10-Q 1 mainbody.htm MAINBODY

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
   
  For the quarterly period ended November 30, 2014
   
[  ] Transition Report pursuant to 13 or 15(d) of the Securities Exchange Act of 1934
   
  For the transition period from __________ to__________
   
  Commission File Number: 333-91191

 

XZERES Corp.

(Exact name of registrant as specified in its charter)

 

Nevada 74-2329327
(State or other jurisdiction of incorporation r organization) (IRS Employer Identification No.)

 

9025 SW Hillman Court, Suite 3126 Wilsonville, OR 97070
(Address of principal executive offices)

 

503-388-7350
(Registrant’s telephone number)

_______________________________________________________________

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days [X] Yes [ ] No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [X] Yes [ ] No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

 

[ ] Large accelerated filer   [ ] Accelerated filer
[] Non-accelerated Filer [X] Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date 61,857,197 as of January 14, 2015.

 


 

TABLE OF CONTENTS

 

 
    Page

 

PART I – FINANCIAL INFORMATION

Item 1: Financial Statements 3
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations 4
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Item 4: Controls and Procedures

 

PART II – OTHER INFORMATION

 

Item 1: Legal Proceedings
Item 5: Other Information
Item 6: Exhibits
2

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements 

 

Our financial statements included in this Form 10-Q are as follows:

 

F-1 Balance Sheet as of November 30, 2014, and February 28, 2014 (unaudited);
F-2 Statements of Operations for the three and nine months ended November 30, 2014 and 2013 (unaudited);
F-3 Statements of Cash Flows for the nine months ended November 30, 2014 and 2013 (unaudited);
F-4 Notes to Financial Statements;

 

These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the SEC instructions to Form 10-Q. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the interim period ended November 30, 2014 are not necessarily indicative of the results that can be expected for the full year. 

3

 XZERES CORP.

CONSOLIDATED BALANCE SHEETS (unaudited)

AS OF NOVEMBER 30, 2014 AND FEBRUARY 28, 2014

 

  November 30, 2014  February 28, 2014
ASSETS          
Current Assets          
Cash and cash equivalents  $1,558,850   $43,495 
Accounts and notes receivable, net – current portion   1,698,154    1,880,398 
Inventories   3,036,311    2,809,035 
Inventory deposits   937,147    760,769 
Deferred financing costs – current portion   89,183    4,778 
Prepaid expenses   149,792    426,179 
Total Current Assets   7,469,437    5,924,654 
Property and Equipment, net   251,154    222,457 
Other Assets          
    Accounts and notes receivable – net of current portion   82,070    107,405 
    Intellectual property   1,802,210    1,802,210 
    Deferred financing costs – net of current portion   178,365    0 
    Deposits   45,554    18,198 
Total Other Assets   2,108,199    1, 927,813 
TOTAL ASSETS  $9,828,790   $8,074,924 
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)          
Current Liabilities          
Accounts payable  $1,101,150   $1,698,001 
Accrued expenses   522,825    821,708 
Customer deposits   179,579    81,569 
Warranty reserve   524,812    189,577 
VAT & sales tax payable   (1,929)   105,984 
Notes payable – related parties – current portion, net of debt discount of $13,987   —      925,192 
Notes payable – current portion, 2014 net of debt discount of $0 and $547,774, respectively   1,785,720    9,557,390 
Total Current Liabilities   4,112,157    13,379,421 
Long-term  Liabilities          
     Notes payable – related parties   874,179    —   
     Notes payable   13,214,280    —   
Total  Long-term Liabilities   14,088,459    —   
TOTAL LIABILITIES   18,200,617    13,379,421 
Stockholder’s Equity (Deficit)          
Preferred stock, par $0.001, 5,000,000 shares authorized, 1,428,571 Series A shares issued and outstanding   —      1,429 
Common stock, par $0.001, 100,000,000 shares authorized, 61,857,197 and 43,126,913 shares issued and outstanding, respectively   61,859    43,129 
Stock warrants   5,952,847    6,280,172 
Additional paid in capital   24,576,793    19,706,899 
Accumulated other comprehensive income (loss)   (2,573)   (1,393)
Accumulated deficit   (38,960,753)   (31,334,733)
Total Stockholders’ Equity (Deficit)   (8,371,828)   (5,304,497)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)  $9,828,790   $8,074,924 

 

See accompanying notes to consolidated financial statements.

F-1

XZERES CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

FOR THE THREE AND NINE MONTHS ENDED NOVEMBER 30, 2014 AND 2013

 

  Three Months Ended  Nine Months Ended
  Nov 30, 2014 (Unaudited)  Nov 30, 2013 (Unaudited)  Nov 30, 2014 (Unaudited)  Nov 30, 2013 (Unaudited)
GROSS REVENUES  $1,234,769   $1,561,208   $2,391,502   $2,704,998 
COST OF GOODS SOLD   710,156    1,228,399    2,174,018    2,137,390 
GROSS PROFIT   524,613    332,809    217,484    567,608 
OPERATING EXPENSES                    
    General and administrative expenses   1,104,809    1,701,963    3,743,773    4,522,877 
    Marketing   74,456    93,579    361,084    256,532 
    Sales expense   469,072    235,071    1,293,287    629,619 
    Engineering/R&D expense   256,075    338,985    748,160    968,476 
TOTAL OPERATING EXPENSES   1,904,412    2,369,598    6,146,304    6,377,504 
LOSS FROM OPERATIONS   (1,379,799)   (2,036,789)   (5,928,820)   (5,809,896)
OTHER INCOME (EXPENSE)                    
     Interest expense   (142,728)   (321,060)   (978,218)   (674,255)
     Other income (expense)   (11,024)   1,354    (718,614)   561,228 
TOTAL OTHER INCOME (EXPENSE)   (153,752)   (319,706)   (1,696,832)   (113,027)
LOSS BEFORE PROVISION FOR INCOME TAXES AND OTHER COMPREHENSIVE INCOME (LOSS)   (1,533,551)   (2,356,495)   (7,625,654)   (5,922,923)
PROVISION FOR INCOME TAXES   —      —      —      —   
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS   (1,533,551)   (2,356,495)   (7,625,654)   (5,922,923)
OTHER COMPREHENSIVE INCOME (LOSS)                    
Foreign currency adjustment gain (loss)   (364)   (4,150)   (1,544)   (4,191)
COMPREHENSIVE INCOME (LOSS)  $(1,533,915)  $(2,360,645)  $(7,627,198)  $(5,927,114)
NET LOSS PER SHARE:                    
   BASIC AND DILUTED  $(0.03)  $(0.07)  $(0.14)  $(0.19)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:                    
BASIC AND DILUTED   61,857,197    31,753,075    53,054,186    31,454,980 

 

See accompanying notes to consolidated financial statements.

