| Summary of Significant Accounting Policies | NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES Nature of Operations We developed Sentir® video surveillance
management platform with big data storage technology for flexible and scalable distribution of hosted video surveillance services
to end users. Sentir has an enterprise-class video hosting architecture, utilizing robust data centers. Sentir is ideal for service
providers such as telecommunications companies, Internet service providers (ISPs), data centers, and cable companies
with an existing physical infrastructure that are looking to add video surveillance services to their customer offerings. Sentir
allows scalability, flexibility, and centralized video management, access, and storage. The advantage this platform offers end
users is that there is no need to buy and maintain video surveillance software and hardware. This platform enables real-time viewing
and recorded playback of video on computers and mobile devices with push notifications and alerts. Our expertise allows us to enable
large service providers to offer cloud-based plug-and-play video surveillance using our Sentir platform. Historically, we sold and installed video surveillance
equipment, primarily for security purposes and secondarily for operational efficiencies and marketing. We also provided video hosting,
in-vehicle streaming video, archiving, and real-time remote surveillance services to a variety of businesses and organizations.
Our principal sources of revenue were derived from monthly fees from video hosting and real-time surveillance services, and one-time
fees for equipment sales and installation. In 2014, we shifted our revenue model from
direct project-based sales to licensing Sentir and selling Sentir-enabled plug-and-play cloud cameras to service providers such
as telecommunications companies, ISPs, data centers, and cable companies already providing services to an existing customer base.
Partnering with service providers that have an existing loyal subscriber base allows us to focus on our customers, the service
providers, and leverage their end-user infrastructure to sell, bill, and provide customer service for the Sentir cloud video surveillance
offering. This business model provides dual revenue streams one from camera sales to the service providers and the other
from monthly Sentir licensing fees on a per-camera activation basis. MEGAsys®, 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. MEGAsys combines
security surveillance products, software, and services to provide integrated security solutions to the end user. Through MEGAsys,
we have access not only to Asian markets but also to Asian manufacturers and engineering expertise. MEGAsys 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. MEGAsys also houses the application engineering team that supports Sentir implementation for our
service provider customers in Asia. In April 2009, the Department
of Homeland Security (DHS) approve us as a Qualified Anti-Terrorism Technology provider under a formal SAFETY Act
Designation. The designation gives us, our partners, and our customers certain liability protection. We became the first company
to offer real-time Internet Protocol (IP) video hosting and remote surveillance services with a SAFETY Act Designation.
Our SAFETY Act Designation was renewed in October 2014. In January 2016, after thoroughly reviewing the analysis of the DHS Office
of SAFETY Act, the Deputy Under Secretary of Science and Technology has determined that our technology satisfies the criteria set
forth in Section 442(d)(s) of the SAFETY Act and in Section 25.8(a) of the Regulations and officially issued a Certification. A
Certificate of Conformance of Technology was issued and our video surveillance products and services were placed on Approved
Products List for Homeland Security. 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 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. We generated accumulated losses of approximately $31 million from January 2005
through December 31, 2015 and have insufficient working capital and cash flows to support operations. These factors raise substantial
doubt about our ability to continue as a going concern. The 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 with the goal of reporting operating profits. To date, we have achieved the following milestones and
plan to continue to execute on our plan:
● We developed Sentir, our cloud-based video management platform, and began executing on our strategy to license its use as a Video Surveillance as a Service (VSaaS) offering to partners such as telecommunications companies, ISPs, data centers, and cable companies in order to gain access to their existing subscriber bases. We currently partner with four telecommunications companies with subscriber bases with millions of users.
● We introduced the ZEE® line of cloud, plug-and-play cameras. 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, cloud-based home security and automation systems.
● We signed an exclusive reseller agreement with a local group in Vietnam that will sell to the Vietnam Telecom and Integrator market under the name Iveda 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 shipped in June and August 2014 for delivery to Filcomserve as reseller to the Philippine Long Distance Company (PLDT) for distribution to its customers.
