Attached files

file filename
EX-31.2 - CERTIFICATION - XZERES Corp.f10q0515ex31ii_xzerescorp.htm
EX-32.1 - CERTIFICATION - XZERES Corp.f10q0515ex32i_xzerescorp.htm
EX-31.1 - CERTIFICATION - XZERES Corp.f10q0515ex31i_xzerescorp.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

☒    Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

   

  For the quarterly period ended May 31, 2015

   

☐    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 ☒ Yes ☐  No

 

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

 

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

 

Large accelerated filer   ☐  Accelerated filer ☐ 
Non-accelerated Filer ☐  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 ☒   No

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 72,768,897 as of July 15, 2015.

 

 

 

 
 

 

 TABLE OF CONTENTS

 

 

      Page 

PART I – FINANCIAL INFORMATION

 
Item 1:  Financial Statements   1 
Item 2:  Management’s Discussion and Analysis of Financial Condition and Results of Operations   3 
Item 3:  Quantitative and Qualitative Disclosures About Market Risk   7 
Item 4:  Controls and Procedures   7 
         
 PART II – OTHER INFORMATION

 

Item 1:  Legal Proceedings   9 
Item 5:  Other Information   9 
Item 6:  Exhibits   9 

 

 
 

 

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 May 31, 2015, and February 28, 2015 (unaudited);
F-2  Statements of Operations for the three months ended May 31, 2015 and 2014 (unaudited);
F-3  Statements of Cash Flows for the three months ended May 31, 2015 and 2014 (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 May 31, 2015 are not necessarily indicative of the results that can be expected for the full year.

 

1
 

 

XZERES CORP.

 

CONSOLIDATED FINANCIAL STATEMENTS

 

MAY 31, 2015

 

Consolidated Balance Sheets as of May 31, 2015 and February 28, 2015 (unaudited)     F - 1  
         
Consolidated Statements of Operations for the Three Months Ended May 31, 2015 and 2014 (unaudited)     F - 2  
         
Consolidated Statements of Cash Flows for the Three Months Ended May 31, 2015 and 2014 (unaudited)     F - 3  
         
Notes to Consolidated Financial Statements     F-4 - F-19  

 

 

2
 

 

XZERES CORP.

CONSOLIDATED BALANCE SHEETS (unaudited)

AS OF MAY 31, 2015 AND FEBRUARY 28, 2015

 

ASSETS   May 31,
2015
    February 28,
2015
 
Current Assets            
Cash and cash equivalents   $ 364,563     $ 880,446  
Accounts and notes receivable, net – current portion     722,367       921,367  
Inventories     3,029,735       2,490,752  
Inventory deposits     872,934       1,003,358  
Prepaid expenses     241,634       218,639  
Total Current Assets     5,231,233       5,514,562  
                 
Property and Equipment, net     175,892       190,051  
                 
Other Assets                
Accounts and notes receivable – net of current portion     149,622       154,139  
Intellectual property, net     1,210,207       1,232,211  
Deposits     45,554       45,554  
Total Other Assets     1,405,383       1,431,904  
                 
TOTAL ASSETS   $ 6,812,508     $ 7,136,517  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)                
                 
Current Liabilities                
Accounts payable   $ 1,506,162     $ 1,535,175  
Accrued expenses     470,444       726,892  
Customer deposits     299,450       79,134  
Warranty reserve     421,433       440,218  
VAT & sales tax payable     24,286       8,527  
Notes payable – related parties – current portion     500,000       -  
Notes payable – current portion     14,286,660       14,821,428  
Total Current Liabilities     17,508,435       17,611,374  
                 
Long-term  Liabilities                
Notes payable – related parties     734,368       734,368  
Total  Long-term Liabilities     734,368       734,368  
TOTAL LIABILITIES     18,242,803       18,345,743  
                 
Stockholder’s Equity (Deficit)                
Common stock, par $0.001, 100,000,000 shares authorized, 72,768,897 and 62,707,197 shares issued and outstanding, respectively     72,768       62,709  
Stock warrants     5,381,245       5,390,489  
Additional paid in capital     26,963,069       25,412,151  
Accumulated other comprehensive income (loss)     (1,393 )     (1,396 )
Accumulated deficit     (43,845,984 )     (42,073,178 )
Total Stockholders’ Equity (Deficit)     (11,430,295 )     (11,209,225 )
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)   $ 6,812,508     $ 7,136,517  

 

See accompanying notes to consolidated financial statements.