F-2

XZERES CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE NINE MONTHS ENDED NOVEMBER 30, 2014 AND 2013

 

  Nine Months Ended
November 30, 2014
  Nine Months Ended
November 30, 2013
Cash Flows from Operating Activities:          
Net operating loss for the period  $(7,625,654)  $(5,922,923)
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:          
Amortization of debt discount   764,172    —   
Depreciation and amortization expense   74,539    120,505 
Bad debt expense   (30,989)   (25,165)
Share-based compensation   111,485    (132,962)
Issuance of common shares and warrants for services   —      1,068,604 
Changes in Assets and Liabilities          
Accounts and notes receivable   238,569    (955,408)
Prepaid expenses   8,839    (507,796)
Inventory and inventory deposits   (403,653)   (2,842,981)
Accounts payable   (596,852)   (1,014,725)
Accrued expenses   (294,105)   675,917 
Customer deposits   98,010    15,064 
VAT & sales tax payable   (107,913)   —   
Warranty reserve   335,235    13,631 
Net Cash Used in Operating Activities   (7,428,317)   (9,508,239)
Cash Flows from Investing Activities:          
Payments received on notes receivable   —      18,748 
Acquisitions of property and equipment   (103,235)   3,952 
Rent deposit   (27,356)   —   
Net Cash Provided by (Used in) Investing Activities   (130,591)   22,700 
Cash Flows from Financing Activities:          
Proceeds from Notes and Loans Payable   15,000,000    7,260,210 
Repayment of Notes and Loans Payable   (9,664,414)   —   
Proceeds from private placement   3,591,241    —   
Proceeds from warrants exercise   1,278,580    2,233,000 
Retirement of preferred stock   (1,129,600)   —   
Net Cash Provided by Financing Activities   9,075,807    9,493,210 
Foreign Currency Effect on Cash   (1,543)   (4,191)
Net Increase in Cash and Cash Equivalents   1,515,355    3,480 
Cash and Cash Equivalents – Beginning   43,495    —   
Cash and Cash Equivalents – Ending  $1,558,850   $3,480 
Supplemental Cash Flow Information:          
Cash paid for interest  $141,004   $75,906 
Cash paid for income taxes  $—     $—   

 

See accompanying notes to consolidated financial statements.

F-3

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2014

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Business 

XZERES Corp. (“XZERES” and the “Company”) is located in Wilsonville, Oregon and was originally incorporated in the state of New Mexico in January of 1984.  The Company was engaged in the natural gas and asphalt businesses until 2007, at which time it liquidated its assets and operations and distributed the net proceeds to its shareholders after paying its debts.  On October 2, 2008, the Company re-domiciled from New Mexico to Nevada in anticipation of pursuing the wind turbine business. The Company commenced operations in the wind turbine business in the fiscal quarter ended May 31, 2010.

 

The Company formed two subsidiaries during the year ended February 28, 2011. XZERES Energy Services Corp. was incorporated in Nevada in January, 2011 and XZERES Wind Europe Limited was formed in Ireland in October, 2010. The Company formed two additional subsidiaries during the year ended February 28, 2014. XZERES Capital Corp. was incorporated in Nevada in January, 2014 and XZERES Wind Japan Limited was formed in Japan in October, 2013.

 

The Company is in the business of designing, developing, and marketing small wind turbine systems and related equipment for electrical power generation, specifically for use in residential, small business, rural electric utility systems, other rural locations, and other infrastructure applications.  The Company employs proprietary technology, including power electronics, alternator design, and blade design to increase performance, reliability, and sound suppression.  The Company also works with manufacturers of inverters, lightning protection equipment and towers to integrate their equipment into the Company’s products.

 

Principles of Consolidation

The financial statements reflect the consolidated results of XZERES Corp. and its wholly-owned subsidiaries XZERES Energy Services Corp. (a Nevada corporation), XZERES Wind Europe Limited (formed in Ireland), XZERES Capital Corp. (a Nevada corporation), and XZERES Wind Japan Limited (formed in Japan). All material inter-company transactions have been eliminated in the consolidation.

 

Basis of Presentation

The accompanying interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission (“SEC”), and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s Form 10-K filed with the SEC as of and for the period ended February 28, 2014. In the opinion of management, all adjustments necessary in order for the financial statements to be not misleading have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results expected for the full year.

 

Accounting Basis

The Company uses the accrual basis of accounting and accounting principles generally accepted in the United States of America (“GAAP” accounting).  The Company has adopted a February 28 fiscal year end.

 

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

F-4

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2014

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Fair Value of Financial Instruments

The Company’s financial instruments consist of cash and cash equivalents, accounts and notes receivable, inventories, inventory deposits, deferred financing costs, prepaid expenses, notes payable, accounts payable, accrued expenses, customer deposits, taxes payable and warranty reserve. The carrying amount of these financial instruments approximates fair value due either to length of maturity or interest rates that approximate prevailing market rates unless otherwise disclosed in these financial statements.

 

Recent Accounting Pronouncements

The Company does not expect the adoption of recently issued accounting pronouncements to have a significant impact on the Company’s results of operation, financial position or cash flows.

 

Revenue Recognition

The Company recognizes revenue when products are shipped from the factory and collection is reasonably assured.

 

XZERES sells wind turbines and power efficiency products to dealers and end users directly. Dealers are required to sign an agreement with XZERES that requires the dealer to sell one unit the first year and three units per year, thereafter. Dealers receive dealer pricing, a discount to the suggested retail price of the product. Products sold directly to end users are sold at the retail price. To date, the Company has not offered any other price concessions to its dealers, and has no post shipment obligations other than the warranty it provides.

 

Cash and Cash Equivalents

XZERES considers all highly liquid investments with maturities of three months or less to be cash equivalents. The Company had cash of $1,558,850 and $43,495 at November 30, 2014 and February 28, 2014, respectively.

 

Advertising Costs

The Company’s policy regarding advertising is to expense advertising when incurred. XZERES incurred advertising expense of $9,159 and $27,932 during the quarters ended November 30, 2014 and 2013, respectively. Advertising expense totaled $18,710 and $56,294 for nine months ended November 30, 2014 and 2013, respectively.

 

Stock-Based Compensation

The Company accounts for employee stock-based compensation in accordance with the guidance of FASB ASC Topic 718, Compensation – Stock Compensation which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values.

 

The Company follows ASC Topic 505-50, formerly EITF 96-18, “Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods and Services,” for stock options and warrants issued to consultants and other non-employees.  In accordance with ASC Topic 505-50, these stock options and warrants issued as compensation for services provided to the Company are accounted for based upon the fair value of the services provided or the estimated fair market value of the option or warrant, whichever can be more clearly determined.  The fair value of the equity instrument is charged directly to compensation expense or prepaid expense and additional paid-in capital over the period during which services are rendered.

F-5

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2014

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Dividends

The Company has not adopted any policy regarding payment of dividends. No dividends have been paid during any of the periods shown.

 

On October 19, 2012 the Company sold 1,428,571 shares of the Series A Convertible Preferred stock at a price per share of $1.05 for total proceeds of $1,500,000. The sale of the Series A Convertible Preferred stock included the issuance of 2,142,857 warrants. Based upon the Black Scholes pricing model the warrants have a fair value of $0.2106 per warrant. The portion of the proceeds allocated to warrants is $345,000. The Preferred shares are convertible into three shares of common stock. A deemed dividend of $259,285 was recorded which represents the intrinsic value of the conversion feature on the issuance date. On August 21, 2014, the Company retired all the outstanding preferred and corresponding warrants under a settlement agreement with the Preferred shareholder.

 

Property and Equipment

Property and equipment are stated at cost.  Depreciation is computed on the straight line method over the estimated useful lives of the assets, which range from three to seven years.

 

Research and Development

We incur research and development costs (“R&D”) to develop and improve our products. Our products reach technological feasibility shortly before the products are released and therefore R&D costs are expensed as incurred. Employee related costs associated with product development are included in R&D costs.

 

Intangible Assets

In accordance with ASC 350, Goodwill and Other Intangible Assets, the Company tests its intangible assets for impairment on an annual basis and between annual tests if events occur or circumstances change that would more likely than not reduce the fair value below its carrying amount.

