Iveda Solutions, Inc.: Form 10-Q for the period ended Sep 30, 2022

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and associated notes appearing elsewhere in this Form 10-Q Quarterly Report and with our audited consolidated financial statements for the year ended December 31, 2021 included in this Form 10-Q Quarterly Report.

Note Regarding Forward-Looking Information

This Quarterly Report on Form 10-Q (or Form 10-Q Quarterly Report) contains forward looking statements that involve risks and uncertainties. All statements other than statements of historical fact contained in this Form 10-Q Quarterly Report, including statements regarding future events, our future financial performance, business strategy, and plans and objectives for future operations, are forward-looking statements. In many cases, you can identify forward-looking statements by terminology such as “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should,” or “will” or the negative of these terms or other comparable terminology. Although we do not make forward looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. These statements are only predictions and involve known and unknown risks, uncertainties, and other factors, including the risks outlined under “Risk Factors”, “Liquidity and Capital Resources” with respect to our ability to continue to generate cash from operations or new investment, or elsewhere in this Report on Form 10-Q Quarterly Report or discussed in our audited consolidated financial statements for the year ended December 31, 2021, which may cause our or our industry’s actual results, levels of activity, performance, or achievements to differ materially from those expressed or implied by these forward-looking statements. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time, and it is not possible for us to predict all risk factors, nor can we address the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause our actual results to differ materially from those contained in any forward-looking statements.

Overview

Iveda has been offering real-time IP video surveillance technologies to our customers since 2005. While we still offer video surveillance technologies, our core product line has evolved to include AI intelligent search technology that provide true intelligence to any video surveillance system and IoT (Internet of Things) devices and platforms. Our evolution is in response to digital transformation demands from many cities and organizations across the globe. Our IvedaAI intelligent video search technology adds critical intelligence to normally passive video surveillance systems. IvedaAI provides AI functions to any IP camera and most popular network video recorders (NVR) and video management systems (VMS). IvedaAI comes with an appliance or server, preconfigured with multiple AI functions based on the end user requirements.

AI Functions

• Object Search
• Face Search (No Database Required)
• Face Recognition (from a Database)
• License Plate Recognition (100+ Countries), includes make and model
• Intrusion Detection
• Weapon Detection
• Fire Detection
• People Counting
• Vehicle Counting
• Temperature Detection
• Public Health Analytics (Facemask Detection,
• QR and Barcode Detection

Key Features

• Live Camera View
• Live Tracking
• Abnormality Detection – Vehicle/Person wrong direction detection
• Vehicle/Person Loitering Detection
• Fall Detection
• Illegal Parking Detection
• Heatmap Generation

IvedaAI consists of deep-learning video analytics software running in a computer/server environment that can either be deployed at an edge level or data center for centralized cloud model. We combined hardware and artificial intelligence software for fast and efficient video search for objects stored in an external (NVR) or storage device and live-streaming video data from any IP camera.

IvedaAI works with any ONVIF-compliant IP cameras and most popular NVR/VMS (Video Management System) platforms, enabling accurate search across dozens to thousands of cameras in less than 1 second. IvedaAI products are designed to maximize efficiency, save time, and cut cost. Users can set up alerts instead of watching hours of video recording after the fact.

Iveda offers many IoT sensors and devices for a variety of applications such as energy management, smart home, smart building, smart community, and patient/elder care. Together, our gateway and station serve as the main hub for sensors and devices in any given area. They are equipped with high-level communication protocols such as Zigbee, WiFi, Bluetooth, and USB. They connect to the Internet via Ethernet or cellular data network. We provide IoT platforms that enable centralized device management and push digital services on a massive scale. Our smart devices include water sensor, environment sensor, entry sensor, smart plug, siren, body temperature pad, care watch and tracking devices.

We also offer smart power technology for office buildings, schools, shopping centers, hotels, hospitals, and smart city projects. Our smart power hardware is equipped with an RS485 communication interface allowing the meters to be connected to various third-party SCADA software for monitoring and control purposes. This line of product includes smart power, water meter, smart lighting controls systems, and smart payment system.

Iveda’s Cerebro manages all the components of our smart power technology including statistics on energy consumption. Cerebro is a software platform designed to integrate multiple unconnected energy, security and safety applications and devices and control them through one comprehensive user interface.

Cerebro’s roadmap includes a dashboard for all Iveda’s platforms for central device management. Cerebro is system-agnostic and will support cross-platform interoperability. The common unified user interface will allow remote control of platforms, sensors, and subsystems throughout an entire environment. This integration and unification of all subsystems enable acquisition and analysis of all information on one central command center, allowing comprehensive, effective, and overall management and protection of a city.

