10-Q 1 form10q.htm FORM10Q

 

 

 

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, 2012
   
[  ] 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 or 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. 27,339,941 as of January 18, 2013.

 

 

 

 
 

 

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   6
Item 3:   Quantitative and Qualitative Disclosures About Market Risk   10
Item 4:   Controls and Procedures   10
         
    PART II – OTHER INFORMATION    
         
Item 1:   Legal Proceedings   12
Item 5:   Other Information   12
Item 6:   Exhibits   12

 

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 30,2012, and February 29, 2012(unaudited);
F-2 Statements of Operations for the three and six months ended November 30, 2012 and 2011(unaudited);
F-3 Statements of Cash Flows for the six months ended November 30, 2012 and 2011(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, 2012 are not necessarily indicative of the results that can be expected for the full year.

 

3
 

 

XZERES CORP.

CONSOLIDATED FINANCIAL STATEMENTS

 

NOVEMBER 30, 2012

 

4
 

 

XZERES CORP.

(FORMERLY XZERES WIND CORP)

CONSOLIDATED FINANCIAL STATEMENTS

 

NOVEMBER 30, 2012

 

Consolidated Balance Sheets as of November 30, 2012 and February 29, 2012 (Unaudited)   F - 1
     
Consolidated Statements of Operations for the Three and Nine Months Ended November 30, 2012 and 2011 (Unaudited)   F - 2
     
Consolidated Statements of Cash Flows for the Nine Months Ended November 30, 2012 and 2011 (Unaudited)   F - 3
     
Notes to Consolidated Financial Statements   F-4 - F-14

 

5
 

 

XZERES CORP.

(FORMERLY XZERES WIND CORP)

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

AS OF NOVEMBER 30, 2012 AND FEBRUARY 29, 2012

 

   November 30, 2012   February 29, 2012 
ASSETS          
Current Assets          
Cash and cash equivalents  $89,048   $236,682 
Accounts receivable, net   360,712    1,036,778 
Subscription receivable   0    80,000 
Notes receivable-current portion   66,330    45,552 
Inventories   975,188    828,188 
Inventory deposit   70,092    70,092 
Deferred financing costs, net   51,667    - 
Prepaid expenses   255,391    334,361 
Total Current Assets   1,868,428    2,631,653 
           
Property and Equipment, net   301,817    347,007 
           
Other Assets          
Notes receivable- net of current portion   115,565    43,309 
Intellectual property   1,802,210    1,802,210 
Website development costs, net   5,882    11,176 
Deposit   18,198    18,198 
Total Other Assets   1,941,855    1,874,893 
           
TOTAL ASSETS  $4,112,100   $4,853,553 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)          
Liabilities          
Current Liabilities          
Accounts payable  $1,910,940   $2,177,351 
Due to factor-related party   451,629    303,806 
Accrued expenses   365,358    113,551 
Accrued interest   26,883    - 
Customer deposits   135,074    520,458 
Warranty reserve   134,714    87,018 
Sales tax payable   -    32,822 
Notes payable   2,010,026    - 
Convertible note payable   100,000    - 
Total Liabilities   5,134,624    3,235,006 
           
Stockholders’ Equity (Deficit)          
Series A Convertible Preferred stock, par $0.001, 2,000,000 shares authorized, 1,428,571 shares issued and outstanding   1,429    0 
Common stock, par $0.001, 100,000,000 shares authorized, 27,215,776 and 25,500,414 shares issued and outstanding, respectively   27,216    25,501 
Stock warrants   4,221,235    3,791,031 
Additional paid in capital   13,933,871    11,790,160 
Accumulated other comprehensive income (loss)   (53,776)   (8,477)
Accumulated deficit   (19,152,499)   (13,979,668)
Total Stockholders’ Equity (Deficit)   (1,022,524)   1,618,547 
           
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)  $4,112,100   $4,853,553 

 

The accompanying notes are an integral part of the financial statements.

 

F-1
 

  

XZERES CORP.

(FORMERLY XZERES WIND CORP)

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

FOR THE THREE AND NINE MONTHS ENDED NOVEMBER 30, 2012 AND 2011

 

   Three Months Ended   Nine Months Ended 
   November 30, 2012   November 30, 2011   November 30, 2012   November 30, 2011 
                 
GROSS REVENUES  $1,912,850   $927,451   $3,747,992   $3,312,569 
                     
COST OF GOODS SOLD   1,689,259    676,509    3,192,991    2,488,959 
                     
GROSS PROFIT   223,592    250,942    555,001    823,610 
                     
OPERATING EXPENSES                    
General and administrative expenses   1,292,303    1,164,575    4,052,869    3,367,932 
Marketing   61,869    87,120    165,766    283,012 
Sales expense   154,708    562,266    671,626    1,259,057 
Engineering/R&D expense   198,135    554,556    426,826    1,765,190 
TOTAL OPERATING EXPENSES   1,707,015    2,368,517    5,317,087    6,675,191 
                     
