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EX-32.1 - XZERES Corp.ex32_1.htm

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, 2011
 
[  ] 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). [ ] 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. 21,415,560 shares as of January 12, 2012

   

 

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, 2011 and February 28, 2011 (unaudited)
F-2 Statements of Operations for the three and nine months ended November 30, 2011 and 2010 (unaudited)
F-3 Statements of Cash Flows for the nine months ended November 30, 2011 and 2010 (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, 2011 are not necessarily indicative of the results that can be expected for the full year.

3

 

XZERES CORP.

(FORMERLY XZERES WIND CORP)

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

AS OF NOVEMBER 30, 2011 AND FEBRUARY 28, 2011

 

ASSETS  November 30, 2011  February 28, 2011
Current Assets          
Cash and cash equivalents  $70,458   $364,068 
Accounts receivable   1,776,245    633,669 
Inventories   928,813    502,548 
Inventory deposit   —      40,066 
Prepaid expenses   181,886    110,281 
Total Current Assets   2,957,402    1,650,632 
Property and Equipment, net   404,725    375,115 
Other Assets          
Intellectual property   1,603,082    1,320,226 
Website development costs, net   12,940    18,234 
Deposit   18,198    18,198 
Total Other Assets   1,634,220    1,356,658 
TOTAL ASSETS  $4,996,347   $3,382,405 
LIABILITIES AND STOCKHOLDERS’ EQUITY          
LIABILITIES          
Current Liabilities          
Accounts payable  $2,358,028   $600,451 
Accrued expenses   248,140    107,277 
Customer deposits   244,936    48,228 
Warranty reserve   15,948    16,601 
Deferred Revenue   36,000    —   
Notes Payable – related party   —      97,500 
Notes Payable   —      100,000 
Total Liabilities   2,903,052    970,057 
STOCKHOLDERS’ EQUITY          
Preferred stock, par $0.01, 5,000,000 shares authorized, no shares issued and outstanding   0    0 
Common stock, par $0.001, 100,000,000 shares authorized, 21,306,477 and 15,382,816 shares issued and outstanding, respectively   21,307    15,383 
Stock warrants   3,045,860    1,565,054 
Additional paid in capital   10,293,574    6,207,203 
Accumulated deficit   (11,267,446)   (5,375,292)
Total Stockholders’ Equity   2,093,295    2,412,348 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $4,996,347   $3,382,405 

 

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

F-1

XZERES CORP.

(FORMERLY XZERES WIND CORP)

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

FOR THE THREE AND NINE MONTHS ENDED NOVEMBER 30, 2011 AND 2010

 

   Three Months Ended  Nine Months Ended
   November 30, 2011  November 30, 2010  November 30, 2011  November 30, 2010
             
GROSS REVENUES  $927,451   $471,534   $3,312,569   $837,403 
                     
COST OF GOODS SOLD   676,509    352,832    2,488,959    630,850 
                     
GROSS PROFIT   250,942    118,702    823,610    206,553 
                     
OPERATING EXPENSES                    
   General and administrative expenses   1,164,575    696,471    3,367,932    1,887,476 
   Marketing   87,120    41,173    283,012    149,457 
   Sales expense   562,266    232,885    1,259,057    408,244 
   Engineering/R&D expense   554,556    420,693    1,765,190    1,002,266 
TOTAL OPERATING EXPENSES   2,368,517    1,391,222    6,675,191    3,447,443 
                     
LOSS FROM OPERATIONS   (2,117,575)   (1,272,520)   (5,851,581)   (3,240,890)
                     
OTHER INCOME (EXPENSE)   (12,940)   918    (40,573)   4,135 
                     
NET LOSS BEFORE PROVISION FOR INCOME TAXES   (2,130,515)   (1,271,602)   (5,892,154)   (3,236,755)
                     
PROVISION FOR INCOME TAXES   0    0    0    0 
                     
NET LOSS  $(2,130,515)  $(1,271,602)  $(5,892,154)  $(3,236,755)
                     
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING   20,063,345    13,280,255    19,165,262    12,015,809 
                     
NET LOSS PER SHARE:                    
  BASIC AND DILUTED  $(0.11)  $(0.10)  $(0.31)  $(0.27)

 

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

F-2

XZERES CORP.

