Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - XZERES Corp.Financial_Report.xls
EX-32.1 - SECTION 906 - XZERES Corp.ex32-1.htm
EX-32.2 - SECTION 906 - XZERES Corp.ex32-2.htm
EX-31.2 - SECTION 302 - XZERES Corp.ex31-2.htm
EX-31.1 - SECTION 302 - XZERES Corp.ex31-1.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 May 31, 2012
   
[  ] Transition Report pursuant to 13 or 15(d) of the Securities Exchange Act of 1934
   
  For the transition period from __________ to__________
   
  Commission File Number: 000-54742

 

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   [X] 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. 26,610,387 as of July 16, 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 8
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:

 

Consolidated Balance Sheets as of May 31, 2012  and February 29, 2012 (UNAUDITED)   F - 1 
     
Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended May 31, 2012 and 2011 (UNAUDITED)   F - 2
     
Consolidated Statements of Cash Flows for the Three Months  Ended May 31, 2012 and 2011 (UNAUDITED)   F - 3 
     
Notes to Consolidated Financial Statements   F-4 - F-15

 

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 May 31, 2012 are not necessarily indicative of the results that can be expected for the full year.

 

3
 

 

XZERES CORP.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

AS OF MAY 31, 2012 AND FEBRUARY 29, 2012

 

  May 31, 2012   February 29, 2012 
 ASSETS          
Current Assets          
Cash and cash equivalents  $3,561   $236,682 
Accounts receivable, net   629,059    1,036,778 
Subscription receivable   0    80,000 
Notes receivable – current portion   120,281    45,552 
Inventories   781,533    828,188 
Inventory deposits   70,092    70,092 
Prepaid expenses   580,844    334,361 
Total Current Assets   2,185,370    2,631,653 
           
Property and Equipment, net   332,797    347,007 
           
Other Assets          
Notes receivable – net of current portion   115,565    43,309 
Intellectual property   1,802,210    1,802,210 
Website development costs, net   9,411    11,176 
Deposits   18,198    18,198 
Total Other Assets   1,945,384    1,874,893 
           
TOTAL ASSETS   4,463,551   $4,853,553 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
LIABILITIES          
Current Liabilities          
Accounts payable  $2,133,213   $2,177,351 
Due to factor-related party   309,876    303,806 
Accrued expenses   155,302    113,551 
Customer deposits   901,540    520,458 
Warranty reserve   80,160    87,018 
VAT & sales tax payable   59,651    32,822 
Notes payable   488,778    0- 
Total Liabilities   4,128,520    3,235,006 
           
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, 26,610,387 and 25,500,414 shares issued and outstanding, respectively   26,610    25,501 
Stock warrants   3,800,275    3,791,031 
Additional paid in capital   12,317,964    11,790,160 
Accumulated other comprehensive income (loss)   (44,791)   (8,477)
Accumulated deficit   (15,765,027)   (13,979,668)
Total Stockholders’ Equity   335,031    1,618,547 
           
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $4,463,551   $4,853,553 

 

See accompanying notes to consolidated financial statements.

 

F-1
 

 

XZERES CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)

FOR THE THREE MONTHS ENDED MAY 31, 2012 AND 2011

 

   Three Months Ended 
   May 31, 2012   May 31, 2011 
         
GROSS REVENUES  $649,041   $1,017,217 
           
COST OF GOODS SOLD   503,817    765,781 
           
GROSS PROFIT   145,224    251,436 
           
OPERATING EXPENSES          
General and administrative expenses   1,290,720    1,177,879 
Marketing   55,545    92,668 
Sales expense   420,939    325,817 
Engineering/R&D expense   124,310    639,583 
TOTAL OPERATING EXPENSES   1,891,514    2,235,947 
           
LOSS FROM OPERATIONS   (1,746,290)   (1,984,511)
           
OTHER INCOME (EXPENSE)   (39,069)   (14,187)
           
LOSS BEFORE PROVISION FOR INCOME TAXES   (1,785,359)   (1,998,698)
           
