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, 2013
[  ] 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. 41,993,857 as of January 14, 2014.

 


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 7
Item 4: Controls and Procedures 8

 

PART II – OTHER INFORMATION

 

Item 1: Legal Proceedings 9
Item 5: Other Information 9
Item 6: Exhibits 9
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, 2013, and February 28, 2013 (unaudited);
F-2 Statements of Operations for the three and six months ended November 30, 2013 and 2012 (unaudited);
F-3 Statements of Cash Flows for the nine months ended November 30, 2013 and 2012 (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, 2013 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, 2013 AND FEBRUARY 28, 2013

 

ASSETS November 30, 2013  February 28, 2013
Current Assets         
Cash and cash equivalents $3,480   $—   
Accounts receivable, net  1,111,868    131,295 
Notes receivable – current portion  49,264    49,264 
Inventories  3,269,200    751,524 
Inventory deposits  467,505    142,200 
Deferred financing costs – current portion  8,361    46,625 
Prepaid expenses  581,267    73,471 
Total Current Assets  5,490,945    1,194,379 
          
Property and Equipment, net  243,282    320,579 
          
Other Assets         
    Notes receivable – net of current portion  87,365    106,113 
    Deferred financing costs – net of current portion  —      4,778 
    Intellectual property  1,802,210    1,802,210 
    Website development costs, net  —      4,117 
    Deposits  18,198    18,198 
Total Other Assets  1,907,773    1, 935,416 
          
TOTAL ASSETS $7,642,000   $3,450,374 
          
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)         
Current Liabilities         
Accounts payable $1,274,186   $2,434,147 
Accrued expenses  1,556,874    880,957 
Customer deposits  249,477    234,413 
Warranty reserve  164,260    150,629 
     Due to factor-related party  220,685    —   
Notes payable-related parties  630,122    —   
Notes payable  1,685,000    2,068,350 
Total Current Liabilities  5,780,604    5,768,496 
          
Long-Term  Liabilities         
     Due to factor-related party  —      235,040 
     Notes payable – related parties  —      690,000 
     Notes payable  6,489,549    160,000 
Total  Long-term Liabilities  6,489,549    1,085,040 
TOTAL LIABILITIES  12,270,153    6,853,536 
          
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    1,429 
Common stock, par $0.001, 100,000,000 shares authorized, 36,251,042 and 28,392,827 shares issued and outstanding, respectively  36,252    28,394 
Stock warrants  5,854,899    4,273,130 
Additional paid in capital  17,183,413    14,070,918 
Accumulated other comprehensive income (loss)  57,977    61,127 
Accumulated deficit  (27,762,123)   (21,838,160)
Total Stockholders’ Equity (Deficit)  (4,628,153)   (3,403,162)
          
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) $7,642,000   $3,450,374 

 

See accompanying notes to consolidated financial statements.

F-4

XZERES CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

FOR THE THREE AND NINE MONTHS ENDED NOVEMBER 30, 2013 AND 2012

 

  Three Months Ended  Nine Months Ended
  Nov 30, 2013 (Unaudited)  Nov 30, 2012 (Unaudited)  Nov 30, 2013 (Unaudited)  Nov 30, 2012 (Unaudited)
            
GROSS REVENUES $1,561,208   $1,912,850   $2,704,998   $3,747,992 
                    
COST OF GOODS SOLD  1,228,399    1,689,259    2,137,390    3,192,991 
                    
GROSS PROFIT  332,809    223,591    567,608    555,001 
                    
OPERATING EXPENSES                   
    General and administrative expenses  1,701,963    1,292,303    4,522,877    4,052,869 
    Marketing  93,579    61,869    256,532    165,766 
    Sales expense  235,071    154,708    629,619    671,626 
    Engineering/R&D expense  338,985    198,135    968,476    426,826 
TOTAL OPERATING EXPENSES  2,369,598    1,707,015    6,377,504    5,317,087 
                    
LOSS FROM OPERATIONS  (2,036,789)   (1,483,424)   (5,809,896)   (4,762,086)
                    