(FORMERLY XZERES WIND CORP)

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE NINE MONTHS ENDED NOVEMBER 30, 2011 AND 2010

 

   Nine Months Ended
November 30, 2011
  Nine Months Ended
November 30, 2010
Cash Flows from Operating Activities:          
Net loss for the period  $(5,892,154)  $(3,236,755)
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:          
Depreciation and Amortization expense   108,614    26,287 
Share-based compensation   394,768    377,892 
Issuance of common shares for services   —      4,381 
Changes in Assets and Liabilities          
Accounts receivable   (1,142,576)   (200,953)
Inventories   (426,264)   (267,841)
Inventory deposit   40,066    (67,815)
Prepaid expenses   (71,605)   (57,299)
Accounts payable   1,757,577    166,658 
Accrued expenses   140,863    (186,820)
Customer deposits   196,708    11,350 
Warranty reserve   (27,106)   (32,977)
Net Cash Used in Operating Activities   (4,921,109)   (3,463,892)
           
Cash Flows from Investing Activities:          
Purchase of property and equipment   (53,462)   (245,223)
Deposit paid   —      (7,500)
Acquisition of Property   (50,000)   —   
Net Cash Used in Investing Activities   (103,462)   (252,723)
           
Cash Flows from Financing Activities:          
Proceeds from issuance of common shares   5,165,512    3,873,709 
Repayment of notes payable   (197,500)   —   
Equity issuance costs   (237,051)   (2,500)
Net Cash Provided by Financing Activities   4,730,961    3,871,209 
           
Net Increase (Decrease) in Cash and Cash Equivalents   (293,610)   154,594 
           
Cash and Cash Equivalents - Beginning   364,068    195,990 
           
Cash and Cash Equivalents - Ending  $70,458   $350,584 
           
Supplemental Cash Flow Information:          
Cash paid for interest  $—     $—   
Cash paid for income taxes  $—     $—   
           
Supplemental Non-Cash Investing and Financing Activities:          
Shares issued to acquire assets  $249,871   $1,276,861 
Shares issued in payment of accrued expense   —     $82,381 
Loans from shareholder converted to common shares   —     $90,940 
Warrants issued in connection with private placements  $1,480,806   $995,246 

 

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

F-3

XZERES CORP.

(FORMERLY XZERES WIND CORP)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2011

 

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.

 

Development Stage in Prior Periods

XZERES Corp. was in the development stage from October 3, 2008 to May 31, 2010. The fiscal year ending February 28, 2011 is the first fiscal year during which the Company is considered an operating company and is no longer in the development stage.

 

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, 2011. In the opinion of management, all adjustments necessary in order for the financial statements to be not misleading have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results expected for the full year.

 

Accounting Basis

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

 

Use of Estimates

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

F-4

XZERES CORP.

(FORMERLY XZERES WIND CORP)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2011

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Concentration of Credit Risks

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

 

Recent Accounting Pronouncements

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

 

Revenue Recognition

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

 

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

 

Accounts Receivable

Accounts receivable is generated from sales of wind turbine systems. At November 30, 2011 and February 28, 2011, accounts receivable were substantially comprised of balances due from end customers and dealers.

 

As of the November 30, 2011 quarter end, the Company has not created an allowance for doubtful accounts. While the Company has not experienced any customer defaults to date, it may elect to begin reserving for potential bad debts in future quarters as sales continue to increase.

 

Cash and Cash Equivalents

XZERES considers all highly liquid investments with maturities of three months or less to be cash equivalents. The Company had cash of $70,458 and $364,068 at November 30, 2011 and February 28, 2011, respectively.

 

Advertising Costs

The Company’s policy regarding advertising is to expense advertising when incurred. XZERES incurred advertising expense of $29,983 during the quarter ended November 30, 2011.