 

F-1
 

 

XZERES CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

FOR THE THREE MONTHS ENDED MAY 31, 2015 AND 2014

 

  

May 31,
2015

  May 31,
2014
 
         
GROSS REVENUES  $616,588   $501,948 
           
COST OF GOODS SOLD   416,453    603,893 
           
GROSS PROFIT   200,135    (101,945)
           
OPERATING EXPENSES          
General and administrative expenses   1,261,928    1,338,841 
Marketing   63,518    155,261 
Sales expense   300,085    390,241 
Engineering/R&D expense   198,184    248,995 
TOTAL OPERATING EXPENSES   1,823,715    2,133,338 
           
LOSS FROM OPERATIONS   (1,623,580)   (2,235,283)
           
OTHER INCOME (EXPENSE)          
Interest expense   (139,378)   (389,945)
Amortization of debt discount   -    (427,256)
Other income (expense)   (9,851)   985 
TOTAL OTHER INCOME (EXPENSE)   (149,229)   (816,216)
           
LOSS BEFORE PROVISION FOR INCOME TAXES AND OTHER COMPREHENSIVE INCOME (LOSS)   (1,772,809)   (3,051,499)
           
PROVISION FOR INCOME TAXES   -    - 
           
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS   (1,772,809)   (3,051,499)
           
OTHER COMPREHENSIVE INCOME (LOSS)          
Foreign currency adjustment gain (loss)   3    (857)
           
COMPREHENSIVE INCOME (LOSS)  $(1,772,806)  $(3,052,356)
           
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:          
BASIC AND DILUTED   69,051,113    43,173,870 
           
NET LOSS PER SHARE:          
BASIC AND DILUTED  $(.03)  $(0.07)

 

See accompanying notes to consolidated financial statements.

 

F-2
 

 

XZERES CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

FOR THE THREE MONTHS ENDED MAY 31, 2015 AND 2014

 

   May 31,
2015
   May 31,
2014
 
Cash Flows from Operating Activities:        
Net loss for the period  $(1,772,809)  $(3,051,499)
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:          
Amortization of debt discount   -    427,256 
Depreciation and amortization expense   49,033    27,017 
Bad debt expense   (1,039)   (18,475)
Share-based compensation   34,460    54,698 
Issuance of common shares for services   17,276    - 
Changes in Assets and Liabilities          
Accounts and notes receivable   204,557    1,158,171 
Prepaid expenses   (22,995)   207,981 
Inventory and inventory deposits   (408,559)   (62,558)
Accounts payable   (225,573)   (276,434)
Accrued expenses   (59,889)   119,258 
Customer deposits   220,317    24,603 
VAT & sales tax payable   15,759    (61,982)
Warranty reserve   (18,786)   5,280 
Net Cash Used in Operating Activities   (1,968,248)   (1,446,684)
           
Cash Flows from Investing Activities:          
Acquisitions of property and equipment   (12,870)   (1,170)
Rent deposit   -    (10,690)
Net Cash Used in Investing Activities   (12,870)   (11,860)
           
Cash Flows from Financing Activities:          
Net increase/(decrease) in notes and loans payable, net of debt discount   (34,768)   1,490,236 
Proceeds from common stock offering   1,500,000    - 
Net Cash Provided by Financing Activities   1,465,232    1,490,236 
           
Foreign Currency Effect on Cash   3    (857)
           
Net Increase/(Decrease) in Cash and Cash Equivalents   (515,883)   30,835 
Cash and Cash Equivalents – Beginning    880,446    43,495 
           
Cash and Cash Equivalents – Ending  $364,563   $74,330 
           
Supplemental Cash Flow Information:          
Cash paid for interest  $139,378   $269,727 
Cash paid for income taxes  $-   $- 

 

See accompanying notes to consolidated financial statements.

 

F-3
 

 

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

MAY 31, 2015

 

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 formed two additional subsidiaries during the year ended February 28, 2014. XZERES Capital Corp. was incorporated in Nevada in January, 2014 and XZERES Wind Japan Limited was formed in Japan in October, 2013.

 

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), XZERES Wind Europe Limited (formed in Ireland), XZERES Capital Corp. (a Nevada corporation), and XZERES Wind Japan Limited (formed in Japan). All material inter-company transactions have been eliminated in the consolidation.

 

Basis of Presentation

The accompanying interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission (“SEC”), and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s Form 10-K filed with the SEC as of and for the period ended February 28, 2015, as amended. In the opinion of management, all adjustments necessary in order for the financial statements to be not misleading have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results expected for the full year.

 

Accounting Basis

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

 

Use of Estimates

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

 

F-4
 

 

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

MAY 31, 2015

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Fair Value of Financial Instruments

The Company’s financial instruments consist of cash and cash equivalents, accounts and notes receivable, inventories, inventory deposits, prepaid expenses, notes payable, 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.

 

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 $364,563 and $880,446 at May 31, 2015 and February 28, 2015, respectively.

 

Advertising Costs

The Company’s policy regarding advertising is to expense advertising when incurred. XZERES incurred advertising expense of $2,134 and $7,024 during the quarters ended May 31, 2015 and 2014, 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.

 

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 directly to compensation expense or prepaid expense and additional paid-in capital over the period during which services are rendered.

 

F-5
 

 

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

MAY 31, 2015

 

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.

 

Property and Equipment

Property and equipment are stated at cost.  Depreciation is computed on the straight line method over the estimated useful lives of the assets, which range from three to seven years.

 

Research and Development

We incur research and development costs (“R&D”) to develop and improve our products. Our products reach technological feasibility shortly before the products are released and therefore R&D costs are expensed as incurred. Employee related costs associated with product development are included in R&D costs.

 

Intangible Assets

In accordance with ASC 350, Goodwill and Other Intangible Assets, the Company tests its intangible assets for impairment on an annual basis and between annual tests if events occur or circumstances change that would more likely than not reduce the fair value below its carrying amount.