OTHER INCOME (EXPENSE)                   
     Interest expense  (321,060)   —      (674,255)   —   
     Other income (expense)  1,354    (34,171)   561,228    (151,461)
TOTAL OTHER INCOME (EXPENSE)  (319,706)   (34,171)   (113,027)   (151,461)
                    
LOSS BEFORE PROVISION FOR INCOME TAXES AND OTHER COMPREHENSIVE INCOME (LOSS)  (2,356,495)   (1,517,595)   (5,922,923)   (4,913,547)
                    
PROVISION FOR INCOME TAXES  —      —      —      —   
                    
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS  (2,356,495)   (1,517,595)   (5,922,923)   (4,913,547)
                    
DEEMED DIVIDEND  —      (259,285)   —      (259,285)
                    
OTHER COMPREHENSIVE INCOME (LOSS)                   
Foreign currency adjustment gain (loss)  (4,150)   1,785    (4,191)   (45,299)
                    
COMPREHENSIVE INCOME (LOSS) $(2,360,645)  $(1,775,095)  $(5,927,114)  $(5,218,131)
                    
NET LOSS PER SHARE:                   
   BASIC AND DILUTED $(0.07)  $(0.07)  $(0.19)  $(0.20)
                    
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:                   
BASIC AND DILUTED  31,753,075    27,215,776    31,454,980    26,563,601 

  

See accompanying notes to consolidated financial statements.

F-5

XZERES CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE NINE MONTHS ENDED NOVEMBER 30, 2013 AND 2012

 

  Nine Months Ended November 30, 2013  Nine Months Ended November 30, 2012
Cash Flows from Operating Activities:         
Net loss for the period $(5,922,923)  $(4,913,547)
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:         
Depreciation and amortization expense  120,505    105,560 
Allowance for doubtful accounts  (25,165)   7,866 
Share-based compensation  132,962    48,395 
Issuance of common shares for services  112,375    541,487 
Issuance of common shares for fee  —      225,000 
Issuance of  warrants for consulting  959,229    —   
Changes in Assets and Liabilities         
Accounts receivable  (955,408)   668,200 
Subscription receivable  —      80,000 
Prepaid expenses  (507,796)   (73,114)
Inventory and inventory deposits  (2,842,981)   (147,000)
Accounts payable  (1,014,725)   (266,411)
Accrued expenses  675,917    340,723 
Customer deposits  15,064    (385,384)
VAT & sales tax payable  —      (32,822)
Warranty reserve  13,631    47,696 
Net Cash Used in Operating Activities  (9,508,239)   (3,753,350)
          
Cash Flows from Investing Activities:         
Net change in notes receivable  18,748    (93,034)
Acquisitions of property and equipment  3,952    (21,539)
Net Cash Used in Investing Activities  22,700    (114,573)
          
Cash Flows from Financing Activities:         
Proceeds from issuance of preferred shares  —      1,500,000 
Net increase in notes and loans payable  7,260,210    2,273,088 
Proceeds from exercise of warrants  2,233,000    —   
Equity issuance costs  —      (7,500)
Net Cash Provided by Financing Activities  9,493,210    3,765,588 
          
Foreign Currency Effect on Cash  (4,191)   (45,299)
          
Net Increase (Decrease) in Cash and Cash Equivalents  3,480    (147,634)
Cash and Cash Equivalents – Beginning  —      236,682 
          
Cash and Cash Equivalents – Ending $3,480   $89,048 
          
Supplemental Cash Flow Information:         
Cash paid for interest $—     $—   
Cash paid for income taxes $—     $—   

 

See accompanying notes to consolidated financial statements.

F-6

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2013

 

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 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 28, 2013. 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-7

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2013

 

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, prepaid expenses, accounts payable, accrued expenses, customer deposits, warranty reserve, due to factor, and notes payable. 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 a minimum of $150,000 in product per year. 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. XZERES had cash of $3,480 and $0 at November 30, 2013 and February 28, 2013, respectively.

 

Advertising Costs

The Company’s policy regarding advertising is to expense advertising when incurred. XZERES incurred advertising expense of $27,932 and $17,461 during the quarters ended November 30, 2013 and 2012, respectively. For the nine months ended November 30, 2013 and 2012, XZERES incurred advertising expense of $56,294 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.

