Iveda Solutions, Inc. 10-K

ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 27 Key Features ● Live Camera View ● Live Tracking ● Abnormality Detection – Vehicle/Person wrong direction detection ● Vehicle/Person Loitering Detection ● Fall Detection ● Illegal Parking Detection ● Heatmap Generation IvedaAI consists of deep-learning video analytics software running in a computer/server environment that can either be deployed at an edge level or data center for centralized cloud model. We combined hardware and artificial intelligence software for fast and efficient video search for objects stored in an external (NVR) or storage device and live streaming video data from any IP camera. IvedaAI works with any ONVIF-compliant IP cameras and most popular NVR/VMS (Video Management System) platforms, enabling accurate search across dozens to thousands of cameras in less than 1 second. IvedaAI products are designed to maximize efficiency, save time, and cut cost. 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 will license our CEREBRO 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. 28 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, 2025 and 2024, 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. New Accounting Standards See Financial Statement Footnotes for discussion. 29 Results of Operations for the Year Ended December 31, 2025 Compared with the Year Ended December 31, 2024 The table below sets forth the Net Revenue, Cost of Goods Sold, Operating Expenses, Other Income and Expenses, Tax Expense and Net Income by segment for each of the respective periods and a comparison period over period. Consolidated US Taiwan Consolidated US Taiwan Consolidated US Taiwan Year ended December 31, 2025 Year ended December 31, 2024 Comparison of Year ended December 31, 2025 and 2024 Revenues $ 5,280,312 $ 709,197 $ 4,571,115 $ 6,020,639 $ 869,261 $ 5,151,378 $ (740,327 ) (12 )% $ (160,064 ) (18 )% $ (580,263 ) (11 )% Cost of Goods Sold 4,007,440 545,438 3,462,002 4,719,005 615,010 4,103,995 (711,565 ) (15 )% (69,572 ) (11 )% (641,993 ) (16 )% Gross Profit 1,272,872 163,759 1,109,113 1,301,634 254,251 1,047,383 (28,762 ) (2 )% (90,492 ) (36 )% 61,730 6 % 24 % 23 % 24 % 22 % 29 % 20 % Operating Expenses Salaries and Payroll Expenses 1,699,049 1,026,934 672,115 1,667,330 967,793 699,537 31,719 2 % 59,141 6 % (27,422 ) (4 )% Pension 21,832 21,832 (21,832 ) (100 )% Travel and Entertainment 477,125 412,747 64,378 552,123 483,146 68,977 (74,998 ) (14 )% (70,399 ) (15 )% (4,599 ) (7 )% Stock-based compensation 376,000 376,000 122,600 122,600 253,400 207 % 253,400 207 % - Marketing 338,469 338,469 757,736 757,736 (419,267 ) (55 )% (419,267 ) (55 )% - Public Company expenses 245,448 245,448 520,966 520,966 (275,518 ) (53 )% (275,518 ) (53 )% - Audit and Accounting 334,264 334,264 312,920 312,920 21,344 7 % 21,344 7 % - Consulting Services 326,339 326,339 412,962 412,962 (86,623 ) (21 )% (86,623 ) (21 )% - Research and Development 170,800 170,800 363,350 363,350 (192,550 ) (53 )% (192,550 ) (53 )% - Software Subscription 84,750 84,750 85,111 85,111 (361 ) 0 % (361 ) 0 % - Insurance 82,973 18,604 64,396 60,873 12,664 48,209 22,100 36 % 5,940 47 % 16,187 34 % Rent 88,534 43,434 45,100 142,986 101,731 41,255 (54,452 ) (38 )% (58,297 ) (57 )% 3,845 9 % Office Supplies and Postage - 34,276 34,276 0 % Other operating expenses 275,990 111,601 164,389 316,872 215,849 101,023 (40,882 ) (13 )% (104,248 ) (48 )% 63,366 63 % Total Operating Expenses 4,499,768 3,489,390 1,010,378 5,371,937 4,356,828 1,015,109 (935,169 ) (17 )% (867,438 ) (20 )% (4,731 ) 0 % Income (Loss) from Operations (3,226,896 ) (3,325,631 ) 98,735 (4,070,303 ) (4,102,577 ) 32,274 843,407 (21 )% 776,946 (19 )% 66,461 206 % Interest Income and Other (Expenses), net 59,268 61,659 (2,391 ) 121,868 95,330 26,538 (62,600 ) (51 )% (33,671 ) (35 )% (28,929 ) (109 )% Net loss before Income Tax (3,167,628 ) (3,263,972 ) 96,344 (3,948,435 ) (4,007,247 ) 58,812 843,807 (21 )% 743,275 (19 )% 37,532 64 % Provision For Income Taxes (30,484 ) (50 ) (30,434 ) (32,385 ) (1,697 ) (30,688 ) 1,901 (6 )% 1,647 (97 )% 254 (1 )% Net Income (Loss) (3,198,112 ) (3,264,022 ) 65,910 (3,980,820 ) (4,008,944 ) 28,124 782,708 (20 )% 744,922 (19 )% 37,786 134 % The decrease in revenue for the year ended December 31, 2025, compared with the same period in 2024 is attributable primarily to decreased equipment sales from Iveda Taiwan as a result of delivery timing related to long-term government contracts and a decreased US revenues through its distributors. The overall gross margin had a slight increase attributed to the higher margin contract sales in Iveda Taiwan. The net decrease in operating expenses in the year ended December 31, 2025, compared with the same period in 2024 is due primarily to a reduction in R&D expense in the US, reduction in public company expenses and no significant investor relations campaigns in the US based operations during this period. A majority of the decrease in loss from operations was primarily due to the reduction in operating expenses. The decrease in net loss was primarily due to a reduction in operating expenses for the year ended December 31, 2025, compared to the same period in 2024. Liquidity and Capital Resources As of December 31, 2025, we had cash and cash equivalents of $3.9 million in our U.S.-based segment and $1.3 million in our Taiwan-based segment, compared to $1.6 million in our U.S.-based segment and $1.0 million in our Taiwan-based segment as of December 31, 2024. This increase in our cash and cash equivalents is primarily a result of the cash provided from the sale of securities of $5.2 million during the year ended December 31, 2025. 