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IDS INDUSTRIES, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Statements Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are "forward-looking statements." These forward-looking statements generally are identified by the words "believes," "project," "expects," "anticipates," "estimates," "intends," "strategy," "plan," "may," "will," "would," "will be," "will continue," "will likely result," and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects on a consolidated basis include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Management's Discussion and Analysis of Financial Condition and Results of Operations Company Overview IDS Industries is restructuring as a family of companies attending niche market opportunities. CHARGE! Energy Storage Inc. Our business focuses on the design and development of solar and power management technologies. We incorporate these technologies into the manufacturing and distribution of solar-based portable and mobile power stations and devices. We also plan to offer a line of 'Stationary" Energy Storage systems that will be adapted for residential and commercial applications allowing customers to reduce their utility costs their dependency on the utility grid. Going forward, we plan to market our products under the brand name Charge! Energy Storage Inc. Our image is a renewable driven product developer creating energy storage solutions for portable, mobile and stationary applications for every American household. Our industry changing technology will be our lead in to expanding into Stationary Energy Storage for residential, commercial and light industrial based on the development of a patent-pending integrated battery management and control system. We believe this development will allow Charge! Energy Storage customers the ability to optimize electric utility savings through the use of power storage systems based on Lithium-ion based chemistries. We have continued to develop a sales and distribution network through selected manufacturers, contracted dealers, energy system integrators, and OEMs nationwide to support our planned sales growth vertically and horizontally as our new Lithium-ion chemistry based units emerge. Products Each product model features our innovative storage and charge design, with the overall product line marketed as the economical, sturdy and reliable choice for portable solar energy as part of an emergency/disaster preparedness plan or for those seeking an off-grid, odorless, noiseless and non-flammable safer source of power. Production on the lead acid based Solar Survivor has been discontinued and replaced with a private label program on the re-tool to switch from the old technology of lead acid to our newly developed lithium-ion product suite This portable product suite includes the long-lasting Lithium-ion chemistry in a 2.5kWh and a 1.25kWh both of which became available to the Market at the end of May 2014. Beyond the change to the industry leading technology of Lithium-ion battery system, our new generation of products have all been ergonomically redesigned to feature a customized metallic or Pelican case with two inline wheels and telescoping handle that provide users extra easy mobility and our 75kWh utilizes our own in-house developed, patent-pending Battery Management System (BMS) technology. 4 Table of Contents Suppliers and Manufacturers In May 2014 IDS Charge! Energy Storage, Inc. (Charge!) has entered into a contract manufacturing and marketing agreement with Ultralife Corporation (NASDAQ:ULBI) for the Charge! Energy branded line of portable and stationary power systems. Charge! Energy Storage Inc has a suite of 5 different products through this business partnership. Plans to enter into an agreement utilizing the efforts of a call center to begin to promote the Charge! Energy Storage solar generator product suite were delayed until July. The call center will be mandated to create specific portable product sales opportunities in niche portable product markets Our patent pending Battery Management System technology, known as project Eclipse, is presently focused on the 12V system for the portable product suite and presently in a beta test stage with an electronics specialist (independent contractor). This technology would first launch in our in house design and build as a price point sensitive .75kWh unit and has nearly completed its re-design. It was slated for production in June 2014 but has been postponed until the fall of 2014 so to allow focus on the sales development of the two larger units in our product suite. Expansion and Development Plan Our portable and stationary energy producing and storage products will be marketed through our developed distributor channels nationwide. Our strategy includes initially building an independent dealer base throughout the U.S. for which we already have over thirty-five dealers signed up. In April 2014 we signed a one year consulting agreements with a team of reputable sales & marketing experts who are defining market opportunity for quickly maturing eastern seaboard, most notably New Jersey and New York. This developmental market work will be in both the Portable and Stationary energy storage markets. This will be augmented with the recent partnership of a call center focused on targeted niche markets that we believe will be readily receptive to our product line, including the off-road vehicle community and hiking, RV, camping, boating and other recreational activities where a clean, quiet and portable electrical energy supply is needed in a remote or off-grid location. Other potential marketplaces include first responders and others that provide disaster relief or emergency services and the cannabis and hemp industries. Many consumers and businesses cannot utilize fossil-fuel based solutions. With our product line, they will have a choice for safe and "green" electricity from solar power generation and our energy storage products. In addition to our portable solar power business, we have launched a consulting for Program Management and performance improvement in manufacturing, services, logistics and quality systems. On February 6, 2014, our newly-formed subsidiary, Propel Management Group, Inc., entered into a Master Services Agreement (the "Agreement") with Californians for Marijuana Legalization and Control (CMLC). Under the Agreement, we will be responsible for overseeing a fundraising effort through telemarketing, e-mail and online to support passage in California of the proposed Marijuana Control, Legalization, and Revenue Act of 2014. In addition, we shall coordinate the gathering of 800,000 signatures on petitions to place the proposed Act on the November ballot in California. We are to be compensated at a rate of $2.75 per petition signature gathered before March 24, 2014 and $3.75 per signature gathered thereafter. In addition, we shall be compensated at a rate of 80% of all contributions generated up to $100,000, 60% of the second $100,000 in contributions, and 43% of contributions generated thereafter. In mid-April 2014 CMLC made a decision to postpone the pursuit of the target of 800,000 signatures by April 24, 2014 to qualify the proposed Act for the California ballot for November 2014. Instead they will focus on the higher volume and younger age turnout that is associated with the Presidential election terms like this next November 2016 elections. Furthermore, negotiations are proceeding as planned to retain Propel Management Group for the California legalization 2016 initiative which would be a contract allowing PMG to expand the service of coordinating through multiple Call Centers and raising funds through November of 2016 at the levels defined for the previous 2014 initiative. In June 2014, Propel Management Group was again retained on a subsequent contract by this same group for the education, rallying voters and raising funds for Medical Marijuana Dispensaries initiative in San Jose, CA referred to as Control & Regulation San Jose (CRSJ). 5 Table of Contents On March 31, Propel Management Group (PMG) with Aja Cannafacturing (AJA), to develop and launch one of the first licensed medical marijuana processors in the state of Nevada. Upon the successful licensing and launch of the facility it is under consideration that AJA would become a subsidiary of IDST as a term of the contract. If the signing of this agreement proceeds, PMG would discontinued inpursuing the acquisition of MiCannaLabs.com which was publicly announced on March 11, 2014. Due to legal technicalities, principals of any cannabis or hemp testing facility must not have any interest in any growing and manufacturing facility according to Nevada state law. (Update): Given the short window of time for application submission and the exorbitant cost the IDST Board decided to not pursue licensing in Clark County at this time however, we will continue to pursue such opportunities as they arise in other NV Counties. Furthermore it is still the intention of IDS Industries to advance further in to the Medicinal Indoor Growers Market through acquiring & distributing advanced technology and equipment to the industry. Results of Operations for the Three Months ended May 31, 2014 compared to the Three Months Ended May 31, 2013. Revenue During the three months ended May 31, 2014, revenue was $12,839 compared to $17,899 for the three months ended May 31, 2013. There were no sales for the parent company IDS Industries in the current quarter because we discontinued production of lead acid products. As a renewable focused-company it became apparent that lead acid technology did not align with our company mission. More compelling was that lead acid performance was inferior and not robust enough to support our requirements for portable generators. This also allowed us to focus all resources on expediting the transformation to Lithium-ion technologies. The $12,839 of revenue was generated by our new subsidiary Propel Management Group, Inc. Operating Expenses Professional fees for the three months ended May 31, 2014 were $14,804, as compared to $17,054 for the three months ended May 31, 2013, a decrease of $2,250 or 13%. Professional fees mainly consist of legal, auditor and other fees associated with the Company's quarterly filings and year end audit. The decrease in the current period is attributed to a decrease in legal fees that were incurred. Stock based compensation was $50,730 for the three months ended May 31, 2014, as compared to $0 for the three months ended May 31, 2013. This non-cash compensation expense consisted of stock issued for various consulting and marketing services. Salaries and wage expense for the three months ended May 31, 2014 increased $22,310 or 28% to $55,021, as compared to $77,331 for the prior comparable period. Marketing and advertising expense for the three months ended May 31, 2014 was $3,441, as compared to $0 for the three months ended May 31, 2013. The increase is in conjunction with marketing our new products. General and administrative expense for the three months ended May 31, 2014 decreased $44,163 to $78,934 as compared to $194,506 for the prior comparable period. Overall there was an $85,961 decrease in operating expenses for the comparable periods ended May 31. Other income and expense During the three months ended May 31, 2014 we incurred $123,289 of expense for amortization of debt discount and had a gain on the change in fair value of our derivative liability of $924,095, neither of which we had in the prior year. These new gains and losses are a result of the derivative accounting required for the issuance of convertible debt. We also had an increase in interest expense of $12,602 to $22,449 from $9,847 in the prior period and had an increase in interest income of $757. Net Loss Overall we recorded a net gain of $258,510 for the three months ended May 31, 2014, as compared to a net loss of $307,561 for the three months ended May 31, 2013, an increase of $566,071. The gain for the three months is solely attributed to the gain in derivative liability. 