PROVISION FOR INCOME TAXES   0    0 
           
NET LOSS   (1,785,359)   (1,998,698)
           
OTHER COMPREHENSIVE LOSS          
Foreign currency translation adjustment gain (loss)   (36,314)   0 
           
COMPREHENSIVE LOSS  $(1,821,673)  $(1,998,698)
           
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: BASIC AND DILUTED   26,221,781    18,031,530 
           
NET LOSS PER SHARE: BASIC AND DILUTED  $(0.07)  $(0.11)

 

See accompanying notes to consolidated financial statements.

 

F-2
 

 

XZERES CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE THREE MONTHS ENDED MAY 31, 2012 AND MAY 31, 2011

 

  

Three Months

Ended

May 31, 2012

  

Three Months

Ended

May 31, 2011

 
Cash Flows from Operating Activities:          
Net loss for the period  $(1,785,359)  $(1,998,698)
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:          
Depreciation and amortization expense   23,678    41,081 
Allowance for doubtful accounts   13,175    0 
Share-based compensation   44,424    264,763 
Issuance of common shares for services   232,000    0 
Issuance of common shares for fee   225,000    0 
Issuance of warrants for purchase order financing   9,244    0 
           
Changes in Assets and Liabilities          
Accounts receivable   394,544    (645,806)
Subscription receivable   80,000    0 
Prepaid expenses   (246,483)   (9,235)
Inventory   46,655    (300,623)
Accounts payable   (44,138)   315,213 
Accrued expenses   76,740    (34,226)
Customer deposits   381,082    (5,543)
VAT & sales tax payable   26,829    0 
Warranty reserve   (6,858)   11,042 
Net Cash Used in Operating Activities   (529,467)   (2,362,032)
           
Cash Flows from Investing Activities:          
           
Net increase in notes receivable   (146,985)   0 
Acquisitions of property and equipment   (7,703)   (75,155)
Net Cash Used in Investing Activities   (154,688)   (75,155)
           
Cash Flows from Financing Activities:          
Proceeds from issuance of common shares   0    2,791,512 
Proceeds from purchase order financing   488,778    0 

Equity issuance costs

   (7,500)   (237,051)
Increase in due to factor-related party   6,070    0 
Repayment of notes payable        (197,500)
Net Cash Provided by Financing Activities   487,348    2,356,961 
           
Foreign Currency Effect on Cash and Cash Equivalents   (36,314)   0 
Net Increase (Decrease) in Cash and Cash Equivalents   (233,121)   (80,226)
           
Cash and Cash Equivalents – Beginning   236,682    364,068 
           
Cash and Cash Equivalents – Ending  $3,561   $283,842 
           
Supplemental Cash Flow Information:          
Cash paid for interest  $0   $0 
Cash paid for income taxes  $0   $0 

 

See accompanying notes to consolidated financial statements.

 

F-3
 

 

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 2012

 

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 29, 2012. In the opinion of management, all adjustments necessary in order for the financial statements to be not misleading have been reflected herein.

 

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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 2012

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Concentration of Credit Risks

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

 

Recent Accounting Pronouncements

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

 

Revenue Recognition

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

 

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

 

Cash and Cash Equivalents

XZERES considers all highly liquid investments with maturities of three months or less to be cash equivalents. The Company had cash of $3,561 and $236,682 at May 31, 2012 and February 29, 2012, respectively.

 

Advertising Costs

The Company’s policy regarding advertising is to expense advertising when incurred. XZERES incurred advertising expense of $6,195 and $35,228 during the quarters ended May 31, 2012 and 2011, respectively.

 

Fair Value of Financial Instruments

The Company’s financial instruments consist of cash and cash equivalents, accounts and notes receivable, inventories, prepaid expenses, accounts payable, accrued expenses, customer deposits, and warranty reserve, taxes payable, notes payable, and due to factor. 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.

 

Dividends

The Company has not adopted any policy regarding payment of dividends. No dividends have been paid during any of the periods shown.

