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IVDA > SEC Filings for IVDA > Form 10-Q on 14-Aug-2014All Recent SEC Filings

Show all filings for IVEDA SOLUTIONS, INC.

Form 10-Q for IVEDA SOLUTIONS, INC.


14-Aug-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion should be read in conjunction with the Company's unaudited financial statements and associated notes appearing elsewhere in this Form 10-Q.

Note Regarding Forward-Looking Information

This Quarterly Report on Form 10-Q, including the following "Management's Discussion and Analysis of Financial Condition and Results of Operations," contains forward-looking statements, which involve risks and uncertainties, including statements regarding our capital needs, business strategy, and expectations. For a discussion of certain risks related to the statements, please see Part I, "Item IA, Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2013. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "may," "should," "will," "expect," "plan," "intend," "anticipate," "believe," "estimate," "predict," "potential," "forecast," "project" or "continue," the negative of such terms or other comparable terminology.

You should not rely on forward-looking statements as predictions of future events or results. Any or all of our forward-looking statements may turn out to be wrong. They can be affected by inaccurate assumptions, risks and uncertainties, and other factors, which could cause actual events or results to be materially different from those expressed or implied in the forward-looking statements. These factors may cause our actual results to differ materially from any forward-looking statement. In addition, new factors emerge from time to time and it is not possible for us to predict all factors that may cause actual results to differ materially from those contained in any forward-looking statements. We disclaim any obligation to publicly update any forward-looking statements to reflect events or circumstances after the date of this report, except as required by applicable law.

Except as otherwise indicated by the context, references in this Quarterly Report on Form 10-Q to "we," "our," "us," "Iveda," and "the Company" refer to the business of Iveda Solutions, Inc.

Critical Accounting Policies and Estimates

Management's Discussion and Analysis of Financial Conditions and Results of Operations is based upon our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires the Company's management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. A description of our critical accounting policies and related judgments and estimates that affect the preparation of our financial statements is set forth in Item 7, "Management's Discussion and Analysis of Financial Conditions and Results of Operations," of our Annual Report on Form 10-K for the year ended December 31, 2013. Such policies are unchanged.

Overview

Iveda Solutions, Inc. began operations on January 24, 2005, under the name IntelaSight, Inc., a Washington corporation doing business as Iveda Solutions ("IntelaSight"). On October 15, 2009, IntelaSight became a wholly-owned operating subsidiary of Iveda Corporation (formerly known as Charmed Homes, Inc.), a Nevada corporation, through a merger. 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, Inc. On April 30, 2011, the Company completed its acquisition of Sole-Vision Technologies, Inc. (doing business as MegaSys), a corporation organized under the laws of the Republic of China (Taiwan) ("MegaSys"). As of April 30, 2011, MegaSys became a wholly owned subsidiary of the Company.

Iveda is an established and innovative company, delivering secure, open source and enterprise class managed video services by leveraging the power of cloud computing. The Company's robust enterprise class video hosting architecture, utilizing data centers, allows scalability, flexibility, and centralized video management, access, and storage, without the burden of buying and maintaining software and equipment. Iveda's customers simply log in online, access their cameras and begin watching live and/or recorded video data from anywhere in the world at any time using any Internet-enabled device.

Iveda developed Sentir, a revolutionary Software as a Service video management platform, which enables companies such as telecommunications, cable, internet, data centers, and other communication companies with subscribers already paying for monthly services, to offer cloud video surveillance services for additional recurring monthly revenue.

The Company began selling and installing video surveillance equipment, primarily for security purposes and secondarily for operational efficiencies and marketing, and provides video hosting in-vehicle streaming video, archiving, and real-time remote surveillance services with a proprietary reporting system, DSR™ (Daily Surveillance Report), to a variety of businesses and organizations. By consolidating computer power into a single location at the server level, the Company creates efficiencies due to economies of scale leveraging cloud computing, which offers more features and flexibility compared to traditional box systems. The Company has a SAFETY Act Designation by the Department of Homeland Security as an anti-terrorism technology provider. The Company's current principal sources of revenue are derived from our video hosting real-time surveillance and equipment sales and installation but anticipates licensing its cloud based video platform will be more significant in the future.

MegaSys, our Taiwanese subsidiary, specializes 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 video hosting, remote video storage, and real-time surveillance revenues. MegaSys does not own any proprietary technology or intellectual property other than certain trademarks in Taiwan used in its business.

New Accounting Pronouncements

In March 2014 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-07, Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements. The guidance addresses the consolidation of lessors in certain common control leasing arrangements and is based on a consensus reached by the Private Company Council (PCC).

Under current U.S. GAAP, a company is required to consolidate an entity in which it has a controlling financial interest. The assessment of controlling financial interest is performed under either: (a) a voting interest model; or (b) a variable interest entity model. In a variable interest entity model, the company has a controlling financial interest when it has: (a) the power to direct the activities that most significantly affect the economic performance of the entity; and (b) the obligation to absorb losses or the right to receive benefits of the entity that could be potentially significant to the entity.

