NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1
|
BASIS
OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
These
statements should be read in conjunction with our consolidated financial statements and notes thereto included in our Annual Report
on Form 10-K for the year ended December 31, 2015. The operating results and cash flows for the six-month period ended June 30,
2016 are not necessarily indicative of the results that will be achieved for the full fiscal year ending December 31, 2015 or
for future periods.
The
accompanying condensed consolidated financial statements have been prepared without audit and reflect all adjustments, consisting
of normal recurring adjustments, which are, in our opinion, necessary for a fair statement of the financial position and the results
of operations for the interim periods. Preparing financial statements requires us to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenue, and expenses. Estimates are used for, but not limited to, accounting for
the allowance for doubtful accounts, impairment costs, depreciation and amortization, sales returns and discounts, warranty costs,
uncertain tax positions and the recoverability of deferred tax assets, stock compensation, contingencies, and the fair value of
assets and liabilities disclosed. Actual results and outcomes may differ from our estimates and assumptions. The statements have
been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and pursuant
to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures
normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such SEC
rules and regulations.
The
balance sheet at December 31, 2015 has been derived from the audited financial statements at that date but does not include all
of the information and footnotes required by GAAP for complete financial statements.
Consolidation
Effective
April 30, 2011, we completed our acquisition of Sole Vision Technologies (dba MEGAsys), a company based in Taiwan. We consolidate
our financial statements with the financial statements of MEGAsys. All intercompany balances and transactions have been eliminated
in consolidation.
Going
Concern
The
accompanying condensed consolidated financial statements have been prepared assuming that we will continue as a going concern,
which contemplates the realization of assets and the liquidation of liabilities in the normal course of business. Our Audit Report
on the Consolidated Financial Statements for the year ended December 31, 2015 contained a going concern qualification. Since inception,
we have generated an accumulated deficit from operations of approximately $33 million at June 30, 2016 and have used approximately
$0.3 million in cash to fund operations through the six months ended June 30, 2016. As a result, a significant risk exists regarding
our ability to continue as a going concern. The condensed consolidated 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.
We
adopted a multi-step plan to enable us to continue to operate and begin to report operating profits. The highlights of that plan
are as follows:
|
●
|
We
developed Sentir, our cloud-based video management platform, and began executing on our strategy to license its use as a VSaaS
offering to partners, as of March 2014, such as telecommunications companies, ISPs, data centers, and cable companies in order
to gain access to their existing subscriber bases.
|
|
|
|
|
●
|
We
introduced the ZEE® line of cloud, plug-and-play cameras in September 2013. The camera line includes two indoor cameras,
one outdoor camera, and one pan/tilt P/T camera. We utilize contract manufacturers for our cloud cameras and other cloud-enabled
devices. The Sentir-enabled cameras simplify service providers’ VSaaS offering to end users.
|
|
|
|
|
●
|
We
developed IvedaMobile® – a cloud-hosting service that turns any smartphone or tablet into a mobile, cloud video
streaming device.
|
|
|
|
|
●
|
We
introduced IvedaHome for shipments beginning 2016, cloud-based home security and automation systems.
|
|
|
|
|
●
|
We
signed an exclusive reseller agreement in November 2015 with a local group in Vietnam that will sell to the Vietnam Telecom
and Integrator market under the name Iveda Vietnam. Our initial shipment of ZEE cameras was sent in February 2016 for delivery
to Vietnam Posts and Telecommunications (VNPT) for distribution to its customers.
|
IVEDA
SOLUTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
●
|
We
closed $500,000 strategic investment transaction with the new majority owner of Iveda Vietnam. The new majority owner is expected
to fund the working capital requirements for deposits and final payment before we ship cameras and other Sentir-enabled devices,
through our contract manufacturing relationships in Asia. This role is key in facilitating business with large telecom customers
on terms acceptable in Vietnam.
|
|
|
|
|
●
|
We
are actively collaborating with certain telecommunications companies in other countries to resell our products and services
in their respective countries. Our initial shipments of ZEE cameras were sent in June and August 2014 for delivery to Filcomserve
as reseller to the Philippine Long Distance Company (“PLDT”) for distribution to its customers.
|
|
|
|
|
●
|
We
launched a new website highlighting our licensing business model, which focuses on telecommunications companies, data centers,
ISPs, cable companies, and other similar organizations.
|
|
|
|
|
●
|
We
reduced our U.S.-based segment operating costs by eliminating its direct project-based sales channel and all costs related
to project-based sales as well as our real time monitoring services to focus our activities and resources on licensing Sentir.
|
|
|
|
|
●
|
In
November 2013, we hired Bob Brilon as our Chief Financial Officer and Executive Vice President of Business Development. In
February 2014, Mr. Brilon was appointed as our President. Mr. Brilon has strong ties with the investment community and has
extensive experience with domestic and foreign institutional investors, which may be instrumental in raising capital to fund
our growth. Mr. Brilon has also been instrumental in restructuring the business model reducing the workforce and implementing
relevant cost reductions in 2014, 2015 and 2016.
|
Concentrations
Financial
instruments, which potentially subject us to concentrations of credit risk, consist principally of cash and cash equivalents and
trade accounts receivable.