Iveda’s Utilus smart pole technology is a smart power management and wireless mesh communications network deployed on new or existing light pole structures. The Utilus network uses WiFi, 4G and 5G small cell capabilities, and other wireless protocols to provide distributed video surveillance with AI video search technology and remote management of local devices such as trackers, water meters, electrical meters, valves, circuit breakers and sensors.

In the last few years, smart city has been a hot topic among municipalities across the globe. With little to no human interaction, technology increases efficiency, expedites decision making, and reduces response time. Dwindling public safety budgets and resources has necessitated the transformation. More and more municipalities are using next-generation technologies to improve the safety and security of its citizens. Our response is our complete suite of IoT technologies, including AI intelligent video search technology, smart sensors, tracking devices, video surveillance systems, and smart power.

We license our platform and sell IoT hardware to service providers such as telecommunications companies, integrators and other technology resellers already providing services to an existing customer base. Partnering with service providers that have an existing loyal customer base allows us to focus on servicing just a handful of our partners and concentrating on our technology offering. Service providers leverage their end-user infrastructure to sell, bill, and provide customer service for Iveda’s product offering. This business model provides dual revenue streams – one from hardware sales and the other from monthly licensing fees.

Iveda Taiwan, our subsidiary in Taiwan, specializes in deploying new, and integrating existing, video surveillance systems for airports, commercial buildings, government customers, data centers, shopping centers, hotels, banks, and Safe City. Iveda Taiwan combines security surveillance products, software, and services to provide integrated security solutions to the end user. Through Iveda Taiwan, we have access not only to Asian markets but also to Asian manufacturers and engineering expertise. Iveda Taiwan is our research and development arm, working with a team of developers in Taiwan.

In April, 2011, we completed our acquisition of Iveda Taiwan, a company founded in 1998 by a group of sales and research and development professionals from Taiwan Panasonic Company. Iveda Taiwan, specializes in deploying new, and integrating existing, 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. Iveda Taiwan combines security surveillance products, software, and services to provide integrated security solutions to the end user. Through Iveda Taiwan, we have access not only to Asian markets but also to Asian manufacturers and engineering expertise. Iveda Taiwan is our research and development arm, working with a team of developers. Iveda Taiwan also houses the application engineering team that supports Sentir implementation for our service provider customers in Asia. The Company depends on Iveda Taiwan as the majority of the company’s revenues have come from Iveda Taiwan since the acquisition in April 2011. For the years ended December 31, 2021 and 2020, Iveda Taiwan’s operations accounted for 93% and 71% of our total revenue, respectively.

The acquisition of Iveda Taiwan provided the following benefits to our business:

• An established presence and credibility in Asia and access to the Asian market.
• Relationships in Asia for cost-effective research and development of new product offerings and securing the best pricing for end user devices.
• Sourcing of products directly using Iveda Taiwan’s product sourcing expertise to enhance our custom integration capabilities.
• Enhancements to the global distribution potential for our products and services.

In November 2012, we signed a cooperation agreement with ITRI, a research and development organization based in Taiwan. Together with ITRI, we have developed cloud-video services. Pursuant to the cooperation agreement, we licensed, through our subsidiary, Sole-Vision Technologies, Inc., the right to use U.S. Patent No. 8,719,442 (as well as its Taiwanese and Chinese counterparts) with respect to the development of cloud-video technologies.

In June and August 2014, in collaboration with our local partner in the Philippines, we shipped our ZEE cloud plug-and-play cameras for delivery to the Philippine Long Distance Telephone Company (“PLDT”) for distribution to its customers with a cloud video surveillance service offering, utilizing our Sentir platform.

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 us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue 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 our audited consolidated financial statements for the year ended December 31, 2021. Such policies are unchanged.

New Accounting Standards

There were no new standards recently issued which would have an impact on our operations or disclosures.

Results of Operations for the Three and Nine months Ended September 30, 2022 Compared with the Three and Nine months Ended September 30, 2021

Net Revenue

We recorded net consolidated revenue of $1.5 million for the three months ended September 30, 2022, compared with $0.4 million for the three months ended September 30, 2021, an increase of $1.1 million, or 257%. For the three months ended September 30, 2022, our equipment sales and installation revenue was $1.36 million, or 93% of net revenue, and our service revenue was $.10 million, or 7% of net revenue. In fiscal 2021, our equipment sales and installation revenue was $.30 million, or 73% of consolidated net revenue, and our service revenue was $.11 million, or 26% of net revenue. The increase in total revenue in 2022 compared with the same period in fiscal 2021 is attributable primarily to increased equipment and installation sales from Iveda Taiwan and Iveda US operations, $.7 million and $.4 million, respectively..