To determine which model applies, a company preparing financial statements must first determine whether it has a variable interest in the entity being evaluated for consolidation and whether that entity is a variable interest entity.

The new guidance allows a private company to elect (when certain conditions exist) not to apply the variable interest entity guidance to a lessor under common control. Instead, the private company would make certain disclosures about the lessor and the leasing arrangement.

Under the amendments in this ASU, a private company lessee could elect an alternative not to apply variable interest entity guidance to a lessor when:

· The private company lessee and the lessor are under common control;

· The private company lessee has a leasing arrangement with the lessor;

· Substantially all of the activity between the private company lessee and the lessor is related to the leasing activities (including supporting leasing activities) between those two companies, and

· If the private company lessee explicitly guarantees or provides collateral for any obligation of the lessor related to the asset leased by the private company, then the principal amount of the obligation at inception does not exceed the value of the asset leased by the private company from the lessor.

If elected, the accounting alternative should be applied to all leasing arrangements meeting the above conditions. The alternative should be applied retrospectively to all periods presented, and is effective for annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015. Early application is permitted for all financial statements that have not yet been made available for issuance.

In April 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The amendments in the ASU change the criteria for reporting discontinued operations while enhancing disclosures in this area. It also addresses sources of confusion and inconsistent application related to financial reporting of discontinued operations guidance in U.S. GAAP.

Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect on the organization's operations and financial results. Examples include a disposal of a major geographic area, a major line of business, or a major equity method investment.

In addition, the new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations.

The new guidance also requires disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting. This disclosure will provide users with information about the ongoing trends in a reporting organization's results from continuing operations.

The amendments in this ASU enhance convergence between U.S. GAAP and International Financial Reporting Standards (IFRS). Part of the new definition of discontinued operation is based on elements of the definition of discontinued operations in IFRS 5, Non-Current Assets Held for Sale and Discontinued Operations.

The amendments in the ASU are effective in the first quarter of 2015 for public organizations with calendar year ends. For most nonpublic organizations, it is effective for annual financial statements with fiscal years beginning on or after December 15, 2014. Early adoption is permitted.

The Company's management does not currently anticipate that the future application of either new accounting standard will have a material impact on the Company's financial statements.

Results of Operations

RevenueWe recorded revenue of $351,262 for the three months ended June 30, 2014, compared to $794,166 for the three months ended June 30, 2013, a decrease of $442,904 or 56%. In the three months ended June 30, 2014, our recurring service revenue was $143,837 or 41% of revenue, and our equipment sales and installation revenue was $191,705 or 55% of revenue, compared to recurring service revenue of $157,823 or 20% of revenue, and equipment sales and installation revenue of $621,989 or 78% of revenue for the same period in 2013. Our U.S. operations saw an increase of $95,471 in revenues during the three months ended June 30, 2014, while our MegaSys subsidiary saw revenues decrease by $538,375 during the second fiscal quarter. This decrease was due to an anticipated decline in large project-driven revenue from Taiwan.

We recorded revenue of $726,126 for the six months ended June 30, 2014, compared to $1,409,388 for the six months ended June 30, 2013, a decrease of $683,262 or 48%. In the six months ended June 30, 2014, our recurring service revenue was $302,638 or 42% of revenue, and our equipment sales and installation revenue was $402,016 or 55% of revenue, compared to recurring service revenue of $326,832 or 23% of revenue, and equipment sales and installation revenue of $1,057,822 or 75% of revenue for the same period in 2013. The decrease in revenue was due to an anticipated decline in large project revenues in Taiwan during the six months ended June 30, 2014.

Cost of RevenueTotal cost of revenue was $313,867 (89% of revenues; gross margin of 11%) for the three months ended June 30, 2014, compared to $627,934 (79% of revenue; gross margin of 21%) for the three months ended June 30, 2013, a decrease of $314,067 or 50%. The decrease of cost of revenue and decrease of gross margin was primarily due to the over-all corresponding decrease in total revenues combined with lower equipment sales margins from large projects in Taiwan.

Total cost of revenue was $524,401 (72% of revenues; gross margin of 28%) for the six months ended June 30, 2014, compared to $1,192,882 (85% of revenues; gross margin of 15%) for the six months ended June 30, 2013, a decrease of $668,481 or 56%. The decrease of cost of revenue and decrease of gross margin was primarily due to the over-all corresponding decrease in total revenues combined with lower equipment sales margins from large projects in Taiwan.

Operating ExpensesOperating expenses were $1,531,084 for the three months ended June 30, 2014, compared to $1,615,072 for the three months ended June 30, 2013, a decrease of $83,988 or 5%. The decrease in operating expenses was primarily related to a reduction in sales and financial consulting expenses.