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 Federal Deposit Insurance Corporation (“FDIC”) insurance limit. Deposits
in Taiwan financial institutions are insured by Central Deposit Insurance Corporation (“CDIC”) with maximum coverage
of NTD 3 million. At times, amounts on deposit in Taiwan may be in excess of the CDIC insurance limit.
Accounts
receivable are unsecured, and we are at risk to the extent such amount becomes uncollectible. We perform periodic credit evaluations
of our customers’ financial condition and generally do not require collateral. U.S.-based segment revenue from one customers
represented approximately 78% of total revenue for the six months ended June 30, 2016, and three customers represented approximately
52% of the total U.S.-based segment accounts receivable at June 30, 2016. Taiwan-based segment revenue from two customers represented
approximately 81% of total revenue for the six months ended June 30, 2016, and four customers represented approximately 84% of
total Taiwan-based segment accounts receivable at June 30, 2016.
IVEDA
SOLUTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Intangible
Assets
Intangible
assets consist of trademarks and other intangible assets associated with the purchase price allocation of MEGAsys. Such assets
are being amortized over their estimated useful lives ranging from six months to ten years. Other intangible assets are fully
amortized at June 30, 2016. Future amortization of trademarks is as follows:
2016
|
|
$
|
10,000
|
|
2017
|
|
|
20,000
|
|
2018
|
|
|
20,000
|
|
2019
|
|
|
20,000
|
|
Thereafter
|
|
|
26,666
|
|
Total
|
|
$
|
96,666
|
|
Fair
Value of Financial Instruments
Fair
value estimates discussed herein are based upon certain market assumptions and pertinent information available to us as of June
30, 2016 and December 31, 2015. The respective carrying values of certain on-balance-sheet financial instruments approximate their
fair values. These financial instruments include cash, accounts receivable, accounts payable, accrued expenses, and amounts due
to related parties. Fair values were assumed to approximate carrying values for these financial instruments because either they
are short-term in nature and their carrying amounts approximate their fair values or they are receivable or payable on demand.
Derivative
Financial Instruments
We
do not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. We evaluate all of our financial
instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative
financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value
and is then re-valued at the reporting date, with changes in the fair value reported in the consolidated statements of operations.
For stock-based derivative financial instruments, we use the Black-Scholes option pricing model to value the derivative instruments
at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities
are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument
could be required within 12 months of the balance sheet date. Our derivative liability relates to the 2013 Warrants issued in
connection with the 2013 Debentures (subsequently converted to Series A Preferred Stock on December 9, 2014). These warrants contain
a ratchet provision, which allows the exercise price to adjust downward based on certain events.
Segment
Information
We
conduct operations in various geographic regions. The operations conducted and the customer bases located in the foreign countries
are similar to the operations conducted and the customer bases located in the United States. The net revenue and net assets (liabilities)
for other significant geographic regions are as follows
|
|
June
30, 2016
|
|
|
|
Net
Revenue
|
|
|
Net
Assets (Liabilities)
|
|
United
States
|
|
$
|
247,621
|
|
|
$
|
(1,900,840
|
)
|
Republic
of China (Taiwan) MEGAsys
|
|
$
|
503,520
|
|
|
$
|
(138,464
|
)
|
Furthermore,
due to operations in various geographic locations, we are susceptible to changes in national, regional, and local economic conditions,
demographic trends, consumer confidence in the economy, and discretionary spending priorities that may have a material adverse
effect on our future operations and results.
IVEDA
SOLUTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
We
are required to collect certain taxes and fees from customers on behalf of government agencies and remit them back to the applicable
governmental agencies on a periodic basis. The taxes and fees are legal assessments to the customer, for which we have a legal
obligation to act as a collection agent. Because we do not retain the taxes and fees, we do not include such amounts in revenue.
We record a liability when the amounts are collected and relieve the liability when payments are made to the applicable governmental
agencies.