We recorded net consolidated revenue of $2.3 million for the nine months ended September 30, 2022, compared with $1.3 million for the nine months ended September 30, 2021, an increase of $1.0 million, or 80%. For the nine months ended September 30, 2022, our equipment sales and installation revenue was $2.14 million, or 91% of net revenue, and our service revenue was $.20 million, or 9% of net revenue. In fiscal 2021, our equipment sales and installation revenue was $1.08 million, or 83% of consolidated net revenue, and our service revenue was $.22 million, or 17% of net revenue. The increase in total revenue in 2022 compared with the same period in fiscal 2021 is attributable primarily to increased equipment sales and installation revenue from Iveda Taiwan and Iveda US, $.6 million and $.4 million, respectively.

Cost of Revenue

Total cost of revenue was $1.1 million (76% of revenue; gross margin of 24%) for the three months ended September 30, 2022, compared with $0.14 million (33% of revenue; 67% gross margin) for the three months ended September 30, 2021, an increase of $.98 million, or 713%. The increase in cost of revenue was primarily driven by increased revenue. The decrease in overall gross margin was also primarily attributed to the increase in equipment sales versus the higher margin service revenue of Iveda Taiwan.

Total cost of revenue was $1.7 million (71% of revenue; gross margin of 29%) for the nine months ended September 30, 2022, compared with $0.8 million (60% of revenue; 40% gross margin) for the nine months ended September 30, 2021, an increase of $0.9 million, or 113%. The increase in cost of revenue was primarily driven by increased equipment sales revenues for Iveda Taiwan and Iveda US operations. The decrease in overall gross margin was also primarily attributed to the increase in equipment sales versus the higher margin service revenue of Iveda Taiwan.

Operating Expenses

Operating expenses were $1.03 million for the three months ended September 30, 2022, compared with $0.70 million for the three months ended September 30, 2021, an increase of $0.33 million, or 48%. This net increase in operating expenses in 2022 compared with 2021 is due primarily related to a ramp up in personnel in the US based administrative, sales and technical support personnel as well as research and development expenses for IvedaAI.

Operating expenses were $3.07 million for the nine months ended September 30, 2022, compared with $2.04 million for the nine months ended September 30, 2021, an increase of $1.03 million, or 50%. This net increase in operating expenses in 2022 compared with 2021 is due primarily related to a ramp up in personnel in the US based administrative, sales and technical support personnel as well as research and development expenses for IvedaAI.

Loss from Operations

Loss from operations increased to $0.68 million for the three months ended September 30, 2022, compared with $0.42 million for the three months ended September 30, 2021, an increase of $0.26 million, or 60%. A majority of the increase in loss from operations was primarily due to increased operating expenses.

Loss from operations increased to $2.39 million for the nine months ended September 30, 2022, compared with $1.52 million for the nine months ended September 30, 2021, an increase of $0.87 million, or 57%. A majority of the increase in loss from operations was primarily due to increased operating expenses.

Other Income (Expense)-Net

Other income (expense) -net was $10,593 for the three months ended September 30, 2022, compared with ($29,280) for the three months ended September 30, 2021, a change of $39,873. The majority of the other expense for 2021 was interest expense and the majority of the other income for 2022 was interest earned.

Other income (expense) -net was $(8,242) for the nine months ended September 30, 2022, compared with ($256,535) for the nine months ended September 30, 2021, a decrease of $248,293, or 97%. The majority of the other (expense) for 2021 was interest expense accrued for convertible debentures, valuation of the convertible debenture features and the value of warrants given as incentive for the convertible debentures during 2021. The significant decrease from 2021 to 2022 is related to the conversion of the majority of the convertible debentures in 2021 and interest earned increase in 2022.

Net Loss

Net loss was $0.67 million for the three months ended September 30, 2022, compared with $0.45 million for the three months ended September 30, 2021. The increase of $0.22 million, or 47%, in net loss was caused primarily by an increase in operating expenses related to a ramp up in personnel in the US-based administrative, sales and technical support personnel as well as research and development expenses for IvedaAI.

Net loss was $2.4 million for the nine months ended September 30, 2022, compared with $1.78 million for the nine months ended September 30, 2021. The increase of $0.62 million, or 35%, in net loss was caused primarily by a increase in operating expenses related to a ramp up in personnel in the US-based administrative, sales and technical support personnel as well as research and development expenses for IvedaAI.