 

Stock-Based Compensation

Stock-based compensation is accounted for at fair value in accordance with SFAS No. 123 and 123 (R) (ASC 718). The Company adopted its stock option plan in 2010. The Company issued 2,457,500 stock options to its employees beginning in fiscal year 2011 thru the quarter ended November 30, 2011. The Company recorded stock-based compensation expense of $86,836 during the quarter ended November 30, 2011. The Company has also issued shares to outside consultants for various services rendered.

 

Fair Value of Financial Instruments

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

F-5

XZERES CORP.

(FORMERLY XZERES WIND CORP)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2011

 

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.

 

Income Taxes

Income taxes are accounted for under the assets and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.

 

It is the Company’s policy to classify interest and penalties on income taxes as interest expense or penalties expense. As of November 30, 2011, 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. Common share equivalents totaling 8,391,253 at November 30, 2011 representing outstanding warrants and options were not included in the computation of diluted earnings per share for the quarter ended November 30, 2011, as their effect would have been anti-dilutive.

 

Reclassifications

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

 

NOTE 2 – PREPAID EXPENSES

 

Prepaid expenses consisted of the following:

 

   November 30, 2011  February 28, 2011
Software licenses  $154,323   $59,219 
Interest   0    11,687 
Consulting   27,563    39,375 
   Total prepaid expenses  $181,886   $110,281 

 

F-6

XZERES CORP.

(FORMERLY XZERES WIND CORP)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2011

 

NOTE 3 – INVENTORIES

 

Inventories consist of parts and supplies used in the development, manufacture and installation of wind turbines as well as finished goods. Inventories are stated at the lower of cost, computed using the first-in first-out method, or market.

 

Inventories consisted of the following:

 

   November 30, 2011  February 28, 2011
Finished goods  $702,182   $434,959 
Parts and supplies   226,631    67,589 
Total Inventories  $928,813   $502,548 

 

NOTE 4 – 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, 2011  February 28, 2011
Furniture  $45,831   $38,907 
Computer equipment   173,254    123,922 
Shop machinery and equipment   248,132    224,748 
Vehicles   18,095    30,273 
Subtotal   485,312    417,850 
 Less: accumulated depreciation   (80,587)   (42,735)
Property and equipment, net  $404,725   $375,115 

 

Depreciation expense totaled $12,617 and $38,221 for the three and nine months ended November 30, 2011.

 

NOTE 5 – INTELLECTUAL PROPERTY

 

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

 

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

F-7

XZERES CORP.

(FORMERLY XZERES WIND CORP)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2011

 

NOTE 6 – WEBSITE DEVELOPMENT COSTS

 

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

 

   November 30, 2011  February 28, 2011
Website development costs  $18,234   $21,175 
Less: Accumulated amortization   (5,294)   (2,941)
   Website development costs, net  $12,940   $18,234 

 

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 $5,294 and $0 for the nine months ended November 30, 2011 and 2010, respectively.

 

NOTE 7 – ACCRUED EXPENSES

 

Accrued expenses consisted of the following:

 

   November 30, 2011  February 28, 2011
Wages  $123,414   $107,277 
Professional fees   7,246    0 
Miscellaneous   117,480    0 
 Total Accrued Expenses  $248,140   $107,277 

 

NOTE 8 – 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 $244,936 at November 30, 2011 and $48,228 at February 28, 2011.

 

NOTE 9 – WARRANTY RESERVE

 

The Company accrues for estimated future warranty costs associated with products sold. The Company provides a ten year limited warranty for defects in materials and workmanship. In order to maintain some existing dealer/distributor relationships, the Company elected to set up an initial reserve to estimate its future costs of honoring warranties on previous installations. In Fiscal year 2011, an initial reserve was created based on 100 installed units with estimated warranty costs of $1,000 per unit, creating an initial reserve of $100,000. The reserve is increased by the addition of two percent of all system and tower sales.

 

Warranty reserve activity for the nine months ended November 30, 2011 was as follows:

 

   Nine Months Ended
November 30, 2011
Reserve balance, February 28, 2011  $16,601 
Added to reserve   38,485 
Charges against reserve   (39,138)
    Reserve balance, November 30, 2011  $15,948 

 

F-8

 

XZERES CORP.