We
operate two reportable business segments as defined in ASC 280, “Segment Reporting.” We have a U.S.-based segment,
Iveda, and a Taiwan-based segment, MEGAsys. Each segment has a chief operating decision maker and management personnel who review
their respective segment’s performance as it relates to revenue, operating profit, and operating expenses.
Statements
of operations for the three and six months ended June 30, 2016 for each of our reporting segments are provided below.
|
|
Three
Months
|
|
|
Three
Months
|
|
|
|
|
|
|
Ended
June 30, 2016
|
|
|
Ended
June 30, 2016
|
|
|
Condensed
Consolidated
|
|
|
|
Iveda
Solutions, Inc.
|
|
|
MEGAsys
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
120,053
|
|
|
$
|
218,571
|
|
|
$
|
338,624
|
|
Cost
of Revenue
|
|
|
84,612
|
|
|
|
171,640
|
|
|
|
256,252
|
|
Gross
Profit
|
|
|
35,441
|
|
|
|
46,931
|
|
|
|
82,372
|
|
Depreciation
and Amortization
|
|
|
26,531
|
|
|
|
-
|
|
|
|
26,531
|
|
General
and Administrative
|
|
|
426,681
|
|
|
|
71,235
|
|
|
|
497,916
|
|
Gain
(Loss) from Operations
|
|
|
(417,771
|
)
|
|
|
(24,304
|
)
|
|
|
(442,075
|
)
|
Foreign
Currency Gain
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Gain
on Derivatives
|
|
|
(4,272
|
)
|
|
|
-
|
|
|
|
(4,272
|
)
|
Gain
on Disposal of Asses, Net
|
|
|
7,313
|
|
|
|
-
|
|
|
|
7,313
|
|
Interest
Income
|
|
|
-
|
|
|
|
183
|
|
|
|
183
|
|
Interest
Expense
|
|
|
(19,131
|
)
|
|
|
(2,016
|
)
|
|
|
(21,147
|
)
|
Gain
(Loss) Before Income Taxes
|
|
|
(433,861
|
)
|
|
|
(26,137
|
)
|
|
|
(459,998
|
)
|
Benefit
(Provision) for Income Taxes
|
|
|
-
|
|
|
|
(16,711
|
)
|
|
|
(16,711
|
)
|
Net
Income (Loss)
|
|
$
|
(433,861
|
)
|
|
$
|
(42,848
|
)
|
|
$
|
(476,709
|
)
|
|
|
Six
Months
|
|
|
Six
Months
|
|
|
|
|
|
|
Ended
June 30, 2016
|
|
|
Ended
June 30, 2016
|
|
|
Condensed
Consolidated
|
|
|
|
Iveda
|
|
|
MEGAsys
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
247,621
|
|
|
$
|
503,520
|
|
|
$
|
751,141
|
|
Cost
of Revenue
|
|
|
191,932
|
|
|
|
394,730
|
|
|
|
586,662
|
|
Gross
Profit
|
|
|
55,689
|
|
|
|
108,790
|
|
|
|
164,479
|
|
Depreciation
and Amortization
|
|
|
52,758
|
|
|
|
-
|
|
|
|
52,758
|
|
General
and Administrative
|
|
|
952,190
|
|
|
|
168,446
|
|
|
|
1,120,636
|
|
Gain
(Loss) from Operations
|
|
|
(949,259
|
)
|
|
|
(59,656
|
)
|
|
|
(1,008,915
|
)
|
Foreign
Currency Gain
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Gain
on Derivatives
|
|
|
(1,077
|
)
|
|
|
-
|
|
|
|
(1,077
|
)
|
Loss
on Disposal of Assets, Net
|
|
|
8,965
|
|
|
|
-
|
|
|
|
8,965
|
|
Interest
Income
|
|
|
-
|
|
|
|
204
|
|
|
|
204
|
|
Interest
Expense
|
|
|
(38,675
|
)
|
|
|
(3,344
|
)
|
|
|
(42,019
|
)
|
Gain
(Loss) Before Income Taxes
|
|
|
(980,046
|
)
|
|
|
(62,796
|
)
|
|
|
(1,042,842
|
)
|
Provision
for Income Taxes
|
|
|
-
|
|
|
|
(16,711
|
)
|
|
|
(16,711
|
)
|
Net
Income (Loss)
|
|
$
|
(980,046
|
)
|
|
$
|
(79,507
|
)
|
|
$
|
(1,059,553
|
)
|
IVEDA
SOLUTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Revenue
as shown below represents sales to external customers for each segment. Intercompany revenue is immaterial and has been eliminated.
Additions
to long-lived assets as presented in the following table represent capital expenditures.
