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EX-31.2 - XZERES Corp.ex31-2.htm
EX-31.1 - XZERES Corp.ex31-1.htm
EX-32.2 - XZERES Corp.ex32-2.htm
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 August 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: 333-91191

 

XZERES Corp.

(Exact name of registrant as specified in its charter)

 

Nevada   74-2329327
(State or other jurisdiction of incorporation or organization)   (IRS Employer Identification No.)

 

9025 SW Hillman Court, Suite 3126 Wilsonville, OR 97070

(Address of principal executive offices)

 

503-388-7350

(Registrant’s telephone number)

 

 
(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days [X] Yes [  ] No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [X] Yes [  ] No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

 

[  ] Large accelerated filer [  ] Accelerated filer
[  ] Non-accelerated Filer [X] Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [  ] Yes [X] No

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 26,810,387 as of October 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   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:

 

F-1   Balance Sheets as of August 31,2012, and February 29, 2012(unaudited);
F-2   Statements of Operations for the three and six months ended August 31, 2012 and 2011(unaudited);
F-3   Statements of Cash Flows for the six months ended August 31, 2012 and 2011(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 August 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 AUGUST 31, 2012 AND FEBRUARY 29, 2012

 

   August 31, 2012   February 29, 2012 
ASSETS          
Current Assets          
Cash and cash equivalents  $104,645   $236,682 
Accounts receivable, net   468,858    1,036,778 
Subscription receivable   -    80,000 
Notes receivable - current portion   66,330    45,552 
Inventories   838,169    828,188 
Inventory deposit   70,092    70,092 
Deferred financing costs, net   71,041    - 
Prepaid expenses   499,127    334,361 
Total Current Assets   2,118,262    2,631,653 
           
Property and Equipment, net   324,346    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   7,647    11,176 
Deposit   18,198    18,198 
Total Other Assets   1,943,620    1,874,893 
           
TOTAL ASSETS  $4,386,228   $4,853,553 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)          
Current Liabilities          
Accounts payable  $1,881,023   $2,177,351 
Due to factor-related party   322,012    303,806 
Accrued expenses   428,446    113,551 
Accrued interest   27,644    - 
Customer deposits   729,562    520,458 
Warranty reserve   100,136    87,018 
Sales tax payable   527    32,822 
Notes payable   2,010,026    - 
Convertible note payable   100,000    - 
Total Liabilities   5,599,376    3,235,006 
           
Stockholders’ Equity (Deficit)          
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   26,611    25,501 
Stock warrants   3,876,235    3,791,031 
Additional paid in capital   12,315,187    11,790,160 
Accumulated other comprehensive income (loss)   (55,561)   (8,477)
Accumulated deficit   (17,375,620)   (13,979,668)
Total Stockholders’ Equity (Deficit)   (1,213,148)   1,618,547 
           
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)  $4,386,228   $4,853,553 

 

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

 

F-1
 

   

XZERES CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

FOR THE THREE AND SIX MONTHS ENDED AUGUST 31, 2012 AND 2011

 

   Three Months Ended   Six Months Ended 
   Aug 31, 2012 (Unaudited)   Aug 31, 2011 (Unaudited)   Aug 31, 2012 (Unaudited)   Aug 31, 2011 (Unaudited) 
                 
GROSS REVENUES  $1,186,101   $1,367,901   $1,835,142   $2,385,118 
                     
COST OF GOODS SOLD   999,915    1,046,669    1,503,732    1,812,450 
                     
GROSS PROFIT   186,186    321,232    331,410    572,668 
                     
OPERATING EXPENSES                    
General and administrative expenses   1,469,846    1,025,478    2,760,566    2,203,357 
Marketing   48,352    103,224    103,897    195,892 
Sales expense   95,979    370,974    516,918    696,791 
Engineering/R&D expense   104,381    571,051    228,691    1,210,634 
TOTAL OPERATING EXPENSES   1,718,558    2,070,727    3,610,072    4,306,674 
                     
LOSS FROM OPERATIONS   (1,532,372)   (1,749,495)   (3,278,662)   (3,734,006)
                     