6 Table of Contents Results of Operations for the Nine Months ended May 31, 2014 compared to the Nine Months Ended May 31, 2013. Revenue IDS Industries was a pre-revenue status for Q1 2014 as it migrated away from the lead acid technology and developed Lithium-ion chemistry products. During this emergence and development phase Propel Management Group Inc., was launched to raise revenues via providing services with existing core competencies within its existing staff. During the nine months ended May 31, 2014, revenue was $16,213 compared to $34,729 for the nine months ended May 31, 2013. There were no sales for the parent company IDS Industries in the current period because we discontinued production of lead acid products. As a renewable focused-company it became apparent that lead acid technology did not align with our company mission. More compelling was that lead acid performance was inferior and not robust enough to support our requirements for portable generators. This also allowed us to focus all resources on expediting the transformation to Lithium-ion technologies. The $16,213 of revenue was generated by our new subsidiary Propel Management Group, Inc. Operating Expenses Professional fees for the nine months ended May 31, 2014 were $60,387, as compared to $96,103 for the nine months ended May 31, 2013, a decrease of $35,716 or 37%. Professional fees mainly consist of legal, auditor and other fees associated with the Company's quarterly filings and year end audit. The decrease in the current period is attributed to a decrease in legal fees that were incurred. Stock based compensation was $174,790 for the nine months ended May 31, 2014, as compared to $0 for the nine months ended May 31, 2013. This non-cash compensation expense consisted of stock issued for various consulting and marketing services as well as stock valued at $81,250 for shares issued to the CEO. Salaries and wage expense for the nine months ended May 31, 2014 increased $65,373 or 35% to $250,308, as compared to $184,935 for the prior comparable period. The trend is now tracking at lower than previous YTD trends with recent re-structuring in Operations, Engineering and Finance. Marketing and advertising expense for the nine months ended May 31, 2014 was $41,176, as compared to $0 for the nine months ended May 31, 2013. The increase is in conjunction with marketing our new products. General and administrative expense for the nine months ended May 31, 2014 decreased $568,250 to $123,097, as compared to $691,347 for the prior comparable period. In the prior period we had accounted for stock based compensation in G&A expense. We have since changed our policy and now account for stock based compensation in its own separate account. Overall there was a $322,627 decrease in operating expenses for the comparable period ended May 31, 2013 as a result of restructuring by the Company. Other income and expense During the nine months ended May 31, 2014 we incurred $304,035 of expense for amortization of debt discount and had a gain on the change in fair value of our derivative liability of $574,743, neither of which we had in the prior year. These new gains and losses are a result of the derivative accounting required for the issuance of convertible debt. We also had an increase in interest expense of $42,836 to $58,551 from $15,715 in the prior period and had an increase interest income of $4,317. Net Loss Overall we recorded a net loss of $1,004,563 for the nine months ended May 31, 2014, as compared to a net loss of $1,017,472 for the nine months ended May 31, 2013. As we go forward with the development of our portable solar generator business during the current fiscal year, we expect that our operating expenses will continue to increase and that we will also begin to generate increasing revenues from the sale of our products. 7 Table of Contents Liquidity and Capital Resources As of May 31, 2014, we had an accumulated deficit of $2,416,176 and a working capital deficit of $1,033,944. For the nine months ended May 31, 2014, net cash used in operating activities was $363,380 and we received $350,450 from financing activities. We have received short term loan financing to fund operations under various promissory notes. Our promissory note obligations currently issued and outstanding are as follows: We owe the principal sum of $100,000 to Steven J. Caspi under the terms of a Forbearance Agreement issued March 10, 2014 which modified the terms of the original Convertible Promissory Note and Security Agreement (the "Note") issued November 19, 2012. The Forbearance Agreement bears interest at an annual rate of five percent (5%), with all principal and interest being due on or before November 30, 2014. The Note is convertible to shares of our common stock, in whole or in part at the option of Mr. Caspi, at a conversion price of $0.005 per share. As of May 31, 2014, this note is still outstanding and has accrued interest of $9,411. On May 31, 2013, the Company's former CEO, Bruce Knoblich and the Company executed a promissory note for $289,998, $2,150 of which has been repaid. The note bears interest at 5% and was due November 30, 2013. As of November 30, 2013 the due date on the note was extended with no specific terms. Total accrued interest on the note is $17,885. On June 19, 2013, we entered into a Promissory Note (the "Note") with JMJ Financial ("JMJ"). The nominal principal sum of the Note is $300,000 with an original issue discount of ten percent (10%). Upon closing, JMJ loaned the Company the sum of $55,000 under the Note, with any additional advances up to the total principal sum to be made in the future and at the sole discretion of JMJ. All unpaid principal and interest due under the Note must be paid within one (1) year of the effective date of each advance made by JMJ under the Note. As of May 31, 2014, the total principal and interest due under this note is $85,022. We have received financing under a series of Convertible Promissory Notes (the "Notes") issued to Asher Enterprises, Inc. ("Asher"). The Notes bear interest at an annual rate of 8%, with principal and interest coming due approximately nine months from the respective dates of issue. The Notes may be converted in whole or in part, at the option of the holder, to shares of our common stock, par value $0.001, at any time following 180 days after the issuance dates of the Notes. The conversion price under the Note is 51% of the Market Price of our common stock on the conversion dates. For purposes of the Notes, "Market Price" is defined as the average of the 3 lowest closing prices for our common stock on the 30 trading days immediately preceding the conversion dates. As of May 31, 2014, the total principal and interest due under these notes is $73,000 and $1,376, respectively. On January 22, 2014, we obtained short term financing from Finiks Capital, LLC under a Promissory Note in the amount of $100,000 (the "Note"). The Note features an original issue discount of ten percent (10%) and has a face amount of $100,000. We will initially receive $20,000 from the Lender and will receive additional funds at the Lender's sole discretion. The Note accrues no interest if the principal sum due is repaid within ninety days. The Note incurs interest one time at a rate of ten percent (10%) on the principal sum due, with all principal and interest due in full on the maturity date of one hundred eighty days from the date of issue. At any time, the Note may be converted, in whole or in part at the option of the holder, at a price per share of fifty-one percent (51%) of the average of the three lowest bid side prices in the ten trading days previous to the conversion. As of May 31, 2014, the total principal and interest due under this note is $48,400. We have received financing under a series of Convertible Promissory Notes (the "Notes") issued to KBM Worldwide, Inc. ("KBM"). The Notes bear interest at an annual rate of 8%, with principal and interest coming due approximately nine months from the respective dates of issue. The Notes may be converted in whole or in part, at the option of the holder, to shares of our common stock, par value $0.001, at any time following 180 days after the issuance dates of the Notes. The conversion price under the Note is 51% of the Market Price of our common stock on the conversion dates. For purposes of the Notes, "Market Price" is defined as the average of the 3 lowest closing prices for our common stock on the 30 trading days immediately preceding the conversion dates. As of May 31, 2014, the total principal and interest due under these notes is $106,000 and $1,162, respectively. On March 5, 2014, the Company executed a Convertible Promissory Note (the "note") with Black Mountain Equities, Inc. ("Black Mountain"). The nominal principal sum of the Note is $250,000, with an original issue discount of ten percent (10%). The note matures one year from the effective date of each payment, which is made at the sole discretion of Black Mountain. The Note is convertible into common stock in whole or in part at a variable conversion price equal to the lessor of $0.025 or a 60% discount to the lowest trade price in the twenty five trading days prior to conversion. The Company received its first payment towards the loan of $25,000. As of May 31, 2014, the total principal and interest due under these notes is $27,500 and $2,750, respectively. We will require significant additional financing in order to move forward effectively with the development of our new portable solar power generator business and our battery management and charge controller products line. We intend to fund the development of our new business through debt and/or equity financing arrangements. We do not have any formal commitments or arrangements for the sales of stock or the advancement or loan of funds at this time. There can be no assurance that such additional financing will be available to us on acceptable terms, in amounts sufficient to fund our planned acquisitions and other activities, or at all. 8 Table of Contents Going Concern As discussed in the notes to our financial statements, we have minimal revenue and an accumulated deficit of $2,416,176. This has raised substantial doubt for our auditors about our ability to continue as a going concern. Without realization of additional capital, it would be unlikely for us to continue as a going concern. Our activities to date have been supported by equity and debt financing. Management continues to seek funding from its shareholders and other qualified investors to pursue its business plan. Off Balance Sheet Arrangements As of May 31, 2014, there were no off balance sheet arrangements. Critical Accounting Policies In December 2001, the SEC requested that all registrants list their most "critical accounting polices" in the Management Discussion and Analysis. The SEC indicated that a "critical accounting policy" is one which is both important to the portrayal of a company's financial condition and results, and requires management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Currently, we do not believe that any accounting policies fit this definition. Recently Issued Accounting Pronouncements We do not expect the adoption of recently issued accounting pronouncements to have a significant impact on our results of operations, financial position or cash flow. |