 

The Company applies the provisions of ASC Topic 350, requiring that intangible assets that have indefinite lives are not amortized but are subject to an annual impairment test or more frequent test if indicators of impairment exist.

 

Income Taxes

Income taxes are accounted for under the assets and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. It is the Company’s policy to classify interest and penalties on income taxes as interest expense or penalties expense. As of November 30, 2014, there have been no interest or penalties incurred on income taxes.

F-6

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2014

 

Basic Income (Loss) Per Share

Basic income (loss) per share is calculated by dividing the Company’s net loss applicable to common shareholders by the weighted average number of common shares during the period. Diluted earnings per share is calculated by dividing the Company’s net income available to common shareholders by the diluted weighted average number of shares outstanding during the year. The diluted weighted average number of shares outstanding is the basic weighted number of shares adjusted for any potentially dilutive debt or equity. Common share equivalents, which include warrants and options, totaled 32,321,480 at November 30, 2014. Outstanding warrants and options were not included in the computation of diluted earnings per share for the quarter ended November 30, 2014, as their effect would have been anti-dilutive.

 

Reclassifications

Certain accounts and financial statement captions in the prior periods have been reclassified to conform to the current period financial statements.

 

NOTE 2 - ACCOUNTS AND NOTES RECEIVABLE

 

Accounts receivable is generated from sales of wind turbine systems and power efficiency products. At November 30, 2014, accounts receivable were substantially comprised of balances due from end customers and dealers.

 

Notes receivable are generated from sales of wind turbine systems. At November 30, 2014, notes receivable were comprised of balances due from eight end customers. The term of the notes receivable vary from five to seven years at an annual interest rate ranging from 4.5% to 7%. Payments are received on a monthly basis.

 

An allowance for doubtful accounts is provided against accounts and notes receivable for amounts management believes may be uncollectible. The Company determines the adequacy of this allowance by regularly reviewing the composition of its receivable aging and evaluating individual customer receivables, considering the customer’s financial condition, credit history and current economic circumstance. As of November 30, 2014 and February 28, 2014 an allowance for doubtful accounts of $222,921 and $228,881, respectively, has been provided.

 

  November 30, 2014  February 28, 2014
Accounts and notes receivable  $2,003,145   $2,216,684 
Less: Allowance for doubtful accounts   (222,921)   (228,881)
Accounts and notes receivable, net   1,780,224    1,987,803 
  Less: Current portion   1,698,154    1,880,398 
Long-term portion  $82,070   $107,405 

 

NOTE 3 – PREPAID EXPENSES

 

Prepaid expenses consisted of the following:

  November 30, 2014  February 28, 2014
Software licenses  $36,285   $11,399 
Consulting   113,507    414,780 
Total prepaid expenses  $149,792   $426,179 

 

F-7

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2014

 

NOTE 4 – DEFERRED FINANCING COSTS

 

We defer certain costs associated with financing activities related to the issuance of equity securities (deferred offering costs) and debt securities (deferred financing costs). These costs consist primarily of legal, banking and other professional fees related to the transactions. Upon successful completion of the offering of equity securities, deferred offering costs are recorded as a reduction of the net proceeds in paid in capital. If the offering is not successful, such costs will be expensed. Deferred financing costs are amortized over the life of the related debt.

 

Deferred financing costs consisted of the following:

 

  November 30, 2014  February 28, 2014
Deferred financing costs  $366,548   $99,000 
Less: accumulated amortization   (99,000)   (94,222)
Deferred financing costs, net  $267,548   $4,778 
  Less: Current portion   89,183    4,778 
Long-term portion  $178,365   $—   

NOTE 5 – INVENTORIES

 

Inventories consist of parts and supplies used in the development, manufacture and installation of wind turbines as well as finished goods. Inventories are stated at the lower of cost, computed using the average cost, or market. Inventory deposits are payments made to vendors as advances against inventory expected to be delivered when completed. Inventory deposits totaled $937,147 and $760,769 at November 30, 2014 and February 28, 2014, respectively.

 

Inventories consisted of the following:  November 30, 2014  February 28, 2014
Finished goods  $1,062,384   $776,327 
Parts & Supplies   1,973,927    2,032,708 
Total Inventories  $3,036,311   $2,809,035 

 

NOTE 6 – PROPERTY AND EQUIPMENT

 

Property and equipment are being depreciated over their estimated useful lives using the straight-line method of depreciation for book purposes.

 

  November 30, 2014  February 28, 2014
Furniture  $51,684   $51,684 
Computer equipment   176,674    174,263 
Shop machinery and equipment   296,026    199,721 
Testing Site & Equipment   31,389    31,389 
Molds & Tooling   51,893    77,515 
Vehicles   10,998    10,998 
Subtotal   618,664    545,570 
Less: accumulated depreciation   (367,510)   (323,114)
Property and equipment, net  $251,154   $222,456 

 

Depreciation expense totaled $27,100 and $26,879 for three months ended November 30, 2014 and 2013 respectively. For the nine months ended November 30, 2014 and 2013, depreciation expense totaled $74,539 and $81,248, respectively.

F-8

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2014

 

NOTE 7 – INTELLECTUAL PROPERTY

 

Intellectual property consists of product designs with an infinite life, including the designs for the recently acquired power efficiency products.

 

The Company annually, or more frequently if events or changes indicate that the asset might be impaired, evaluates the fair value of the intellectual property to determine whether events and circumstances warrant a revision to the fair value of these assets. 

 

NOTE 8 – ACCRUED EXPENSES

 

Accrued expenses consisted of the following:

 

  November 30, 2014  February 28, 2014
Wages  $98,968   $44,156 
Payroll taxes   283,087    414,768 
Benefits   6,658    6,658 
Interest   134,112    356,126 
Total accrued expenses  $522,825   $821,708 

 

 

NOTE 9 – CUSTOMER DEPOSITS

 

A customer deposit of 50% of the selling price is sometimes made at the time a wind turbine is ordered. Deposits are reclassified to revenue once the unit is completed and delivered. Customer deposits were $179,579 at November 30, 2014 and $81,569 at February 28, 2014. 

F-9

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2014

 

NOTE 10 – WARRANTY RESERVE

 

The Company accrues for estimated future warranty costs by establishing a reserve of 2% of fiscal year wind turbine sales and tower sales. The reserve is reduced over the five year warranty period as follows:

 

Year 1   0.1%
Year 2   0.3%
Year 3   0.4%
Year 4   0.5%
Year 5   0.7%
Total Warranty Reserve as  a % of Sales   2.0%

 

During the quarter ended August 31, 2014, we elected to take an additional one-time reserve related to a quality issue. We are currently estimating the associated expense at $300,000. Warranty reserve balances were as follows at November 30, 2014 and February 28, 2014:

 

  November 30, 2014  February 28, 2014
FY 2011  $9,464   $16,223 
FY 2012   41,297    55,063 
FY 2013   64,947    79,343 
FY 2014   72,001    38,948 
FY 2015   337,103    0 
Reserve balance  $524,812   $189,577 

 

 

NOTE 11 – CAPITAL STOCK

 

Common Stock

For the nine months ending November 30, 2014, the following share-related transactions occurred:

 

  • 300,000 common shares were issued in connection with the conversion of a prior outstanding note payable in the amount of $105,000.

  • 4,334,795 common shares were issued in connection with warrants exercised for proceeds of $1,278,579

  • 3,275,489 common shares were sold to unrelated third parties in a private placement at $0.35 per share for net proceeds of $1,146,421.

