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IVDA > SEC Filings for IVDA > Form 10-K/A on 1-May-2014All Recent SEC Filings

Show all filings for IVEDA SOLUTIONS, INC.

Form 10-K/A for IVEDA SOLUTIONS, INC.


1-May-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our audited and unaudited financial statements and associated notes appearing elsewhere in this report.

Overview

Iveda Solutions, Inc. began operations on January 24, 2005 under the name of IntelaSight, Inc. On October 15, 2009, IntelaSight became a wholly- owned subsidiary of Charmed Homes, Inc., which changed its name to Iveda Corporation. All Company operations were conducted through IntelaSight until December 31, 2010, at which time IntelaSight merged with and into Iveda Corporation and changed its name to Iveda Solutions. On April 30, 2011, the Company completed its acquisition of MegaSys . See "Item 1. Business - General." Unless otherwise noted, all references to "Iveda," "Company," "we," "us" and "our" hereafter in this section refer to the current business of Iveda Solutions, Inc.

Iveda installs video surveillance equipment, primarily for security purposes, and provides video hosting, archiving and real-time remote surveillance services to a variety of businesses and organizations. The accompanying financial statements have been prepared assuming that Iveda will continue as a going concern. Iveda generated accumulated losses of approximately $21.8 million through December 31, 2013.

A multi-step plan was adopted by management to enable the Company to continue to operate and begin to report operating profits. The highlights of that plan are as follows:

The Board of Directors approved the Company to engage with a financial capital markets advisor in connection with a potential capital financial transaction to raise up to $30 million in long-term financing.

In December 2013, the Board of Directors also approved the Company to raise up to an aggregate amount of $3.6 million in bridge financing through the sale of Convertible Debentures in advance of the long-term financing.

In the third quarter of 2013, the Company launched two new camera lines in collaboration with MegaSys, its Taiwan subsidiary and Industrial Technology Research Institute (ITRI), its nonprofit research and development partner in Taiwan. These products are enablers of the Company's video hosting services.

The Company has recently developed two other standalone services:

o IvedaMobile-a cloud-hosting service that turns any smartphone or tablet into a mobile, cloud video streaming device. This was developed with ITRI.

IvedaXchange - In collaboration with a technology partner, the Company developed a real-time situational awareness dashboard to enable organizations instant access to vital and filtered information such as emergency situations, location of critical assets, video monitoring, and local IvedaXchange - In collaboration with a technology partner, the Company developed a real-times situational awareness dashboard to enable organizations instant access to vital and filtered information such as emergency situations, location of critical assets, video monitoring, and local news. IvedaXchange is well-suited for law enforcement agencies and schools.

The Company launched a new website to highlight new products and services with corresponding applications.

The Company launched a second website allowing for direct web-sales, geared toward the residential and small-to-medium sized businesses.

The Company intends to continue to participate in industry and vertical tradeshows to launch new products, generate leads, solicit resellers and other sales channels, and identify potential technology partners.

The Company intends to continue advertising on selected trade magazines and running Google Adwords to generate leads.

The Company has evaluated its reseller distribution channel and eliminated non-performing components of the channel.

In November 2013, Iveda hired Bob Brilon as our chief financial officer and executive vice president of business development. He has strong ties with the investment community and has extensive experience in mergers and acquisitions, strategic growth planning, and interacting with domestic and foreign institutional investors, which will be instrumental to our market expansion, global distribution of our cloud video hosting platform and services, and raising capital to fund our growth. In February 2014, he was also appointed as the Company's president.

The Company is in active collaboration with certain telecommunications companies in other countries to resell the Company's products and services in their respective countries.

Application of Critical Accounting Policies

We have identified the policies below as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations are discussed throughout Management's Discussion and Analysis of Financial Condition and Results of Operations when such policies affect our reported or expected financial results.