Liquidity and Capital Resources

As of September 30, 2022, we had cash and cash equivalents of $10.6 million compared to $1.4 million as of September 30, 2021. The increase in our cash and cash equivalents is primarily a result of our stock offerings that closed April 2022 and August 2022 with net proceeds of $11.5 million with an offset of the operating losses during the nine months ended September 30, 2022. There are no legal or economic factors that materially impact our ability to transfer funds between our U.S.-based and Taiwan-based segments.

Net cash used in operating activities during the nine months ended September 30, 2022 was $3.3 million compared to $1.2 million net cash used during the nine months ended September 30, 2021. Net cash used in operating activities for the nine months ended September 30, 2022 consisted primarily of the $2.4 million net loss including $0.26 million of non-cash charges (primarily common stock for services and stock option compensation), $0.4 million of increased inventory, a decrease by $0.8 million in accrued expenses, and an increase of $0.1 million in accounts receivable. Cash used in operating activities for the nine months ended September 30, 2021 consisted primarily of the $1.8 million net loss including $0.3 million of non-cash charges (primarily common stock for services, interest value of convertible debt features, value of warrants issued for interest and stock option compensation) offset primarily by $0.6 million in additional accounts payable and accrued expenses.

Net cash used in investing activities for the nine months ended September 30, 2022 was $5,184. Net cash used by investing activities during the nine months ended September 30, 2021 was $17,352.

Net cash provided by financing activities for the nine months ended September 30, 2022 was $12.6 million compared with $2.2 million provided during the nine months ended September 30, 2021. Net cash provided by financing activities in 2022 is primarily a result of the proceeds from equity offerings underwritten by Maxim Group in April 2022 and August 2022 for the nine months ended September 30, 2022. Net cash provided by financing activities in 2021 consisted primarily of $2.1 million unregistered common stock sold at the U.S based operations.

We have experienced significant operating losses since our inception. At September 30, 2022, we had approximately $29 million in net operating loss carryforwards available for federal income tax purposes, which will begin to expire in 2025. We did not recognize any benefit from the federal net operating loss carryforwards in 2022 or 2021. We also had approximately $2.0 million in state net operating loss carryforwards, which expire after five years.

We have limited liquidity and have not yet established a stabilized source of revenue sufficient to cover operating costs, based on our current estimated burn rate. Accordingly, our continuation as a going concern is dependent upon our ability to generate greater revenue through increased sales and/or our ability to raise additional funds through the capital markets. No assurance can be given that we will be successful in future financing and revenue-generating efforts. Even if funding is available, we cannot assure investors that it will be available on terms that are favorable to our existing stockholders. Additional funding may be achieved through the issuance of equity or debt securities that could be significantly dilutive to the percentage ownership of our existing stockholders. In addition, these newly issued securities may have rights, preferences, or privileges senior to those of our existing stockholders. Accordingly, such a financing transaction could materially and adversely impact the price of our common stock.

Substantially all of our cash is deposited in three financial institutions, two 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.

Our accounts receivable are unsecured, and we are at risk to the extent such amounts become uncollectible. Although we perform periodic evaluations of our customers’ credit and financial condition, we generally do not require collateral in exchange for our products and services provided on credit.

We provide an allowance for doubtful collections, which is based upon a review of outstanding receivables, historical collection information, and existing economic conditions. Payment terms for our U.S.-based segment require prepayment for most products before they are shipped and monthly Sentir licensing fees, which are due in advance on the first day of each month. For our U.S.-based segment, accounts receivable that are more than 120 days past due are considered delinquent. Payment terms for our Taiwan-based segment vary based on our agreements with our customers. Generally, we receive payment for our products and services within one year of commencing the project, except that we retain 5% of the total payment amount and release such amount one year after the completion of the project. For our U.S.-based segment, we had no doubtful accounts receivable allowances for the nine months ended September 30, 2022 and year ended December 31, 2021. For our Taiwan-based segment, we set up no doubtful accounts receivable allowances for the nine months ended September 30, 2022 and year ended December 31, 2021. We deem the rest of our accounts receivable to be collectible based on certain factors, including the nature of the customer contracts and past experience with similar customers. Delinquent receivables are written off based on individual credit valuation and specific circumstances of the customer, and we generally do not charge interest on past due receivables.