LOSS FROM OPERATIONS   (1,483,423)   (2,117,575)   (4,762,086)   (5,851,581)
                     
OTHER INCOME (EXPENSE)   (34,171)   (12,940)   (151,461)   (40,573)
                     
NET LOSS BEFORE PROVISION FOR INCOME TAXES   (1,517,594)   (2,130,515)   (4,913,547)   (5,892,154)
                     
PROVISION FOR INCOME TAXES   0    0    0    0 
                     
NET LOSS   (1,517,594)   (2,130,515)   (4,913,547)   (5,892,154)
                     
DEEMED DIVIDEND   (259,285)   0    (259,285)   0 
                     
OTHER COMPREHENSIVE LOSS                    
Foreign currency translation adjustment gain (loss)   1,785    0    (45,299)   0 
                     
COMPREHENSIVE LOSS  $(1,775,094)  $(2,130,515)  $(5,185,131)  $(5,892,154)
                     
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING   27,215,776    20,063,345    26,563,601    19,165,262 
                     
NET LOSS PER SHARE:                    
BASIC AND DILUTED  $(0.07)  $(0.11)  $(0.20)  $(0.31)

 

The accompanying notes are an integral part of the financial statements.

 

F-2
 

 

XZERES CORP.

(FORMERLY XZERES WIND CORP)

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE NINE MONTHS ENDED NOVEMBER 30, 2012 AND 2011

 

   Nine Months Ended November 30, 2012   Nine Months Ended November 30, 2011 
Cash Flows from Operating Activities:          
Net loss for the period  $(4,913,546)  $(5,892,154)
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:          
Depreciation and Amortization expense   105,560    108,614 
Allowance for doubtful accounts   7,866    - 
Share-based compensation   48,395    394,768 
Share-based services   541,487    - 
Issuance of common shares for fee   225,000    - 
Changes in Assets and Liabilities          
Accounts receivable   668,200    (1,142,576)
Subscription receivable   80,000    - 
Inventories   (147,000)   (426,264)
Inventory deposit   -    40,066 
Prepaid expenses   (73,114)   (71,605)
Accounts payable   (266,411)   1,757,577 
Accrued expenses   340,723    140,863 
Sales tax payable   (32,822)   - 
Customer deposits   (385,384)   196,708 
Warranty reserve   47,696    (27,106)
Net Cash Used in Operating Activities   (3,753,350)   (4,921,109)
           
Cash Flows from Investing Activities:          
Purchase of property and equipment   (21,539)   (53,462)
Net increase in notes receivable   (93,034)   - 
Acquisition of Property   -    (50,000)
Net Cash Used in Investing Activities   (114,573)   (103,462)
           
Cash Flows from Financing Activities:          
Proceeds from issuance of common shares   -    5,165,512 
Proceeds from issuance of preferred shares   1,500,000    - 
Increase in due to factor   147,823    - 
Proceeds from notes payable   2,125,265    - 
Repayment of notes payable   -    (197,500)
Equity issuance costs   (7,500)   (237,051)
Net Cash Provided by Financing Activities   3,765,588    4,730,961 
           
Foreign Currency Effect on Cash   (45,299)   - 
Net Increase (Decrease) in Cash and Cash Equivalents   (147,634)   (293,610)
           
Cash and Cash Equivalents – Beginning   236,682    364,068 
           
Cash and Cash Equivalents – Ending  $89,048    70,458 
           
Supplemental Cash Flow Information:          
Cash paid for interest  $-   $- 
Cash paid for income taxes  $-   $- 

 

The accompanying notes are an integral part of the financial statements.

 

F-3
 

 

 XZERES CORP.

(FORMERLY XZERES WIND CORP)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2012

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Business

 

XZERES Corp. (“XZERES” and the “Company”) is located in Portland, 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 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) and XZERES Wind Europe Limited (formed in Ireland). 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 29, 2012, as amended. 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.

 

Fair Value of Financial Instruments

 

The Company’s financial instruments consist of cash and cash equivalents, accounts and notes receivable, inventories, inventory deposit, prepaid expenses, notes payable, due to factor, 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.

 

F-4
 

  

XZERES CORP.

(FORMERLY XZERES WIND CORP)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2012

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Concentration of Credit Risks

 

The Company maintains its cash in institutions insured by the Federal Deposit Insurance Corporation (FDIC). All deposit accounts at FDIC-insured institutions are insured up to at least $250,000 per depositor. At certain times the Company’s balances exceed the insured amount.

 

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 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 $89,048 and $236,682 at November 30, 2012 and February 29, 2012, respectively.