In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of our financial statements in conformity with accounting principles generally accepted in the United States. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. The results form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ significantly from those estimates under different assumptions and conditions. We believe that the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require our most difficult, subjective, and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

The material estimates for Iveda are that of the stock based compensation recorded for options and warrants issued and the income tax valuation allowance recorded for deferred tax assets. The fair values of options and warrants are determined using the Black-Scholes option-pricing model. Iveda has no historical data on the accuracy of these estimates. The estimated sensitivity to change is related to the various variables of the Black-Scholes option-pricing model stated below. The specific quantitative variables are included in the Notes to the Financial Statements. The estimated fair value of options and warrants is recognized as expense on the straight-line basis over the options' and warrants' vesting periods. The fair value of each option and warrant granted is estimated on the date of grant using the Black-Scholes option-pricing model with the expected life, dividend yield, expected volatility, and risk free interest rate weighted- average assumptions used for options and warrants granted. Expected volatility for 2013 and 2012 was estimated by using the Dow Jones U.S. Industry indexes sector classification methodology for industries similar to the Company. The risk-free rate for periods within the contractual life of the option and warrant is based on the U.S. Treasury yield curve in effect at the grant date. The expected life of options and warrants is based on the average of three public companies offering services similar to Iveda.

Impairment of Long-Lived Assets

We have a significant amount of property and equipment primarily consisting of leased equipment. The Company reviews the recoverability of the carrying value of long-lived assets using the methodology prescribed in ASC 360 "Property, Plant and Equipment." Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of an asset to the undiscounted future net operating cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying value of the assets exceeds their fair value.

Basis of Accounting and Going Concern

Iveda's financial statements have been prepared on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America. In addition, the accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business. The Company generated accumulated losses of approximately $21.8 million through December 31, 2013 and has insufficient working capital and cash flows to support operations. These factors raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from this uncertainty.

Revenue and Expense Recognition

The Company recognizes revenue when persuasive evidence of an arrangement exists, title transfer has occurred, the price is fixed or readily determinable, and collectability is reasonably assured. The Company recognizes revenue in accordance with ASC 60, "Revenue Recognition." Sales are recorded net of sales returns and discounts, which are estimated at the time of shipment based upon historical data. Revenues from monitoring services are recognized when the services are provided. Expenses are recognized as incurred.

Revenues from fixed-price equipment installation contracts are recognized on the percentage-of-completion method. The percentage completed is measured by the percentage of costs incurred to date to estimated total costs for each contract. This method is used because management considers expended costs to be the best available measure of progress on these contracts. Because of inherent uncertainties in estimating costs and revenues, it is at least reasonably possible that the estimates used will change.

Contract costs include all direct material, subcontractors, labor costs, and equipment costs and those indirect costs related to contract performance. General and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability may result in revisions to costs and income and are recognized in the period in which the revisions are determined. Changes in estimated job profitability resulting from job performance, job conditions, contract penalty provisions, claims, change orders, and settlements are accounted for as changes in estimates in the current period. Profit incentives are included in revenues when their realization is reasonably assured. Claims are included in revenues when realization is probable and the amount can be reliably estimated.

The liability, "Billings in excess of costs and estimated earnings on uncompleted contracts," represents billings in excess of revenues recognized.

Stock-Based Compensation

On January 1, 2006, the Company adopted the fair value recognition provisions of ASC 718, Share-Based Payment , which requires the recognition of an expense related to the fair value of stock-based compensation awards. The Company elected the modified prospective transition method as permitted by ASC 718. Under this transition method, stock-based compensation expense for the years ended December 31, 2011 and 2010 includes compensation expense for stock- based compensation granted on or after the date ASC 718 was adopted based on the grant-date fair value estimated in accordance with the provisions of ASC 718. The Company recognizes compensation expense on a straight-line basis over the requisite service period of the award. The fair value of stock-based compensation awards granted prior to, but not yet vested as of December 31, 2010 and 2009, were estimated using the "minimum value method" as prescribed by original provisions of ASC 718, Accounting for Stock-Based Compensation , therefore, no compensation expense is recognized for these awards in accordance with ASC 718. The Company recognized $221,177 and $248,072 of stock-based compensation expense for the years ended December 31, 2013 and 2012, respectively.