 

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. For the quarters ended November 30, 2013 and 2012, the Company recorded stock–based compensation expense relating to non-employees in the amount of $33,000 and $390,692 respectivelyFor the nine months ended November 30, 2013 and 2012, the Company recorded stock-based compensation relating to non-employees of $1,068,604 and $589,882 respectively.

F-8

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2013

 

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 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 issuance date.

 

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 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 the quarter ended November 30, 2013, 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. Weighted average common share equivalents totaled 31,753,075 at November 30, 2013. Outstanding warrants and options were not included in the computation of diluted earnings per share for the quarter ended November 30, 2013, as their effect would have been anti-dilutive.

F-9

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2013

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

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 July 2, 2013, the Company entered into an Asset Purchase Agreement (the “Acquisition”) to acquire substantially all of the remaining assets of Southwest Windpower Inc., consisting primarily of inventory, intellectual property and product designs for the Skystream wind turbine. Under the terms of the Acquisition, the Company paid $654,321 in cash.

 

The purchase price was allocated as follows:

 

Description Amount
Inventory $1,216,689 
Gain on purchase  (562,368)
Total $654,321 

  

NOTE 3 - ACCOUNTS AND NOTES RECEIVABLE

 

Accounts receivable is generated from sales of wind turbine systems and power efficiency products. At November 30, 2013, accounts receivable were substantially comprised of balances due from end customers.

 

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, 2013 and February 28, 2013 an allowance for doubtful accounts of $118,422 and $143,587, respectively, has been provided.

 

  November 30, 2013  February 28,  2013
Accounts and notes receivable $1,366,920   $430,259 
Less: Allowance for doubtful accounts  (118,422)   (143,587)
Accounts and notes receivable, net $1,248,498   $286,672 

 

 

Notes receivable is generated from sales of wind turbine systems. At November 30, 2013, notes receivable were comprised of balances due from six 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.

F-10

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2013 

 

NOTE 4 – PREPAID EXPENSES

 

Prepaid expenses consisted of the following:

 

  November 30, 2013 

February

28, 2013

Software licenses $15,647   $11,558 
Consulting  565,620    61,913 
Total prepaid expenses $581,267   $73,471 

  

NOTE 5 – 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, 2013  February 28, 2013
Deferred financing costs $85,204   $85,204 
Less: accumulated amortization  (76,843)   (33,801)
Deferred financing costs, net $8,361   $51,403 

 

NOTE 6 – 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.

Inventories consisted of the following:

  November 30, 2013  February 28, 2013
Finished goods $2,114,713   $324,888 
Parts and supplies  1,154,487    426,636 
Total Inventories $3,269,200   $751,524 

 

F-11

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2013

 

NOTE 7 – 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, 2013  February 28, 2013
Furniture $48,624   $48,624 
Computer equipment  175,269    171,318 
Shop machinery and equipment  194,215    194,215 
Testing Site & Equipment  31,389    31,389 
Molds & Tooling  76,947    76,947 
Vehicles  10,998    10,998 
Subtotal  537,442    533,491 
Less: accumulated depreciation  (294,160)   (212,912)
Property and equipment, net $243,282   $320,579 

 

Depreciation expense totaled $26,879 and $22,529 for the three months ended November 30, 2013 and 2012 respectively. For the nine months ended November 30, 2013 and 2012, depreciation expense totaled $81,248 and $66,729, respectively.

 

NOTE 8 – 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 9 – WEBSITE DEVELOPMENT COSTS

 

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

 

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 $588 and $1,765 for the three months ended November 30, 2013 and 2012, respectively. Amortization expense was $4,117 and $5,294 for the nine months ended November 30, 2013 and 2012, respectively.

 

   November 30, 2013    February 28, 2013 
Website development costs $21,175   $21,175 
Less: Accumulated amortization  (21,175)   (17,058)
Website development costs, net $0   $4,117 

F-12

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2013

 

NOTE 10 – ACCRUED EXPENSES

 

Accrued expenses consisted of the following:

 

  November 30, 2013  February 28, 2013
Wages $99,440   $93,545 
Payroll Taxes  663,466    693,421 
Benefits  1,942    8,441 
Consulting  462,763    —   
Interest  329,263    85,550 
Total Accrued Expenses $1,556,874   $880,957 

  

NOTE 11 – 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 $249,477 at November 30, 2013 and $234,413 at February 28, 2013.