  • 9,820,000 common shares were sold to unrelated third parties in a private placement at $0.25 per share for net proceeds of $2,455,000.

  • 1,000,000 common shares were issued in connection with the Preferred stock settlement agreement

F-10

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2014

 

NOTE 11 – CAPITAL STOCK (CONTINUED)

 

During the fiscal year ending February 28, 2014, the following share-related transactions occurred:

 

  • 385,715 common shares valued at $145,237 were issued in payment of accounts payable.

  • 542,500 common shares were issued for consulting services to multiple providers. The shares were valued at various market prices ranging between $0.15 and $0.50 per share. The combined value of the shares was $112,375, all of which was expensed during the fiscal year.

  • 300,000 common shares were issued valued at $150,000 in connection with prior equity issuance costs that were owed.

  • 312,500 common shares were issued valued at $100,000 in connection with an adjustment in pricing from a previous investment.

  • 7,627,875 common shares were issued in connection with warrants exercised for proceeds of $2,712,500.

  • 5,000,000 common shares were sold to unrelated third parties in a private placement at $0.45 per share for net proceeds of $2,250,000.

  • 565,496 common shares were issued in connection with the conversion of the prior outstanding note payable in the amount of $197,923.

Total common shares issued and outstanding at November 30, 2014 were 61,857,197.

 

Preferred Stock 

  • On August 21, 2014, the Company retired all its existing outstanding Preferred Shares under a settlement agreement with the Preferred shareholder.

F-11

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2014

 

NOTE 12 – STOCK WARRANTS AND OPTIONS

 

Stock Options

The Company accounts for employee stock-based compensation in accordance with the guidance of FASB ASC Topic 718, Compensation – Stock Compensation which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values.

 

The Company has adopted a stock option and award plan to attract, retain and motivate its directors, officers, and employees. Options provide the opportunity to acquire a proprietary interest in the Company and to benefit from its growth. Vesting terms and conditions are determined by the Board of Directors at the time of the grant. The current Plan provides for the issuance of up to 2,823,199 common shares for directors, officers, and employees. The Company amended the original plan to increase the available issuance of common shares up to 4,000,000. The amendment will require shareholder ratification and is expected to occur at the next annual meeting planned for March 2015.

 

The Company granted 200,000 new options during the quarter ending November 30, 2014, while 170,000 qualified options were canceled due to terminations. The Company granted 2,375,000 new qualified options during the fiscal year ending February 28, 2014. During the same period, 965,000 qualified options were canceled due to terminations and the Company also issued a non-qualified option for 700,000 to its former Chairman under a settlement arrangement. The Company did not grant any stock options to employees in fiscal 2013. The Company estimated the fair value of employee options issued in fiscal 2014 as of the grant dates at $590,588 using the Black-Scholes option pricing model. For the nine months ended November 30, 2014 the company estimated the value of options issued using the Black –Scholes option pricing model to be $100,300. Compensation expense is being recognized over the vesting periods of the options which range from immediate vesting to vesting over two years. Previously recognized compensation expense is reversed if an employee terminates service prior to exercise and expiration of the option.

 

Key assumptions used by the Company are summarized as follows: 

 

  Employee Stock Options
Stock Price   $0.17-$2.20 
Exercise Price   $.35-$1.25 
Expected volatility   73.4% - 98% 
Expected dividend yield   0.00%
Risk-free rate   2.0-3.37% 
Vesting period   0-4 years 
Expected term   7 years 

 

Options issued to employees are classified as compensation expenses. Stock option expense recognized in net earnings amounted to $28,598 and $53,668 during the quarters ending November 30, 2014 and 2013, respectively. Unrecognized expense of $395,910 remains to be recognized through 2018.

F-12

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2014

 

NOTE 12 – STOCK WARRANTS AND OPTIONS (CONTINUED)

 

A summary of changes in stock options during the quarter ended November 30, 2014 and years ended February 28, 2014 and February 28, 2013 is as follows:

 

  Stock Options  Weighted Average Exercise Price

  Expiry Date
 Outstanding, February 28, 2012    2,475,000   $1.13   FY 2019
 Issued    0    0    
 Exercised    0    0    
 Expired/Cancelled    (380,000)   1.13    
 Outstanding, February 29, 2013    2,095,000    1.13    
 Issued    2,375,000    0.368   FY 2020
 Exercised    0    0    
 Expired/Cancelled    (1,085,000)   1.14    
 Outstanding, February 28, 2014    3,385,000   $0.618    
 Issued    200,000    0.35    
 Exercised    0    0    
 Expired/Cancelled    (275,000)  $0.55    
 Outstanding, November 30, 2014    3,310,000   $0.605    

 

Because the Company’s stock-based compensation options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the estimate, amounts estimated using the Black-Scholes option pricing model may differ materially from the actual fair value of the Company’s stock-based compensation options.

 

Stock Warrants

The Company follows ASC Topic 505-50, formerly EITF 96-18, “Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods and Services,” for stock options and warrants issued to consultants and other non-employees.  In accordance with ASC Topic 505-50, these stock options and warrants issued as compensation for services provided to the Company are accounted for based upon the fair value of the services provided or the estimated fair market value of the option or warrant, whichever can be more clearly determined.  The fair value of the equity instrument is charged directly to compensation expense or prepaid expense and additional paid-in capital, and amortized over the period during which services are rendered. All warrants issued were valued using the Black-Scholes pricing model.

 

During the nine months ending November, 2014, the Company granted 2,645,000 warrants in connection with an amendment to its previous credit facility, which provided for an increase in the total borrowing limit to $11,033,000. Those warrants were valued at $603,165 and were initially recorded as a debt discount. On August 21, 2014, the original credit facility was fully paid off and as a result, the remaining debt discount was fully expensed during the August 2014 quarter.

 

F-13

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2014

 

NOTE 12 – STOCK WARRANTS AND OPTIONS (CONTINUED)

 

During fiscal year 2014, the Company granted 8,935,000 warrants in connection with its new credit facility and amendments made to certain existing credit facilities previously outstanding. Those warrants were valued at $757,491 and were recorded as a debt discount. During the November 30, 2014 quarter, the Company granted an additional 2,070,000 warrants in connection with an increase provided in its new credit facility. Those warrants were valued at $519,727 and were also recorded as a debt discount. During the November 30, 2013 quarter, the Company granted an additional 493,393 warrants in connection with a further increase provided in the credit facility. Those warrants were valued at $111,026 and were also recorded as a debt discount. Additionally, 12,128,572 warrants valued at $956,229 were issued to certain consultants. These warrants are amortized over an 18 month period beginning April 1, 2013. On August 21, 2014, the senior credit facility was fully paid off and as a result, the remaining debt discounts associated with that facility were fully expensed during the August 2014 quarter. The remaining, related-party notes and their corresponding debt discount amounts are being amortized over the previously amended term. The unamortized portion of those debt discounts was $0 at November 30, 2014.

 

During fiscal year 2013, the Company granted 2,142,857 warrants in connection with its series A Preferred Stock. A fair value of $345,000 was allocated to the warrants based upon the Black-Scholes pricing model. A total of 695,000 warrants valued at $85,204 were issued in connection with purchase order financing and were recorded as a debt discount. The debt discount is being amortized over the term of the financing and has been fully amortized.