● In December 2014, our Board of Directors approved our company raising up to $4.0 million through the Private Placement. As of the final closing on March 13, 2015, we raised approximately $3.1 million through the sale of Series B Preferred Stock.
● 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. Mr. Brilon has strong ties with the investment community and has extensive experience with strategic growth planning and domestic and foreign institutional investors, which will be instrumental to our market expansion, global distribution of our cloud video hosting platform and services, and raising capital to fund our growth. In February 2014, Mr. Brilon was appointed as our President. Impairment of Long-Lived Assets We have a significant amount of property and
equipment, consisting primarily of leased equipment. We review the recoverability of the carrying value of long-lived assets using
the methodology prescribed in ASC 360 Property, Plant and Equipment. We review our long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable.
Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of an asset to the undiscounted
future net operating cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment
to be recognized is measured as the amount by which the carrying value of the assets exceeds their fair value. We did not make
any impairment for the years ended December 31, 2015 and 2014. Basis of Accounting Our consolidated financial statements have
been prepared on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States
of America. Use of Estimates The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. Revenue and Expense Recognition We recognize revenue in accordance with ASC
605, Revenue Recognition. We recognize revenue when (1) persuasive evidence of an arrangement exists, (2) title transfer
has occurred, (3) the price is fixed or readily determinable, and (4) collectability is reasonably assured. Sales are recorded
net of sales returns and discounts, which are estimated at the time of shipment based upon historical data. Revenues from services are recognized when
the services are provided. Expenses are recognized as incurred. Revenues from fixed-price equipment installation
contracts are recognized on the percentage-of-completion method. The percentage completed is measured by the percentage of costs
incurred to date to estimated total costs for each contract. This method is used because management considers expended costs to
be the best available measure of progress on these contracts. Because of inherent uncertainties in estimating costs and revenues,
it is at least reasonably possible that the estimates used will change. Contract costs include all direct material,
subcontractors, labor costs, and equipment costs and those indirect costs related to contract performance. General and administrative
costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which
such losses are determined. Changes in job performance, job conditions, and estimated profitability may result in revisions to
costs and income and are recognized in the period in which the revisions are determined. Changes in estimated job profitability
resulting from job performance, job conditions, contract penalty provisions, claims, change orders, and settlements are accounted
for as changes in estimates in the current period. Profit incentives are included in revenues when their realization is reasonably
assured. Claims are included in revenues when realization is probable and the amount can be reliably estimated. Comprehensive Loss Comprehensive loss is defined to include all
changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, all items
that are required to be recognized under current accounting standards as components of comprehensive income are required to be
reported in a financial statement that is presented with the same prominence as other financial statements. Our current component
of other comprehensive income is the foreign currency translation adjustment. 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 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. 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 two customers during 2015 represented
approximately 66% of total revenues and one customers represented approximately 62% of the total U.S.-based segment accounts receivable
of $6,550 as of December 31, 2015. Taiwan-based segment revenue from three customers during 2015 represented approximately 79%
of total revenues and four customers represented approximately 94% of total Taiwan-based segment accounts receivable of $1,399,362
as of December 31, 2015. No other customers represented greater than 10% of total revenues in 2015 and 2014. Cash and Cash Equivalents For purposes of the statement of cash
flows, we consider all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Accounts Receivable We provide an allowance for doubtful
collections, which is based upon a review of outstanding receivables, historical collection information, and existing economic