 

Advertising Costs

 

The Company’s policy regarding advertising is to expense advertising when incurred. XZERES incurred advertising expense of $17,461 and $29,983 during the quarter ended November 30, 2012 and 2011 respectively. For the nine months ended November 30, 2012 and 2011, Xzeres incurred advertising expense of $33,893 and $116,484 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. During the three months ended November 30, 2012 the Company did not make any grants of employee stock options. For the three months ended November 30, 2012 and November 30, 2011, the Company recorded stock-based compensation expense of $6,747 and $86,836, respectively. Unrecognized expense of $423,862 remains to be recognized over the remaining vesting terms of the options. 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 to expense over the period during which services are rendered. The Company has also issued shares to outside consultants for various services rendered. For the quarter ended November 30, 2012 and November 30, 2011, the Company recorded stock–based compensation expense relating to non-employees in the amount of $390,692 and $11,813 respectively. For the nine months ended November 30, 2012 and 2011, the Company recorded stock-based compensation relating to non-employees of $589,882 and $35,439 respectively.

 

F-5
 

  

XZERES CORP.

(FORMERLY XZERES WIND CORP)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2012

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Dividends

 

The Company has not adopted any policy regarding payment of dividends.

 

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 module 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 date of issuance.

 

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, 2012, there have been no interest or penalties incurred on income taxes.

 

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. Outstanding warrants and options were not included in the computation of diluted earnings per share for the quarter ended November 30, 2012 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 – ACQUISITION

 

On April 25, 2011, the Company entered into an Asset Purchase Agreement (the “Acquisition”) to acquire substantially all of the assets of Rochester Power Saver Inc., consisting primarily of intellectual property and product designs for surge suppression and power conditioning devices. Under the terms of the Acquisition, the Company paid 304,721 shares of its restricted common stock, $50,000 in cash for a total consideration of $500,000 and will pay a 5% royalty on gross profits to the founders up to a maximum of $150,000 over the next 24 months following the closing of the acquisition.

 

The purchase price was allocated as follows:

 

Description  Amount 
Bank account  $2,686 
Accounts receivable   9,850 
Inventory and equipment   4,479 
Intellectual property – product designs   482,985 
Total  $500,000 

  

F-6
 

  

XZERES CORP.

(FORMERLY XZERES WIND CORP)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2012

 

NOTE 3 – ACCOUNTS RECEIVABLE

 

Accounts receivable is generated from sales of wind turbine systems and power efficiency products. At November 30, 2012, accounts receivable were substantially comprised of balances due from end customers and dealers.

 

As of the February 29, 2012, the Company has created an allowance for doubtful accounts equal to 2% of accounts receivable. While the Company has not experienced any customer defaults to date, it has elected to begin reserving for potential bad debts.

 

   November 30, 2012     February 29, 2012 
Accounts receivable  $368,578   $1,059,750 
Less: Allowance for doubtful accounts   (7,866)   (22,972)
Accounts receivable, net  $360,712   $1,036,778 

 

Notes receivable are generated from sales of wind turbine systems. At November 30, 2012, notes receivable were comprised of balances from end customers. Terms of the notes receivable are seven years at an annual interest rate of 4.5% with payments received on a monthly basis.

 

NOTE 4 – PREPAID EXPENSES

 

Prepaid expenses consisted of the following:

 

   November 30, 2012     February 29, 2012 
Software licenses  $42,035   $38,299 
Other   68,105    0 
Consulting   145,251    296,062 
Total prepaid expenses  $255,391   $334,361 

 

NOTE 5 – DEFERRED FINANCING COSTS

 

The fair value of warrants issued in connection with the PO financing arrangements have been recorded as deferred financing costs. The warrants were fair valued at $85,204 using the Black-Scholes pricing model. These costs are being amortized over the terms of the related loan agreements. Deferred financing costs include due diligence, legal and banking fees.

 

Deferred financing costs consisted of the following:

 

   November 30, 2012     February 29, 2012 
Deferred financing costs  $85,204   $0 
Less: accumulated amortization   (33,537)   0 
Deferred financing costs, net  $51,667   $0 

  

Amortization expense for the three and nine month periods ended November 30, 2012 totaled $19,374 and $33,537, respectively.

 

F-7
 

 

XZERES CORP.

(FORMERLY XZERES WIND CORP)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2012

 

NOTE 6 – SUBSCRIPTION RECEIVABLE

 

The subscription receivable was collected on March 21, 2012.

 

NOTE 7 – 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 first-in first-out method, or market.