Acquisition of MegaSys

On April 30, 2011, the Company acquired Sole-Vision Technologies, Inc. (doing business as MegaSys), a corporation organized under the laws of the Republic of China ("MegaSys"), pursuant to the share exchange agreement (the "Agreement") dated March 21, 2011 and a related side agreement of even date (the "Side Agreement"), by and among the Company, MegaSys, and the shareholders of MegaSys (the "MegaSys Shareholders"). Pursuant to the Agreement (i) the Company acquired 100% of the issued and outstanding shares of MegaSys Common Stock in exchange for the issuance to the MegaSys Shareholders of 1,700,000 shares of Common Stock of the Company (the "Exchange"), and (ii) MegaSys became a wholly owned subsidiary of Iveda. The Side Agreement provided that the MegaSys Shareholders were entitled to receive up to an additional 2,000,000 shares of Common Stock of the Company upon achievement by MegaSys of certain financial milestones set forth therein. Those financial milestones were not achieved, therefore, the additional 2,000,000 shares will not be issued. The Exchange was approved by Taiwan's Foreign Investment Commission Agency.

MegaSys is a Taiwanese company specializing in deploying video surveillance systems for airports, commercial buildings, government customers, data centers, shopping centers, hotels, banks, and Safe City initiatives in Taiwan and other neighboring countries. MegaSys integrates security surveillance products, software and services to provide integrated security solutions to the end user. Most of MegaSys's revenues are derived from one-time sales, which differs from Iveda's business model of on-going monitoring revenues. MegaSys does not own any proprietary technology or intellectual property other than certain trademarks in China and Taiwan used in its business.

Management believes that the acquisition of MegaSys provides the following potential benefits to the Company's business:

MegaSys has an established presence and credibility in, and provides the Company with access to, the Asian market.

Management believes that the Company will be able to leverage MegaSys's relationships in Asia for cost-effective research and development of new product offerings and cost reduction of current product offerings.

Management is able to source products directly using MegaSys's product sourcing expertise to enhance the Company's custom integration capabilities.

The Company benefits from cost reductions for infrastructure equipment
(servers, storage devices, network switches, and Super Wifi technologies) through a direct OEM relationship.

Management believes that MegaSys enhances the global distribution potential for Iveda's products and services.

MegaSys benefits from the Company's expertise in cloud-based video surveillance and access to the U.S. markets for its products.

The Company does not expect to derive significant revenues from prior MegaSys customer installations. However, the prior MegaSys customer base helps to establish credibility for the Company to market its products and services in the Taiwanese and other Asian marketplaces. There can be no assurance that the Company will generate material future revenue from MegaSys's customers at the time of the Exchange.

Results of Operations for the Year Ended December 31, 2013 Compared to the Year Ended December 31, 2012

Net Revenue. We recorded net consolidated revenue of $3,345,217 for the year ended December 31, 2013, compared to $3,608,998 for the year ended December 31, 2012, a decrease of $263,781 or 7%. In fiscal 2013, our recurring service revenue was $495,585 or 15% of consolidated net revenue, and our equipment sales and installation revenue was $2,691,915 or 80% of net revenue, compared to 605,840 or 17% of net revenue for recurring service and $2,815,150 or 78% of net revenue for equipment sales and installation revenue in 2012. Revenues in our U.S. operations were primarily derived from our recurring monthly service revenue, which represents 67% of U.S. net income. This decrease in total revenue in 2013 compared to the same period in 2012 is attributable primarily to reduced equipment sales from MegaSys.

Cost of Revenue. Total cost of revenue was $2,729,350 (82% of revenues; gross margin of 18%) for the year ended December 31, 2013, compared to $3,230,495 (89% of revenues; 11% gross margin) for the year ended December 31, 2012, a decrease of $501,145 or 16%. The decrease in cost of revenue and increase of gross margin was primarily due to the more favorable gross margins associated to the approximately 96% of MegaSys' revenue, derived from equipment sales and installation.

Operating Expenses. Operating expenses were $7,415,682 for the year ended December 31, 2013, compared to $4,223,455 for the year ended December 31, 2012, an increase of $3,192,227 or 76%. The significant increase in operating expenses was largely due to an impairment charge to goodwill during 2013 of $841,000. Without the goodwill charge in 2013 compared to 2012, operating expenses increased by $2,351,227, or 56%. This increase was attributable primarily to additional professional sales personnel and increased salaries and benefits, increased spending for sales and marketing collateral and tradeshows, increased sales consulting expenses, increased travel expenses for sales personnel including international travel, and increased costs for product and software development. Significant operating expense and effort was expended in 2013 related to potential sales opportunities that are expected to be recognized during 2014.