conditions. For our U.S.-based segment, receivables past due more than 120 days are considered delinquent. For our Taiwan-based
segment, receivables over one year are considered delinquent. Delinquent receivables are written off based on individual credit
valuation and specific circumstances of the customer. As of December 31, 2015 and 2014, respectively, an allowance for uncollectible
accounts of $1,568 and $0 was deemed necessary for our U.S.-based segment. As of December 31, 2015 and 2014, respectively, an allowance
of $409,347 and $342,494 was established against the receivables of our Taiwan-based segment. We do not generally charge interest
on past due receivables. Trade receivables, net are comprised
of the following:
2015 2014
Trade receivables, gross $ 1,407,481 $ 701,298
Allowance for doubtful accounts (410,915 ) (342,494 )
Trade receivables, net $ 996,566 $ 358,804 Other current assets are comprised
of the following:
2015 2014
Notes receivables $ - $ 111,682
Deposits-current 221,788 163,833
Advance to suppliers 34,413 284,212
Prepaid expenses and other current assets 60,009 87,932
Other current assets $ 316,210 $ 647,659 Notes Receivable Notes receivable represents post-dated
checks collected from customers in Taiwan. We provide an allowance for doubtful accounts, which is based upon a review of outstanding
receivables, historical collection information, and existing economic conditions. For our Taiwan-based segment, notes receivables
over 90 days are considered delinquent. Delinquent receivables are written off based on individual credit valuation and specific
circumstances of the customer. As of December 31, 2015 and 2014, no allowance for doubtful accounts was deemed necessary for our
Taiwan-based segment. We do not generally charge interest on past due notes receivable. Deposits Current Our current deposits represent tender
deposits placed with local governments and major customers in Taiwan during the bidding process for new proposed projects. Other Current Assets Other current assets represent cash
paid in advance to insurance companies and vendors for service coverage extending into subsequent periods. Inventories Inventories consists of plug-and-play
cameras purchased for sale to service providers, which are licensing our Sentir platform and equipment for installation projects
and is recorded at the lower of cost (first-in, first-out) or market. We review our inventories for excess
or obsolete products or components based on an analysis of historical usage and an evaluation of estimated future demand, market
conditions, and alternative uses for possible excess or obsolete parts. The allowance for slow-moving and obsolete inventory is
$145,000 and $45, as of December 31, 2015 and 2014, respectively. Property and Equipment Property and equipment are stated at
cost. Depreciation is computed primarily using the straight-line method over estimated useful lives of three to seven years. Expenditures
for routine maintenance and repairs are charged to expense as incurred. Depreciation expense for the years ended December 31, 2015
and 2014 was $174,244 and $201,101, respectively. 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 of six months to ten years. Other intangible assets are fully amortized at December 31, 2015. Future amortization
of trademarks is as follows:
2016 $ 20,000
2017 20,000
2018 20,000
Thereafter 46,666
Total $ 106,666 Other Assets Other assets are comprised of the following:
As of December 31, 2015 2014
Deposits-long-term $ 16,790 $ 48,616
Deferred tax assets 145,591 151,357
Deferred finance costs - 164,347
Other assets $ 162,381 $ 364,320 DepositsLong-Term Long-term deposits consist of our security
deposit held by the third party landlord pursuant to our lease for our office space in Mesa, Arizona, a deposit related to the
leases of MEGAsys office space, and tender deposits placed with local governments and major customers in Taiwan as part
of the bidding process, which are anticipated to be held more than one year if the bid is accepted. Income Taxes Deferred income taxes are recognized
in the consolidated financial statements for the tax consequences in future years of differences between the tax bases of assets
and liabilities and their financial reporting amounts based on enacted tax laws and statutory tax rates. Temporary differences
arise from sales cut-off, depreciation, deferred rent expense, and net operating losses. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount that represents our best estimate of such deferred tax assets that, more
likely than not, will be realized. Income tax expense is the tax payable for the year and the change during the year in deferred
tax assets and liabilities. During 2015, we reevaluated the valuation allowance for deferred tax assets and determined that no
current benefits should be recognized for the year ended December 31, 2015 for our U.S.-based segment. However, benefits of $145,591
and $151,357 are recorded on the balance sheet for our Taiwan-based segment for December 31, 2015 and December 31, 2014, respectively.