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 year ended December 31, 2025 was $2.0 million compared to $4.4 million net cash used during the year ended December 31, 2024. Net cash used in operating activities for the year ended December 31, 2025 consisted primarily of the $3.2 million net loss including $0.5 million of non-cash charges (primarily stock option compensation and common stock issued for investor relations services), and $0.8 million net decrease of accounts payable and accrued operating expenses. Net cash used in operating activities for the year ended December 31, 2024 consisted primarily of the $4.0 million net loss including $0.2 million of non-cash charges (primarily stock option compensation and common stock issued for investor relations services), $0.5 million deferred cost of goods sold, $0.3 million of Taiwan vendor deposits, prepaids and advances to suppliers and $0.4 million net increase of accounts payable and accrued operating expenses. Net cash used in investing activities for the year ended December 31, 2025 and 2024 was minimal. 30 Net cash provided by financing activities for the year ended December 31, 2025 was $4.6 million compared with $2.3 million provided during the year ended December 31, 2024. Net cash provided by financing activities in 2025 is primarily a result of the $4.9 million At-The-Market (ATM) offering of Common Stock. Net cash provided by financing activities in 2024 is primarily a result of the $1.7 million net direct offering of Common Stock and Pre-Funded warrants at $3.44 per share. We have experienced significant operating losses since our inception. At December 31, 2025, we had approximately $40 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 2025 or 2024. We also had approximately $9.0 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 a deposit with the order and 15 days after they are shipped. 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 years ended December 31, 2025 and 2024, respectively. For our Taiwan-based segment, we set up no doubtful accounts receivable allowances for the years ended December 31, 2025 and 2024, respectively. We deem 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. Critical Accounting Policies and Estimates We have identified the policies below as critical to our business operations and the understanding of our results of operations. The impact on our business operations and any associated risks related to these policies are discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations when such policies affect our reported or expected financial results. In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of our financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”). We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. The results form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ significantly from those estimates under different assumptions and conditions. We believe that the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require our most difficult, subjective, and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. 31 The material estimates for our company are that of the stock-based compensation recorded for options and warrants issued and the income tax valuation allowance recorded for deferred tax assets. The fair values of options and warrants are determined using the Black-Scholes option pricing model. We have no historical data on the accuracy of these estimates. The estimated sensitivity to change is related to the various variables of the Black-Scholes option pricing model stated below. The specific quantitative variables are included in the notes to the financial statements. The estimated fair value of options and warrants is recognized as expense on the straight-line basis over the options’ and warrants’ vesting periods. The fair value of each option and warrant granted is estimated on the date of grant using the Black-Scholes option pricing model with the expected life, dividend yield, expected volatility, and risk-free interest rate weighted-average assumptions used for options and warrants granted. Expected volatility for 2014 and 2013 was estimated using the Dow Jones U.S. Industry indexes 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 and warrant is based on the U.S. Treasury yield curve in effect at the grant date. The expected life of options and warrants is based on the average of three public companies offering services similar to ours. Revenue and Expense 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. We recognize revenue in accordance with ASC 60, “Revenue Recognition.” Sales are recorded net of sales returns and discounts, which are estimated at the time of shipment based upon historical data. Revenue from monitoring services are recognized when the services are provided. Expenses are recognized as incurred. Revenue for product and software sales without installation is recorded when the product and/or software has been shipped to the customer. Revenue from fixed-price equipment installation contracts is recognized as the contracts allow for invoicing at various milestones. 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 revenue when their realization is deemed earned by the contract. 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, 2025 and 2024 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 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, 2025 and 2024, was estimated using the “minimum value method” as prescribed by the original provisions of ASC 718, “Accounting for Stock-Based Compensation” and therefore, no compensation expense was recognized for these awards in accordance with ASC 718. We recognized $376,000 and $122,600 of stock-based compensation expense for the years ended December 31, 2025 and 2024, respectively. ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are a smaller reporting company as defined by Item 10(f) of Regulation S-K and are not required to provide the information otherwise required under this item.