 

The Company applies the provisions of ASC Topic 350, requiring that intangible assets that have indefinite lives are not amortized but are subject to an annual impairment test or more frequent test if indicators of impairment exist.

 

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 quarter ended May 31, 2015, 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. Weighted average common share equivalents totaled 26,407,152at May 31, 2015. Outstanding warrants and options were not included in the computation of diluted earnings per share for the quarter ended May 31, 2015, 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 (unaudited)

MAY 31, 2015

 

NOTE 2 - ACCOUNTS AND NOTES RECEIVABLE

 

Accounts receivable is generated from sales of wind turbine systems and power efficiency products. At May 31, 2015, accounts receivable were substantially comprised of balances due from end customers and dealers.

 

Notes receivable are generated from sales of wind turbine systems. At May 31, 2015, notes receivable were comprised of balances due from nine end customers. The term of the notes receivable vary from five to seven years at an annual interest rate ranging from 4.5% to 7%. Payments are received on a monthly basis.

 

An allowance for doubtful accounts is provided against accounts and notes receivable for amounts management believes may be uncollectible. The Company determines the adequacy of this allowance by regularly reviewing the composition of its receivable aging and evaluating individual customer receivables, considering the customer’s financial condition, credit history and current economic circumstance. As of May 31, 2015 and February 28, 2015 an allowance for doubtful accounts of $300,072 and $299,033, respectively, has been provided.

 

   May 31,
2015
   February 28,
2015
 
Accounts and notes receivable  $1,172,061   $1,374,539 
Less: Allowance for doubtful accounts   (300,072)   (299,033)
Accounts and notes receivable, net   871,989    1,075,506 
Less: Current portion   722,367    921,367 
Long-term portion  $149,622   $154,139 

 

NOTE 3 – PREPAID EXPENSES

 

Prepaid expenses consisted of the following:

 

   May 31,
2015
   February 28,
2015
 
Software licenses  $33,335   $15,793 
Insurance   51,306    11,433 
Consulting   156,993    191,413 
Total prepaid expenses  $241,634   $218,639 

 

F-7
 

 

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

MAY 31, 2015

 

NOTE 4 – DEFERRED FINANCING COSTS

 

We defer certain costs associated with financing activities related to the issuance of equity securities (deferred offering costs) and debt securities (deferred financing costs). These costs consist primarily of legal, banking and other professional fees related to the transactions. Upon successful completion of the offering of equity securities, deferred offering costs are recorded as a reduction of the net proceeds in paid in capital. If the offering is not successful, such costs will be expensed. Deferred financing costs are amortized over the life of the related debt. There were no deferred financing costs at May 31, 2015 and February 28, 2015

 

NOTE 5 – 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. Inventory deposits are payments made to vendors as advances against inventory expected to be delivered when completed. Inventory deposits totaled $872,934 and $1,003,358 at May 31, 2015 and February 28, 2015, respectively.

 

Inventories consisted of the following:

 

   May 31,
2015
   February 28,
2015
 
Finished goods  $1,047,091   $981,837 
Parts and supplies   1,982,644    1,508,915 
Total Inventories  $3,029,735   $2,490,752 

 

NOTE 6 – 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,
2015
   

February 28,

2015

 
Furniture   $ 54,012     $ 54,012  
Computer equipment     184,534       176,724  
Shop machinery and equipment     244,335       239,775  
Testing Site & Equipment     31,389       31,389  
Molds & Tooling     112,186       111,686  
Leasehold Improvements     7,270       7,270  
Vehicles     10,998       10,998  
Subtotal     644,724       631,854  
Less: accumulated depreciation     (468,832 )     (441,803 )
Property and equipment, net   $ 175,892     $ 190,051  

 

Depreciation expense totaled $27,029 and $27,017 for three months ended May 31, 2015 and for the three months ended May 31, 2014, respectively.

 

F-8
 

 

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

MAY 31, 2015

 

NOTE 7 – 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. We have elected to begin amortizing the intangibles at a rate of $88,015 per year.

 

NOTE 8 – ACCRUED EXPENSES

 

Accrued expenses consisted of the following:

 

    May 31,
2015
    February 28,
2015
 
Wages   $ 48,687     $ 46,146  
Payroll taxes     228,768       313,153  
Benefits     3,696       3,696  
Inventory received not billed     -       196,559  
Interest     189,293       167,338  
Total accrued expenses   $ 470,444     $ 726,892  

 

NOTE 9 – 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 $299,450 at May 31, 2015 and $79,134 at February 28, 2015.

 

NOTE 10 – 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 (unaudited)

MAY 31, 2015

 

Warranty reserve balances were as follows at May 31, 2015 and February 28, 2015:

 

   May 31,
2015
   February 28,
2015
 
FY 2012  $18,068   $24,090 
FY 2013   47,776    50,112 
FY 2014   60,222    60,632 
FY 2015   289,863    305,385 
FY 2016   5,504    - 
Reserve balance  $421,433   $440,219 

 

Warranty expense amounted to $81,209 and $40,201 for the three months ended May 31, 2015 and May 31, 2014, respectively. Warranty expense for fiscal 2015 was higher than normal due to a system part where the manufacturing partner did not conform to our specifications. We are expensing the cost of those replacements and have initiated a lawsuit against the supplier to recoup those costs plus the lost business opportunities. During the last fiscal year, we also increased our warranty reserve related to this issue.

 

NOTE 11 – CAPITAL STOCK

 

Common Stock

 

During the quarter year ending May 31, 2015, the following share-related transactions occurred:

 

10,000,000 common shares were sold to affiliated parties in a private placement at $0.15 per share for net proceeds of $1,500,000.

 

  61,700 common shares were issued for consulting services. The shares were valued at $0.28 per share resulting in a value of $17,276, which was expensed in the first quarter.

 

During the fiscal year ending February 28, 2015, the following share-related transactions occurred:

  

  719,040 common shares were issued in connection with the conversion of a prior outstanding note payable in the amount of $251,664.

 

  4,334,795 common shares were issued in connection with warrants exercised for proceeds of $1,278,579

 

 

3,275,489 common shares were sold to unrelated third parties in a private placement at $0.35 per share for net proceeds of $1,146,421. 

 

F-10
 

 

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

MAY 31, 2015

 

NOTE 11 – CAPITAL STOCK (CONTINUED)

 

  9,820,000 common shares were sold to unrelated third parties in a private placement at $0.25 per share for net proceeds of $2,455,000.

 

  1,000,000 common shares were issued in connection with the Preferred stock settlement agreement

 

  430,960 common shares were issued in connection with the repurchase of warrants and options

 

During the fiscal year ending February 28, 2014, the following share-related transactions occurred:

  

385,715 common shares valued at $145,237 were issued in payment of accounts payable.

 

542,500 common shares were issued for consulting services to multiple providers. The shares were valued at various market prices ranging between $0.15 and $0.50 per share. The combined value of the shares was $112,375, all of which was expensed during the fiscal year.

 

300,000 common shares were issued valued at $150,000 in connection with prior equity issuance costs that were owed.

 

312,500 common shares were issued valued at $100,000 in connection with an adjustment in pricing from a previous investment.

 

7,627,875 common shares were issued in connection with warrants exercised for proceeds of $2,712,500.

 

5,000,000 common shares were sold to unrelated third parties in a private placement at $0.45 per share for net proceeds of $2,250,000.

 

565,496 common shares were issued in connection with the conversion of the prior outstanding note payable in the amount of $197,923.

 

Total common shares issued and outstanding at May 31, 2015 was 72,768,897.

 

F-11
 

 

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

MAY 31, 2015

 

NOTE 12 – STOCK WARRANTS AND OPTIONS

 

Stock Options

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.

 

The Company has adopted a stock option and award plan to attract, retain and motivate its directors, officers, and employees. Options provide the opportunity to acquire a proprietary interest in the Company and to benefit from its growth. Vesting terms and conditions are determined by the Board of Directors at the time of the grant. The current Plan provides for the issuance of up to 2,823,199 common shares for directors, officers, and employees. The Company amended the original plan to increase the available issuance of common shares up to 4,000,000. The amendment will require shareholder ratification at the next annual meeting.

 

The Company did not grant any new options during the quarter ending May 31, 2015. The Company granted 200,000 new qualified options during the fiscal year ending February 28, 2015. During the same period, 310,000 qualified options were canceled due to terminations. The Company estimated the fair value of employee options issued in fiscal 2015 as of the grant dates at $100,300 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 two years. Previously recognized compensation expense is reversed if an employee terminates service prior to exercise and vesting of the option.

 

Key assumptions used by the Company are summarized as follows:

 

   Employee Stock Options 
Stock Price   $0.17-$2.20 
Exercise Price   $.35-$1.25 
Expected volatility   73.4% - 98% 
Expected dividend yield   0.00%
Risk-free rate   2.0-3.37% 
Vesting period   0-4 years 
Expected term   7 years 

 

Options issued to employees are classified as compensation expense. Stock option expense recognized in net earnings amounted to $34,460 and $54,698 during the quarter ending May 31, 2015 and 2014, respectively. Unrecognized expense of $300,311 remains to be recognized through 2018.

 

F-12
 

 

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

MAY 31, 2015

 

NOTE 12 – STOCK WARRANTS AND OPTIONS (CONTINUED)

 

A summary of changes in stock options during the quarter ended May 31, 2015 and years ended February 28, 2015 and February 28, 2014 is as follows:

 

   Stock Options   Weighted Average Exercise Price   Expiry
Date
Outstanding, February 28, 2013   2,095,000    1.13    
Issued   2,375,000    0.368   FY 2020
Exercised   0    0    
Expired/Cancelled   (1,085,000)   1.14    
Outstanding, February 29, 2014   3,385,000   $1.13    
Issued   200,000    0.35   FY 2021
Exercised   0    0    
Expired/Cancelled   (310,000)   0.48    
Outstanding, February 28, 2015   3,275,000   $0.602    
Issued   0    0    
Exercised   0    0    
Expired/Cancelled   0    0    
Outstanding, May 31, 2015   3,275,000   $0.602    

 

Because the Company’s stock-based compensation options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the estimate, amounts estimated using the Black-Scholes option pricing model may differ materially from the actual fair value of the Company’s stock-based compensation options.