(FORMERLY XZERES WIND CORP)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2011

 

 

NOTE 10 – STOCKHOLDERS’ EQUITY

 

In October, 2008, the Company amended its Articles of Incorporation to increase the 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.

 

During the period ended February 28, 2009, the Company issued 4,501,899 shares of our common stock at a price of $0.01 per share. The Company conducted the offering as a private placement, exempt from the registration requirements of the Securities Act of 1933 under Section 4(2) and/or Rule 506 of Regulation D there under.

 

During the year ended February 28, 2010 an additional 30,545 shares of common stock were issued for cash totaling $305. There was also a correction to the shares outstanding of 79 additional shares, and an additional correction of 3 additional shares during the nine months ended November 30, 2010.

 

During the fiscal year ending February 28, 2011, the following equity-related transactions occurred:

 

  • 200,000 common shares were issued for consulting services. The shares were valued at $.01 per share, which in the opinion of management, approximates the value of the services rendered.

  • 320,000 common shares were issued to an unrelated third party in payment of an accrued expense. The shares were valued at $82,381, representing the fair value of the accrued expense.

  • 226,850 common shares were issued in exchange for $90,740 of shareholder loans. The shares were issued at $.40 per share.

  • 3,192,150 common shares were issued to acquire assets with a total cost of $1,276,864. The shares were issued at $.40 per share.

  • 648,150 common shares were sold to unrelated third parties in a private placement at $.40 per share for total proceeds of $259,260.

  • 4,010,500 common shares were sold in a private placement at $1.00 per share for net proceeds of $3,611,949.

  • 488,375 common shares were issued for consulting services to multiple providers. The shares were valued at various market prices ranging between $0.75 and $1.50 per share. The combined value of the shares totaled $451,988. Of the total value, $358,296 was expensed during the fiscal year end February 28, 2011.

  • 1,614,186 common shares were sold to unrelated third parties in an ongoing private placement at $1.05 per share for net proceeds of $1,503,887.
F-9

 

XZERES CORP.

(FORMERLY XZERES WIND CORP)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2011

 

NOTE 10 – STOCKHOLDERS’ EQUITY (CONTINUED)

 

During the nine months ended November 30, 2011, the following equity-related transactions occurred:

 

  • 3,230,009 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 were issued to acquire assets with a total cost of $299,871.

  • 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.

Total common shares issued and outstanding at November 30, 2011 21,306,477.

 

NOTE 11 – STOCK WARRANTS AND OPTIONS

 

The Company has granted 5,933,753 stock warrants in connection with private placements. The Company has accounted for these warrants as equity instruments in accordance with EITF 00-19 (ASC 815-40), Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, and as such, were classified in stockholders’ equity. The Company has estimated the fair value of the warrants issued in connection with the private placements at $3,045,860 as of the grant dates using the Black-Scholes option pricing model.

 

The Company has also granted 2,457,500 stock options to employees. The Company has estimated the fair value of the options as of the grant dates at $1,687,423 using the Black-Scholes option pricing model. Compensation expense is being recognized over the vesting periods of the options which range from immediate vesting to vesting over four years. Fifteen percent of total issued and outstanding common shares are available for stock options.

 

The Company granted 335,000 new options during the three months ended November 30, 2011, at an exercise price of the $0.80.

 

Key assumptions used by the Company are summarized as follows:

 

   Private Placement Warrants  Employee Stock Options
Stock Price   $0.55-$1.05    $0.75-$2.20 
Exercise Price   $0.80-$1.50    $.80-$1.25 
Expected volatility   69.10%   69.10%
Expected dividend yield   0.00%   0.00%
Risk-free rate   2.62%   2.0-3.37% 
Vesting period   —      0-4 years 
Expected term (in years)   3-5 Years    7 

 

F-10

 

XZERES CORP.

(FORMERLY XZERES WIND CORP)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2011

 

NOTE 11 – STOCK WARRANTS AND OPTIONS (CONTINUED)

 

A Stock Price of $1.00 to $1.05 was used in valuing the warrants and a range of $0.75-$2.20 for valuing the options. The stock price was based on the per share issuance prices from a recent unrelated third party private placements. Volatility was computed based on the average volatility of similar companies in the wind turbine business. The risk-free interest rate is the Treasury Constant Maturity Rate on the date of grant for a period equivalent to the expected term of the instrument. The expected term is the same as the contractual term for the above valuations.