 

During fiscal year 2012, the Company granted 5,207,649 stock warrants valued at $1,841,318 in connection with its common stock private placements. These warrants were accounted for as an equity transaction. Additionally, 1,250,000 warrants valued at $189,875 were issued to an advisor. These warrants were amortized over a 12 month period beginning February 1, 2012. The issuance of new warrants at a reduced exercise price triggered a reset provision on 1,777,225 previously issued warrants resulting in a modification of value of $194,784.

 

A range of stock prices from $0.16 to $1.05 was used in valuing the warrants. The stock price was based on open market trading prices or the per share issuance prices from unrelated third party private placements in the event no active market price was available as occurred in some of the Company’s earlier transactions. Volatility was computed based on the average volatility of similar companies in the wind turbine business. The risk-free interest rate is the Treasury Constant Maturity Rate on the date of grant for a period equivalent to the expected term of the instrument. The expected term is the same as the contractual term for the above valuations.

 

Key assumptions used by the Company are summarized as follows:

  Warrants
Stock Price   $0.16-$1.05 
Exercise Price   $0.35-$1.50 
Expected volatility   73.4% - 98% 
Expected dividend yield   0.00%
Risk-free rate   0.16% - 2.62% 
Vesting period   —   
Expected term   2-5 years 

 

F-14

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2014

 

NOTE 12 – STOCK WARRANTS AND OPTIONS (CONTINUED)

 

A summary of changes in share purchase warrants during the nine months ending November 30, 2014 and years ended February 28, 2014 and February 28, 2013 is as follows:

 

  Number of Warrants 

Weighted Average Exercise Price

  Expiry Date
 Outstanding, February 29, 2012    9,041,967    1.14   Various through 3/18/2016
 Issued    2,837,857    0.39  Various through 10/22/2017
 Exercised    0         
 Cancelled/Expired    0         
 Outstanding, February 28, 2013    11,879,824    0.96    
 Issued    26,126,965    0.353   Various through 4/4/2017
 Exercised    (7,627,875)   0.36    
 Cancelled/Expired    (529,350)        
 Outstanding, February 28, 2014    29,849,564   $0.59    
 Issued    2,645,000   $0.35   4/16/2018
 Exercised    (3,653,084)  $0.35    
 Cancelled/Expired    (2,994,779)  $0.35    
 Outstanding, November 30, 2014    25,846,701   $0.55    

 

NOTE 13 – INCOME TAXES

 

For the period ended November 30, 2014, Xzeres has incurred net losses from continuing operations and, therefore, has no tax liability. The net deferred tax asset generated by the loss carry-forward has been fully reserved. The cumulative net operating loss carry-forward is approximately $38,947,000 at November 30, 2014, and will expire beginning in the year 2029. The cumulative tax effect at the expected rate of 34% of significant items comprising our net deferred tax amount is as follows:

 

The provision for Federal income tax consists of the following:

 

  November 30, 2014  November 30, 2013
Federal income tax benefit attributable to:          
Current operations  $517,000   $2,013,800 
Less: valuation allowance   (517,000)   (2,013,800)
Net provision for Federal income taxes  $0   $0 

 

The cumulative tax effect at the expected rate of 34% of significant items comprising our net deferred tax amount is as follows:

 

  November 30, 2014  February 28, 2014
Deferred tax asset attributable to:          
Net operating loss carryover  $11,167,772   $10,650,772 
Less: valuation allowance   (11,167,772)   (10,650,772)
Net deferred tax asset  $0   $0 

 

Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carry forwards of approximately $38,947,000 for Federal income tax reporting purposes are subject to annual limitations. Should a change in ownership occur net operating loss carry forwards may be limited as to use in future years.

F-15

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2014

 

NOTE 14 – COMMITMENTS

 

Operating Leases

 

The Company leases its office and manufacturing facilities under a lease which expires on July 31, 2017. The lease provides for the payment of taxes and operating costs, such as insurance and maintenance in addition to the base rental payments. The lease is renewable for an additional three year term.

 

Aggregate minimum annual rental payments under the non-cancelable operating lease are as follows:

 

 Year ended February 28, 2015   $153,977 
 Year ended February 28, 2016    169,708 
 Year ended February 28, 2017    174,804 
 Year ended February 28, 2018    73,550 
 Sub-Total   $572,039 

 

The rent expense totaled $107,270 and $70,017 for the three months ending November 30, 2014 and 2013, respectively. Rent expense was $267,470 and $160,334 for the nine months ending November 30, 2014 and 2013, respectively.

 

 

NOTE 15 – NOTES PAYABLE – RELATED PARTIES

 

Notes payable – related parties consists of three separate notes:

  November 30, 2014  February 28, 2014
Purchase order (PO) financing note payable due within five days of receipt by Company, in whole or in part, portion of funds collected on collateral sales order, or, Company may submit a new collateral sales order with value equal to or in excess of principal outstanding. Interest rate is 1% per month. The note maturity date was originally May 15, 2013. On April 1, 2013, under a new simple note agreement, the maturity date was extended until October 14, 2014 at 10% interest per annum. On August 21, 2014, the note was further amended, extending the maturity date until October 1, 2016.  Under the new terms, interest is reduced to 10% per annum, and monthly payments of $4,937 are due May 1, 2013 until October 1, 2016, when all remaining principal and interest was due. On May 10, 2013, the board approved a conversion feature for the note allowing for principal and accrued interest to be converted at any time into common shares at $0.35 per share.  On the commitment date, the conversion feature was valued at $0. In addition, the board approved the issuance of a warrant giving the holder the right to purchase 517,500 shares of common stock at a price of $0.35 per share for a period of 3 years. As required by ASC 470-20, the Company valued the warrant and recorded a debt discount to market available at the time of issuance. The discount is amortized over the life of the loan. As of November 30, 2014, $48,772 has been amortized and the balance is shown net of a $0 remaining debt discount.  $561,824   $540,148 

F-16

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2014

 

NOTE 15 – NOTES PAYABLE – RELATED PARTIES (CONTINUED)

 

On August 25, 2011, the Company entered into a purchase and sale factoring agreement with a related party whereby the Company sells certain accounts receivable to the factor. Under the terms of this agreement, the factor made advances to the Company based on certain international accounts receivable. Interest was computed at 8% of the factored amount for the period the factored accounts receivable remain outstanding.  The agreement was initially due to expire on December 15, 2012, and was extended on April 1, 2013 under a new simple note agreement at 10%. Monthly payments of $2,159 are due under the note until October 1, 2014, when all remaining principal and interest are due.  On August 21, 2014, the note was further amended, extending the maturity date until October 1, 2016.  On May 10, 2013, the board approved a conversion feature for the note allowing for principal and accrued interest to be converted at any time into common shares at $0.35 per share.  On the commitment date, the conversion feature was valued at $0.  In addition, the board approved the issuance of a warrant giving the holder the right to purchase 250,000 shares of common stock at a price of $0.35 per share for a period of 3 years.  As required by ASC 470-20, the Company valued the warrant and recorded a debt discount to market available at the time of issuance. The discount is amortized over the life of the loan. As of November 30, 2014, $23,410 has been amortized and the balance is shown net of a $0 remaining debt discount.   139,811    234,407 
Promissory note bearing a 10% annual interest rate. Unsecured. The note maturity date was originally May 1, 2013. On April 1, 2013, under a new simple note agreement, the maturity date was extended until October 14, 2013 at 10% interest. On August 21, 2014, the note was further amended, extending the maturity date until October 1, 2016.  On May 10, 2013, the board approved a conversion feature for the note allowing for principal and accrued interest to be converted at any time into common shares at $0.35 per share.  On the commitment date, the conversion feature was valued at $0. In addition, the board approved the issuance of a warrant giving the holder the right to purchase 667,500 shares of common stock at a price of $0.35 per share for a period of 3 years. As required by ASC 470-20, the Company valued the warrant and recorded a debt discount to market available at the time of issuance. The discount is amortized over the life of the loan. As of November 30, 2014, $49,291 has been amortized and the balance is shown net of a $0 remaining debt discount.   172,544    150,637 
Totals   874,179    925,192 
Less: current maturities   0    925,192 
Long-term portion  $874,179   $0 