 

Stock Warrants

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 directly to compensation expense or prepaid expense and additional paid-in capital, and amortized over the period during which services are rendered. All warrants issued were valued using the Black-Scholes pricing model.

 

During fiscal year 2015, the Company granted 2,645,000 warrants in connection with an amendment to its previous credit facility, which provided for an increase in the total borrowing limit to $11,033,000. Those warrants were valued at $603,165 and were initially recorded as a debt discount. On August 21, 2014, the original credit facility was fully paid off and as a result, the remaining debt discount was fully expensed during the August 2014 quarter.

 

F-13
 

 

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

MAY 31, 2015

 

NOTE 12 – STOCK WARRANTS AND OPTIONS (CONTINUED)

 

During fiscal year 2014, the Company granted 8,935,000 warrants in connection with its new credit facility and amendments made to certain existing credit facilities previously outstanding. Those warrants were valued at $757,491 and were recorded as a debt discount. During the November 30, 2014 quarter, the Company granted an additional 2,070,000 warrants in connection with an increase provided in its new credit facility. Those warrants were valued at $519,727 and were also recorded as a debt discount. During the November 30, 2013 quarter, the Company granted an additional 493,393 warrants in connection with a further increase provided in the credit facility. Those warrants were valued at $111,026 and were also recorded as a debt discount. Additionally, 12,128,572 warrants valued at $956,229 were issued to certain consultants. These warrants are amortized over an 18 month period beginning April 1, 2013. On August 21, 2014, the senior credit facility was fully paid off and as a result, the remaining debt discounts associated with that facility were fully expensed during the August 2014 quarter. The remaining, related-party notes and their corresponding debt discount amounts are being amortized over the previously amended term. The unamortized portion of those debt discounts was $0 at February 28, 2015.

 

During fiscal year 2013, the Company granted 2,142,857 warrants in connection with its series A Preferred Stock. A fair value of $345,000 was allocated to the warrants based upon the Black-Scholes pricing model. A total of 695,000 warrants valued at $85,204 were issued in connection with purchase order financing and were recorded as a debt discount. The debt discount is being amortized over the term of the financing and has been fully amortized.

 

During fiscal year 2012, the Company granted 5,207,649 stock warrants valued at $1,841,318 in connection with its common stock private placements. These warrants were accounted for as an equity transaction. Additionally, 1,250,000 warrants valued at $189,875 were issued to an advisor. These warrants were amortized over a 12 month period beginning February 1, 2012. The issuance of new warrants at a reduced exercise price triggered a reset provision on 1,777,225 previously issued warrants resulting in a modification of value of $194,784.

 

A range of stock prices from $0.16 to $1.05 was used in valuing the warrants. The stock price was based on open market trading prices or the per share issuance prices from unrelated third party private placements in the event no active market price was available as occurred in some of the Company’s earlier transactions. 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.

 

Key assumptions used by the Company are summarized as follows:

 

   Warrants 
Stock Price   $0.16-$1.05 
Exercise Price   $0.35-$1.50 
Expected volatility   73.4% - 98% 
Expected dividend yield   0.00%
Risk-free rate   0.16% - 2.62% 
Vesting period   - 
Expected term   2-5 years 

 

F-14
 

 

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

MAY 31, 2015

 

NOTE 12 – STOCK WARRANTS AND OPTIONS (CONTINUED)

 

A summary of changes in share purchase warrants during the quarter ended May 31, 2015 and years ended February 28, 2015 and February 28, 2014 is as follows:

 

   Number of Warrants   Weighted 
Average
Exercise
Price
   Expiry Date
Outstanding, February 29, 2013   11,879,824   $0.96    
Issued   26,126,965   $0.353   Various through 4/4/2017
Exercised   (7,627,875)  $0.36    
Cancelled/Expired   (529,350)        
Outstanding, February 28, 2014   29,849,564   $0.59    
Issued   2,645,000   $0.35   4/16/2018
Exercised   (3,653,084)  $0.35    
Cancelled/Expired   (5,614,328)  $0.63    
Outstanding, February 28, 2015   23,227,152   $0.53    
Issued   0         
Exercised   0         
Cancelled/Expired   (95,000)  $0.80    
Outstanding, May 31, 2015   23,132,152   $0.53    

 

NOTE 13 – INCOME TAXES

 

For the period ended May 31, 2015, 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 $14,361,543 at May 31, 2015, 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,
2015
    May 31,
2014
 
Federal income tax benefit attributable to:            
Current operations   $ 602,800     $ 1,035,000  
Less: valuation allowance     (602,800 )     (1,035,000 )
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,
2015
   February 28,
2015
 
Deferred tax asset attributable to:        
Net operating loss carryover  $14,904,643   $14,301,843 
Less: valuation allowance   (14,904,643)   (14,301,843)
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 approximately $43,000,000 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-15
 

 

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

MAY 31, 2015

 

NOTE 14 – COMMITMENTS

 

Operating Leases

 

The Company leases its office and manufacturing facilities under a lease which expires in July 31, 2017. 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, 2015  $153,977 
Year ended February 28, 2016   169,708 
Year ended February 28, 2017   174,804 
Year ended February 28, 2018   73,550 
Sub-Total  $572,039 

 

Rent expense totaled $124,916 and $75,582 for the three months ending May 31, 2015 and 2014, respectively.

