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XPWR > SEC Filings for XPWR > Form 10-Q on 14-Jan-2014All Recent SEC Filings

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Form 10-Q for XZERES CORP.


14-Jan-2014

Quarterly Report


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.

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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.

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