 

F-5
 

 

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 2012

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Stock-Based Compensation

The Company accounts for employee stock-based compensation in accordance with the guidance of FASB ASC Topic 718, Compensation – Stock Compensation which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. During the three months ended May 31, 2012 the Company did not make any grants of employee stock options. For the quarter ended May 31, 2012 and May 31, 2011, the Company recorded stock-based compensation expense of $44,424 and $358,106 respectively. Unrecognized expense of $728,248 remains to be recognized over the vesting terms of the options.

 

The Company follows ASC Topic 505-50, formerly EITF 96-18, “Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods and Services,” for stock options and warrants issued to consultants and other non-employees. In accordance with ASC Topic 505-50, these stock options and warrants issued as compensation for services provided to the Company are accounted for based upon the fair value of the services provided or the estimated fair market value of the option or warrant, whichever can be more clearly determined. The fair value of the equity instrument is charged to expense over the period during which services are rendered. The Company has also issued shares to outside consultants for various services rendered. For the quarter ended May 31, 2012 and May 31, 2011,, the Company recorded stock–based compensation to non-employees in the amount of $210,309 and $11,813 respectively. 

 

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 fiscal year ended May 31, 2012, there have been no interest or penalties incurred on income taxes.

 

Basic Income (Loss) Per Share

Basic income (loss) per share is calculated by dividing the Company’s net loss applicable to common shareholders by the weighted average number of common shares during the period. Diluted earnings per share is calculated by dividing the Company’s net income available to common shareholders by the diluted weighted average number of shares outstanding during the year. The diluted weighted average number of shares outstanding is the basic weighted number of shares adjusted for any potentially dilutive debt or equity. Common share equivalents totaled 26,610,387 at May 31, 2012. Outstanding warrants and options were not included in the computation of diluted earnings per share for the fiscal year ended May 31, 2012, as their effect would have been anti-dilutive.

 

Reclassifications

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

 

F-6
 

 

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 2012

 

NOTE 2 - ACQUISITION COSTS

 

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

 

The purchase price was allocated as follows:

 

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

 

NOTE 3 - ACCOUNTS RECEIVABLE

 

Accounts receivable is generated from sales of wind turbine systems and power efficiency products. At May 31, 2012, accounts receivable were substantially comprised of balances due from end customers and dealers.

 

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

 

   May 31,
2012
   February 29,
2012
 
Accounts receivable  $642,235   $1,059,750 
Less: Allowance for doubtful accounts   (13,176)   (22,972)
Accounts receivable, net  $629,059   $1,036,778 

  

Notes receivable are generated from sales of wind turbine systems. At May 31, 2012, notes receivable were comprised of balances due from end customers. The term of the notes receivable is seven years at an annual interest rate of 4.5%. Payments are received on a monthly basis.

 

NOTE 4 – PREPAID EXPENSES

 

Prepaid expenses consisted of the following:

 

   May 31,
2012
   February 29,
2012
 
Software licenses  $38,091    38,299 
Extension Fee   175,000    0 
Consulting   367,753    296,062 
Total prepaid expenses  $580,844    334,361 

  

F-7
 

 

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 2012

 

NOTE 5 – SUBSCRIPTION RECEIVABLE

 

The subscription receivable was collected on March 21, 2012.

 

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:

 

   May 31,
2012
   February 29,
2012
 
Finished goods  $607,833   $690,682 
Parts and supplies   173,700    137,506 
Total Inventories  $781,533   $828,188 

  

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.

 

   May 31,
2012
   February 29,
2012
 
Furniture  $48,624   $48,624 
Computer equipment   171,318    171,318 
Shop machinery and equipment   239,803    232,100 
Vehicles   10,998    10,998 
Subtotal   470,743    463,040 
 Less: accumulated depreciation   (137,946)   (116,033)
Property and equipment, net  $332,797   $347,007 

 

Depreciation expense totaled $21,913 and $12,617 for three months ended May 31, 2012 and 2011, 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.