Inventories
and property and equipment for operating segments are regularly reviewed by management and are therefore provided below.
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
120,053
|
|
|
$
|
48,912
|
|
|
$
|
247,621
|
|
|
$
|
148,235
|
|
Republic
of China (Taiwan)
|
|
|
218,571
|
|
|
|
726,649
|
|
|
|
503,520
|
|
|
|
1,153,149
|
|
|
|
$
|
338,624
|
|
|
$
|
775,561
|
|
|
$
|
751,141
|
|
|
$
|
1,301,384
|
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Operating
Earnings (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
(417,771
|
)
|
|
$
|
(845,216
|
)
|
|
$
|
(949,259
|
)
|
|
$
|
(1,740,396
|
)
|
Republic
of China (Taiwan)
|
|
|
(24,304
|
)
|
|
|
18,132
|
|
|
|
(59,656
|
)
|
|
|
64,501
|
|
|
|
$
|
(442,075
|
)
|
|
$
|
(827,084
|
)
|
|
$
|
(1,008,915
|
)
|
|
$
|
(1,675,895
|
)
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
|
2016
|
|
|
2015
|
|
Property
and Equipment, Net
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
131,721
|
|
|
$
|
354,218
|
|
Republic
of China (Taiwan)
|
|
|
10,121
|
|
|
|
11,475
|
|
|
|
$
|
141,842
|
|
|
$
|
365,693
|
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
|
2016
|
|
|
2015
|
|
Additions
(Disposals) to Long-Lived Assets
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
-
|
|
|
$
|
(3,883
|
)
|
Republic
of China (Taiwan)
|
|
|
(793
|
)
|
|
|
(1,172
|
)
|
|
|
$
|
(793
|
)
|
|
$
|
(5,055
|
)
|
IVEDA
SOLUTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
|
2016
|
|
|
2015
|
|
Inventory,
Net
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
67,289
|
|
|
$
|
262,880
|
|
Republic
of China (Taiwan)
|
|
|
112,808
|
|
|
|
157,943
|
|
|
|
$
|
180,097
|
|
|
$
|
420,823
|
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
|
2016
|
|
|
2015
|
|
Total
Assets
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
814,458
|
|
|
$
|
1,659,937
|
|
Republic
of China (Taiwan)
|
|
|
1,580,327
|
|
|
|
2,542,083
|
|
|
|
$
|
2,394,785
|
|
|
$
|
4,202,020
|
|
Reclassification
Certain
amounts in 2015 may have been reclassified to conform to the 2016 presentation.
New
Accounting Standards
There
were no new standards recently issued which would have an impact on our operations or disclosures.
The
short term debt balances were as follows:
|
|
June
30, 2016
|
|
|
December
31, 2015
|
|
Loan
from Bank SinoPac at 2.95% interest rate per annum. Due at June 2016 - December 2016.
|
|
$
|
154,600
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Loan
from Hua Nan Bank at 2.88% interest rate per annum. Due at February 2016 - August 2016.
|
|
$
|
154,600
|
|
|
$
|
-
|
|
|
|
|
|
|
|
3
|
|
|
Loan
from shareholder at 9.5% interest rate per annum. Originated February 2016 with initial term to March 31, 2016, then due upon
demand, repaid in July 2016.
|
|
$
|
100,000
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Loan
from Shanghai Bank at 3.24% interest rate per annum. Due at July 2015 - March 2016.
|
|
$
|
-
|
|
|
$
|
53,025
|
|
|
|
|
|
|
|
|
|
|
Balance
at end of period
|
|
$
|
409,200
|
|
|
$
|
53,025
|
|
IVEDA
SOLUTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Preferred
Stock
We
are currently authorized to issue up to 100,000,000 shares of preferred stock, par value $0.00001 per share, 10,000,000 shares
of which are designated as Series A Preferred Stock and 500 shares of which are designated as Series B Preferred Stock. Our Articles
of Incorporation authorize the issuance of shares of preferred stock with designations, rights, and preferences determined from
time to time by our Board of Directors. Accordingly, our Board of Directors is empowered, without stockholder approval, to issue
preferred stock with dividend, liquidation, conversion, voting, or other rights which could adversely affect the voting power
or other rights of the stockholders of our common stock. In the event of issuance, the preferred stock could be utilized, under
certain circumstances, as a method of discouraging, delaying, or preventing a change in control of our company.
Series
A Preferred Stock
We
are authorized to issue up to 10,000,000 shares of Series A Preferred Stock. Each share of Series A Preferred Stock accrues cumulative
dividends at a rate of 9.5% per annum on the original issue price of $1.00 per share. Accrued but unpaid dividends are payable
by us, either in cash or in shares of our common stock, upon the occurrence of a Liquidation Event (as defined in our Articles
of Incorporation) or upon conversion of the shares into shares of our common stock. In addition, in the event of any liquidation,
dissolution, or winding up of our company, the holders of Series A Preferred Stock are entitled to receive distributions of any
of the assets of our company prior and in preference to the holders of our common stock, but after distribution of any assets
of our company to the holders of our Series B Preferred Stock in an amount equal to the Series B Preferred Stock’s original
issue price plus any accrued but unpaid dividends.
Each
share of Series A Preferred Stock is convertible at the option of the holder, at any time, into shares of our common stock equal
to the original issue price divided by an adjusted conversion price of $0.97 per share of Series A Preferred Stock, subject to
certain adjustments. On April 22, 2016, conversion price was adjusted to $0.86 as a result of Series B Tranche A warrants exercised
by certain shareholders, at an adjusted exercise price of $0.35 per share. On June 30, 2017, all shares of Series A Preferred
Stock not already converted will automatically convert into shares of our common stock at the then-applicable conversion price.
The
holders of Series A Preferred Stock have the same voting rights as, and vote as a single class with, the holders of our common
stock. Each holder of our Series A Preferred Stock is entitled to the number of votes equal to the number of shares of our common
stock into which such shares of Series A Preferred Stock may be converted. In addition, in the event we sell, grant, or issue
any Common Stock Equivalent (as defined in our Articles of Incorporation)
at a price per share that is lower than the then-applicable
conversion price for the Series A Preferred Stock, the conversion price for the Series A Preferred Stock will be adjusted to account
for the dilutive issuance. If we effectuate a stock split or subdivision of our common stock or our Board of Directors declares
a dividend payable in our common stock, the conversion price for the Series A Preferred Stock will be appropriately decreased
to protect the Series A Preferred Stock holders from any dilutive effect of the stock split, subdivision, or stock dividend. Similarly,
if the number of shares of our common stock outstanding decreases due to a reverse stock split or other combination of the outstanding
shares of our common stock, then the applicable conversion price of the Series A Preferred Stock will increase in order to proportionately
decrease the number of shares issuable upon conversion
.
Holders of our Series A Preferred Stock have no sinking fund or
redemption rights.
During
the six months ended June 30, 2016, we issued 72,204 shares of common stock for conversion of Series A preferred shares.
Series
B Preferred Stock
We
are authorized to issue up to 500 shares of Series B Preferred Stock. Each share of Series B Preferred Stock accrues dividends
at a rate of 9.5% per annum on the original issue price of $10,000 per share. Dividends on the Series B Preferred Stock accrue
daily and compound annually. All accrued but unpaid dividends on the Series B Preferred Stock must be paid, declared, or set aside
prior to the declaration of any dividend on any class of stock that is junior in preference to the Series B Preferred Stock. Dividends
on the Series B Preferred Stock are paid quarterly, beginning on July 1, 2015 in either cash or shares of our common stock. In
addition, all accrued but unpaid dividends are payable by us, either in cash or in shares of our common stock, upon the occurrence
of a Liquidation Event (as defined in our Articles of Incorporation) or upon the conversion of the shares into shares of our common
stock.
IVEDA
SOLUTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In
the event of any liquidation, dissolution, or winding up of our company, the holders of Series B Preferred Stock are entitled
to receive distributions of any of the assets of our company equal to 100% of the original issue price plus all accrued but unpaid
dividends prior and in preference to the holders of Series A Preferred Stock and holders of our common stock. We also have the
option to redeem all, but not less than all, of the Series B Preferred Stock, provided that certain conditions have been met.
Should we choose to redeem the outstanding shares of our Series B Preferred Stock, we are required to pay the original purchase
price plus all accrued but unpaid dividends. Each share of Series B Preferred Stock is convertible at the option of the holder,
at any time, into shares of our common stock equal to the original issue price divided by an initial conversion price of $0.75
per share of Series B Preferred Stock, subject to certain adjustments. On April 22, 2016, conversion price was adjusted to $0.35
as a result of Series B Tranche A warrants exercised by certain shareholders, at an adjusted exercise price of $0.35 per share.
On December 31, 2017, all shares of our Series B Preferred Stock not already converted will automatically convert into shares
of our common stock at the then-applicable conversion price.
