Iveda Solutions, Inc.: Form 10-Q for the period ended Sep 30, 2024

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.

Note Regarding Forward-Looking Information

This Report on 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 consolidated financial statements for the year ended December 31, 2023, 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

21

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 one second. IvedaAI products are designed to maximize efficiency, save time, and cut cost. Instead of watching hours of video recording after-the-fact, users can set up alerts.

Iveda offers many IoT sensors and devices for various applications such as energy management, smart home, smart building, smart community and patient/elder care. 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 dashboard for all of Iveda’s platforms for central management of all devices. 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, the smart city concept has been a hot topic among cities 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, 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 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 and managing our relationship with the Industrial Technology Research Institute (“ITRI”) in Taiwan. 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 we acquired them in April 2011. For the years ended December 31, 2023 and 2022, 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 consolidated financial statements for the year ended December 31, 2023. 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 Months Ended September 30, 2024 Compared with the Three Months Ended September 30, 2023

Net Revenue

We recorded net consolidated revenue of $2.40 million for the three months ended September 30, 2024, compared with $0.87 million for the three months ended September 30, 2023, an increase of $1.53 million, or 175%. For the three months ended September 30, 2024, our service revenue was $0.06 million, or 3% of net revenue, and our equipment sales and installation revenue was $2.34 million, or 97% of net revenue. For the three months ended September 30, 2023, our service revenue was $0.09 million, or 10% of consolidated net revenue, and our equipment sales and installation revenue was $0.79 million, or 90% of net revenue. The increase in total revenue in 2024 compared with the same period in 2023 is attributable primarily to increased equipment sales from Iveda Taiwan as a result of delivery timing related to long-term contracts.

Cost of Revenue

Total cost of revenue was $2.0 million (83% of revenue; gross margin of 17%) for the three months ended September 30, 2024, compared with $0.73 million (84% of revenue; gross margin of 16%) for the three months ended September 30, 2023, an increase of $1.26 million, or 172%. The increase in cost of revenue was primarily driven by increased Iveda Taiwan revenue. The slight increase in overall gross margin was primarily attributed to the higher margin equipment and service revenue for new customers.

Operating Expenses

Operating expenses were $1.01 million for the three months ended September 30, 2024, compared with $1.05 million for the three months ended September 30, 2023, a decrease of ($0.04) million, or (3%). This net decrease in operating expenses in 2024 compared with 2023 is due primarily to no significant investor relations campaigns in the US based operations during this period.

Loss from Operations

Loss from operations decreased to $0.60 million for the three months ended September 30, 2024, compared with $0.91 million for the three months ended September 30, 2023, a decrease of $0.31 million, or 34%. A majority of the decrease in loss from operations was primarily due to increased revenues and related gross margins and reduction in operating expenses.

Other Income (Expense), Net

Other income (expense), net was $27,363 of net other income for the three months ended September 30, 2024, compared with $54,303 of net other expense for the three months ended September 30, 2023, a decrease of ($26,904) of other income, or (50%). The majority of the other income for 2024 and 2023 was interest income from cash in the bank.

Net Loss Attributable to Non-Controlling Interest

Net Loss Attributable to Non-Controlling Interest of the Philippines Joint Venture was $19,331 for the three months ended September 30, 2024 compared to $23,522 for the three months ended September 30, 2023. The reduction is attributed to less pre-revenue expenses in 2024 versus the initial travel and presentation expenses of 2023 to various cities in the Philippines.

Net Loss

Net loss was $0.57 million for the three months ended September 30, 2024, compared with $0.85 million for the three months ended September 30, 2023. The decrease of $0.28 million, or 33%, in net loss was primarily due to increased revenues and related gross margins and reduction in operating expenses.

Results of Operations for the Nine months Ended September 30, 2024 Compared with the Nine months Ended September 30, 2023

Net Revenue

We recorded net consolidated revenue of $4.3 million for the nine months ended September 30, 2024, compared with $5.5 million for the nine months ended September 30, 2023, a decrease of ($1.2 million), or (22%). For the nine months ended September 30, 2024, our service revenue was $0.27 million, or 6% of net revenue, and our equipment sales and installation revenue was $4.0 million, or 94% of net revenue. For the nine months ended September 30, 2023, our service revenue was $0.36 million, or 7% of consolidated net revenue, and our equipment sales and installation revenue was $5.1 million, or 93% of net revenue. The decrease in total revenue in 2024 compared with the same period in 2023 is attributable primarily to decreased equipment sales from Iveda Taiwan as a result of delivery timing related to long-term contracts.