See Note 11 for more information regarding those tax benefits. We are subject to U.S. federal income
tax as well as state income tax. Our U.S. income tax returns are subject
to review and examination by federal, state, and local authorities. Our U.S. tax returns for the years 2012 to 2014 are open to
examination by federal, local, and state authorities. Our Taiwan tax returns are subject to
review and examination by the Taiwan Ministry of Finance. Our Taiwan tax return for the years 2010 to 2014 are open to examination
by the Taiwan Ministry of Finance. Restricted Cash Restricted cash represents time deposits
on account to secure short-term bank loans in our Taiwan-based segment. Accounts and Other Payables
2015 2014
Accounts Payable $ 1,470,263 $ 1,185,446
Accrued Expenses 816,993 966,520
Deferred Revenue 316,870 14,280
Accounts and Other Payables $ 2,604,126 $ 2,166,246 Deferred Revenue Advance payments received from customers
on future installation projects are recorded as deferred revenue. Research and Development We invested $264,767 and $304,121 in
research and development in 2015 and 2014, respectively, which we used to develop our Sentir cloud video surveillance platform
and the integration of our ZEE cloud plug-and-play cameras. Research and development costs are expensed as incurred. Costs related
to internally developed software are expensed as research and development. Contracted software development costs are capitalized
and then amortized once feasibility has been achieved. Stock-Based Compensation On January 1, 2006, we adopted the fair
value recognition provisions of ASC 718, Share-Based Payment, which requires the recognition of an expense related
to the fair value of stock-based compensation awards. We elected the modified prospective transition method as permitted by ASC
718. Under this transition method, stock-based compensation expense for the years ended December 31, 2012 and 2011 includes compensation
expense for stock-based compensation granted on or after the date ASC 718 was adopted based on the grant-date fair value estimated
in accordance with the provisions of ASC 718. We recognize stock-based compensation expense on a straight-line basis over the requisite
service period of the award. The fair value of stock-based compensation awards granted prior to, but not yet vested as of December
31, 2015 and 2014, were estimated using the minimum value method as prescribed by original provisions of ASC 718,
Accounting for Stock-Based Compensation. Therefore, no compensation expense is recognized for these awards in accordance
with ASC 718. We recognized $216,700 and $373,000 of stock-based compensation expense for the years ended December 31, 2015 and
2014, respectively. Fair Value of Financial Instruments Fair value estimates discussed herein
are based upon certain market assumptions and pertinent information available to us as of December 31, 2015 and 2014. 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 they are short-term in nature and their carrying amounts approximate
their fair values or because they are receivable or payable on demand. 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 business conducted
and the customer bases located in the United States. The net revenues and net assets (liabilities) for other significant geographic
regions are as follows:
December 31, 2015
Net Revenue Net Assets (Liabilities)
United States $ 305,240 $ (1,191,417 )
Republic of China (Taiwan) $ 2,766,372 $ (8,084 ) 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. 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 Solutions, Inc., and a Taiwan-based
segment, MEGAsys. Each segment has a chief operating decision maker and management personnel who review their respective segments
performance as it relates to revenue, operating profit, and operating expenses.
Twelve Months Twelve Months Condensed
Ended Dec. 31, 2015 Ended Dec. 30, 2015 Consolidated
Iveda MEGAsys Total
Revenue $ 305,240 $ 2,766,372 $ 3,071,612
Cost of Revenue 337,472 2,052,572 2,390,044
Gross Profit (32,232 ) 713,800 681,568
Depreciation and Amortization 177,465 14,042 191,507
General and Administrative 3,262,646 564,375 3,827,021
Gain (Loss) from Operations (3,472,343 ) 135,383 (3,336,960 )
Foreign Currency Gain 8,644 5,402 14,046
Gain on Derivatives 58,857 - 58,857
Loss on Disposal of Assets, Net (131,692 ) - (131,692 )
Interest Income 18,273 2,171 20,444
Interest Expense (367,950 ) (29,187 ) (397,137 )
Gain (Loss) Before Income Taxes (3,886,211 ) 113,769 (3,772,442 )
Benefit (Provision) for Income Taxes - (12,572 ) (12,572 )
Net Income (Loss) $ (3,886,211 ) $ 101,197 $ (3,785,014 ) Revenues as shown below represent sales
to external customers for each segment. Intercompany revenues have been eliminated and are immaterial. 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.