Operating expenses were $3,058,814 for the six months ended June 30, 2014, compared to $2,886,156 for the six months ended June 30, 2013, an increase of $172,658 or 6%. The increase in operating expenses in 2014 over 2013 is due primarily to increased research and development expenses.

Loss from OperationsAs a result of the decreases in revenues the loss from operations increased to $1,493,689 for the three months ended June 30, 2014, compared to $1,448,840 for the three months ended June 30, 2013, an increase in loss of $44,849 or 3%.

As a result of the overall decrease in revenues, loss from operations increased to $2,857,089, for the six months ended June 30, 2014, compared to $2,669,649 for the six months ended June 30, 2013, an increase in loss of $187,440 or 7%.

Other Expense-NetOther expense-net was $79,199 for the three months ended June 30, 2014, compared to $58,081 for the three months ended June 30, 2013, the increase of $21,118 or 36% was primarily related to interest accrued on the convertible debentures.

Other expense-net was $121,366 for the six months ended June 30, 2014, compared to $93,500 for the six months ended June 30, 2013, an increase of $27,866 or 30% primarily related to interest accrued on the convertible debentures.

Net LossThe increase of $81,846 or 5% in the net loss to $1,588,767 for the three months ended June 30, 2014, from $1,506,921 for the three months ended June 30, 2013, was primarily due to increased interest expense.

The increase of $231,185 or 8% in the net loss to $2,994,334 for the six months ended June 30, 2014, from $2,763,149 for the six months ended June 30, 2013, was primarily the effect of reduced gross profit and an increase in operating expenses and interest expense.

Liquidity and Capital Resources

On June 30, 2014, we had cash and cash equivalents of $673,600 including $422,676 in our domestic business and $250,924 in our foreign business. The increase in cash from $559,729 as of December 31, 2013 was primarily due to issuance of convertible debentures. 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 six months ended June 30, 2014, and for the six months ended June 30, 2013, was $3,231,777 and $1,909,123 respectively. Cash used in operating activities for those periods consisted primarily of the net loss from operations.

Net cash used in investing activities for the six months ended June 30, 2014, and the six months ended June 30, 2013, was $214,378 and $68,597 respectively.

We have experienced significant operating losses since our inception. At December 31, 2013, we had approximately $17 million in net operating loss carry forwards available for federal and state income tax purposes. We did not recognize any benefit from these operating loss carry forwards for the year ended 2013 or through the six months ended June 30, 2014. Our operating loss carry forwards expire starting in 2025 and continuing through 2032.

The Company has limited liquidity and has not yet established a stabilized source of revenues sufficient to cover operating costs. At our current estimated burn rate, the Company has sufficient capital to continue its operations for only a short period of time. Accordingly, the Company must raise capital to continue as a going concern. The Company recently completed the offering and sale of convertible subordinated debentures and is exploring financing alternatives for additional funding. The Board of Directors approved the Company to engage with an investment banker to act as the Company's financial and capital markets advisor to seek to raise up to $30 million in long term financing. 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 the capital markets. No assurance can be given that the Company will be successful in these efforts. Even if funding is available, the Company cannot assure investors that it will be available on terms that are favorable to the Company's existing shareholders. Additional funding may be accomplished through the issuance of equity or debt securities that could be significantly dilutive to the percentage ownership of Iveda's existing shareholders. In addition, these newly issued securities may have rights, preferences or privileges senior to those of existing shareholders. Accordingly, such a financing transaction could materially and adversely impact the price of our Common Stock.

Our U.S. operation's revenue from three customers represented approximately 56% of total revenues for the three months ended June 30, 2014, and two of those customers represent approximately 80% of total accounts receivable at June 30, 2014. No other customers represented greater than 10% of total revenues in the three months ended June 30, 2014.

As of the three months ended June 30, 2014, our U.S. operation has two new customer receivables aged over 120 days. The terms for payment for our U.S. operations are generally "due upon receipt" or, for municipalities, due within 30 days. These customers have been identified and an adequate allowance for doubtful accounts has been set up to offset the risk of uncollectibility.

Our Taiwan operation's revenue from three customers represented approximately 58% of total revenues for the three months ended June 30, 2014, and represent approximately 81% of total accounts receivable at June 30, 2014. No other customers represented greater than 10% of total revenues in the three months ended June 30, 2014.

Our Taiwan operations have 88% of gross accounts receivables aged over 120 days as of June 30, 2014. The payment terms vary based on the timing of the completion of customer projects. MegaSys generally does not control the time of payment because MegaSys's product is only one component of the larger 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 61%, or $468,030, allowance for doubtful accounts as of the quarter ended June 30, 2014. 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.

Off Balance Sheet Arrangements During the reporting period, the Company had no off-balance sheet arrangements, as such term is defined in Item 303(a)(4) of Regulation S-K.

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