 

The warrants issued in connection with the private placement were valued at $3,045,860 and have been accounted for as an equity transaction. Options issued to employees were classified as compensation expense for the three months ended November 30, 2011. Stock option expense recognized in net earnings amounted to $86,836 and 394,768 for the three and nine months ended November 30, 2011, respectively. As of November 30, 2011, there was $829,404 of unrecognized compensation expense related to non-vested share awards that we expect to recognize over a weighted average period of 3.5 years.

 

NOTE 12 – INCOME TAXES

 

For the period ended November 30, 2011, 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 $11,267,000 at November 30, 2011, 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, 2011  November 30, 2010
Federal income tax benefit attributable to:          
Current operations  $2,003,000   $1,100,000 
Less: valuation allowance   (2,003,000)   (1,100,000)
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, 2011  February 28, 2011
Deferred tax asset attributable to:          
Net operating loss carryover  $3,831,000   $1,195,000 
Less: valuation allowance   (3,831,000)   (1,195,000)
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 $11,267,000 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-11

 

XZERES CORP.

(FORMERLY XZERES WIND CORP)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2011

 

NOTE 13 – COMMITMENTS

 

Operating Leases

The Company leases its office and manufacturing facilities under a lease which expires in July, 2013. The lease provides for the payment of taxes and operating costs, such as insurance and maintenance in addition to the base rental payments. The lease is renewable for an additional three year term.

 

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

 

Year ended February 28, 2012  $70,448 
2013   72,564 
2014   37,152 
Total  $180,164 

 

Rent expense totaled $138,554 and $20,683 for the nine months ended November 30, 2011 and 2010, respectively.

 

NOTE 14 – SUBSEQUENT EVENTS

 

Management has evaluated subsequent events through the date on which the financial statements were issued, January 12, 2012, and has determined it does not have any material subsequent events to disclose.

F-12

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 originally incorporated in New Mexico in 1984. We re-domiciled in Nevada in 2008. We were in the development stage from October 3, 2008 to May 31, 2010. The fiscal year ending February 28, 2011, was the first fiscal year during which we are considered an operating company and are no longer in the development stage. Beginning during the fiscal quarter ended May 31, 2010, we have been engaged in the small wind turbine and power efficiency business.

 

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

 

Business of Company

 

We are in the business of designing, developing, and marketing distributed generation, wind power systems for the small wind (2.5kW-100kW) market as well as power management solutions.  Our grid connected and off grid wind turbine systems, which consist of our 2.5kW and 10kW devices and related equipment, are utilized for electrical power generation for applications and markets such as residential, micro-grid based rural and island electrification, agricultural, small business, rural electric utility systems, as well as other private, corporate infrastructure and government applications. Our wind power systems are focused on distributed energy, where a specific machine's energy output is largely or entirely used on-site where the equipment is installed, as well as grid connected applications. While many of our customers take advantage of their local net-metering rules within the United States and Feed In Tariffs that are often available in Europe and Internationally (to sell power back to the grid), our wind power systems are not dependent on transmission needs to carry the energy produced to another location and are therefore well suited for remote electrification, available with or without a battery coupled solution. Our power management solutions are deployed primarily for commercial and light industrial applications, and secondarily residential usage and target both urban and rural customers.

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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 DC to AC to connect to a customer’s electrical load or to the grid). We currently design and engineer the turbine and controller, but contract the manufacturing of the turbine and controller through outside parties. The tower, while designed to specifications suitable to our turbine requirements, is made and sold by separate companies depending on the style that the customer orders.  Similarly, the inverter, which converts the energy generated to a form suitable to connect into the electric grid, is manufactured by another company and is a commercial off-the-shelf product.  We sell a “system” with all of these parts included in the selling price.  The system will not operate as designed without these complementary products.  In the case of the inverter, there are other commercially available products that will integrate with our components, but we perform the system integration design to sell the entire system as a package to the customer.  Going forward, we intend to develop new turbine systems, designed for ease of installation and to certification standards which cover standard testing procedures, power ratings, and structural designs of small wind systems.