Loss from Operations. Loss from operations increased to $6,799,815 for the year ended December 31, 2013, compared to $3,844,952 for the year ended December 31, 2012, an increase of $2,954,863 or 77%. A majority portion of this increase was due to the one-time goodwill impairment charge of $841,000 in 2013. The remaining increase in loss of $2,113,863 was primarily due to the increased operating expenses of additional professional sales personnel and increased salaries and benefits, increased spending for sales and marketing collateral and tradeshows, increased sales consulting expenses, increased travel expenses for sales personnel including international travel, and increased costs for product and software development. The majority of the loss, $6,325,892, was from our U.S. operations and the remaining $473,923 was from our operations in Taiwan.

Other Expense-Net. Other expense-net was $71,235 for the year ended December 31, 2013, compared to $79,477 for the year ended December 31, 2012, a decrease of $8,242 or 10%. The expense-net decrease is primarily in which relates to a gain on foreign currency exchange of $10,496.

Net Loss. Net loss was $6,801,714 for the year ended December 31, 2013, compared to $3,841,927 for the year ended December 31, 2012 The increase of $2,959,787 or 77% in net loss was caused by a significant increase in operating expenses coupled with a slight decrease in overall revenues. Significant operating expenses and effort was expended in 2013 related to potential sales opportunities that are expected to be recognized during 2014.

Liquidity and Capital Resources

As of December 31, 2013, we had cash and cash equivalents of $210,515 in our domestic business and $349,214 in our foreign business, compared to $42,920 in our domestic business and $71,542 in our foreign business as of December 31, 2012. This increase in our cash and cash equivalents is primarily a result of financing activities. There are no legal or economic factors that materially impact our ability to transfer funds between our domestic and foreign businesses.

Net cash used in operating activities during the year ended December 31, 2013 was $3,570,922 and during the year ended December 31, 2012 was $3,327,703. Cash used in operating activities for the year ended December 31, 2013 consisted primarily of the net loss offset by approximately $336,402 in non- cash stock option compensation and $222,206 in non-cash compensation. . Cash used in operating activities for the year ended December 31, 2012 consisted primarily of the net loss offset by approximately $248,072 in non-cash stock option compensation and $123,940 in non-cash compensation.

Net cash used by investing activities for the year ended December 31, 2013 was $157,230. Net cash used by investing activities during the year ended December 31, 2012 was $338,825. .

Net cash provided by financing activities for the year ended December 31, 2013 was $4,179,185 and during the year ended December 31, 2012 was $2,918,602. Net cash provided in both periods consisted primarily of net proceeds from the sale of stock and proceeds from short-term borrowings, which were partially offset by principal payments on short term debt note obligations.

At December 31, 2013, we had approximately $17,000,000 in net operating loss carryforwards available for federal income tax purposes. We did not recognize any benefit from these operating loss carryforwards, which federal operating loss carryforwards will expire beginning in 2025 through 2033. State net operating loss carryforwards have begun to expire in 2013.

We have experienced significant operating losses since our inception. Our capital expenditures and working capital requirements will increase and other adjustments to our operating plan will be needed to respond to changes in competition or unexpected events.

We believe that our cash on hand at December 31, 2013 is sufficient to meet our anticipated cash needs for working capital and capital expenditures for the near term. However, the Company has limited liquidity and has not yet established a stabilized source of revenues to cover operating costs over an extended period of time. As a result, risk exists regarding the Company's ability to continue as a going concern. The Company's continuation as a going concern is dependent upon its ability to generate greater revenues through increased sales and/or its ability to raise additional funds through capital markets No assurance can be given that the Company raise sufficient funding to continue as a going concern or to operate profitably.

Two customers in 2013 represented approximately 54% of total revenue and one customer in 2012 represented approximately 69% of total revenue. The accounts receivable from this customer/s was approximately 0% of total accounts receivable as of December 31, 2013. No other customers represented greater than 10% of total revenues in 2013 and 2012.