 

NOTE 15 – NOTES PAYABLE – RELATED PARTIES

 

Notes payable – related parties consists of two separate notes:

 

   May 31,
2015
   February 28,
2015
 
Purchase order (PO) financing note payable due within five days of receipt by Company, in whole or in part, portion of funds collected on collateral sales order, or, Company may submit a new collateral sales order with value equal to or in excess of principal outstanding. Interest rate is 1% per month. The note maturity date was originally May 15, 2013. On April 1, 2013, under a new simple note agreement, the maturity date was extended until October 14, 2014 at 10% interest per annum. On August 21, 2014, the note was further amended, extending the maturity date until October 1, 2016.  Under the new terms, interest is reduced to 10% per annum, and monthly payments of $4,937 are due May 1, 2013 until October 1, 2016, when all remaining principal and interest was due. On May 10, 2013, the board approved a conversion feature for the note allowing for principal and accrued interest to be converted at any time into common shares at $0.35 per share.  On the commitment date, the conversion feature was valued at $0. In addition, the board approved the issuance of a warrant giving the holder the right to purchase 517,500 shares of common stock at a price of $0.35 per share for a period of 3 years. As required by ASC 470-20, the Company valued the warrant and recorded a debt discount to market available at the time of issuance. The discount is amortized over the life of the loan. As of February 28, 2015, $48,772 has been amortized and the balance is shown net of a $0 remaining debt discount.  $561,824   $561,824 

 

F-16
 

 

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

MAY 31, 2015

 

NOTE 15 – NOTES PAYABLE – RELATED PARTIES (CONTINUED)

 

Promissory note bearing a 10% annual interest rate. Unsecured. The note maturity date was originally May 1, 2013. On April 1, 2013, under a new simple note agreement, the maturity date was extended until October 14, 2013 at 10% interest. Under the new terms, outstanding accrued interest was added to principal as of the amendment date.  On August 21, 2014, the note was further amended, extending the maturity date until October 1, 2016.  On May 10, 2013, the board approved a conversion feature for the note allowing for principal and accrued interest to be converted at any time into common shares at $0.35 per share.  On the commitment date, the conversion feature was valued at $0. In addition, the board approved the issuance of a warrant giving the holder the right to purchase 667,500 shares of common stock at a price of $0.35 per share for a period of 3 years. As required by ASC 470-20, the Company valued the warrant and recorded a debt discount to market available at the time of issuance. The discount is amortized over the life of the loan. As of February 28, 2015, $49,291 has been amortized and the balance is shown net of a $0 remaining debt discount.     172,544       172,544  
On May 27, 2015, Xzeres Corp. (the “Company”) entered into a Demand Convertible Subordinated Secured Promissory Note in the amount of $500,000 together with interest at the rate of eight percent. The Note is secured by subordinated liens on all of our assets.     500,000          
Totals     1,234,368       734,368  
                 
Less: current maturities     500,000       0  
                 
Long-term portion   $ 734,368     $ 734,368  

 

NOTE 16 – NOTES PAYABLE

 

   May 31,
2015
   February 28,
2015
 
         
On August 21, 2014, the Company entered into a new term loan with Wells Fargo Bank, which provided $15,000,000 in debt financing.  The agreement calls for a Libor  +3% annual interest rate on funds outstanding.  The loan matures on February 21, 2016 and monthly principal payments of $178,572 start on February 1, 2015.   

14,286,660

    14,821,428 
Totals   14,286,660    14,821,428 
           
Less: current maturities   (14,286,660)   (14,821,428)
           
Long-term portion  $0   $0 

 

F-17
 

 

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

MAY 31, 2015

 

NOTE 16 – NOTES PAYABLE (CONTINUED)

 

Future maturities of note and loan debt are as follows at May 31, 2015:

 

FY 2016   $ 14,786,660  
Thereafter     734,368  
Total   $ 15,521,028  

 

The Company incurred total interest expense of $139,378 and $389,945 for period ended May 31, 2015 and 2014, respectively. Interest expense includes finance charges related to vendors in addition to actual note interest. While the Company is current in all interest and principal payments on the senior credit facility, we are currently in default of the minimum EBITDA covenant.  The lender has not determined to declare the obligations immediately due and payable, but reserves their right to do so at any time.  The lender has also agreed to continue to accept payments per the terms of the loan. 

 

NOTE 17 – 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 18 – SUPPLEMENTAL CASH FLOWS

 

Supplemental Non-Cash Investing and Financing Activities:  May 31,
2015
   May 31,
2014
 
         
Debt discount from fair value of embedded conversion feature  $0   $603,165 
Issuance of common shares for convertible debt and accrued interest  $0   $63,000 

 

F-18
 

 

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

MAY 31, 2015

 

NOTE 19 – CONCENTRATIONS

 

Credit risk- Financial instruments that potentially subject the Company to concentrations of credit risk consist of demand deposits with a financial institution. At May 31, 2015, there is one balance exceeding FDIC insurance of $250,000. The Company believes there is minimal credit risk relative to its cash and investment accounts.