 

F-8
 

 

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 2012

 

NOTE 9 – WEBSITE DEVELOPMENT COSTS

 

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

 

   May 31,
2012
   February 29,
2012
 
Website development costs  $21,175   $21,175 
Less: Accumulated amortization   (11,764)   (9,999)
   Website development costs, net  $9,411   $11,176 

 

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

 

Amortization expense was $1,765 and $1,765 for the three months ended May 31, 2012 and 2011, respectively.

 

NOTE 10 –  ACCRUED EXPENSES

 

Accrued expenses consisted of the following:

 

   May 31,
2012
   February 29,
2012
 
Wages  $155,302   $113,551 
           
Total Accrued Expenses  $155,302   $113,551 

 

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 $901,540 at May 31, 2012 and $520,458 at February 29, 2012.

 

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%

 

F-9
 

 

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 2012

 

NOTE 12 – WARRANTY RESERVE (CONTINUED)

 

Warranty reserve activity was as follows:

   May 31,
2012
   February 29,
2012
 
Reserve balance, beginning   87,018    16,601 
Added to reserve   8,874    129,029 
Charges against reserve   (15,732)   (58,612)
    Reserve balance, ending  $80,160   $87,018 

 

NOTE 13 - FACTORING AGREEMENT-RELATED PARTY

 

On August 25, 2011, the Company entered into a purchase and sale factoring agreement with a related party whereby the Company sells certain international accounts receivable to the factor. Under the terms of this agreement, the factor makes advances to the Company based on certain international accounts receivable. Interest is computed at 8% of the factored amount for the period the factored accounts receivable remain outstanding. Based on this arrangement, the Company is liable to the factor if the accounts receivable are not collected. Payments are due on the Note as receivables are collected. The agreement was initially due to expire on January 15, 2012, and was extended to December 15, 2012. The shares were valued at $.45 per share and are being amortized over the term of the agreement.

 

NOTE 14 – 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 82 additional shares during the fiscal year ended February 28, 2010.

 

F-10
 

 

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 2012

 

NOTE 14 – STOCKHOLDERS’ EQUITY (CONTINUED)

 

During the fiscal year ending February 28, 2011, the following share-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.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

F-11
 

 

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 2012

 

NOTE 14 – STOCKHOLDERS’ EQUITY (CONTINUED)

 

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

 

During the three months ended May 31, 2012, the following share-related transaction occurred:

 

609,973 common shares were issued for consulting services to multiple providers. The shares were valued at $.40-$0.45 per share. The combined value of the shares was $232,000. Of the total value, $64,330 was expensed during the period. 500,000 common shares were issued in March 2012 in connection with the extension of the due date of the related party factor loan to December 15, 2012. The shares were valued at $.45 per share and are being amortized over the term of the loan.

 

Total common shares issued and outstanding at May 31, 2012 were 26,610,387.

 

NOTE 15 – STOCK WARRANTS AND OPTIONS

 

The Company has granted 95,000, 5,207,649 and 2,584,318 stock warrants in connection with private placements during fiscal 2013, 2012 and fiscal 2011, respectively and an additional 1,250,000 warrants in fiscal 2012 to advisors for a total of 9,136,967 warrants issued. The Company has accounted for these warrants as equity instruments in accordance with ASC 815-40, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, and as such, were classified in stockholders’ equity. The Company has estimated the fair value of the warrants issued at $3,800,274 as of the grant dates using the Black-Scholes option pricing model.

 

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

 

Key assumptions used by the Company are summarized as follows:

 

    

Private Placement

Warrants

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

 

A Stock Price of $0.45 to $1.05 was used in valuing the warrants and a range of $0.45-$2.20 for valuing the options. The stock price was based on the per share issuance prices from recent unrelated third party private placements. Volatility was computed based on the average volatility of similar companies in the wind turbine business. The risk-free interest rate is the Treasury Constant Maturity Rate on the date of grant for a period equivalent to the expected term of the instrument. The expected term is the same as the contractual term for the above valuations.

 

The warrants issued in connection with the private placements were valued at $3,610,400 and have been accounted for as an equity transaction. Options issued to employees are classified as compensation expense. Stock option expense recognized in net earnings amounted to $44,424 for the fiscal quarter ended May 31, 2012, and $264,763 for quarter ended May 31, 2011. As of May 31, 2012, there was $ 728,248 of unrecognized compensation expense related to non-vested share awards that we expect to recognize over a weighted average period of 3.5 years.

 

F-12
 

 

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 2012

 

NOTE 16 – INCOME TAXES

 

For the period ended May 31, 2012, Xzeres has incurred net losses from continuing operations and, therefore, has no tax liability. The net deferred tax asset generated by the loss carry-forward has been fully reserved. The cumulative net operating loss carry-forward is approximately $15,800,000 at May 31, 2012, and will expire beginning in the year 2029. The cumulative tax effect at the expected rate of 34% of significant items comprising our net deferred tax amount is as follows:

 

The provision for Federal income tax consists of the following:

 

   May 31,
2012
   May 31,
2011
 
Federal income tax benefit attributable to:          
Current operations  $619,000   $680,000 
Less: valuation allowance   (619,000)   (680,000)
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:

 

   May 31,
2012
   May 31,
2011
 
Deferred tax asset attributable to:          
Net operating loss carryover  $5,372,000   $2,508,000 
Less: valuation allowance   (5,372,000)   (2,508,000)
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 $15,800,000 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-13
 

 

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 2012

 

NOTE 17 – COMMITMENTS AND CONTINGENCIES

 

Operating Leases

 

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

 

 Year Ended February 28, 2013   $72,564 
 February 28, 2014    37,152 
 Total   $109,716 

 

Rent expense totaled $77,862 and $72,391 for the three months ended May 31, 2012 and 2011, respectively.

 

Lawsuits

 

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

 

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

 

NOTE 18- SUPPLEMENTAL NON-CASH INVESTING AND FINANCING INFORMATION

 

   May 31,
2012
   May 31,
2012
 
Shares issued to acquire assets  $0   $249,871 
Shares issued in payment of accrued expense  $34,989    0 
Warrants issued in connection with private placements   0   $1,395,675 
Shares issued for subscription receivable  $0   $650,000 

 

F-14
 

 

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 2012

 

NOTE 19 – NOTES PAYABLE/PURCHASE ORDER FINANCING

 

On May 25, 2012, the Company entered into a purchase order (PO) financing agreement which has provided $510,000 in debt financing, and which we will seek to increase up to a total of $750,000 in debt financing.  This agreement will enable us to receive a portion of the funds owed by customers in advance of when the customer is required to pay the balance (usually prior to shipment or delivery).  We will be required to submit customer orders as collateral for the funds received under the agreement.  Once the products are shipped and the end customer pays the remaining balance, those funds are then used to pay back the amount of the particular PO financed.  The amount repaid is then available for us to borrow against other of our accounts receivable.  The agreement calls for a 12% annual interest rate on any funds outstanding.  As additional consideration for the financing agreement, we issued the financing parties warrants to purchase up to 95,000 shares of our common stock, exercisable at any time during three years from the date of issue, at an exercise price of $0.80 per share.   As orders continue to increase, we may seek to further increase the amount under this financing.  There are no guarantees we will be successful at increasing the amounts available under this PO Financing agreement. The Note Payable balance was $488,778 at May 31, 2012.

 

NOTE 20 – GOING CONCERN

 

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 21 – SUBSEQUENT EVENTS

 

In accordance with ASC Topic 855-10, the Company has analyzed its operations subsequent to May 31, 2012 to the date these financial statements were issued, and has determined that it does not have any material subsequent events to disclose in these financial statements other than those disclosed above.  

 

F-15
 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-Looking Statements

 

Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of complying with those safe-harbor provisions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse affect on our operations and future prospects on a consolidated basis include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Further information concerning our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC.

 

Company Overview

 

XZERES Corp. (“XZERES” and the “Company”) is located in Wilsonville, Oregon and was originally incorporated in the state of New Mexico in January of 1984. The Company was engaged in the natural gas and asphalt businesses until 2007, at which time it liquidated its assets and operations and distributed the net proceeds to its shareholders after paying its debts. On October 2, 2008, the Company re-domiciled from New Mexico to Nevada and commenced operations in the wind turbine business in the fiscal quarter ended May 31, 2010. The Company is in the business of designing, developing, and marketing small wind turbine systems and related equipment for electrical power generation, specifically for use in residential, small business, rural electric utility systems, other rural locations, and other infrastructure applications.

 

The Company 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.

 

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

 

4
 

  

Our Business

 

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

 

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

 

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

 

On April 25, 2011, we acquired the assets of Rochester Power Saver Inc. (the “Rochester Power Acquisition”) 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 now sale a product line of power efficiency devices targeted at small to medium-sized businesses.

   

Results of operations for the three months ended May 31, 2012 and 2011

 

Overview. The quarter ending May 31, 2012 represented the beginning of our Fiscal Year 2013 and third year of operations. We have built a strong presence in both the Domestic market as well as in the United Kingdom (UK), which has generated significant demand for our products. We have also expanded our sales reach into Asia, the Caribbean and other parts of Europe as well. The above efforts have resulted in more orders and more multiple system orders per customer. During the quarter ending May 31, 2012, our backlog of open orders further expanded and is now at the highest level in our history. In addition, we have lowered our operating expenses going forward and have set a goal of reaching profitability during the current fiscal year. Our biggest challenge to fulfilling our expanded backlog and reaching our objectives remains the extremely limited liquidity and insufficient working capital position currently.

 

5
 

 

With the combination of an expanded dealer network along with our direct sales personnel, the Company is experiencing a rapid increase in orders for turbines and the pipeline of potential customers. 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 will contribute to higher revenues in fiscal year 2013. Based on our recent trends and our forward outlook, we have set an objective of achieving $20 million in sales for the current fiscal year ending February 28, 2013. Potential risks to this outlook include: meeting our working capital needs to be able to fulfill the orders, closed customers taking longer to prepare their sites for installation, since we do not recognize revenue until we deliver the system to the customer; negative changes in available incentives for renewable energy; increased restrictions on obtaining permits; and a deterioration in sentiment toward wind energy. With respect to incentives (a key driver in developed areas), there is a tendency for programs to be adjusted periodically. Our experience is that while one region may cut incentives, another area expands incentives. We would expect this ebb and flow of incentives around the world to continue and our global positioning positions us to take advantage of such trends.

 

As opposed to our wind turbine systems, our power efficiency products generally do not receive incentives and are not subject to lengthy permitting processes or installation needs. However, it does often take time to educate a potential customer about the benefits of this technology. We are experiencing a growing pipeline of activity in our power efficiency business and now have 35 dealers representing these products. As a result, we expect this business to experience rapid growth in Fiscal 2013, albeit from a low base.

 

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

 

As a result of strong orders from the UK, along with our existing domestic business and growing activities in Asia, the Company’s current backlog of existing orders, as of July 12, 2012 exceeds the revenue level of the prior entire fiscal year. We currently anticipate this trend to continue, which should lead to a significant overall increase in business for calendar 2013 provided we are able to obtain sufficient working capital.

 

Income. For the three months ended May 31, 2012 and 2011, we generated gross revenue of $649,041 and $1,017,217 respectively. Our revenue decline during the three months ended May 31, 2012 is a result of very limited liquidity and insufficient working capital to be able to more quickly fulfill the high volume of open orders. Our management is currently working on obtaining the additional working capital needed, whether through equity or debt capital or combination thereof.