 

Inventories consisted of the following:

 

     November 30, 2012   February 29, 2012 
  Finished goods   762,757   $690,682 
  Parts and supplies   212,431    137,506 
  Total Inventories  $975,188   $828,188 

 

NOTE 8 – 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, 2012   February 29, 2012 
  Furniture  $48,624   $48,624 
  Computer equipment   175,155    171,318 
  Shop machinery and equipment   249,802    232,100 
  Vehicles   10,998    10,998 
  Subtotal   484,579    463,040 
  Less: accumulated depreciation   (182,762)   (116,033)
  Property and equipment, net  $301,817    347,007 

 

Depreciation expense totaled $22,529 and $12,617 for the three months ended November 30, 2012 and 2011 respectively. For the nine months ended November 30, 2012 and 2011, depreciation expense totaled $66,729 and $38,221 respectively.

 

NOTE 9 – 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.

 

F-8
 

 

XZERES CORP.

(FORMERLY XZERES WIND CORP)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2012

 

NOTE 10 – WEBSITE DEVELOPMENT COSTS

 

The Company has capitalized certain costs incurred in developing their website, which consisted of the following:

 

   November 30, 2012   February 29, 2012 
Website development costs  $21,175   $21,175 
Less: Accumulated amortization   (15,293)   (9,999)
Website development costs, net  $5,882   $11,176 

 

The Company began amortizing the website costs, using the straight-line method over the estimated useful life of 3 years, once it was put into service in September 2010. Ongoing updates to the website are expensed as incurred.

 

Amortization expense was $1,765 and $1,765 for the three months ended November 30, 2012 and 2011, respectively.

 

Amortization expense was $5,294 and $5,294 for the nine months ended November 30, 2012 and 2011, respectively.

 

NOTE 11 – ACCRUED EXPENSES

 

Accrued expenses consisted of the following:

 

   November 30, 2012   February 29, 2012 
Wages  $113,971    113,551 
Miscellaneous   251,387    0 
Total Accrued Expenses  $365,358   $113,551 

 

NOTE 12 – 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 $135,074 at November 30, 2012 and $520,458 at February 29, 2012.

 

NOTE 13 – 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%

 

F-9
 

  

XZERES CORP.

(FORMERLY XZERES WIND CORP)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2012

 

NOTE 13 – WARRANTY RESERVE (CONTINUED)

 

Warranty reserve activity was as follows:

 

   November 30, 2012   February 29, 2012 
Reserve balance, beginning   100,136    16,601 
Added to reserve   61,962    129,029 
Charges against reserve   (27,384)   (58,612)
Reserve balance, ending  $134,714   $87,018 

 

NOTE 14 - FACTORING AGREEMENT-RELATED PARTY

 

On August 25, 2011, the Company entered into a purchase and sale factoring agreement with a related party whereby the Company sells certain international accounts receivable to the factor. Under the terms of this agreement, the factor makes advances to the Company based on certain international accounts receivable. Interest is computed at 8% of the factored amount for the period the factored accounts receivable remain outstanding. Based on this arrangement, the Company is liable to the factor if the accounts receivable are not collected. Payments are due on the Note as receivables are collected. The agreement was initially due to expire on January 15, 2012, and was extended to December 15, 2012. The Company and the related party have mutually agreed to further extend expiration beyond December 15, 2012.

 

NOTE 15 – STOCKHOLDERS’ EQUITY

 

During the fiscal year ending February 29, 2012, the following share-related transactions occurred:

 

3,277,637 common shares were sold to unrelated third parties in a private placement at $1.05 per share for net proceeds of $3,164,611.

 

304,721 common shares valued at $450,000 were issued to acquire assets.

 

466,310 common shares were sold to unrelated third parties in a private placement at an average of $1.02 per share for net proceeds of $474,000.

 

1,250,000 common shares were sold to unrelated third parties in a private placement at an average of $0.80 per share for net proceeds of $1,000,000.

 

625,000 common shares were sold to unrelated third parties in a private placement at an average of $0.40 per share for net proceeds of $250,000.

 

3,714,050 common shares were sold to unrelated third parties in a private placement at an average of $0.40 per share for net proceeds of $1,485,620.

 

479,880 common shares were issued for consulting services to multiple providers. The shares were valued at various market prices ranging between $0.49 and $1.05 per share. The combined value of the shares totaled $290,434. Of the total value, $168,454 was expensed during the year end February 29, 2012, and $121,980 was recorded as prepaid consulting and is being written off over the remaining terms of the contracts.

 

During the nine months ended November 30, 2012, the following equity-related transactions occurred:

 

1,715,362 common shares were issued for consulting services to multiple providers. The shares were valued at various market prices ranging between $0.32 and $0.45 per share. The combined value of the shares was $698,422. Of the total value, $545,023 was expensed during the period.

 

Total common shares issued and outstanding at November 30, 2012 were 27,215,776.

 

F-10
 

  

XZERES CORP.

(FORMERLY XZERES WIND CORP)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2012

 

NOTE 15 – STOCKHOLDERS’ EQUITY (CONTINUED)

 

On October 16, 2012, the Board of Directors established a Series A Convertible Preferred stock, par value $.001 per share. The number of designated shares of Series A Convertible Preferred stock is 2,000,000.

 

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 module 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 date of issuance.

 

NOTE 16 – INCOME TAXES

 

For the period ended November 30, 2012, 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 $18,837,000 at November 30, 2012, 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, 2012   November 30, 2011 
  Federal income tax benefit attributable to:          
  Current operations  $1,686,000   $2,003,000 
  Less: valuation allowance   (1,686,000)   (2,003,000)
  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, 2012   February 29, 2012 
  Deferred tax asset attributable to:          
  Net operating loss carryover  $6,439,000   $4,753,000 
  Less: valuation allowance   (6,439,000)   (4,753,000)
  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 $18,837,000 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.

 

NOTE 17 - SUPPLEMENTAL NON-CASH INVESTING AND FINANCING INFORMATION

 

     November 30, 2012   November 30, 2011 
  Shares issued to acquire assets  $0   $249,871 
  Shares issued in payment of accrued expense  $42,283   $0 
  Warrants issued in connection with private placements  $0   $1,480,806 
  Deemed Dividend  $259,285   $0 

 

F-11
 

  

XZERES CORP.

(FORMERLY XZERES WIND CORP)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2012

 

NOTE 18 – STOCK WARRANTS AND OPTIONS

 

The Company has granted 695,000 warrants during fiscal year 2013 related to purchase order financing facilities. The Company granted 2,142,857, 5,207,649 and 2,584,318 stock warrants in connection with private placements during fiscal year 2013, fiscal 2012 and fiscal 2011, respectively and an additional 1,250,000 warrants in fiscal 2012 to advisors for a total of 9,136,967 warrants issued. The Company has accounted for these warrants as equity instruments in accordance with ASC 815-40, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, and as such, were classified in stockholders’ equity. The Company has estimated the fair value of the warrants issued at $4,025,069 as of the grant dates using the Black-Scholes option pricing model.

 

The Company has also granted 775,000 and 1,700,000 stock options, net of terminations, to employees during fiscal 2012 and fiscal 2011, respectively. The Company has estimated the fair value of the options as of the grant dates at $2,096,889 using the Black-Scholes option pricing model. Compensation expense is being recognized over the vesting periods of the options which range from immediate vesting to vesting over four years. Fifteen percent of total issued and outstanding common shares are available for stock options.

 

Key assumptions used by the Company in the Black-Scholes pricing model are summarized as follows:

 

      Private Placement
Warrants
  

Employee Stock

Options

  Stock Price   $0.35-$1.05   $0.45-$2.20
  Exercise Price   $0.80-$1.50   $.80-$1.25
  Expected volatility   73.4% - 98%   73.4% - 98%
  Risk-free rate   0.16% - 2.62%   2.0-3.37%
  Vesting period   -   0-4 years
  Expected term   3-5 years   7 years

 

A Stock Price of $0.45 to $1.05 was used in valuing the warrants and a range of $0.45-$2.20 for valuing the options. The stock price was based on the per share issuance prices from recent unrelated third party private placements. 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.

 

The warrants issued in connection with the private placements were valued at $3,610,400 and have been accounted for as an equity transaction. Options issued to employees are classified as compensation expense. Stock option expense recognized in net earnings amounted to $6,747 and $48,395 for the three and nine months ended November 30, 2012. Stock option expense recognized in earnings for the three and nine months ended November 30, 2011 was $86,836 and $394,768 respectively. As of November 30, 2012, there was $ 578,255 of unrecognized compensation expense related to non-vested share awards that we expect to recognize over a weighted average period of 3.5 years.

 

NOTE 19 – CONVERTIBLE NOTE PAYABLE

 

The $100,000 convertible note payable is dated June 14, 2012 and bears interest at 8%. Unpaid principal and accrued interest are due on the maturity date of March 18, 2013. After 180 days, unpaid note principal and accrued interest can be converted to common stock at the option of the lender at 58% of the average of the lowest three trading prices for the common stock during the ten trading day period ending on the latest complete trading day prior to the conversion date.

 

F-12
 

  

XZERES CORP.

(FORMERLY XZERES WIND CORP)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2012

 

NOTE 20 – NOTES PAYABLE

 

On May 25, 2012, the Company entered into a purchase order (PO) financing agreement which has provided $510,000 in debt financing, and which we will seek to increase up to a total of $750,000 in debt financing. This agreement will enable 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 12% annual interest rate on any funds outstanding. As additional consideration for the financing agreement, we issued the financing parties warrants to purchase up to 95,000 shares of our common stock, exercisable at any time during three years from the date of issue, at an exercise price of $0.80 per share. As orders continue to increase, we may seek to further increase the amount under this financing. There are no guarantees we will be successful at increasing the amounts available under this PO Financing agreement.