The
holders of Series B Preferred Stock have no voting rights, except as are expressly provided in our Articles of Incorporation or
required by law. Without the approval of at least a majority of the outstanding Series B Preferred Stock, we may not authorize
or issue (i) any additional or other shares of capital stock that are of senior rank to the shares of Series B Preferred Stock
in respect of the preferences as to dividends, distributions, or payments upon the liquidation, dissolution, and winding up of
our company, (ii) any additional or other shares of capital stock that are of equal rank to the shares of Series B Preferred Stock
in respect of the preferences as to dividends, distributions, or payments upon the liquidation, dissolution, and winding up of
our company, or (iii) any capital stock junior in preference to the Series B Preferred Stock having a maturity date that is prior
to the maturity date of the Series B Preferred Stock. Furthermore, if we consummate a Fundamental Transaction (as defined in our
Articles of Incorporation) while shares of our Series B Preferred Stock are outstanding, then the holders of those outstanding
shares have the right to receive, upon conversion of the Series B Preferred Stock, the same amount and kind of securities, cash,
or property as they would have received if they would have been holders of the number of shares of common stock issuable upon
conversion in full of all shares of our Series B Preferred Stock immediately prior to the Fundamental Transaction.
In
addition, in the event we sell, grant, or issue any Common Stock Equivalent (as defined in our Articles of Incorporation) at a
price per share that is lower than the then-applicable conversion price for the Series B Preferred Stock (the “Effective
Price”), the conversion price for the Series B Preferred Stock will be adjusted to the Effective Price.
If
we effectuate a stock split or subdivision of our common stock or our Board of Directors declares a dividend payable in our common
stock, the conversion price for the Series B Preferred Stock will be appropriately decreased to protect the Series B Preferred
Stock holders from any dilutive effect of the stock split, subdivision, or stock dividend. Similarly, if the number of shares
of our common stock outstanding decreases due to a reverse stock split or other combination of the outstanding shares of our common
stock, then the applicable conversion price of the Series B Preferred Stock will increase in order to proportionately decrease
the number of shares issuable upon conversion. Holders of our Series B Preferred Stock have no sinking fund rights.
During
the six months ended June 30, 2016, we issued 362,473 shares of common stock in payment of dividends to Series B preferred stockholders.
Common
Stock
We
are authorized to issue up to 100,000,000 shares of common stock, par value $0.00001 per share. All outstanding shares of our
common stock are of the same class and have equal rights and attributes. The holders of our common stock are entitled to one vote
per share on all matters submitted to a vote of the stockholders of our company. Our common stock does not have cumulative voting
rights. Persons who hold a majority of the outstanding shares of our common stock entitled to vote on the election of directors
can elect all of the directors who are eligible for election. Holders of our common stock are entitled to share equally in dividends,
if any, as may be declared from time to time by our Board of Directors. In the event of liquidation, dissolution, or winding up
of our company, subject to the preferential liquidation rights of any series of preferred stock that we may from time to time
designate, the holders of our common stock are entitled to share ratably in all of our assets remaining after payment of all liabilities
and preferential liquidation rights. Holders of our common stock have no conversion, exchange, sinking fund, redemption, or appraisal
rights (other than such as may be determined by the Board of Directors in its sole discretion) and have no preemptive rights to
subscribe for any of our securities.
During
the six months ended June 30, 2016, we issued 362,473 shares of common stock in payment of dividends to Series B preferred stockholders.
During
the six months ended June 30, 2016, we issued 89,690 shares of common stock for exercised options to purchase common stock.
During
the six months ended June 30, 2016, we issued 1,088,570 shares of common stock for exercised warrants to purchase common stock.
IVEDA
SOLUTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
During
the six months ended June 30, 2016, we issued 72,204 shares of common stock for conversion of Series A preferred shares.
During
the six months ended June 30, 2016, we issued 11,000 shares of common stock for origination fees for a $100,000 short term loan.
During
the six months ended June 30, 2016, we issued 628,571 shares of common stock (with 800,000 warrants at $0.35 exercise price) for
$500,000 strategic investment.
During
the six months ended June 30, 2016, we issued 60,000 shares of common stock for the referral of the $500,000 strategic investment.
Notes
Receivable from Stockholder
In
September 2014, an advisor/stockholder of our company exercised warrants to purchase 200,000 and 300,000 shares of common stock,
granted at an exercise price of $1.02 and $1.00 per share, respectively, in exchange for 5% promissory notes totaling $504,000
due at the extended maturity date of June 30, 2017. Early payments have been received and $11,806 has been applied to the principal.
At September 30, 2015, a prepayment discount was negotiated amending the total outstanding to $230,000. $100,000 was received
on September 30, 2015, and $130,000 was received on October 20, 2015.