 

Operating Expenses. Our Operating Expenses during the three month period ended May 31, 2012 equaled $1,891,514, consisting of $420,939 in sales expense, $55,545 in marketing costs, $124,310 in R&D/Engineering expenses, and $1,290,720 in general and administrative expenses. We had other expense of $39,069 for the period. Therefore, we recorded a net loss of $1,785,359 for the three months ended May 31, 2012. Inclusive in our net loss was non-cash compensation in the amount of $254,733. Our Operating Expenses during the three month period ended May 31, 2011 equaled $2,235,947, consisting of $325,817 in sales expense, $92,668 in marketing costs, $639,583 in R&D/Engineering expenses, and $1,177,879 in general and administrative expenses. We had other expense of $14,187 for the period. We therefore, recorded a net loss of $1,998,698 for the three months ended May 31, 2011.

 

6
 

 

Excluding the non-cash charges associated with employee option expensing and the expensing of shares issued to consultants for services, we experienced close to a 20% reduction in our cash operating costs during the May 31, 2012 quarter. We anticipate further declines in some of our operating expenses as we recently completed a number of key development initiatives as well as implemented efforts to streamline certain areas of operation.

 

Liquidity and Capital Resources

 

As of May 31, 2012, we had total current assets of $2,185,370, consisting of $3,561 in cash and cash equivalents, $629,059 in accounts receivable, $781,533 in inventories and $580,844 in prepaid expenses.  Our total current liabilities as of May 31, 2012 were $4,128,520. Thus, we have negative working capital of $1,943,150 as of May 31, 2012.   As of May 31, 2012, we had total assets of $4,463,551.

 

Operating activities used $529,467 and $2,362,032 in cash for the three months ended May 31, 2012 and May 31, 2011, respectively. Our net loss of $1,785,359, was the primary component of our negative operating cash flow for the three months ended May 31, 2012.

 

Investing Activities used $154,688 in cash during the three month period ending May 31, 2012, as a result of an increase in notes receivable

 

Financing Activities generated $487,348 from purchase order financing in the three months ended May 31, 2012 while $2,356,961 in cash for the three months ended May 31, 2011 was entirely generated from the issuance of new common shares and repayment of a related party note payable. 

 

As of May 31, 2012, the ability to continue the implementation of our business plan over the next twelve months is contingent upon us either generating sufficient revenues from our ongoing operations to fund our business, obtaining additional financing, or some combination of revenues and additional financing. Our current order backlog requires working capital to satisfy in a timely manner. In addition, we also lack sufficient working capital to meet all our current obligations to existing vendor trade payables and have delayed payments to most vendors. Three of our former vendors have filed suit seeking payment as a result of these delays. 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 satisfy our existing backlog of orders or to grow further. This is a high priority in order to support the significant growth of demand for our products. Although there can be no assurance that this additional working 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 July 13, 2012, 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.

 

7
 

  

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

A smaller reporting company is not required to provide the information required by this Item.

 

Item 4. Controls and Procedures

 

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 May 31, 2012. 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 May 31, 2012 our disclosure controls and procedures are effective. There have been no changes in our internal controls over financial reporting during the quarter ended May 31, 2012.

 

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.

  

8
 

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

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

 

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

 

Item 5. Other Information

 

None

 

Item 6. Exhibits

 

Exhibit Number   Description of Exhibit
3.1   Articles of Incorporation as Amended(1)
3.2   Amended and Restated Bylaws(1)
31.1   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1   Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS   XBRL Instance Document
101.SCH   XBRL Taxonomy Extension Schema
101.CAL   XBRL Taxonomy Extension Calculation Linkbase
101.DEF   XBRL Taxonomy Extension Definition Linkbase
101.LAB   XBRL Taxonomy Extension Label Linkbase
101.PRE   XBRL Taxonomy Presentation Linkbase

 

(1) Incorporated by reference to Registration Statement on Form S-1 filed on July 19, 2010.

 

9
 

 

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: July 20, 2012  
     
By: /s/ Frank Greco  
Name:  Frank Greco  
Title: Chief Executive Officer  

 

10