 

On August 6, 2012, the Company entered into a purchase order (PO) financing agreement which has provided $1,500,000 in debt financing. This agreement will enable 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 orders continue to increase, we may seek to further increase the amount under this financing. There are no guarantees we will be successful at increasing the amounts available under this PO Financing agreement.

 

The Purchase Order Financing Notes Payable are as follows:

 

     November 30, 2012   February 29, 2012 
  Notes payable due within five days of receipt by Company, in whole or in part, portion of funds collected on collateral sales order, or at note holder’s discretion, Company may submit a new collateral sales order with value equal to or in excess of principal outstanding. Borrowings must be paid by Maturity Date which ranges from December 31, 2012 to May 15, 2013. Interest rate is 1% per month.  $510,026   $- 
             
  Notes payable due in even installments of principal and interest over the twelve month length of $1,500,000 revolving credit facility collateralized by Company sales orders. Company may Company may submit new sales orders to drawdown as long as amount outstanding does not exceed facility amount. All obligations to the lender must be paid by the later of August 1, 2013 or 180 days after the last drawdown date. Interest rate is 16% per year.   1,500,000    - 
  Totals  $2,010,026   $- 

 

F-13
 

  

XZERES CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2012

 

NOTE 21 – COMMITMENTS

 

Operating Leases

 

The Company leases its office and manufacturing facilities under a lease which expires in July, 2013. 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, 2013  $72,564 
  2014   37,152 
  Total  $109,716 

 

Rent expense totaled $70,941 and $74,379 for the three months ended November 30, 2012 and 2011, respectively.

Rent expense totaled $235,656 and $211,443 for the nine months ended November 30, 2012 and 2011, respectively.

 

Lawsuits

 

On February 22, 2012, we were served with a lawsuit by Hobbes & Towne Inc. an employee recruiting firm, seeking damages in the amount of $105,000. The suit was filed on February 22, 2012 in the Court of Common Pleas, Chester County, Pennsylvania. The dispute arises out of an employee recruiting contract for engineering staff.

 

On May 21, 2012, the Company was served with a lawsuit by XC Associates, Inc. (XC), which was filed in U.S. District Court, Northern District of New York on May 16, 2012. XC was a vendor we had prepared to bring on as a key supplier of blades in early 2011. After numerous delays in delivering initial product to us, we disengaged from XC as a potential supplier. XC initially claimed we owed a balance of approximately $50,000 for initial tooling. We refused the claim. XC has now filed a suit claiming lost business among other damages, totaling approximately $729,000. We intend to vigorously contest these claims, and may assert counterclaims seeking damages for business disruption caused by XC’s failure to perform.

 

On June 25, 2012, we were served with a lawsuit by ESAM, Inc,, a manufacturing firm, seeking damages in the amount of $134,959. The suit was filed in the Circuit Court of the State of Oregon for the County of Josephine. The dispute arises due to delayed payment to the vendor due to the Company’s working capital constraints

 

NOTE 22 – SUBSEQUENT EVENTS

 

In accordance with ASC Topic 855-10, the Company has analyzed its operations subsequent to November 30, 2012 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-14
 

  

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”) 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 and commenced operations in the wind turbine business in the fiscal quarter ended May 31, 2010. 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 operates two wholly-owned subsidiaries, XZERES Energy Services Corp. was incorporated in Nevada in January, 2011 and XZERES Wind Europe Limited was formed in Ireland in October, 2010.

 

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 (2.5kW-100kW) market as well as power management solutions. Our grid connected and off grid wind turbine systems, which consist of our 2.5kW 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, available with or without a battery coupled solution. Our power management solutions are deployed primarily for commercial and light industrial applications, and secondarily residential usage and target both urban and rural customers.

 

6
 

 

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 new turbine systems, designed for ease of installation and to certification standards which cover standard testing procedures, power ratings, and structural designs of small wind systems.

 

We take a system integrator approach to our turbine business combined with a service-centric vertical integration program in order to provide complete solutions to our customers. We design, develop, manufacture, test, assemble and market our systems. In addition, we provide site assessment, customer financing, assistance with government-based financial incentives and local permitting, application engineering, installation, support and maintenance. And now we offer “tip-to-tower” insurance to our wind turbine customers to enable them to protect their valuable investment over the 20 year useful life of their system.

 

In addition, 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 consumption, extend the life of their electrical equipment and electronics via central surge suppression, reduce their carbon footprint, and depending upon the type of customer and the application, provide significant energy savings. We sale our product line of power efficiency devices targeted at small to medium-sized businesses.