NOTE
4
|
STOCK
OPTIONS AND WARRANTS
|
Stock
Options
We
have granted non-qualified stock options to employees, contractors, and directors as equity compensation and to debenture holders
for the extension of debenture maturity dates. All non-qualified options are generally issued with an exercise price no less than
the fair market value of the common stock on the date of the grant as determined by our Board of Directors. Options may be exercised
up to ten years following the date of the grant, with vesting schedules determined by us upon grant. Vesting schedules vary by
grant, with some fully vesting immediately upon grant and others vesting ratably over a period of time up to four years. Standard
vested options may be exercised up to three months following the date of termination of the relationship with the employee, contractor,
or director unless alternate terms are specified at grant. The fair values of options are determined using the Black-Scholes option-pricing
model. The estimated fair value of options is recognized as expense on the straight-line basis over the options’ vesting
periods.
Stock
option transactions during the six months ended June 30, 2016 were as follows:
|
|
Six
months ended June 30, 2016
|
|
|
|
Shares
|
|
|
Weighted-Average
Exercise Price
|
|
|
|
|
|
|
|
|
Outstanding
at Beginning of Year
|
|
|
6,037,754
|
|
|
$
|
0.96
|
|
Granted
|
|
|
30,000
|
|
|
|
0.65
|
|
Exercised
|
|
|
(89,690
|
)
|
|
|
0.10
|
|
Forfeited
or Canceled
|
|
|
(158,500
|
)
|
|
|
0.94
|
|
Outstanding
at End of Period
|
|
|
5,819,564
|
|
|
|
0.97
|
|
|
|
|
|
|
|
|
|
|
Options
Exercisable at End of Period
|
|
|
5,767,439
|
|
|
$
|
0.98
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
Fair Value of Options Granted During the Period
|
|
$
|
0.14
|
|
|
|
|
|
IVEDA
SOLUTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Information
with respect to stock options outstanding and exercisable as of June 30, 2016 is as follows:
|
|
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
Range
of
Exercise
Prices
|
|
|
Number
Outstanding at
June 30, 2016
|
|
|
Weighted-
Average
Remaining
Contractual
Life
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Number
Exercisable at
June 30, 2016
|
|
|
Weighted-
Average
Exercise
Price
|
|
$
|
0.10
- $1.75
|
|
|
|
5,819,564
|
|
|
|
6.5
|
|
|
$
|
0.97
|
|
|
|
5,767,439
|
|
|
$
|
0.98
|
|
The
fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for options granted:
|
|
2016
|
|
Expected
Life
|
|
|
6.25
yrs
|
|
Dividend
Yield
|
|
|
0
|
%
|
Expected
Volatility
|
|
|
18.07
|
%
|
Risk-Free
Interest Rate
|
|
|
2.18
|
%
|
Expected
volatility for 2016 and 2015 was estimated by using the Dow Jones U.S. Industry Indices sector classification methodology for
industries similar to that in which we operate. The risk-free rate for periods within the contractual life of the option is based
on the U.S. Treasury yield curve in effect at the grant date. The expected life of the options is based on the actual expiration
date of the grant.
Warrants
We
have periodically issued warrants to purchase shares of common stock as equity compensation to officers, directors, employees,
and consultants. We have also issued warrants as incentive in connection with the purchase of debt and equity securities.
As
of June 30, 2016, warrants to purchase 7,453,016 shares of common stock were outstanding, all of which were issued either as equity
compensation or in connection with financing transactions. Vesting schedules vary by grant, with some fully vesting immediately
upon grant and others vesting ratably over a period of time up to four years. The warrants expire during a range from two to ten
years following the date of the grant. The fair value of warrants is determined using the Black-Scholes option-pricing model.
The estimated fair value of warrants is recognized as expense on the straight-line basis over the warrants’ vesting periods.
Warrant
transactions during the six months ended June 30, 2016 were as follows:
Outstanding
at December 31, 2015
|
|
|
7,417,302
|
|
Granted
|
|
|
1,484,999
|
|
Exercised
|
|
|
(624,286
|
)
|
Forfeited
or Canceled
|
|
|
(824,999
|
)
|
Warrants
Redeemable at June 30, 2016
|
|
|
7,453,016
|
|
IVEDA
SOLUTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
5
|
RELATED
PARTY TRANSACTIONS
|
|
|
June
30, 2016
|
|
|
|
|
|
During
June 2015 MEGAsys entered into an unsecured loan agreement with two of its directors, Mr. Cheung and Mr. Shiau for $18,180
and $36,360, respectively. During July 2015 MEGAsys entered into additional unsecured loans from Mr. Cheung for $315,120.