 

NOTE 12 – 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%

 

Warranty reserve balances were as follows at November 30, 2013 and February 28, 2013:

  November 30, 2013  February 28, 2013
FY 2011 $9,464   $16,223 
FY 2012  41,297    55,063 
FY 2013  66,815    79,343 
FY 2014  46,684    —   
Reserve balance $164,260   $150,629 

 

F-13

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2013

 

NOTE 13 – CAPITAL STOCK

 

In October, 2008, the Company increased its authorized common stock from 10,000,000 to 100,000,000 shares, and changed the par value of the common stock from no par to $0.001 par value.   The Company also reverse split the outstanding shares of common stock at a ratio of 7.7 to 1, leaving a total of 150,079 shares of common stock issued and outstanding following the split.

 

Common Stock

 

During the nine months ending November 30, 2013, 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, of which $101,875 was expensed during the nine months ending November 30, 2013.

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

  • 250,000 Common shares were issued valued at $100,000 in connection with an adjustment in pricing from a previous investment.

  • 6,380,000 Common shares were issued in connection with warrants exercised.

During the fiscal year ending February 28, 2013, the following share-related transactions occurred:

 

  • 206,718 Common Shares valued at $81,099 were issued in payment of an account payable.

  • 1,508,644 common shares were issued for consulting services to multiple providers. The shares were valued at various market prices ranging between $0.35 and $0.45 per share. The combined value of the shares was $602,150, all of which was expensed during Fiscal 2013.

  • 1,174,051 common shares were issued in connection with the conversion of the prior outstanding convertible note in the amount of $104,000.

 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.

F-14

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2013

 

NOTE 13 – CAPITAL STOCK (CONTINUED)

 

  • 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.

 Total common shares issued and outstanding at November 30, 2013 was 36,251,042.

 

Preferred Stock 

 

  • 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. Each Preferred share is 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. In addition, we filed an amendment to our articles of incorporation establishing the new Preferred Shares.

 NOTE 14 – 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 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 provided for the issuance of up to 2,823,199 common shares for directors, officers, and employees. The Company recently amended the original plan to increase the available issuance of common shares up to 4,000,000. The amendment will require shareholder ratification at the next annual meeting.

 

The Company granted 2,375,000 new qualified options during the nine months ending November 30, 2013. During the same period, 965,000 qualified options were canceled due to terminations. During the nine months ending November 30, 2013, 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 has 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. 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.

F-15

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2013

 

NOTE 14 – STOCK WARRANTS AND OPTIONS (CONTINUED)

 

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 expense. Stock option expense recognized in net earnings amounted to $53,668 and ($132,963) for the three and nine months ended November 30, 2013. Stock option expense recognized in earnings for the three and nine months ended November 30, 2012 was $6,747 and $117,813 respectively. The negative expense values reflect reversals of prior options expensed related to a terminated employee. Unrecognized expense of $424,616 remains to be recognized through 2017.

 

A summary of changes in qualified employee stock options during the nine months ended November 30, 2013 and years ended February 28, 2013 and February 29, 2012 is as follows:

 

  Stock Options  Weighted Average
Exercise Price
 

Expiry
Date

 Outstanding, February 28, 2011    1,700,000   $1.07    FY 2018 
 Issued    1,310,000    1.135    FY 2019 
 Exercised    0    0      
      Expired/Canceled    (535,000)   0.99 
 Outstanding, February 28, 2012    2,475,000    1.13      
 Issued    0    0      
 Exercised    0    0      
      Expired/Canceled    (380,000)   1.13 
 Outstanding, February 28, 2013    2,095,000    1.13      
 Issued    2,375,000    0.368    FY 2020 
 Exercised    0    0      
      Expired/Canceled    (965,000)   1.22 
 Outstanding, November 30, 2013    3,505,000   $0.615      

  

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.