Our U.S. operation has 8% of gross accounts receivable aged over 120 days at the year ended December 31, 2013. The terms for payment for our U.S. operations are "due upon receipt". Therefore, we have established an allowance for doubtful accounts of $31,594 to be recorded with respect to our U.S. operations.

Our Taiwan operations, through MegaSys, have 90% of gross accounts receivables aged over 180 days at December 31, 2013. The payment terms vary based on the timing of the completion of the project. In general, payment takes place within one year of commencing the project, except that 5% of the total payment is retained and released one year after the completion of the project. Excluding such retained amounts, MegaSys provides an allowance for doubtful accounts for any receivables that will not be paid within one year. Management has set up a 57%, or $465,933, allowance for doubtful accounts as of the year ended December 31, 2013. Management deems the rest to be collectible based on the nature of the customer contracts and past experience with similar customers.

Substantially all cash is deposited in two financial institutions, one in the United States and one in Taiwan. At times, amounts on deposit in the United States may be in excess of the FDIC insurance limit. Deposits in Taiwan financial institutions are insured by CDIC (Central Deposit Insurance Corporation) with maximum coverage of NTD 3 million. At times, amounts on deposit in Taiwan may be in excess of the CDIC insurance limit.

The Company leases its office facilities under a non-cancelable operating lease expiring October 2016 that requires minimum monthly payments ranging from $8,669 to $10,836. Rent expense was $106,362 and $107,885 for the years ended December 31, 2013 and 2012, respectively. The Company also has two non-cancellable data center service agreements for approximately $7,517 and $2,518 per month, expiring September 2014. The Company has a third non- cancellable data center service agreement for approximately $6,117, expiring March 2015. Data center services expense was $192,181 and $170,776 for the years ended December 31, 2013 and 2012, respectively, and is included as a component of Cost of Revenue in the Statement of Operations.

Future minimum lease payments under these leases are as follows:

2014 $ 330,451 2015 $ 144,563 2016 $ 113,835

The Company has no off-balance sheet arrangements.

Inflation

Management does not believe that the current levels of inflation in the United States have had a significant impact on the operations of the Company. Likewise, management does not believe that the current levels of inflation in Taiwan have had a significant impact on the operations of MegaSys.

Recent Accounting Standards

In March 2013, FASB has issued Accounting Standards Update (ASU) No. 2013-05, Foreign Currency Matters (Topic 830). This ASU resolve the diversity in practice about whether Subtopic 810-10, Consolidation-Overall, or Subtopic 830-30, Foreign Currency Matters-Translation of Financial Statements, applies to the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights)within a foreign entity. In addition, the amendments in this Update resolve the diversity in practice for the treatment of business combinations achieved in stages (sometimes also referred to as step acquisitions) involving a foreign entity. This ASU is the final version of Proposed Accounting Standards Update EITF11Ar-Foreign Currency Matters (Topic 830), which has been deleted. The amendments in this Update are effective prospectively for fiscal years (and interim reporting periods within those years) beginning after December 15, 2013. For nonpublic entities the amendments in this Update are effective prospectively for the first annual period beginning after December 15, 2014, and interim and annual periods thereafter. The amendments should be applied prospectively to derecognition events occurring after the effective date. Prior periods should not be adjusted. Early adoption is permitted. If an entity elects to early adopt the amendments, it should apply them as of the beginning of the entity's fiscal year of adoption.

In February 2013, FASB issued Accounting Standards Update (ASU) No. 2013-03, Financial Instruments (Topic 825). This ASU clarifies the scope and applicability of a disclosure exemption that resulted from the issuance of Accounting Standards Update No. 2011-04,Fair Value Measurement (Topic 820):
Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendment clarifies that the requirement to disclose "the level of the fair value hierarchy within which the fair value measurements are categorized in their entirety (Level 1, 2, or 3)" does not apply to nonpublic entities for items that are not measured at fair value in the statement of financial position, but for which fair value is disclosed. This ASU is the final version of Proposed Accounting Standards Update 2013-200- Financial Instruments (Topic 825) which has been deleted. The amendments are effective upon issuance.

In February 2013, FASB has issued Accounting Standards Update (ASU) No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of . . .

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