OTHER INCOME (EXPENSE)   (78,221)   (13,445)   (117,290)   (27,633)
                     
LOSS BEFORE PROVISION FOR INCOME TAXES   (1,610,593)   (1,762,940)   (3,395,952)   (3,761,639)
                     
PROVISION FOR INCOME TAXES   0    0    0    0 
                     
NET LOSS   (1,610,593)   (1,762,940)   (3,395,952)   (3,761,639)
                     
OTHER COMPREHENSIVE LOSS                    
Foreign currency translation    adjustment gain (loss)   (10,770)   0    (47,084)   0 
                     
COMPREHENSIVE LOSS  $(1,621,363)  $(1,762,940)  $(3,443,036)  $(3,761,639)
                     
NET LOSS PER SHARE:                    
BASIC AND DILUTED  $(0.06)  $(0.09)  $(0.13)  $(0.20)
                     
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:                    
BASIC AND DILUTED   26,610,387    19,302,825    26,422,117    18,667,178 

 

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

 

F-2
 

   

XZERES CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE SIX MONTHS ENDED AUGUST 31, 2012 AND 2011

 

   Six Months Ended
August 31, 2012
   Six Months Ended
August 31, 2011
 
Cash Flows from Operating Activities:          
Net loss for the period  $(3,395,952)  $(3,761,639)
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:          
Depreciation and Amortization expense   61,892    70,844 
Share-based services   232,000    307,931 
Share-based compensation   41,648    - 
Issuance of common shares for fee   225,000    - 
Allowance for doubtful accounts   10,060    - 
Changes in Assets and Liabilities          
Accounts receivable   557,860    (1,036,655)
Subscription receivable   80,000    - 
Inventories   (9,981)   (588,852)
Inventory deposit   -    40,066 
Prepaid expenses   (164,766)   (69,003)
Accounts payable   (296,328)   1,325,807 
Accrued expenses   377,528    (799)
Sales tax payable   (32,295)   - 
Customer deposits   209,104    34,274 
Warranty reserve   13,118    (5,828)
Net Cash Used in Operating Activities   (2,091,112)   (3,683,852)
           
Cash Flows from Investing Activities:          
Net increase in notes receivable   (93,034)   - 
Purchase of property and equipment   (21,539)   (27,572)
Acquisition of Property   -    (50,000)
Net Cash Used in Investing Activities   (114,573)   (77,572)
           
Cash Flows from Financing Activities:          
Proceeds from issuance of common shares   -    3,915,512 
Repayment of notes payable   -    (197,500)
Increase in due to factor   18,206    - 
Proceeds from notes payable   2,110,026    - 
Equity issuance costs   (7,500)   (237,051)
Net Cash Provided by Financing Activities   2,120,732    3,480,961 
           
Foreign Currency Effect on Cash   (47,084)   - 
           
Net Increase (Decrease) in Cash and Cash Equivalents   (132,037)   (280,463)
           
Cash and Cash Equivalents – Beginning   236,682    364,068 
           
Cash and Cash Equivalents – Ending  $104,645   $83,605 
           
Supplemental Cash Flow Information:          
Cash paid for interest  $-   $- 
Cash paid for income taxes  $-   $- 

 

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

 

F-3
 

 

XZERES CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

AUGUST 31, 2012

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Business

XZERES Corp. (“XZERES” and the “Company”) is located in Portland, 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.

 

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.

 

F-4
 

  

XZERES CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

AUGUST 31, 2012

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

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.

 

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 $104,645 and $236,682 at August 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 $10,247 and $51,273 during the three months ended August 31, 2012 and 2011 respectively. For the six months ended August 31, 2012 and 2011, XZERES incurred advertising expense of $16,442 and $86,501, respectively.