F-17

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2014

 

NOTE 16 – NOTES PAYABLE

 

Notes Payable consists of the following notes:

  November 30, 2014  February 28, 2014
Note payable dated August 6, 2012. The Company entered into a purchase order (PO) financing agreement which provided $1,500,000 in debt financing. This agreement also enabled us to receive a portion of the funds owed by customers in advance of when the customer is required to pay the balance (usually prior to shipment or delivery).  We will be required to submit customer orders as collateral for the funds received under the agreement.  Once the products are shipped and the end customer pays the remaining balance, those funds are then used to pay back the amount of the particular PO financed.  The amount repaid is then available for us to borrow against other of our accounts receivable.  The agreement calls for a 16% annual interest rate on any funds outstanding.  As additional consideration for the financing agreement, we issued the financing party warrants to purchase up to 600,000 shares of our common stock, exercisable at any time during the 24 months from the date of issue, at an exercise price of $0.35 per share. As required by ASC 470-20, the Company valued the warrant and recorded a debt discount to market available at the time of issuance. The discount is amortized over the life of the loan. The note was amended in March 2013 to include the outstanding accrued interest to date. Under the new terms, interest remains at 16%, and monthly payments are due as follows: month 1 - $275,000; month 4 and 5 - $30,000; months 6–11 - $60,000; and month 12 - $105,000.   On August 21, 2014, the note principal was paid in full and all accrued interest was waived by the lender.  $0   $1,105,000 

Notes payable due within five days of receipt by Company, in whole or in part, portion of funds collected on collateral sales order, or, CompanyNotes payable due within five days of receipt by Company, in whole or in part, portion of funds collected on collateral sales order, or, Company may submit a new collateral sales order with value equal to or in excess of principal outstanding. Borrowings were originally due December 31, 2012, but notes were combined on April 1, 2013 under a simple promissory note due October 1, 2014. Under the new terms, the interest rate is 10% per annum, and monthly payments are due as follows: April 15, 2013 - month 1 - $160,000; months 2-5 - $20,000; months 6–10 - $80,000; month 11 - $20,000; and month 12 – all accrued interest. Under the new terms, outstanding accrued interest was added to principal as of the amendment date. On August 21, 2014, the note principal was paid in full and all accrued interest was waived by the lender. may submit a new collateral sales order with value equal to or in excess of principal outstanding. Borrowings were originally due December 31, 2012, but notes were combined on April 1, 2013 under a simple promissory note due October 1, 2014. Under the new terms, the interest rate is 10% per annum, and monthly payments are due as follows: April 15, 2013 - month 1 - $160,000; months 2-5 - $20,000; months 6–10 - $80,000; month 11 - $20,000; and month 12 – all accrued interest. Under the new terms, outstanding accrued interest was added to principal as of the amendment date. On August 21, 2014, the note principal was paid in full and all accrued interest was waived by the lender.

   0    382,153 
On April 3, 2013, the Company entered into a new credit facility, which provided up to $6,500,000 in debt financing.  The agreement calls for a 10% annual interest rate on any funds outstanding.  As of May 31, 2014, the available credit was increased three times to a total of $11,033,000. As additional consideration for the original financing agreement and the increases in available credit, the financing parties were issued warrants to purchase up to 12,715,000 shares of our common stock, exercisable at any time during four years from the date of issuance, at an exercise price of $0.35 per share. As required by ASC 470-20, the Company valued the warrants and recorded a debt discount to market available at the time of issuance. The discounts are amortized over the life of the loan. On August 21, 2014, the note principal and all accrued interest was paid in full.   0    8,070,237 

F-18

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2014

 

NOTE 16 – NOTES PAYABLE (CONTINUED)

 

On August 21, 2014, the Company entered into a new term loan with Wells Fargo Bank, which provided $15,000,000 in debt financing.  The agreement calls for a Libor + 3% annual interest rate on funds outstanding. The loan matures on February 21, 2016 and monthly principal payments of $178,572 start on February 1, 2015.  

   15,000,000    0 
Totals   15,000,000    9,557,390 
Less: current maturities   1,785,720    (9,557,390)
Long-term portion  $13,214,280   $0 

 

Future maturities of note and loan debt are as follows at November 30, 2014:

 

 FY 2015   $178,572 
 FY 2016   $15,695,607 
 Thereafter    0 
 Total   $15,874,179 

 

The Company incurred total interest expense of $142,728 and $321,060 for the three months ended November 30, 2014 and 2013, respectively and $978,218 and $674,255 for the nine months ended November 30, 2014 and 2013, respectively. Interest expense includes finance charges related to vendors in addition to actual note interest.

 

NOTE 17 – GOING CONCERN

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has sustained substantial losses since inception, has limited working capital, and is in need of additional capital to grow its operations so that it can become profitable.

 

In view of this matter, the ability of the Company to continue as a going concern is dependent upon growth of revenues and the ability of the Company to raise additional capital. Management believes that its successful ability to raise capital and increases in revenues will provide the opportunity for the Company to continue as a going concern.

 

F-19

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2014

 

NOTE 18 – SUPPLEMENTAL CASH FLOWS

 

Supplemental Non-Cash Investing and Financing Activities:  November 30, 2014  February 28, 2014
Shares issued in payment of trade debt  $0   $145,237 
Debt discount from fair value of embedded conversion feature  $603,165   $1,388,244 
Issuance of common shares for convertible debt and accrued interest  $105,000   $197,923 
Shares issued for prepaid consulting services  $0   $112,375 
Warrants and options issued for prepaid consulting  $0   $956,229 

  

NOTE 19 – CONCENTRATIONS

 

Credit risk- Financial instruments that potentially subject the Company to concentrations of credit risk consist of demand deposits with a financial institution. The Company believes there is minimal credit risk relative to its cash and investment accounts.

 

The Company is also potentially subject to concentrations of credit risk in its accounts receivable. Credit risk with respect to receivables is limited due to the number of companies comprising the Company’s customer base. Although the Company is directly affected by the financial condition of its customers, management does not believe significant credit risks exist at November 30, 2014. Generally, the Company does not require collateral or other securities beyond the equipment sold to support its accounts receivable.

 

Major customer- The Company has one major customer that accounted for approximately 37% and $541,000 of sales for the three months ended November 30, 2014. The Company expects to maintain this relationship with the customer.

 

Major vendor- The Company has one major vendor that accounted for approximately 10% and $195,913 of materials purchased for the three months ended November 30, 2014. The Company expects to maintain this relationship with the vendor.

 

NOTE 20 – SUBSEQUENT EVENTS

 

In accordance with ASC Topic 855-10, the Company has analyzed its operations subsequent to November 30, 2014 to the date these financial statements were issued, and has determined that it does not have any material subsequent events to disclose in these financial statements.

F-20

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

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” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. 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. We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of complying with those safe-harbor provisions. 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 affect 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. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Further information concerning our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC.

 

Company Overview

 

XZERES Corp. (“XZERES” and the “Company”) was incorporated in the state of New Mexico in January 1984 and re-domiciled to Nevada in October 2008. Since the fiscal quarter ended May 31, 2010, we have been in the business of designing, developing, and marketing small wind turbine systems and related equipment for electrical power generation, specifically for use in residential, small business, rural electric utility systems, other rural locations, and other infrastructure applications.  

 

The Company operates four wholly-owned subsidiaries. XZERES Energy Services Corp. was incorporated in Nevada in January 2011, XZERES Wind Europe Limited was formed in Ireland in October 2010, XZERES Capital Corp. was incorporated in Nevada in January 2014, and XZERES Wind Japan Limited was formed in Japan in October, 2013.

 

Our principal offices are located at 9025 SW Hillman, Suite 3126, Wilsonville, OR 97070. Our phone number is (503) 388-7350.

 

Our Business

 

We are in the business of designing, developing, and marketing distributed generation, wind power systems for the small wind (1kW-100kW) market as well as power management solutions.  We design, develop, manufacture, test, assemble and market our systems around the world. Our grid connected and off grid wind turbine systems, which consist of our 2.4kW and 10kW devices and related equipment, are utilized for electrical power generation for applications and markets such as residential, micro-grid based rural and island electrification, agricultural, small business, rural electric utility systems, as well as other private, corporate infrastructure and government applications. Our wind power systems are focused on distributed energy, where a specific machine's energy output is largely or entirely used on-site where the equipment is installed, as well as grid connected applications. While many of our customers take advantage of their local net-metering rules within the United States and Feed In Tariffs that are often available in Europe and internationally (to sell power back to the grid), our wind power systems are not dependent on transmission needs to carry the energy produced to another location and are therefore well suited for remote electrification, and are available with or without a battery coupled solution. Our power management solutions are deployed primarily for commercial and light industrial applications.

 

Our wind turbine products integrate with currently available complementary products from other manufacturers, such as inverters, lightning protection equipment and towers.  We do not have any written agreements with these other manufacturers. Our systems comprise several major components including the turbine sub-system (which converts wind energy into electricity), the tower (which holds the turbine high in the wind), a turbine controller (which controls the turbine subsystem and contains monitoring hardware and software), and an inverter (which converts the electricity generated from direct current (DC) to alternating current (AC) to connect to a customer’s electrical load or to the grid). We currently design and engineer the turbine and controller, but contract the manufacturing of the turbine and controller through outside parties. The tower, while designed to specifications suitable to our turbine requirements, is made and sold by separate companies depending on the style that the customer orders.  Similarly, the inverter, which converts the energy generated to a form suitable to connect into the electric grid, is manufactured by another company and is a commercial off-the-shelf product.  We sell a “system” with all of these parts included in the selling price.  The system will not operate as designed without these complementary products.  In the case of the inverter, there are other commercially available products that will integrate with our components, but we perform the system integration design to sell the entire system as a package to the customer.  Going forward, we intend to develop or acquire new turbine systems to complement our existing product line.

 

We utilize local dealers to market, sale, and install our products in the various regions in which we operate. Our internal sales, marketing, and support helps provide assistance to our dealers in the form of direct sales lead generation, customer site assessment, assistance with government-based financial incentives and local permitting, application engineering, installation, support and maintenance.

 

In addition to our wind turbine business, we manufacture and sell a family of power efficiency products which are designed to improve the “power factor” and reduce the amount of reactive power being drawn at a location. This expands our product offering beyond small wind power generation into the realm of power management and power efficiency solutions. The addition of this complementary and diversified family of products enables us to offer both business and residential customers, in urban and rural locations, the ability to reduce their power costs, extend the life of their electrical equipment and electronics via improved surge suppression, reduce their carbon footprint and, depending upon the type of customer and the application, provide significant energy savings. We sell our product line of power efficiency devices targeted at small to medium-sized businesses. Going forward, we may develop or acquire new products in the area of power efficiency to complement our existing product line.

 

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Results of operations for the three and nine months ended November 30, 2014 and 2013

 

Overview.  Third quarter revenue improved sequentially as we successfully worked through a key component part issue on our 10kW system. Production levels began to ramp close to our target levels in the final month of the quarterly period. We anticipate further improvement in the production rate as we move forward, which we anticipate will contribute to further strong improvement in revenues. In addition, we expect our new 50kW system, which has been subject to long production lead times, to also begin contributing in the upcoming quarters, thereby further adding to our growth outlook.

 

Revenue.  For the three months ended November 30, 2014 and 2013, we generated gross revenue of $1,234,769 and $1,561,208 respectively.  For the nine months ended November 30, 2014 and 2013, we generated gross revenue of $2,391,502 and $2,704,998, respectively. Our revenues decreased during the nine months ended November 30, 2014 over the prior year and were lower than our forecast due to timing delays in project permits as well as a specific customer delays resulting from market conditions.

 

Operating Expenses. Our Operating Expenses during the three month period ended November 30, 2014 equaled $1,904,413, consisting of $469,072 in sales expense, $74,456 in marketing costs, $256,075 in R&D/Engineering expenses, and $1,104,809 in general and administrative expenses. We had other expense of $154,116 for the period.  Therefore, we recorded a net loss of $1,533,551 for the three months ended November 30, 2014. Inclusive in our net loss were non-cash charges related to the debt discount amortization as well as option and warrant compensation expenses totaling $875,657. Our Operating Expenses during the three month period ended November 30, 2013 equaled $2,369,598, consisting of $235,071 in sales expense, $93,579 in marketing costs, $338,985 in R&D/Engineering expenses, and $1,701,963 in general and administrative expenses. We had other expense of $319,706 for the period.  Therefore, we recorded a net loss of $2,356,495 for the three months ended November 30, 2013. Inclusive in our net loss was non-cash compensation in the amount of $62,766.

 

Our Operating Expenses during the nine month period ended November 30, 2014 equaled $6,146,304, consisting of $1,293,287 in sales expense, $361,084 in marketing costs, $748,160 in R&D/Engineering fees, and $3,743,773 in general and administrative expenses. We had other expense of $1,696,833 for the period.  Therefore, we recorded a net loss of $7,625,653 for the nine months ended November 30, 2014. Inclusive in our net loss was non-cash compensation in the amount of $111,485. Our Operating Expenses during the nine month period ended November 30, 2013 equaled $6,377,504 consisting of $629,619 in sales expense, $256,532 in marketing costs, $968,476 in R&D/Engineering fees,   and $4,522,877 in general and administrative expenses. We had other expense of $113,027 for the period.  Therefore, we recorded a net loss of $5,922,923 for the nine months ended November 30, 2013.

 

Liquidity and Capital Resources

 

As of November 30, 2014, we had total current assets of $7,469,437 consisting of $1,558,850 in cash and cash equivalents, $1,698,154 in accounts and notes receivable, $3,973,458 in inventories and inventory deposits and $238,975 in prepaid expenses and deferred financing costs.  Our total current liabilities as of November 30, 2014 were $4,112,157. Thus, we have working capital of $3,357,280 as of November 30, 2014.   As of November 30, 2014, we had total assets of $9,828,790.

 

Operating activities used $7,428,317 and $9,508,239 in cash for the nine months ended November 30, 2014 and November 30, 2013, respectively. The net loss of $7,625,654 was the result of inventory, accounts payable and accrued expenses usage of $403,653, 596,852 and $294,105 respectively. These were the primary components of our negative operating cash flow for the nine months ended November 30, 2014.