F-16

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2013

 

NOTE 14 – STOCK WARRANTS AND OPTIONS (CONTINUED)

 

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 first quarter of fiscal 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 August 31, 2013 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 500,000 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. The debt discount is being amortized over the term of the financing. The unamortized portion of the debt discount was $930,417 at November 30, 2013. 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.

 

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. The issuance of the warrants in connection with the Preferred Stock triggered a reset provision on 1,777,225 previously issued warrants resulting in a modification of value of $51,895. 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. The unamortized portion of the debt discount was $31,650 at February 28, 2013.

 

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 $0.31 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.

F-17

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2013

 

NOTE 14 – STOCK WARRANTS AND OPTIONS (CONTINUED)

 

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

 

A summary of changes in share purchase warrants during the nine months ended November 30, 2013 and years ended February 28, 2013 and February 29, 2012 is as follows:

 

   Number of Warrants  Weighted Average
Exercise Price
  Expiry Date
 Outstanding, February 28, 2011    2,584,318   $1.328   Various through 3/18/2016
 Issued    6,457,649    1.063   Various through 3/18/2016
 Exercised    0         
 Cancelled/Expired    0         
 Outstanding, February 29, 2012    9,041,967    1.14    
 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    23,633,572    0.35   Various through 4/4/2017
 Exercised    (6,380,000)   0.35    
 Cancelled/Expired    0         
 Outstanding, November 30, 2013    29,133,396   $0.60    

 

 

F-18

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2013

 

 

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 negative 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.

 

NOTE 16 – INCOME TAXES

 

For the period ended November 30, 2013, 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 $27,762,000 at November 30, 2013, 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, 2013  November 30, 2012
Federal income tax benefit attributable to:         
Current operations $2,013,800   $1,686,000
Less: valuation allowance  (2,013,800)   (1,686,000)
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, 2013  February 28, 2013
Deferred tax asset attributable to:         
Net operating loss carryover $9,351,800   $7,338,000
Less: valuation allowance   (9,351,800)    (7,338,000)
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 $27,762,000 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-19

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2013

 

 NOTE 17 – COMMITMENTS

 

Operating Leases

The Company leases its office and manufacturing facilities under a lease which expired in July, 2013. We originally entered into a 3-month extension to provide time to complete an analysis of future space requirements and subsequently increased that extension for another 12 months. The temporary lease provides for the payment of taxes and operating costs, such as insurance and maintenance in addition to the base rental payments.

 

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

 

 Year ended February 28, 2014   $60,144 

 

Rent expense totaled $70,017 and $70,941 for the three months ended November 30, 2013 and 2012, respectively.

Rent expense totaled $160,334 and $235,656 for the nine months ended November 30, 2013 and 2012, respectively.

 

NOTE 18 – CONVERTIBLE NOTE PAYABLE

 

The convertible note was originated on June 14, 2012 in the amount of $100,000 with an 8% interest rate. The unpaid principal and accrued interest was due on the maturity date of March 18, 2013. After 180 days, the unpaid note principal and accrued interest could 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. The convertible note payable was entirely converted to equity by January 24, 2013. 

 

NOTE 19 – DUE TO FACTOR-RELATED PARTY

 

  November 30, 2013  February 28, 2013
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 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 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. Under the note, outstanding accrued interest was added to principal as of the amendment date. The November 30, 2013 balance is shown net of a $14,355 debt discount. $220,685   $235,040 
          
Less: current maturities  (220,685)   (0)
          
Long-term Portion $0   $235,040 

 

F-20

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2013

 

NOTE 20 – NOTES PAYABLE – RELATED PARTIES

 

Notes payable – related parties consists of two separate notes:

 

  November 30, 2013  February 28, 2013
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, 2013 at 10% interest. Under the new terms, interest is reduced to 10%, and monthly payments of $4,937 are due May 1, 2013 until October 1, 2014, when all remaining principal and interest are due. Under the note, outstanding accrued interest was added to principal as of the amendment date. The November 30, 2013 balance is shown net of a $29,740 debt discount. $490,260   $520,000 
          
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. Under the note, outstanding accrued interest was added to principal as of the amendment date. The November 30, 2013 balance is shown net of a $30,138 debt discount.  139,862    170,000 
Totals  630,122    690,000 
          