All of the loans are at maximum of 8.8% interest per annum and matured December 30, 2015. We paid the $284,820 principal balance
and accrued interest on January 31, 2016.
|
|
|
-
|
|
|
|
|
|
|
On
December 30, 2014, we entered into a debenture agreement with Mr. Farnsworth, a member of our Board of Directors, for $10,000,
at 9.5% interest per annum with interest and principal payable on January 31, 2015. We paid the principal and accrued interest
on the Farnsworth Debenture in full on January 26, 2015.
|
|
|
-
|
|
|
|
|
|
|
On
December 9, 2014, we entered into a debenture agreement with Mr. Gillen, a member of our Board of Directors, for $100,000,
at 9.5% interest per annum with interest and principal payable on January 5, 2015. Mr. Gillen also received a warrant to purchase
25,000 shares of our common stock at an exercise price of $1.00 per share. As consideration for agreeing to extend the maturity
date of the debenture, we granted Mr. Gillen options to purchase 10,000 shares of our common stock at an exercise price of
$0.77 per share. We paid the principal and accrued interest on the Gillen Debenture in full on February 4, 2015.
|
|
|
-
|
|
|
|
|
|
|
On
October 14, 2014, we entered into a debenture agreement with Mr. Joe Farnsworth, a member of our Board of Directors, for $35,000,
at 9.5% interest per annum with interest and principal payable on February 5, 2015. We paid the principal and accrued interest
on the Farnsworth Debenture in full on February 4, 2015.
|
|
|
-
|
|
|
|
|
|
|
On
September 10, 2014, we entered into a debenture agreement with Mr. Alex Kuo, a member of the Board of Directors, for $30,000,
through his wife, Li-Min Hsu, at 9.5% interest per annum with interest and principal payable on the extended maturity date
of December 31, 2015. As consideration for the extension of the debenture, we granted Mrs. Hsu options to purchase 3,000 shares
of our common stock with an exercise price of $0.77 per share.
|
|
|
30,000
|
|
|
|
|
|
|
On
September 8, 2014, we entered into a debenture agreement with Mr. Kuo’s wife, Li-Min Hsu, for $100,000, at 9.5% interest
per annum with interest and principal payable on the extended maturity date of December 31, 2015. As consideration for the
extension of the debenture, we granted Mrs. Hsu options to pruchase 10,000 shares of our common stock with an exercise price
of $0.77 per share.
|
|
|
100,000
|
|
|
|
|
|
|
On
August 28, 2014, we entered into a debenture agreement with Mr. Gregory Omi, a member of our Board of Directors of the company
for $200,000, at 9.5% interest per annum with interest and principal payable on the extended maturity date of Decemer 31,
2016. As consideration for the extension of the debenture, we granted Mr. Omi options to purchase 20,000 shares of our common
stock with an exercised price of $0.77 per share. This debenture was extended to December 31, 2016 and as consideration for
agreeing to exend the maturity date of the debenture, we granted Mr. Omi options to purchase 20,000 shares of common stock
at an exercised price of $0.65 per share.
|
|
|
200,000
|
|
|
|
|
|
|
On
November 19, 2012, we entered into a convertible debenture agreement with Mr. Robert Gillen, a member of our Board of Directors,
for $100,000 (the “Gillen I Debenture”), under his company Squirrel-Away, LLC. Under the original terms of the
agreement, interest is payable at 10% per annum and became due on December 19, 2014. Gillen I Debenture was extended to January
5, 2015. On June 20, 2013, interest of $5,000 was paid on the debenture. As consideration for agreeing to extend the maturity
date of the debenture to December 31, 2015, we granted Mr. Gillen options to purchase 10,000 shares of common stock at an
exercised price of $0.77 per share This debenture was extended to December 31, 2016 and as consideration for agreeing to exend
the maturity date of the debenture, we granted Mr. Gillen options to purchase 10,000 shares of common stock at an exercised
price of $0.65 per share.
|
|
|
100,000
|
|
|
|
|
|
|
On
April 1, 2016, we entered into a debenture agreement with Mr. Joe Farnsworth, a member of our Board of Directors, for $10,000,
at 9.5% interest per annum with interest and principal payable on July 1, 2016.
|
|
$
|
10,000
|
|
|
|
|
|
|
Total
Due to Related Parties
|
|
$
|
440,000
|
|
Less
Current Portion
|
|
|
(440,000
|
)
|
Less:
Debt Discount
|
|
|
-
|
|
Total
Long-Term
|
|
$
|
-
|
|
IVEDA
SOLUTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS