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XPWR > SEC Filings for XPWR > Form 10-Q on 15-Jul-2014All Recent SEC Filings

Show all filings for XZERES CORP.

Form 10-Q for XZERES CORP.


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

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

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

Our Business

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

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

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

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

Table of Contents

Results of operations for the three months ended May 31, 2014 and 2013

Overview. While first quarter revenue improved over the prior year period, it was well below our internal plan. This has been partially related to the permitting process taking longer than originally anticipated with our UK market activities. However, the greater impact was related to a quality issue on a critical system component where the manufacturer did not conform to our specifications. We anticipate this quality issue to be resolved by the early August timeframe. The quality issue also impacted our warranty costs and hence gross margins during the period as we have expensed the cost of replacements on existing systems in the field.

Income. For the three months ended May 31, 2014 and 2013, we generated gross revenue of $501,948 and $131,387 respectively. Our revenue increase during the three months ended May 31, 2014 was primarily a result of the improved working capital position since last year, but was lower than our forecast due to timing delays in project permits as well as a specific supplier delay due to a quality problem.

Operating Expenses. Our Operating Expenses during the three month period ended May 31, 2014 equaled $2,133,338, consisting of $390,241 in sales expense, $155,261 in marketing costs, $248,995 in R&D/Engineering expenses, and $1,338,841 in general and administrative expenses. We had other expense of $816,216 for the period. Therefore, we recorded a net loss of $3,051,499 from operations for the three months ended May 31, 2014. Inclusive in our net loss were non-cash charges of $639,954 associated with employee options, and the amortization of consultant warrants and debt discount. Our Operating Expenses during the three month period ended May 31, 2013 equaled $1,528,263, consisting of $210,525 in sales expense, $76,215 in marketing costs, $290,880 in R&D/Engineering expenses, and $950,643 in general and administrative expenses. We had other expense of $111,388 for the period. Therefore, we recorded a net loss of $1,619,409 for the three months ended May 31, 2013. Inclusive in our net loss was a benefit of $249,397 due to a reversal of non-cash compensation expense related to terminated employee options.

Liquidity and Capital Resources

As of May 31, 2014, we had total current assets of $4,669,539, consisting of $74,330 in cash and cash equivalents, $743,455 in accounts and notes receivable, $3,632,362 in inventories and inventory deposits and $218,198 in prepaid expenses. Our total current liabilities as of May 31, 2014 were $14,437,890. Thus, we have negative working capital of $9,768,351 as of May 31, 2014. As of May 31, 2014, we had total assets of $6,801,896.

Operating activities used $1,446,684 and $2,971,110 in cash for the three months ended May 31, 2014 and May 31, 2013, respectively. Our net loss of $3,051,499 and accounts payable reduction of $276,434, were the primary components of our negative operating cash flow for the three months ended May 31, 2014.

Investing Activities used $11,860 in cash during the three month period ending May 31, 2014.

Financing Activities generated $1,490,236 from an increase in the senior credit facility in the three months ended May 31, 2014.

As of May 31, 20143, 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.

General Outlook:

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

UK FITCO - We have been actively promoting the FITCO program in the UK since the fall of last year. It did contribute to revenues in the final 2 quarters of the year, although at a moderate level. The program enables a landowner to receive a turbine and the power it generates for free while the investor partner (Gale Force) collects the available Feed-In-Tariff payouts. Gale Force has committed significant funding resources for the UK effort, with the focus on purchasing the XZERES 10kW turbine. We are working with a number of project partners in the country who assist in identifying quality sites, meeting with the landowner, and securing the lease contract for Gale Force. Once the site has planning and connection approval, Gale Force then purchases the system from us and we assist in arranging for installation. Gale Force and the Project partners have already secured a large volume of sites awaiting permit approvals and are working toward reaching a minimum monthly goal of 15-30 systems. While the permitting approvals have taken longer, we do expect the pace to pick up as we move forward. The average equipment sales price from Xzeres, for the 10kW system, is approximately $55,000.

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

Table of Contents

Japan Sales & FITCO - Japan has introduced a very attractive feed-in-tariff (FIT) program. We have been actively working through the certification process to have our systems approved for the FIT in Japan. We expect this new market opportunity to be significant due to the high FIT rate, Japan's strong wind resources, and the overall need for power alternatives. Our project financing partners, Gale Force, also intend to support a FITCO model (similar to the UK effort) for this new market. We have already established a wholly-owned subsidiary in Japan and started selling activity. We intend to install our first system in the country in late July/early August of this year, which will serve as a useful selling tool for potential customers and dealers alike. Between direct sales activities and the FITCO program, we believe we can ramp the Japan market to equal or stronger levels than the UK efforts by late summer or early fall of this year.

Skystream - The acquisition of the Skystream product has afforded us an exceptional new product with a large existing installed base and significant brand presence globally. We further believe it's the best product on the market for its size range and there are substantial opportunities for this size of turbine. While the product was off the market for approximately 8 months before we purchased it, we have re-engaged numerous dealers around the world and continue to see increased quoting and pipeline momentum and expect it to be a strong contributor to our forward growth. Skystream enjoyed a significant global presence with over 8500 installed systems in over 110 countries around the world and we believe there continues to be a very strong market worldwide for the Skystream turbine. 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 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.

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

Southeast Asia Project - We continue to actively support a potentially large remote island electrification project in the Southeast Asia region. This has included providing a demonstration unit which successfully passed the defined criteria and then assisting our local project partner with identifying the broader scope of the project. More importantly, we recently received our first commercial order for an initial project that we expect to be installed by July of this year.

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

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 experience rapid growth this fiscal year.

Off Balance Sheet Arrangements

As of May 31, 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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