 

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

 

On April 25, 2011, we acquired the assets of Rochester Power Saver Inc. and now 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 acquisition expanded 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. As a result of this acquisition, we have introduced the new power efficiency product line and have generated initial sales.

 

Results of operations for the three and nine months ended November 30, 2011 and 2010

 

Overview.  We commenced our current operations during the quarter ended May 31, 2010. Shortly thereafter, we began to aggressively expand operations, including the hiring of sales and marketing personnel.  We have also established a wholly-owned subsidiary in Dublin, Ireland for the purposes of serving the European market, particularly the United Kingdom (UK). We opened a sales office in the UK and hired local sales and sales support personnel for this location. These efforts have contributed to our overall sales growth and rapidly expanding backlog, especially internationally.

 

With the combination of the additional sales channels and larger number of sales personnel, the company is experiencing a rapid increase in both completed sales and the pipeline of potential customers.  We will also continue to initiate key marketing efforts such as promotion of our new website, the creation of online user tools, and targeted email campaigns.  While it can be difficult to predict when a potential customer may purchase one of our turbine systems or when a newly closed customer will have their site ready for product delivery, we believe that the growing sales backlog and potential pipeline along with the greater overall interest in our products may contribute to higher revenues in future quarters.  Potential risks to this outlook include: 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 federal and state incentives for renewable energy such as tax credits, rebates, etc.; increased restrictions on obtaining permits; and a reduction in sentiment toward wind energy.  If any significant changes to any of these factors were to occur, it could have a material impact on our current growth opportunities.  

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European Growth. During the quarter ended November 30, 2011, we announced an agreement with the largest wind dealer in the United Kingdom (UK). We granted this dealer exclusivity for certain parts of the UK in return for specified minimum purchase quantities. This was a culmination of our efforts over the past 12 months to build a presence in the lucrative UK marketplace. As a result of this effort and new agreement, we now anticipate significant growth from the UK market going forward. Since the November period end, we have experienced a substantial increase in new orders from the UK, which is a combination of the new, large dealer signed as well as our own sales team efforts.

 

As a result of strong orders from the UK, along with our existing domestic business, the Company’s current backlog of existing orders, as of January 15, totals more than $3.5 million, up from approximately $802,000 as of November 30, 2011 and approximately $425,000 as of the end of the prior quarter on August 30, 2011. Our current backlog exceeds the revenue level of the prior three quarters combined. We currently anticipate this trend to continue, which should lead to a significant overall increase in business for calendar 2012 provided we are able to obtain sufficient working capital.

 

In addition, we expect significant growth in our newer, power efficiency business. Over the past two months, we have signed 23 new dealers that will promote and sell the product line. None of these recent dealers are included in the above mentioned backlog. We also have many more prospective dealers in our pipeline.

 

Income.  For the three months ended November 30, 2011 and 2010, we generated gross revenue of $ 927,451 and $471,534 respectively.  For the nine months ended November 30, 2011 and 2010, we generated gross revenue of $3,312,569 and $837,403, respectively. Our revenue growth during the period ended November 30, 2011 was attributable to our ongoing efforts to sell our wind turbine systems, which began last year.  Our initial selling efforts began toward the end of our first quarter last year (ending May 31, 2010) and resulted in growing sales including the recently completed quarter ending November 30, 2011.

 

Operating Expenses. Our Operating Expenses during the three month period ended November 30, 2011 equaled $2,368,517, consisting of $562,266 in sales expense, $87,120 in marketing costs, $554,556 in R&D/Engineering expenses, and $1,164,575 in general and administrative expenses. We had other expense of $12,940 for the period.  Therefore, we recorded a net loss of $2,130,515 for the three months ended November 30, 2011. Inclusive in our net loss was non-cash compensation in the amount of $86,836. Our Operating Expenses during the three month period ended November 30, 2010 equaled $1,391,222, consisting of $232,885 in sales expense, $41,173 in marketing costs, $420,693 in R&D/Engineering expenses, and $696,471 in general and administrative expenses. We had other income of $918 for the period.  We therefore, recorded a net loss of $1,271,602 for the three months ended November 30, 2010.  