Less: current maturities  (630,122)   0 
          
Long-term portion $0   $690,000 

F-21

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2013

 

NOTE 21 – NOTES PAYABLE

 

Notes Payable consists of three separate notes:

 

  November 30, 2013  February 28, 2013
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. 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 principal 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. $1,105,000   $1,408,350 
          
Notes 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, interest remains at 16%, and monthly principal 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. Interest rate is 10% annually. Under the note, outstanding accrued interest was added to principal as of the amendment date.  420,000    660,000 
          
Promissory note bearing a 12% annual interest rate originally due December 31, 2012. Unsecured. The note was amended on April 1, 2013 to include the outstanding accrued interest to date. Under the new terms, interest remains at 12%, and monthly payments of $1,981 are due May 1, 2013 until October 1, 2014, when all remaining principal and interest are due.  160,000    160,000 
          
On April 3, 2013, the Company entered into a new credit facility, which provides up to $6,500,000 in debt financing.  The agreement calls for a 10% annual interest rate on any funds outstanding.  As additional consideration for the financing agreement, the financing parties were issued warrants to purchase up to 7,500,000 shares of our common stock, exercisable at any time during four years from the date of issue, at an exercise price of $0.35 per share. The November 30, 2013 balance is shown net of a $856,184 debt discount.       —   
   6,489,549    0 
Totals  8,174,549    2,228,350 
          
Less: current maturities  (1,685,000)   (2,068,350)
Long-term portion  6,489,549   $160,000 

F-22

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2013

 

NOTE 22 – SUPPLEMENTAL CASH FLOWS

 

Supplemental Non-Cash Investing and Financing Activities: November 30, 2013  February 28, 2013
Modification of warrants $0   $51,895 
Shares issued in payment of trade debt $145,237   $81,099 
Debt discount from warrants issued in connection with debt $1,388,244   $85,204 
Issuance of common shares for convertible debt and accrued interest $0   $104,000 
Deemed dividend $0   $259,285 

 

NOTE 23 – CONCENTRATIONS

 

Credit risk- Financial instruments that potentially subject the Company to concentrations of credit risk consist of demand deposits with a financial institution. At November 30, 2013, there are no balances exceeding FDIC insurance of $250,000. 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, 2013. Generally, the Company does not require collateral or other securities to support its accounts receivable.

 

Major customer- The Company has one major customer that accounted for approximately 48% and $728,000 of sales for the three months ended November 30, 2013 and approximately 27% and $728,000 of sales for the nine months ended November 30, 2013. The Company expects to maintain this relationship with the customer.

 

Major vendor- The Company has one major vendor that accounted for approximately 25% and $212,000 of materials purchased for the three months ended November 30, 2013 and approximately 20% and $491,600 of materials purchased for the nine months ended November 30, 2013. The Company expects to maintain this relationship with the vendor.

 

NOTE 24 – SUBSEQUENT EVENTS

 

On December 18, 2013, the Company closed on a private placement of common stock and warrants by consummating the sale of 4,444,444 shares of common stock and warrants to purchase an additional 2,222,222 shares, exercisable at $0.385 per share at any time for a period of three years from the issue date. Each share and one-half warrant sold for $0.45, for total gross proceeds in this closing of $2,000,000. 


F-23

 

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 January of 1984.  Since the fiscal quarter ended May 31, 2010, our business has been 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.  

XZERES Energy Services Corp., incorporated in Nevada in January, 2011 and XZERES Wind Europe Limited, 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 (2.4kW-100kW) market as well as power management solutions.  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, 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.

4

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 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 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, 2013 and 2012

 

Overview.  Third quarter revenue saw further sequential gains, a benefit from the new, larger credit facility, which was completed at the end of March. Since completing the new facility, we have invested heavily in our supply chain and inventory in preparation for key initiatives that are now underway. The Company believes it is now well positioned with work-in-process and finished goods inventory on hand along with the supplier base now in a position to perform at a much higher level to meet these targeted initiatives.