 

Stock-Based Compensation

The Company accounts for employee stock-based compensation in accordance with the guidance of FASB ASC Topic 718, Compensation – Stock Compensation which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. During the three months ended August 31, 2012 the Company did not make any grants of employee stock options. For the three months ended August 31, 2012 and August 31, 2011, the Company recorded stock-based compensation expense of $(2,776) and $43,168, respectively. Unrecognized expense of $585,002 remains to be recognized over the remaining 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 August 31, 2012 and August 31, 2011, the Company recorded stock–based compensation expense relating to non-employees in the amount of $213,881 and $11,813 respectively. For the six months ended August 31, 2012 and 2011, the Company recorded stock-based compensation relating to non-employees of $424,190 and $23,626 respectively.

 

Fair Value of Financial Instruments

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

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

AUGUST 31, 2012

 

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 August 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. Outstanding warrants and options were not included in the computation of diluted earnings per share for the quarter ended August 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.

 

NOTE 2 - ACQUISITION

 

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 and $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 the next 24 months.

 

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 

 

F-6
 

  

XZERES CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

AUGUST 31, 2012

 

NOTE 3 - ACCOUNTS RECEIVABLE

 

Accounts receivable is generated from sales of wind turbine systems and power efficiency products. At August 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.

 

   August 31, 2012   February 29, 2012 
Accounts receivable  $478,918   $1,059,750 
Less: Allowance for doubtful accounts   (10,060)   (22,972)
Accounts receivable, net  $468,858   $1,036,778 

 

Notes receivable are generated from sales of wind turbine systems. At August 31, 2012, notes receivable were comprised of balances from end customers. Terms of the notes receivable are seven years at an annual interest rate of 4.5% with payments received on a monthly basis.

 

NOTE 4 – PREPAID EXPENSES

 

Prepaid expenses consisted of the following:

 

   August 31, 2012   February 29, 2012 
Software licenses  $51,822   $38,299 
Other   33,229    0 
Consulting   414,076    296,062 
Total Prepaid expenses  $499,127   $334,361 

 

NOTE 5 – DEFERRED FINANCING COSTS

 

The fair value of warrants issued in connection with the PO financing arrangements have been recorded as deferred financing costs. The warrants were fair valued at $85,204 using the Black-Scholes pricing model. These costs are being amortized over the terms of the related loan agreements. Deferred financing costs include due diligence, legal and banking fees.

 

Deferred financing costs consisted of the following:

 

   August 31, 2012   February 29, 2012 
Deferred financing costs  $85,204   $0 
Less: accumulated amortization   (14,163)   0 
Deferred financing costs, net  $71,041   $0 

 

Amortization expense for the three and six month periods ended August 31, 2012 totaled $14,163 and $0, respectively.

 

NOTE 6 – SUBSCRIPTION RECEIVABLE

 

The subscription receivable was collected on March 21, 2012.

 

F-7
 

  

XZERES CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

AUGUST 31, 2012

 

NOTE 7 – 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:

 

   August 31, 2012   February 29, 2012 
Finished goods  $770,985   $690,682 
Parts and supplies   67,184    137,506 
Total Inventories  $838,169   $828,188 

 

 

NOTE 8 – PROPERTY AND EQUIPMENT

 

Property and equipment are being depreciated over their estimated useful lives using the straight-line method of depreciation for book purposes.

 

   August 31, 2012   February 29, 2012 
Furniture  $48,624   $48,624 
Computer equipment   175,155    171,318 
Shop machinery and equipment   249,802    232,100 
Vehicles   10,998    10,998 
Subtotal   484,579    463,040 
Less: accumulated depreciation   (160,233)   (116,033)
Property and equipment, net  $324,346   $347,007 

 

Depreciation expense totaled $22,287 and $12,987 for the three months ended August 31, 2012 and 2011 respectively. For the six months ended August 31, 2012 and 2011, depreciation expense totaled $44,200 and $25,234, respectively.

 

NOTE 9 – WEBSITE DEVELOPMENT COSTS

 

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

 

   August 31, 2012   February 29, 2012 
Website development costs  $21,175   $21,175 
Less: Accumulated amortization   (13,528)   (9,999)
Website development costs, net  $7,647   $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 August 31, 2012 and 2011, respectively.

 

Amortization expense was $3,530 and $3,530 for the six months ended August 31, 2012 and 2011, respectively.

 

F-8
 

  

XZERES CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

AUGUST 31, 2012

 

NOTE 10 – INTELLECTUAL PROPERTY

 

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

 

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

 

NOTE 11 – ACCRUED EXPENSES

 

Accrued expenses consisted of the following:

 

     August 31, 2012   February 29, 2012 
  Wages  $265,443   $113,551 
  Inventory Received Not Billed   163,003    0 
  Total Accrued Expenses  $428,446   $113,551 

 

NOTE 12 – 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 $729,562 at August 31, 2012 and $520,458 at February 29, 2012.

 

NOTE 13 – WARRANTY RESERVE

 

The Company accrues for estimated future warranty costs by establishing a reserve of 2% of fiscal year wind turbine sales and tower sales. The reserve is reduced over the five year warranty period as follows:

 

Year 1 0.1%
Year 2 0.3%
Year 3 0.4%
Year 4 0.5%
Year 5 0.7%
   
Total Warranty Reserve as a % of Sales 2.0%

 

Warranty reserve activity was as follows:

 

   August 31, 2012   February 29, 2012 
Reserve balance, beginning  $80,160   $16,601 
Added to reserve   35,273    129,029 
Charges against reserve   (15,297)   (58,612)
Reserve balance, ending  $100,136   $87,018 

  

F-9
 

  

XZERES CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

AUGUST 31, 2012

 

NOTE 14 - 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.

 

NOTE 15 – 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-10
 

  

XZERES CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

AUGUST 31, 2012

 

NOTE 15 – STOCKHOLDERS’ EQUITY (CONTINUED)

 

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.
   
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 six months ended August 31, 2012, the following share-related transactions occurred:

 

1,109,973 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 $491,989. Of the total value, $247,601 was expensed during the period.

 

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

 

NOTE 16 – STOCK WARRANTS AND OPTIONS

 

The Company has granted 695,000 warrants valued at $85,204 during fiscal year 2013 related to purchase order financing facilities.

 

The Company also granted 5,207,649 and 2,584,318 stock warrants valued at $3,610,400 in connection with private placements during fiscal 2012 and fiscal 2011, respectively. 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 these warrants at $3,800,274 as of the grant dates using the Black-Scholes option pricing model. The Company also granted 1,250,000 warrants valued at $189,875 to advisors in fiscal 2012. Advisor warrants are amortized over the term of the related advisor agreement.

 

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.

  

F-11
 

 

XZERES CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

AUGUST 31, 2012

 

NOTE 16 – STOCK WARRANTS AND OPTIONS (CONTINUED)

 

Options issued to employees are classified as compensation expense. Stock option expense recognized in net earnings amounted to $(2,776) and $41,648 for the three and six months ended August 31, 2012. Stock option expense recognized in earnings for the three and six months ended August 31, 2011 was $264,763 and $307,932 respectively. As of August 31, 2012, there was $ 585,002 of unrecognized compensation expense related to non-vested share awards that we expect to recognize over a weighted average period of 3.5 years.

 

Key assumptions used by the Company in the Black-Scholes pricing model are summarized as follows:

 

    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.

 

NOTE 17 – INCOME TAXES

 

For the period ended August 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 $17,376,000 at August 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 for the six months ended:

 

   August 31, 2012  August 31, 2011
Federal income tax benefit attributable to:          
Current operations  $1,155,000   $680,000 
Less: valuation allowance   (1,155,000)   (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:

 

   August 31, 2012  February 29, 2012
Deferred tax asset attributable to:          
Net operating loss carryover  $5,908,000   $4,753,000 
Less: valuation allowance   (5,908,000)   (4,753,000)
Net deferred tax asset  $0   $0 

 

F-12
 

  

XZERES CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

AUGUST 31, 2012

 

 NOTE 17 – INCOME TAXES (CONTINUED)

 

Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carry forwards of $17,376,000 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.

 

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 18 – 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 
 2014    37,152 
 Total   $109,716 

 

Rent expense totaled $86,853 and $66,163 for the three months ended August 31, 2012 and 2011, respectively.

Rent expense totaled $164,715 and $138,554 for the six months ended August 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.

 

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.

  

NOTE 19 - SUPPLEMENTAL NON-CASH INVESTING AND FINANCING INFORMATION

 

   August 31,2012  August 31,2011
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  $85,204   $1,395,675 

 

F-13
 

  

 XZERES CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

AUGUST 31, 2012

 

NOTE 20 – NOTES PAYABLE

 

On May 25, 2012, the Company entered into a purchase order (PO) financing agreement which has provided $510,000 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 customer orders. 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.

 

On August 6, 2012, the Company entered into a purchase order (PO) financing agreement which has provided $1,500,000 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 additional customer orders. The agreement calls for a 16% annual interest rate on any funds outstanding. As additional consideration for the financing agreement, we issued the financing party warrants to purchase up to 600,000 shares of our common stock, exercisable at any time during the 24 months from the date of issue, at an exercise price of $0.35 per share.

 

Note Payable balances related to the Purchase Order Financing consisted of the following:

 

   August 31, 2012  February 29, 2012
Notes payable outstanding balance and interest is due within five days of receipt by Company of funds received from customer on a sales order identified as collateral in the PO financing agreement. At the note holder’s discretion, in lieu of immediate repayment, Company may submit a new sales order, with value equal to or in excess of principal outstanding, as collateral in the PO financing arrangement.. Outstanding balance must be paid by Maturity Date of the PO financing arrangements which range from December 31, 2012 to May 15, 2013.Notes are collateralized by specifically identified Company sales orders. Interest rate is 1% per month.  $510,026   $- 
           
Note payable due in even installments of principal and interest over the twelve month term of the PO financing arrangement. Note is collateralized by specifically identified Company sales orders. Outstanding balance due to the note holder must be paid by the later of August 1, 2013 or 180 days after the last drawdown date on the PO Financing arrangement. Note is collateralized by specifically identified Company sales orders. Interest rate is 16% per year.
   1,500,000    - 
Totals  $2,010,026   $- 

 

F-14
 

  

XZERES CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

AUGUST 31, 2012

 

NOTE 21 – CONVERTIBLE NOTE PAYABLE

 

The $100,000 convertible note payable is dated June 14, 2012 and bears interest at 8%. Unpaid principal and accrued interest are due on the maturity date of March 18, 2013. The note is convertible after 180 days from the issue date. Unpaid note principal and accrued interest can be converted to common stock at the option of the lender at 58% of the average of the lowest three trading prices for the common stock during the ten trading day period ending on the latest complete trading day prior to the conversion date.

 

NOTE 22 – SUBSEQUENT EVENTS

 

In accordance with ASC Topic 855-10, the Company has analyzed its operations subsequent to August 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.

 

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 operates two wholly-owned subsidiaries, 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.

 

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.

 

4
 

 

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

 

We 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.

 

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

 

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

 

Overview. The quarter ending August 31, 2012 completed the first half of our Fiscal Year 2013. Over the past two and half years, we have built a strong presence in both the Domestic market as well as in the United Kingdom (UK), which has generated significant demand during the current fiscal year for our products. We have also expanded our sales efforts into Asia, the Caribbean and other parts of Europe. Those efforts have resulted in more orders and more multiple system orders per customer and our backlog of open orders remains at the highest level in our history. We have also continued to lower our operating expenses 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 has been an extremely limited liquidity and insufficient working capital position, which we helped address late in the quarter with the August 6th closing of a new larger credit facility.

 

5
 

 

 

We believe that the existing and growing sales backlog, current pipeline, and the greater overall interest in our products will contribute to higher revenues in fiscal year 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 numerous 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 in 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 August 31, 2012 and 2011, we generated gross revenue of $1,186,101 and $1,367,901 respectively. For the six months ended August 31, 2012 and 2011, we generated gross revenue of $1,835,142 and $2,385,118, respectively. Our revenue decline during the three months ended August 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. However, late in the period we improved our working capital with the new credit facility and hence our revenues increased over 83% sequentially from the first fiscal quarter. Our management will continue to work on obtaining the additional working capital as needed, whether through equity or debt capital or combination thereof.