Cost of Revenue

Total cost of revenue was $3.2 million (74% of revenue; gross margin of 26%) for the nine months ended September 30, 2024, compared with $4.6 million (83% of revenue; gross margin of 17%) for the nine months ended September 30, 2023, a decrease of ($1.4 million), or (30%). The decrease in cost of revenue was primarily driven by decreased Iveda Taiwan revenue. The increase in overall gross margin % was primarily attributed to the higher margin equipment and service revenue for smaller contracts.

Operating Expenses

Operating expenses were $3.4 million for the nine months ended September 30, 2024, compared with $3.2 million for the nine months ended September 30, 2023, an increase of $0.2 million, or 6%. This net increase in operating expenses in 2024 compared with 2023 is due primarily to a ramp up in investor relations in the US based operations related to maintaining NASDAQ compliance.

Loss from Operations

Loss from operations was $2.3 million for the nine months ended September 30, 2024, compared with $2.3 million for the nine months ended September 30, 2023. The loss from operations for the nine months was consistent because of the reduction in loss from operations in the most recent quarter results.

Other Income (Expense), Net

Other income (expense), net was $111,657 of net other income for the nine months ended September 30, 2024, compared with $76,500 of net other expense for the nine months ended September 30, 2023, an increase of $35,157 of other income, or 46%. The majority of the other income for 2024 was interest income from cash in the bank.

Net Loss Attributable to Non-Controlling Interest

Net Loss Attributable to Non-Controlling Interest of the Philippines Joint Venture was $40,330 for the nine months ended September 30, 2024 compared to $83,489 for the nine months ended September 30, 2023. The reduction is attributed less pre-revenue expenses in 2024 versus the initial travel and presentation expenses of 2023 to various cities in the Philippines.

Net Loss

Net loss was $2.16 million for the nine months ended September 30, 2024, compared with $2.14 million for the nine months ended September 30, 2023. The increase of $0.02 million, or 1%, in net loss was primarily due to increased gross margins and decreased operating costs.

Liquidity and Capital Resources

As of September 30, 2024, we had cash and cash equivalents of $3.6 million compared to $4.8 million as of December 31, 2023. This decrease in our cash and cash equivalents for the nine months ended September 30, 2024 is related to the operating losses during the nine months ended September 30, 2024 offset by a sale of common stock and pre-funded warrants during the quarter ended September 30, 2024. 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, 2024 was ($3.2) million compared to ($1.9) million net cash used during the nine months ended September 30, 2023. Net cash used in operating activities for the nine months ended September 30, 2024 consisted primarily of the net loss of ($2.2) million. Other factors for the nine months ended September 30, 2024 included ($1.0) million cash used from the increase of inventory and by the increase of ($1.9) million of accounts receivable. Net cash used by operating activities for the nine months ended September 30, 2023 consisted primarily of the $0.8 million net collection of accounts receivable offset by net loss of ($2.1) million.

Net cash used in investing activities for the nine months ended September 30, 2024 was $0.3 million consisting primarily of the development of the IvedaAI platforms. Net cash used by investing activities during the nine months ended September 30, 2023 was $0.6 million consisting primarily of the development of the IvedaAI platforms.

Net cash provided by financing activities for the nine months ended September 30, 2024 was $2.3 million compared with $0.9 million provided during the nine months ended September 30, 2023. Net cash provided by financing activities in 2024 of $2.3 million is primarily a result of the sale of common stock and pre-funded warrants, $1.8 million, and the net proceeds from bank loans in Taiwan for the nine months ended September 30, 2024. The cash provided for the nine months ended September 30, 2023 is related primarily to the exercise of 945,900 warrants at $1.40 with net proceeds of $1.4 million offset by $0.45 million payments against short and long term loans in Taiwan during the nine months ended September 30, 2023.

We have experienced significant operating losses since our inception. At December 31, 2023, we had approximately $32 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 2023 or 2022. We also had approximately $5.0 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, 2024 and year ended December 31, 2023. For our Taiwan-based segment, we set up no doubtful accounts receivable allowances for the nine months ended September 30, 2024 and year ended December 31, 2023. 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.

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). There is inadequate knowledge of technical accounting and SEC reporting process in the Company. The Company is filing financial statements with the Securities Exchange Commission (SEC) under accounting principles generally accepted in the United States of America (“US GAAP”). The Company needs enough accounting personnel to perform all accounting functions and that have appropriate experience in financial reporting under US GAAP. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer, as of December 31, 2023, concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are not 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

In December 2013, we hired Robert J. Brilon, as Chief Financial Officer who has experience in SEC reporting and disclosures. We have plans for hiring additional financial personnel and implementing additional controls and processes involving both of our financial personnel in order to ensure all transactions are accounted for and disclosed in an accurate and timely manner. There have not been any other changes in our internal control over financial reporting identified by management’s evaluation pursuant to Rules 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.