The COVID-19 pandemic represents a fluid situation that presents a wide range of potential impacts of varying durations for different global geographies, including locations where the Company has offices, employees, customers, vendors and other suppliers and business partners.

Like most businesses, the COVID-19 pandemic and efforts to mitigate the same began to have impacts on our business in March 2020. By that time, much of our first fiscal quarter was completed. During the remainder of 2020 and the first quarter of 2021, the Company observed decreases in demand from certain customers, including primarily municipalities and commercial customers in Taiwan as well as delays in project timelines in Taiwan. The Company estimates that the COVID-19 pandemic resulted in decreases of approximately $1.2 million revenues and $0.3 million gross profit contribution for the twelve months ended March 31, 2021 and $0.2 million revenues and $0.05 million gross profit contribution for the three months ended March 31, 2021. However, the Company is beginning to experience an increase in demand for the twelve months ended March 31, 2022, compared to the last half of 2020.

Given the fact that the Company’s products are sold through a variety of distribution channels, the Company expects its sales will experience more volatility as a result of the changing and less predictable operational needs of many customers as a result of the COVID-19 pandemic. The Company is aware that many companies, including many of its suppliers and customers, are reporting or predicting negative impacts from COVID-19 on future operating results. Although the Company observed significant declines in demand for its products from certain customers during 2020 and the first quarter of 2021, the Company believes that the impact of the COVID-19 remains too fluid and unknown, hindering the Company from determining the long-term demand for current products. The Company also cannot be certain how demand may shift over time as the impacts of the COVID-19 pandemic may go through several phases of varying severity and duration.

The Company does not expect there to be material changes to its assets on its balance sheet or its ability to timely account for those assets. The Company has also reviewed the potential impacts on future risks to the business as it relates to collections, returns and other business-related items.

To date, travel restrictions and border closures have not materially impacted its ability to obtain inventory or manufacture or deliver products or services to customers. However, if such restrictions become more severe, they could negatively impact those activities in a way that would harm the business over the long term. Travel restrictions impacting people can restrain our ability to assist its customers and distributors as well as impact its ability to develop new distribution channels, but at present the Company does not expect these restrictions on personal travel to be material to our business operations or financial results. The Company has taken steps to restrain and monitor its operating expenses and therefore it does not expect any such impacts to materially change the relationship between costs and revenues.

Like most companies, the Company has taken a range of actions with respect to how it operates to assure it complies with government restrictions and guidelines as well as best practices to protect the health and well-being of its employees and its ability to continue operating its business effectively. To date, the Company has been able to operate its business effectively using these measures and to maintain internal controls as documented and posted. The Company also has not experienced challenges in maintaining business continuity and does not expect to incur material expenditures to do so. However, the impacts of COVID-19 and efforts to mitigate the same have remained unpredictable and it remains possible that challenges may arise in the future.

The actions the Company has taken so far during the COVID-19 pandemic include, but are not limited to, requiring all employees who can work from home to work from home and increasing its IT networking capability to best assure employees can work effectively outside the office.

The Company currently believes revenue for the year ending December 31, 2021 has been impacted due to the conditions noted. Based on the Company’s current cash position and its projected cash flow from operations, the Company believes that it will have sufficient capital and or have access to sufficient capital through public and private equity and debt offerings to sustain operations for a period of one year following the date of this filing. If business interruptions resulting from the COVID-19 pandemic were to be prolonged or expanded in scope, the business, financial condition, results of operations and cash flows would be negatively impacted. The Company will continue to actively monitor this situation and will implement actions necessary to maintain business continuity.

Effects of Inflation

For the periods for which financial information is presented, we do not believe that the current levels of inflation in the United States have had a significant impact on our operations. Likewise, we do not believe that the current levels of inflation in Taiwan have had a significant impact on the operations of Iveda Taiwan.

Off Balance Sheet Arrangements

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not have any undisclosed borrowings or debt, and we have not entered into any synthetic leases. We are, therefore, not materially exposed to any financing, liquidity, market, or credit risk that could arise if we had engaged in such relationships.

We are a smaller reporting company as defined by 17 C.F.R. 229 (10)(f)(i) and are not required to provide information under this item.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer, as of September 30, 2022, concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act was recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There have not been any changes in our internal control over financial reporting identified by management’s evaluation pursuant to Rule 13a-15(d) or 15d-15(d) of the Exchange Act during the most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, misstatements, errors, and instances of fraud, if any, within our company have been or will be prevented or detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management or Board override of the control.

The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

We are a smaller reporting company as defined by 17 C.F.R. 229 (10)(f)(i) and are not required to provide information under this item.