 

Results of operations for the three and nine months ended November 30, 2012 and 2011

 

Overview. Since launching our wind products in early 2010, we have continued to build a strong presence in both the Domestic market as well as in the United Kingdom (UK), which has generated significant demand during the current fiscal year for our products. Those efforts have resulted in more orders and more multiple system orders per customer and enabled us to generate record revenues in the November 2012 quarter. We are also actively pursuing opportunities in additional markets, including areas in Asia, the Caribbean and other parts of Europe. We anticipate those new markets to contribute to our growth in the upcoming fiscal year. We have also continued to lower our operating expenses as reflected in the most recent quarter. Our biggest challenge to fulfilling our expanded backlog and reaching our objectives has been an extremely limited liquidity and insufficient working capital position, which we helped address late during the quarter with the October closing of our Series A preferred investment.

 

7
 

 

 We believe that the existing and growing sales backlog, current pipeline, and the greater overall interest in our products will contribute to further growth in our revenues going forward. Potential risks to this outlook include: meeting our working capital needs to be able to fulfill the orders, closed customers taking longer to prepare their sites for installation, since we do not recognize revenue until we deliver the system to the customer; negative changes in available incentives for renewable energy; increased restrictions on obtaining permits; and a deterioration in sentiment toward wind energy. With respect to incentives (a key driver in developed areas), there is a tendency for programs to be adjusted periodically. Our experience is that while one region may cut incentives, another area expands incentives. We would expect this ebb and flow of incentives around the world to continue and our global positioning positions us to take advantage of such trends.

 

As opposed to our wind turbine systems, our power efficiency products generally do not receive incentives and are not subject to lengthy permitting processes or installation needs. However, it does often take time to educate a potential customer about the benefits of this technology. We are experiencing a growing pipeline of activity in our power efficiency business and now have numerous dealers representing these products. As a result, we expect this business to experience rapid growth, albeit from a low base.

 

European market. The UK market remains a significant near-term driver in our business. In late 2011, we announced an agreement with the largest wind dealer in the UK. We granted this dealer exclusivity for certain parts of the UK in return for specified minimum purchase quantities. This has been enhanced with our own sales team efforts, which operate in the non-exclusive areas of the country. We are also targeting select areas in other European markets, such as Italy, where customer economics, are attractive.

 

As a result of strong orders from the UK, along with our existing domestic business and growing activities in Asia, the Company expects to achieve further growth in its business in calendar 2013, provided we are able to obtain sufficient working capital.

 

Other Quarter Highlights. During the period ended November 30, 2012, we incurred significantly higher shipping costs due to the timing of filling working capital needs combined with our commitment to meet certain customer delivery schedules. This negatively impacted our gross margin levels well below prior levels. We anticipate shipping costs to return to a more normal level going forward. In addition, we recently implemented a price increase as a result of recent system improvements that have further enhanced the average power production output. The combination of improved pricing and normal shipping costs is expected to substantially improve our margins going forward. We also continued to lower our cash operating costs in the period ended November 30,2012. We incurred $397,439 in non-cash expenses associated with option and stock awards during the period. Excluding that non-cash expense, we lowered our cash-based expenses by more than 42% from the prior year.

 

Income. For the three months ended November 30, 2012 and 2011, we generated gross revenue of $1,912,850 and $927,451, respectively. For the nine months ended November 30, 2012 and 2011, we generated gross revenue of $3,747,992 and $3,312,569, respectively. Our revenue increase during the three months ended November 30, 2012 is a result of improved liquidity which enabled us to fulfill part of the previous order backlog. Our management will continue to work on obtaining the additional working capital as needed, whether through equity or debt capital or a combination thereof.

 

8
 

  

Operating Expenses. Our Operating Expenses during the three month period ended November 30, 2012 equaled $1,707,015 consisting of $154,708 in sales expense, $61,869 in marketing costs, $198,135 in R&D/Engineering expenses, and $1,292,303 in general and administrative expenses. We had other expense of $34,171 for the period. Therefore, we recorded a net loss of $1,517,594 for the three months ended November 30, 2012. Inclusive in our net loss was non-cash expenses in the amount of $397,439. Our Operating Expenses during the three month period ended November 30, 2011 equaled $2,368,517, consisting of $562,266 in sales expense, $87,120 in marketing costs, $554,556 in R&D/Engineering expenses, and $1,164,575 in general and administrative expenses. We had other expense of $12,940 for the period. Therefore, we recorded a net loss of $2,130,515 for the three months ended November 30, 2011. Inclusive in our net loss was non-cash compensation in the amount of $86,836. The decrease in our net loss for the period ended November 30, 2012 over the same period in 2011 is attributable to a reduction in outside services associated with our significant product enhancements which we completed earlier this year along with our efforts to improve efficiencies and streamline operations.

