,159) | $(537,998) | $(2,275,381) | $(1,478,849) |
| Net loss | $(662,654) | $(539,456) | $(2,290,162) | $(1,490,919) |
| Basic and diluted loss per share | $(0.04) | $(0.04) | $(0.15) | $(0.10) |
- Q3 revenue increased 222%; nine-month revenue increased 196%. Growth reflected the MegaSys acquisition and higher U.S. revenue.
- Recurring service revenue was $219,333, or 37% of Q3 revenue, while equipment sales and installation were $369,006, or 63%. For the first nine months, the mix was 31% recurring services and 69% equipment and installation.
- Operating expenses rose 29% in Q3 and 60% for the nine-month period, primarily from acquisition-related professional fees and non-cash stock compensation.
- Cash used in operating activities was $1,878,531 for the first nine months, compared with $1,566,932 in the prior-year period. Investing activities provided $688,692, largely from $740,561 of cash acquired in the MegaSys acquisition. Financing activities provided $1,371,156, including $1,239,750 from common-stock issuances.
- Cash and cash equivalents were $466,966 at September 30, 2011, compared with $355,343 at December 31, 2010. Management stated that domestic cash was $207,170 and foreign cash was $259,796.
- Current assets were $1,909,591 and current liabilities were $930,779. Accounts receivable increased to $959,457 from $361,686 at year-end 2010; inventory increased to $143,037 from $4,651.
- Total liabilities were $940,725, including $334,597 of short-term bank loans, $91,107 of notes payable net of discount, $28,091 due to related parties, and $21,357 of capital lease obligations. The Asian bank loans bear interest of 3.2% and 3.6% and were due in October and December 2011.
- Stockholders’ equity was $3,456,526 versus $517,953 at December 31, 2010, primarily reflecting equity issued during the period and the MegaSys acquisition. Accumulated deficit was $8,985,260.
Material changes and unusual items
- MegaSys was acquired for a stated purchase price of $3,302,000, funded through issuance of 1,700,000 common shares valued at $1,666,000 and an additional 250,000 shares valued at $245,000 issued to an acquisition consultant. The allocation included $1,796,710 of goodwill and $330,000 of intangible assets.
- Up to 2,000,000 additional shares, valued at $1,636,000, may be issued if specified MegaSys 2011 and 2012 financial and revenue milestones are achieved.
- The company issued 3,344,972 common shares during the nine months, including 1,394,972 shares in private placements and 1,950,000 shares related to the MegaSys transaction.
- Stock compensation expense was $704,005 for the first nine months, compared with $217,160 in the prior-year period. Options outstanding increased to 3,536,512, and 4,631,291 options and warrants were excluded from diluted EPS because they were anti-dilutive.
- Two customers represented approximately 42% of nine-month revenue and approximately 77% of accounts receivable at September 30, 2011. The company reported some receivables aged over 120 days and recorded an allowance for doubtful accounts.
Outlook, liquidity, risks, and contingencies
- Management disclosed substantial doubt regarding the company’s ability to continue as a going concern. The company had approximately $9 million of accumulated deficit and used approximately $1.9 million in operating cash during the first nine months.
- Management stated that cash on hand was insufficient for anticipated short-term working capital and capital expenditure needs. The company planned to seek additional debt and equity financing, expand distributor and reseller networks, and evaluate potential mergers or acquisitions. Failure to obtain funding or increase sales could require reductions in operations or labor expenses.
- After the reporting period, the company reported completing a $2.5 million private placement; the filing specifically describes October issuances of 847,500 shares at $1.00 per share. During the reporting period, it received $390,000 and issued 390,000 shares under the same private-placement memorandum.
- On October 28, 2011, the company entered into a one-year, non-exclusive strategic collaboration agreement with Telmex U.S.A. LLC for resale of its products and services. Either party may terminate on 30 days’ notice.
- The company entered into a $45,000 shareholder promissory note. Interest is payable through 45,000 warrants exercisable at $1.10 per share. It also authorized 47,500 warrants at $1.10 per share for a director assisting with fundraising.
- Disclosure controls and procedures were deemed ineffective as of September 30, 2011. Management identified a material weakness arising from having only one employee knowledgeable in SEC accounting and reporting and inadequate segregation of duties. Management planned to add financial personnel as resources permit.
- Revenue and receivables are concentrated among a limited number of customers, cash may exceed FDIC insurance limits, and the company is exposed to foreign operations, currency movements, and geographic economic conditions.
Important facts for investors to verify
- Verify the company’s ability to fund operations and meet the going-concern risk, including the actual proceeds and availability from the reported private placement.
- Assess whether MegaSys can achieve the milestones that could trigger issuance of the additional 2,000,000 shares.
- Review customer concentration, aging of accounts receivable, and collectibility of the $959,457 receivable balance.
- Confirm repayment or refinancing of the short-term Asian bank loans due in October and December 2011.
- Evaluate the effect of lower-margin equipment revenue on future gross margins and the sustainability of recurring service revenue.
- Monitor remediation of the material weakness in disclosure controls and segregation of duties.
- Reconcile the filing’s share-count disclosures: the cover reports 17,009,229 common shares outstanding, while the balance-sheet presentation refers to 19,009,229 shares issued and outstanding, including 2,000,000 shares reserved for issuance.