 

The Company is also potentially subject to concentrations of credit risk in its accounts receivable. Credit risk with respect to receivables is limited due to the number of companies comprising the Company’s customer base. Although the Company is directly affected by the financial condition of its customers, management does not believe significant credit risks exist at May 31, 2015. Generally, the Company does not require collateral or other securities beyond the equipment sold to support its accounts receivable.

 

Major customers- The Company has one major customer that accounted for approximately 49.8% and $306,914 of sales for the three months ended May 31, 2015. The Company expects to maintain this relationship with the customer. The Company has 5 customers who’s AR balances exceeds 5% of the total outstanding AR. The Company believes that these amounts are collectible.

 

Major vendors- The Company has one major vendor that accounted for approximately 10.3% and $42,746 of materials purchased for the three months ended May 31, 2015. The Company expects to maintain this relationship with the vendor. The Company has 4 vendors who’s outstanding balance due exceeds 5% of the total outstanding payables balance. The Company expects to maintain the relationship with these vendors.

 

NOTE 20 – SUBSEQUENT EVENTS

 

On June 9th, the Company completed the sale of $6 million of preferred series B shares, including the $500,000 promissory note dated May 27th which was converted into this preferred offering.  The preferred shares are not convertible into common stock and provide for a 10% annual coupon, payable in cash or stock.  For additional details, please refer to the 8k filed on June 15th, 2015.

 

In accordance with ASC Topic 855-10, the Company has analyzed its operations subsequent to May 31, 2014 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 mentioned above.

 

F-19
 


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 effect on our operations and future prospects on a consolidated basis include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Further information concerning our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC.

 

Company Overview

 

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

 

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

 

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

 

Our Business

 

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

 

3
 

 

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 several commercially available products that will integrate with our components, but we perform the system integration design to sell the entire system as a package to the customer. Going forward, we intend to develop or acquire new turbine systems to complement our existing product line.

  

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

 

In addition to our wind turbine business, we manufacture and sell a family of power efficiency products which are designed to improve the “power factor” and reduce the amount of reactive power being drawn at a location. We sell our product line of power efficiency devices targeted at small to medium-sized businesses.

 

Results of operations for the three months ended May 31, 2015 and 2014

 

Overview.  Although revenue increased over 20% compared to the prior year period, it was well below our goals as we have a number of key customer projects that were simply not yet ready for equipment delivery and installations as anticipated. None of these opportunities are lost, but reflect timing differences associated with larger projects. We continue to anticipate a substantial increase in revenue contribution throughout fiscal 2016.

 

4
 

 

Income.  For the three months ended May 31, 2015 and 2014, we generated gross revenue of $616,588 and $501,948 respectively.   Our revenue increase during the three months ended May 31, 2015 was a result of the improved order activity, but was lower than our expectations due to timing delays in project permits.

 

Cost of Goods Sold. The company incurred a total of $416,453 and $603,893 in Cost of Goods Sold for the three months ended May 31, 2015 and 2014 respectively. The decrease was the result of higher throughput, moving production of key components in house and lower costs for raw materials used in manufacturing. The resulting gross profit (loss) for the three months ended May 31, 2015 and 2014 was $200,135 and ($101,945) respectively.

 

Operating Expenses. Our Operating Expenses during the three month period ended May 31, 2015 equaled $1,823,715, consisting of $300,085 in sales expense, $63,518 in marketing costs, $198,184 in R&D/Engineering expenses, and $1,261,928 in general and administrative expenses. We had other expense of $149,229 for the period.  Therefore, we recorded a net loss of $1,772,809 from operations for the three months ended May 31, 2015. Inclusive in our net loss were non-cash charges of $51,736 associated with employee options, and consultant shares. Our Operating Expenses during the three month period ended May 31, 2014 equaled $2,133,338, consisting of $390,241 in sales expense, $155,261 in marketing costs, $248,995 in R&D/Engineering expenses, and $1,338,841 in general and administrative expenses. We had other expense of $816,216 for the period.  Therefore, we recorded a net loss of $3,051,499 from operations for the three months ended May 31, 2014. Inclusive in our net loss were non-cash charges of $51,736 associated with employee options, and the amortization of consultant warrants and debt discount.

 

Liquidity and Capital Resources:

 

As of May 31, 2015, we had total current assets of $5,231,233, consisting of $364,563 in cash and cash equivalents, $871,989 in accounts and notes receivable, $3,902,669 in inventories and inventory deposits and $241,634 in prepaid expenses.  Our total current liabilities as of May 31, 2015 were $17,508,435. Thus, we have negative working capital of $12,277,202 as of May 31, 2015.   As of May 31, 2015, we had total assets of $6,812,508.