December 31,
2015 2014
Revenue
United States $ 305,240 $ 964,116
Republic of China (Taiwan) 2,766,372 2,208,890
Elimination of intersegment revenues - (987,263 )
$ 3,071,612 $ 2,185,743
December 31,
2015 2014
Operating Earnings (Loss)
United States $ (3,472,343 ) $ (4,939,752 )
Republic of China (Taiwan) 135,383 (19,932 )
$ (3,336,960 ) $ (4,959,684 )
December 31,
2015 2014
Property and Equipment, Net
United States $ 184,806 $ 514,707
Republic of China (Taiwan) 4,288 17,805
$ 189,094 $ 532,512
December 31,
2015 2014
Additions to (Deletions from) Long-Lived Assets
United States $ (26,295 ) $ 262,873
Republic of China (Taiwan) (1,147 ) 5,777
$ (27,442 ) $ 268,650
December 31,
2015 2014
Inventory
United States $ 101,597 $ 271,797
Republic of China (Taiwan) 75,313 116,121
$ 176,910 $ 387,918
December 31,
2015 2014
Total Assets
United States $ 547,280 $ 1,149,776
Republic of China (Taiwan) 1,901,538 2,335,098
$ 2,448,818 $ 3,484,874 Reclassification Certain amounts in 2014 have been reclassified
to conform to the 2015 presentation. New Accounting Standards In March 2014, FASB issued Accounting
Standards Update (ASU) No. 2014-07, Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements Under GAAP, a company is required to
consolidate an entity in which it has a controlling financial interest. The assessment of controlling financial interest is performed
under either (a) a voting interest model or (b) a variable interest entity model. Under the variable interest entity model, the
company has a controlling financial interest when it has (a) the power to direct the activities that most significantly affect
the economic performance of the entity and (b) the obligation to absorb losses or the right to receive benefits of the entity that
could be potentially significant to the entity. To determine which model applies, a
company preparing financial statements must first determine whether it has a variable interest in the entity being evaluated for
consolidation and whether that entity is a variable interest entity. The new guidance allows a private company
to elect (when certain conditions exist) not to apply the variable interest entity guidance to a lessor under common control. Instead,
the private company would make certain disclosures about the lessor and the leasing arrangement. Under the amendments in this ASU, a
private company lessee could elect an alternative not to apply variable interest entity guidance to a lessor when:
● The private company lessee and the lessor are under common control;
● The private company lessee has a leasing arrangement with the lessor;
● Substantially all of the activity between the private company lessee and the lessor is related to the leasing activities (including supporting leasing activities) between those two companies, and
● If the private company lessee explicitly guarantees or provides collateral for any obligation of the lessor related to the asset leased by the private company, then the principal amount of the obligation at inception does not exceed the value of the asset leased by the private company from the lessor. If elected, the accounting alternative
should be applied to all leasing arrangements meeting the above conditions. The alternative should be applied retrospectively to
all periods presented, and is effective for annual periods beginning after December 15, 2014, and interim periods within annual
periods beginning after December 15, 2015. Early application is permitted for all financial statements that have not yet been made
available for issuance. In April 2014, FASB issued ASU No. 2014-08,
Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations
and Disclosures of Disposals of Components of an Entity Under the new guidance, only disposals representing
a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect
on the organizations operations and financial results. Examples include a disposal of a major geographic area, a major line
of business, or a major equity method investment. In addition, the new guidance requires expanded
disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities,
income, and expenses of discontinued operations. The new guidance also requires disclosure of
the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations
reporting. This disclosure will provide users with information about the ongoing trends in a reporting organizations results
from continuing operations. The amendments in ASU No. 2014-08 enhance convergence
between GAAP and the International Financial Reporting Standards (IFRS). Part of the new definition of discontinued operation is
based on elements of the definition of discontinued operations in IFRS 5, Non-Current Assets Held for Sale and Discontinued
Operations The amendments in ASU No. 2014-08 are effective
beginning the first quarter of 2015 for public organizations with calendar year ends. For most nonpublic organizations, it becomes
effective for financial statements with fiscal years beginning on or after December 15, 2014. Early adoption is permitted. |