 

Our Operating Expenses during the nine month period ended November 30, 2011 equaled $6,675,191, consisting of $1,259,057 in sales expense, $283,012 in marketing costs, $1,765,190 in R&D/Engineering fees, and $3,367,932 in general and administrative expenses. We had other expense of $40,573 for the period.  Therefore, we recorded a net loss of $5,892,154 for the nine months ended November 30, 2011. Our Operating Expenses during the nine month period ended November 30, 2010 equaled $ 3,447,443, consisting of $408,244 in sales expense, $149,457 in marketing costs, $1,002,266 in R&D/Engineering expenses,   and $1,887,476 in general and administrative expenses. We had other income of $4,135 for the period.  Therefore, we recorded a net loss of $3,236,755 for the nine months ended November 30, 2010. The substantial loss for both periods ended November 30, 2011 and 2010 is attributable to the costs of commencing our business operations as a small wind turbine manufacturing and sales company.  

 

Net Loss.  We recorded a net loss of $2,130,515 for the three months ended November 30, 2011 as compared to a net loss of $1,271,602 for the three months ended November 30, 2010.  For the nine months ended November 30, 2011 and 2010, we recorded a net loss of $5,892,154 and $3,236,755, respectively. The substantial loss for both periods is attributable to the costs attributable to commencing our business operations as a small wind turbine manufacturing and sales company.  

 

We expect further net losses in the near future until we are able to increase the sale of our products and achieve higher revenues.

6

Liquidity and Capital Resources

 

As of November 30, 2011, we had total current assets of $2,957,402, consisting of $70,458 in cash and cash equivalents, $1,776,245 in accounts receivable, $928,813 in inventories and $181,886 in prepaid expenses.  Our total current liabilities as of November 30, 2011 were $2,903,052. Thus, we have working capital of $54,350 as of November 30, 2011.   As of November 30, 2011, we had total assets of $4,996,347.

 

Operating activities used $4,921,109 and $3,463,892 in cash for the nine months ended November 30, 2011 and November 30, 2010, respectively. Our net loss of $5,892,154, our inventory purchasing of $426,264, and an increase in accounts receivable of $1,142,576, were the primary components of our negative operating cash flow for the nine months ended November 30, 2011.


Investing Activities used $103,462 in cash during the nine month period ending November 30, 2011, as a result of the purchase of computer, machinery and equipment, as compared to $252,723 cash used for the nine months ended November 30, 2010.

 

Financing Activities generated $4,730,961 and $3,871,209 in cash for the nine months ended November 30, 2011 and 2010, respectively, consisting entirely of proceeds from the issuance of new common shares and repayment of a related party note payable.

 

As of November 30, 2011, 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. In particular, at present we lack sufficient working capital to be able to timely satisfy our current order backlog of approximately $3.5 million as of January 15, 2012. Our management has made obtaining additional working capital, whether equity or debt capital, a high priority for the next twelve months as the lack thereof constitutes a significant present constraint on our ability to grow. There can be no assurance that we will be able to acquire this working capital on favorable terms, or at all. If we are unable to do so, the execution of our business plan will be adversely impacted.

 

Off Balance Sheet Arrangements

 

As of January 12th 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

 

We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of November 30, 2011. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer, Frank Greco and our Chief Financial Officer, Steven Shum. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of November 30, 2011 our disclosure controls and procedures are effective. There have been no changes in our internal controls over financial reporting during the quarter ended November 30, 2011.

 

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

 

Limitations on the Effectiveness of Internal Controls

 

Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving our objectives and our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective at that reasonable assurance level. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the internal control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

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PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

We are not a party to any pending legal proceeding. We are not aware of any pending legal proceeding to which any of our officers, directors, or any beneficial holders of 5% or more of our voting securities are adverse to us or have a material interest adverse to us.

 

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 17, 2012
 
  /s/ Frank Greco
By: Frank Greco
Title: Chief Executive Officer

 

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