 

Operating activities used $1,968,248 and $1,446,684 in cash for the three months ended May 31, 2015 and May 31, 2014, respectively. Our net loss of $1,772,809, inventory increase of $408,559 and accounts payable reduction of 225,573, were the primary components of our negative operating cash flow for the three months ended May 31, 2015.


Investing Activities used $12,870 and $11,860 in cash during the three month period ending May 31, 2015 and 2014 respectively.

 

Financing Activities generated $1,465,232 primarily from an offering of common stock in the three months ended May 31, 2015 and $1,490,236 in the three months ended May 31, 2014.

 

As of May 31, 2015, the ability to continue the implementation of our business plan over the next twelve months is contingent upon us either generating sufficient revenues from our ongoing operations to fund our business, obtaining additional financing, or some combination of revenues and additional financing.

 

General Outlook:

 

We believe our forward outlook is strong. We have applied significant resources toward developing key programs and creating a foundation for substantial growth as well as resolved the critical component shortfall. In addition, we have a more diversified product line and have opportunities in a greater number of markets than prior periods. Some of the key sales initiatives in our near-term forecast include:

 

  Japan Sales & FITCO – Japan has introduced a very attractive feed-in-tariff (FIT) program. Our 10kW system received certification and is now approved for the FIT in Japan. We have successfully installed our first grid-connected system in the country. We expect this new market opportunity to be significant due to the high FIT rate, Japan’s strong wind resources, and the overall need for power alternatives. In addition to direct sales, our project financing partners, Gale Force, are supporting a FITCO model for this new market. Gale Force has committed significant funding resources for the new Japan effort, with the focus on purchasing the XZERES 10kW turbine. We are working with project partners who assist in identifying quality sites, meeting with the landowners, and securing a lease contract for Gale Force. Once the site has the necessary approvals, Gale Force then purchases the system from us and we assist in arranging for installation. Gale Force and the Project partners have already secured sites awaiting approvals. We have also established a wholly-owned subsidiary in Japan with selling activity underway and orders received already. Between direct sales activities and the FITCO program, we believe the Japan market will ramp to a significant opportunity moving forward. To date, we have received a significant volume of purchase orders from customers and expect to deliver on those orders this year as those customer prepare their project sites.

 

5
 

 

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

 

  Skystream – The acquisition of the Skystream product afforded us an exceptional new product with a large existing installed base and significant brand presence globally. We further believe it’s the best product on the market for its size range and there are substantial opportunities for this size of turbine. Skystream enjoyed a significant global presence with over 8500 installed systems in over 110 countries around the world and we believe there continues to be a very strong market worldwide. In addition, the Skystream turbine is ideally suited for unique applications, such as powering remote cell phone towers, an area we are actively pursuing with several major telecom companies.

 

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

 

  Southeast Asia Project – We continue to actively support a potentially large remote island electrification project in the Southeast Asia region. This has included providing a demonstration unit which successfully passed the defined criteria and then assisting our local project partner with identifying the broader scope of the project. More importantly, our first commercial order for this program was installed and is operational and our project partner has recently provided us with a planned rollout schedule, which indicates a significant number of Turbines anticipated for calendar 2015.

 

6
 

 

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

 

Other Operational Points:

 

Looking ahead into fiscal 2016, we have implemented several system cost improvements that should further enhance product margins. Further, we believe we will achieve synergies with the Skystream and our 50kW product both on the gross margin side and operating margin side, thereby enhancing our overall bottom line.

 

Off Balance Sheet Arrangements

 

As of May 31, 2015, there were no off balance sheet arrangements.

 

Going Concern

 

We have incurred losses since inception, and have not yet received sufficient revenues from sales of products or services to reach profitability. These factors create substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustment that might be necessary if we are unable to continue as a going concern.

 

Our ability to continue as a going concern is dependent on generating cash from the sale of our common stock and/or obtaining debt financing and attaining future profitable operations. Management’s plans include selling our equity securities and obtaining debt financing to fund our capital requirement and ongoing operations; however, there can be no assurance we will be successful in these efforts.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

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

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. The term “disclosure controls and procedures”, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (“Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective for the period ended May 31, 2015.

 

7
 

 

Management’s Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The internal controls for the Company are provided by executive management’s review and approval of all transactions. Our internal control over financial reporting also includes those policies and procedures that:

 

  (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

 

  (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with the authorization of our management; and

 

  (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Management conducted an evaluation of the effectiveness of internal control over financial reporting based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was not effective as of May 31, 2015.

 

There were no changes in our internal control over financial reporting during the period ended May 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

8
 

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

On December 17, 2014 the company filed suit in Maricopa County, Arizona against a former supplier seeking damages related to the supplier’s inadequate manufacturing of a key component of the 10kW turbine system. We have discontinued using this supplier and have moved the manufacturing process in-house. We intend to seek full remuneration for excess warranty costs incurred as well as lost business opportunities as we worked on the resolution. There can be no assurances that our claims, totaling $15 million, will be successful. The supplier has also filed a claim against the company to recover payment for the remaining inventory and WIP held by them, totaling $350,000. 

 

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

 

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 14, 2015
     
  By: /s/ David Hofflich
    David Hofflich
  Title: Chief Executive Officer

 

 

10