 

Operating Expenses. Our Operating Expenses during the three month period ended August 31, 2012 equaled $1,718,558 consisting of $95,979 in sales expense, $48,352 in marketing costs, $104,381 in R&D/Engineering expenses, and $1,469,846 in general and administrative expenses. We had other expense of $78,221 for the period. Therefore, we recorded a net loss of $1,610,593 for the three months ended August 31, 2012. Inclusive in our net loss was non-cash compensation in the amount of $(2,776). Our Operating Expenses during the three month period ended August 31, 2011 equaled $2,070,727, consisting of $370,974 in sales expense, $103,224 in marketing costs, $571,051 in R&D/Engineering expenses, and $1,025,478 in general and administrative expenses. We had other expense of $13,445 for the period. Therefore, we recorded a net loss of $1,762,940 for the three months ended August 31, 2011. Inclusive in our net loss was non-cash compensation in the amount of $43,168. The decrease in our net loss for the period ended August 31, 2012 over the same period in 2011 is attributable to a reduction in outside services associated with our significant product enhancements which we completed earlier this year along with our efforts to improve efficiencies and streamline operations.

6
 

 

 

Our Operating Expenses during the six month period ended August 31, 2012 equaled $3,610,072 consisting of $516,918 in sales expense, $103,897 in marketing costs, $228,691 in R&D/Engineering fees, and $2,760,566 in general and administrative expenses. We had other expense of $117,290 for the period. Therefore, we recorded a net loss of $3,395,952 for the six months ended August 31, 2012. Our Operating Expenses during the six month period ended August 31, 2011 equaled $4,306,674, consisting of $696,791 in sales expense, $195,892 in marketing costs, $1,210,634 in R&D/Engineering fees, and $2,203,357 in general and administrative expenses. We had other expense income of $27,633 for the period. Therefore, we recorded a net loss of $3,761,639 for the six months ended August 31, 2011. The substantial loss for both periods ended August 31, 2012 and 2011 is attributable to the costs attributable to commencing our business operations as a small wind turbine manufacturing and sales company.

 

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 16% reduction in our cash operating costs during the six months ending August 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 August 31, 2012, we had total current assets of $2,118,262 consisting primarily of $104,465 in cash and cash equivalents, $468,858 in accounts receivable, $838,169 in inventories and $499,127 in prepaid expenses. Our total current liabilities as of August 31, 2012 were $5,599,376. Thus, we have negative working capital of $3,481,114 as of August 31, 2012.  As of August 31, 2012, we had total assets of $4,386,228.

 

Operating activities used $2,091,112 and $3,683,852 in cash for the six months ended August 31, 2012 and August 31, 2011, respectively. Our net loss of $3,395,952 was the primary component of our negative operating cash flow for the six months ended August 31, 2012.


Investing Activities used $114,573 in cash during the six month period ending August 31, 2012, primarily as a result of an increase in notes receivable.

 

Financing Activities generated $2,120,732 in cash from purchase order financing in the six months ended August 31, 2012 while $3,480,961 in cash for the six months ended August 31, 2011 was entirely generated from the issuance of new common shares and repayment of a related party note payable.

 

As of August 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 many vendors. Three of our former vendors have filed suit seeking payment as a result of these delays. Our management will continue to make obtaining additional working capital as needed, 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 large backlog of orders or to grow further. Although there can be no assurance that this additional working capital will be acquired, management believes that the current company opportunities are significant enough that we will be able to do so. If we are unable to do so, the execution of our business plan could be adversely impacted.

  

Off Balance Sheet Arrangements

 

As of October 12, 2012, there were no off balance sheet arrangements.

 

7
 

 

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.

 

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 August 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 August 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 August 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.

 

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PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

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.

 

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 June 25, 2012, we were served with a lawsuit by ESAM, Inc,, a manufacturing firm, seeking damages in the amount of $134,959. The suit was filed in the Circuit Court of the State of Oregon for the County of Josephine. The dispute arises due to delayed payment to the vendor due to the Company’s working capital constraints.

 

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:  October 15, 2012  
     
By: /s/ Frank Greco  
Title: Chief Executive Officer  

 

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