 

Our efforts and investments made to improve the supply chain and flow of product is being done to not only support our normal business activity, but to also support our new major sales program in the UK (and eventually in other regions), known as FITCO. FITCO is a program where investors, project developers, and XZERES (as the turbine equipment supplier) have come together to provide an attractive solution to land owners that makes it very financially attractive to install an XZERES system. The investors and project developers have committed substantial resources and set significant goals for this effort and we anticipate it will enable XZERES to sell a higher volume of turbines beginning in calendar 2014. This new program provided initial benefits in the November quarter with an initial order of systems at the end of the quarter. Based on the current volume of identified projects, we expect increasing contribution from this effort as we move forward. All sales under this program will be completed at normal product pricing.

 

We also continue to actively pursue opportunities in additional markets, including areas in Asia, the Caribbean and other parts of Europe.  While it remains difficult to predict the exact timing on when new markets will begin to produce orders, we believe those new markets will contribute to our growth in the current fiscal year. 

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Acquisition of Skystream product. During the second quarter, on July 9th, we announced we had acquired certain assets of Southwest Windpower, which included its popular Skystream product. We believe there is a very strong market worldwide for the Skystream turbine and we have already begun marketing and selling the product and expect it to also contribute to our overall revenue growth. According to Southwest’s records, the Skystream product generated approximately $9mil in revenue during 2012 . There can be no assurance that we will be able to generate similar levels of revenue with the product, but we have begun selling the system, continue to actively sign up former Southwest dealers as XZERES dealers, and continue to experience an increasing level of interest and quoting activity for the Skystream product.

 

Potential risks to our overall growth outlook include: the ability of our suppliers to ramp production, 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 enables 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 as a result, continue to expect this business to expand from current levels. 

 

Income.  For the three months ended November 30, 2013 and 2012, we generated gross revenue of $1,561,208 and $1,912,850 respectively.   For the nine months ended November 30, 2013 and 2012, we generated gross revenue of $2,704,998 and $3,747,992, respectively. Our revenue decline during the three and nine months ended November 30, 2013 was primarily a result of very limited liquidity at the beginning of the fiscal year and the lead time required to ramp our suppliers since our new, larger credit facility was closed at the end of March.

 

Operating Expenses. 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 $53,669. 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 $1,517,595 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 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. 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.  

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Liquidity and Capital Resources

 

As of November 30, 2013, we had total current assets of $5,490,945, consisting primarily of $3,480 in cash and cash equivalents, $1,161,132 in accounts and notes receivable, $3,736,705 in inventories and inventory deposits and $581,267 in prepaid expenses.  Our total current liabilities as of November 30, 2013 were $5,780,604. Thus, we have negative working capital of $289,659 as of November 30, 2013.   As of November 30, 2013, we had total assets of $7,642,000.

 

Operating activities used $9,508,239 and $3,753,350 in cash for the nine months ended November 30, 2013 and November 30, 2012, respectively. Our net loss of $5,922,923 and increased inventory of $2,842,981 were the primary components of our negative operating cash flow for the nine months ended November 30, 2013.


Investing Activities provided $22,700 in cash during the nine month period ending November 30, 2013, primarily as a result of payments received on notes receivable.

 

Financing Activities generated $9,493,210 in cash from the new credit facility and warrant exercise in the nine months ended November 30, 2013 while $3,765,588 in cash for the nine months ended November 30, 2012 was primarily generated from purchase order and note financing along with the issuance of the preferred shares.

 

As of November 30, 2013, 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. 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.

 

Off Balance Sheet Arrangements

 

As of January 15, 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.

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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, 2013.

 

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, 2013.

 

There were no changes in our internal control over financial reporting during the period ended November 30, 2013,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 August 5th, 2013 we were served with a lawsuit from our former chairman, David Baker, claiming breach of the settlement agreement signed on April 17, 2013.  Part of the original settlement agreement provided for 3 equal cash payments of $19,825 over a 3 month period.  Two of those cash payments have yet to be made by the Company, which is the primary basis of the claim.  The Company is reviewing the fulfillment of certain obligations by Mr. Baker under the original settlement and will either seek its own remedies or complete the remaining cash payments owed.  The Company does not expect this matter to have a material impact on its operations.

 

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 13, 2013
   /s/ Frank Greco
By: Frank Greco
Title: Chief Executive Officer

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