 

Our Operating Expenses during the nine month period ended November 30, 2012 equaled $5,317,087 consisting of $671,626 in sales expense, $165,766 in marketing costs, $426,826 in R&D/Engineering fees, and $4,052,869 in general and administrative expenses. We had other expense of $151,461 for the period. Therefore, we recorded a net loss of $4,913,547 for the nine months ended November 30, 2012. Our Operating Expenses during the nine month period ended November 30, 2011 equaled $6,675,191, consisting of $1,259,057 in sales expense, $283,012 in marketing costs, $1,765,190 in R&D/Engineering fees, and $3,367,932 in general and administrative expenses. We had other expense of $40,573 for the period. Therefore, we recorded a net loss of $5,892,154 for the nine months ended November 30, 2011.

 

Excluding the non-cash charges associated with employee option expensing and the expensing of shares issued to consultants for services, we experienced close to a 25% reduction in our cash operating costs during the nine months ending November 30, 2012. We anticipate further declines in some of our operating expenses going forward.

 

Liquidity and Capital Resources

 

As of November 30, 2012, we had total current assets of $1,868,428,consisting primarily of $89,048 in cash and cash equivalents, $360,712 in accounts receivable, $975,188 in inventories and $255,391 in prepaid expenses. Our total current liabilities as of November 30, 2012 were $5,134,624. Thus, we have negative working capital of $3,266,196 as of November 30, 2012. As of November 30, 2012, we had total assets of $4,112,100.

 

Operating activities used $3,764,994 and $4,921,109 in cash for the nine months ended November 30, 2012 and November 30, 2011, respectively. Our net loss of $4,913,546 was the primary component of our negative operating cash flow for the nine months ended November 30, 2012.

 

Investing Activities used $114,573 in cash during the nine month period ending November 30, 2012, primarily as a result of an increase in notes receivable

 

Financing Activities generated $3,777,232 in cash from purchase order financing and the issuance of preferred shares in the nine months ended November 30, 2012 while $4,730,961 in cash for the nine months ended November 30, 2011 was entirely generated from the issuance of new common shares and repayment of a related party note payable.

 

As of November 30, 2012, 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. Our current order backlog requires working capital to satisfy in a timely manner. In addition, we also lack sufficient working capital to meet all our current obligations to existing vendor trade payables and have delayed payments to many vendors. Our management will continue to make obtaining additional working capital as needed, whether equity or debt capital, a high priority for the next twelve months as the lack thereof constitutes a significant present constraint on our ability to satisfy our existing large backlog of orders or to grow further. Although there can be no assurance that this additional working capital will be acquired, management believes that the current company opportunities are significant enough that we will be able to do so. If we are unable to do so, the execution of our business plan could be adversely impacted.

 

9
 

  

Off Balance Sheet Arrangements

 

As of January 22, 2013,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 defective to the extent that the Company’s Form 10-K filing for the year ended February 29, 2012, filed with the SEC on June 13, 2012 (File No. 333-91191), did not fully and completely describe our disclosure controls and procedures. The Company has retained new legal counsel in an attempt to ensure that the descriptions of our disclosure controls and procedures in future SEC filings are full and complete.

 

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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 effective as of November 30, 2012.

 

There were no changes in our internal control over financial reporting during the quarter ended November 30, 2012, 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

 

On May 21, 2012, we were served with a lawsuit by XC Associates, Inc. (XC), which was filed in U.S. District Count, Northern District of New York on May 16, 2012. XC was a vendor we had prepared to bring on as a key supplier of blades in early 2011. After numerous delays in delivering initial product to us, we disengaged from XC as a potential supplier. XC initially claimed we owed a balance of approximately $50,000 for initial tooling. We refused the claim. XC has now filed a suit claiming lost business among other damages, totaling approximately $729,000. We intend to vigorously contest these claims, and may assert counterclaims seeking damages for business disruption caused by XC’s failure to perform. We filed a response on July 6, 2012 seeking complete dismissal of all claims.

 

On February 22, 2012, we were served with a lawsuit by Hobbes & Towne Inc. an employee recruiting firm, seeking damages in the amount of $105,000. The suit was filed on February 22, 2012 in the Court of Common Pleas, Chester County, Pennsylvania. The dispute arises out of an employee recruiting contract for engineering staff. We have answered the suit and intend to vigorously contest the plaintiff’s claims.

 

On June 25, 2012, we were served with a lawsuit by ESAM, Inc,, a manufacturing firm, seeking damages in the amount of $134,959. The suit was filed in the Circuit Court of the State of Oregon for the County of Josephine. The dispute arises due to delayed payment to the vendor due to the Company’s working capital constraints

 

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

 

101.INS*   XBRL Instance Document
101.SCH*   XBRL Taxonomy Extension Schema Document
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*   XBRL Taxonomy Extension Label Linkbase Document
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase Document

 

* Filed Herewith. 

 

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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: 01/22/2013  
     
By: /s/ Frank Greco  
Title: Chief Executive Officer  

 

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