Investing Activities used $130,591 in cash during the nine month period ending November 30, 2014.

 

Financing Activities netted $9,075,807. This was a result of our new senior term loan with Wells Fargo Bank, additional equity investment and warrant exercises during the nine months ended November 30, 2014, partially offset by the repayment of prior loans and the repurchase of our Series A preferred.

 

As of November 30, 2014, the ability to continue the implementation of our business plan over the next twelve months is contingent upon us either generating sufficient revenues from our ongoing operations to fund our business, obtaining additional financing, or some combination of revenues and additional financing.

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General Outlook:

 

While our recently completed quarters have been disappointing in terms of revenues, we believe the general outlook remains strong. We have applied significant resources toward developing key programs and creating a foundation for substantial growth as well as resolved the critical component shortfall. In addition, we anticipate important new markets to begin contributing this year, thanks in part to our Skystream acquisition and the more recent Argosy licensing agreement, but also from prior efforts to target new markets. While precise forecasting can be a challenge and we have already experienced a longer ramp up time on some of the mentioned programs than we originally anticipated, we do anticipate increasing revenue contribution as we move forward. Some of the key sales initiatives in our near-term forecast include:

 

  • Japan Sales & FITCO – Japan has introduced a very attractive feed-in-tariff (FIT) program. Our 10kW system received certification and is now approved for the FIT in Japan. We have successfully installed our first grid-connected system in the country. We expect this new market opportunity to be significant due to the high FIT rate, Japan’s strong wind resources, and the overall need for power alternatives. In addition to direct sales, our project financing partners, Gale Force, are supporting a FITCO model (similar to the UK effort) for this new market. We have established a wholly-owned subsidiary in Japan with selling activity underway and orders received already. Between direct sales activities and the FITCO program, we believe the Japan market will ramp to a significant opportunity moving forward.

  • UK FITCO – We have been actively promoting the FITCO program in the UK since the last year. It has contributed to revenues over the last several quarters, although at a moderate level. The program enables a landowner to receive a turbine and the power it generates for free while the investor partner (Gale Force) collects the available Feed-In-Tariff payouts. Gale Force has committed significant funding resources for both the UK and Japan effort, with the focus on purchasing the XZERES 10kW turbine. We are working with project partners who assist in identifying quality sites, meeting with the landowner, and securing a lease contract for Gale Force. Once the site has planning and connection approval, Gale Force then purchases the system from us and we assist in arranging for installation. Gale Force and the Project partners have already secured a large volume of sites awaiting permit approvals. The average equipment sales price from Xzeres, for the 10kW system, is approximately $55,000.

  • Domestic Sales and Lease - We launched a new leasing program for the domestic market that is similar in concept to the popular domestic solar leasing models. This will complement our existing sales efforts. We focus in specific regions where the economics are the most attractive, although the U.S. market in general is a more difficult market given the dramatic scale-back of many state incentive programs that have greatly curtailed small wind sales over the past two years. We will remain active in the U.S. market with a more targeted sales effort, but generally expect the bulk of our activity to emanate from our various international efforts.

  • Skystream – The acquisition of the Skystream product afforded us an exceptional new product with a large existing installed base and significant brand presence globally. We further believe it’s the best product on the market for its size range and there are substantial opportunities for this size of turbine. While the product was off the market for approximately 8 months before we purchased it, we have re-engaged numerous dealers around the world and continue to see increased quoting and pipeline momentum and expect it to be a strong contributor to our forward growth. Skystream enjoyed a significant global presence with over 8500 installed systems in over 110 countries around the world and we believe there continues to be a very strong market worldwide. In addition, the Skystream turbine is ideally suited for unique applications, such as powering remote cell phone towers, an area we are actively pursuing with several major telecom companies.

  • XZERES 50kW Turbine – We further extended our breadth of product offerings with the exclusive, manufacturing and licensing of Argosy Wind’s 50kW turbine. Different markets and settings require different sized solutions to best fit the customer needs. With the addition of a 50kW system, the Company can now better address customer solutions and capture additional business opportunities. In addition to the substantial pipeline opportunities that already existed for the 50kW, we anticipate our project partner, Gale Force, to incorporate the system into their activities in the UK and elsewhere. There are a number of sites in the UK that have already been identified for the new 50kW system and we expect to generate meaningful revenue near-term from this product.

  • Southeast Asia Project – We continue to actively support a potentially large remote island electrification project in the Southeast Asia region. This has included providing a demonstration unit which successfully passed the defined criteria and then assisting our local project partner with identifying the broader scope of the project. More importantly, our first commercial order for this program was recently installed and is now operational and our project partner has recently provided us with a planned rollout schedule, which indicates a significant number of Turbines anticipated for 2015.

  • Other – We currently have a number of other specific activities being pursued in multiple areas of the Caribbean, India and South America, some of which we anticipate could further augment our growth this year

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Off Balance Sheet Arrangements

 

As of November 30, 2014, there were no off balance sheet arrangements.

 

Going Concern

 

We have incurred losses since inception, and have not yet received sufficient revenues from sales of products or services to reach profitability. These factors create substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustment that might be necessary if we are unable to continue as a going concern.

 

Our ability to continue as a going concern is dependent on generating cash from the sale of our common stock and/or obtaining debt financing and attaining future profitable operations. Management’s plans include selling our equity securities and obtaining debt financing to fund our capital requirement and ongoing operations; however, there can be no assurance we will be successful in these efforts.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

A smaller reporting company is not required to provide the information required by this Item.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. The term “disclosure controls and procedures”, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (“Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective for the period ended November 30, 2014.

 

Management’s Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The internal controls for the Company are provided by executive management’s review and approval of all transactions. Our internal control over financial reporting also includes those policies and procedures that:

 

(1)pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

 

(2)provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with the authorization of our management; and

 

(3)provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Management conducted an evaluation of the effectiveness of internal control over financial reporting based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was not effective as of November 30, 2014.

 

There were no changes in our internal control over financial reporting during the period ended November 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

In December of 2013, our XZERES Energy Services subsidiary received notice of a non-monetary default judgment related to a turbine customer in Texas, named TSNT Enterprises, Inc. It was a project handled by one of our dealers in the area, who was named in the lawsuit and has been defending the claims. A trial will be necessary to determine to what extent TSNT incurred any damages. We dispute TSNT's calculation of loss-of-use damages, which we contend is not technically possible. We have proposed a global settlement (primarily funded by the dealer) to resolve this matter. Regardless of the outcome of the settlement negotiations or trial, we do not expect TSNT's disputed claim to have a material impact on our operations. 

 

On December 17, 2014 the company filed suit in Maricopa County, Arizona against a former supplier seeking damages related to the supplier’s inadequate manufacturing of a key component of the 10kW turbine system. We have discontinued using this supplier and have moved the manufacturing process in-house. We intend to seek full remuneration for excess warranty costs incurred as well as lost business opportunities as we worked on the resolution. There can be no assurances that our claims, in excess of $5 million, will be successful. The supplier has also filed a claim against the company to recover payment for the remaining inventory and WIP held by them, totaling $350,000.

 

Item 5. Other Information

 

None

 

Item 6. Exhibits

 

Exhibit Number Description of Exhibit
31.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  XZERES Corp.
   
Date:  January 14, 2015
   
   /s/ David Hofflich
By: David Hofflich
Title: Chief Executive Officer

  

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