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XZERES CORP. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Statements Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words "believes," "project," "expects," "anticipates," "estimates," "intends," "strategy," "plan," "may," "will," "would," "will be," "will continue," "will likely result," and similar expressions. We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of complying with those safe-harbor provisions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse affect on our operations and future prospects on a consolidated basis include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Further information concerning our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC. Company Overview XZERES Corp. ("Xzeres" and the "Company") was originally incorporated in New Mexico in 1984. We re-domiciled in Nevada in 2008. We were in the development stage from October 3, 2008 to May 31, 2010. The fiscal year ending February 28, 2011, was the first fiscal year during which we are considered an operating company and are no longer in the development stage. Beginning during the fiscal quarter ended May 31, 2010, we have been engaged in the small wind turbine business. Our principal offices are located at 9025 SW Hillman, Suite 3126, Wilsonville, OR 97070. Our phone number is (503) 388-7350. Business of Company We are in the business of designing, developing, and marketing distributed generation, wind power systems for the small wind (2.5kW-100kW) market as well as power management solutions. Our grid connected and off grid wind turbine systems, which consist of our 2.5kW and 10kW devices and related equipment, are utilized for electrical power generation for applications and markets such as residential, micro-grid based rural and island electrification, agricultural, small business, rural electric utility systems, as well as other private, corporate infrastructure and government applications. Our wind power systems are focused on distributed energy, where a specific machine's energy output is largely or entirely used on-site where the equipment is installed, as well as grid connected applications. While many of our customers take advantage of their local net-metering rules within the United States and Feed In Tariffs that are often available in Europe and Internationally (to sell power back to the grid), our wind power systems are not dependent on transmission needs to carry the energy produced to another location and are therefore well suited for remote electrification, available with or without a battery coupled solution. Our power management solutions are deployed primarily for commercial and light industrial applications, and secondarily residential usage and target both urban and rural customers. 4 Table of Contents Our wind turbine products integrate with currently available complementary products from other manufacturers, such as inverters, lightning protection equipment and towers. We do not have any written agreements with these other manufacturers. Our systems comprise several major components including the turbine sub-system (which converts wind energy into electricity), the tower (which holds the turbine high in the wind), a turbine controller (which controls the turbine subsystem and contains monitoring hardware and software), and an inverter (which converts the electricity generated from DC to AC to connect to a customer's electrical load or to the grid). We currently design and engineer the turbine and controller, but contract the manufacturing of the turbine and controller through outside parties. The tower, while designed to specifications suitable to our turbine requirements, is made and sold by separate companies depending on the style that the customer orders. Similarly, the inverter, which converts the energy generated to a form suitable to connect into the electric grid, is manufactured by another company and is a commercial off-the-shelf product. We sell a "system" with all of these parts included in the selling price. The system will not operate as designed without these complementary products. In the case of the inverter, there are other commercially available products that will integrate with our components, but we perform the system integration design to sell the entire system as a package to the customer. Going forward, we intend to develop new turbine systems, designed for ease of installation and to certification standards which cover standard testing procedures, power ratings, and structural designs of small wind systems. We take a system integrator approach to our turbine business combined with a service-centric vertical integration program in order to provide complete solutions to our customers. We design, develop, manufacture, test, assemble and market our systems. In addition, we provide site assessment, customer financing, assistance with government-based financial incentives and local permitting, application engineering, installation, support and maintenance. And now we offer "tip-to-tower" insurance to our wind turbine customers to enable them to protect their valuable investment over the 20 year useful life of their system. On April 25, 2011, we acquired the assets of Rochester Power Saver Inc. and now manufacture and sell a family of power efficiency products which are designed to improve the "power factor" and reduce the amount of reactive power being drawn at a location. This acquisition expanded our product offering beyond small wind power generation into the realm of power management and power efficiency solutions. The addition of this complementary and diversified family of products enables us to offer both business and residential customers, in urban and rural locations, the ability to reduce their power consumption, extend the life of their electrical equipment and electronics via central surge suppression, reduce their carbon footprint, and depending upon the type of customer and the application, provide significant energy savings. As a result of this acquisition, we have recently introduced the new power efficiency product line and generated initial sales in the quarter ending May 31, 2011. Results of operations for the three months ended May 31, 2011 and 2010 Overview. We commenced our current operations during the quarter ended May 31, 2010. Shortly thereafter, we began to aggressively expand operations, including the hiring of sales and marketing personnel to begin selling our products. Such sales and marketing efforts enabled us to generate meaningful initial revenue during the August 31, 2010 quarter, which further expanded in each subsequent quarter. Additionally, the company has also announced key strategic initiatives that include new selling methods, such as direct-to-end users, and its new micro-generation utility sales model. The results of these new selling efforts has resulted in further contribution to the overall sales growth. With the combination of the additional sales channels and larger number of sales personnel, the company is experiencing a rapid increase in both completed sales and the pipeline of potential customers. We will also continue to initiate key marketing efforts such as promotion of our new website, the creation of online user tools, and targeted email campaigns. While it can be difficult to predict when a potential customer may purchase one of our turbine systems or when a newly closed customer will have their site ready for product delivery, we believe that the growing sales backlog and potential pipeline along with the greater overall interest in our products may contribute to higher revenues in future quarters. Potential risks to this outlook include: closed customers taking longer to prepare their sites for installation (since we do not recognize revenue until we deliver the system to the customer), negative changes in available federal and state incentives for renewable energy such as tax credits, rebates, etc.; increased restrictions on obtaining permits; and a reduction in sentiment toward wind energy. While we are unaware of any significant changes to any of these factors, if such were to occur, it could have a material impact on our current growth opportunities. Fortunately, current trends remain generally positive for renewable energy. 5 Table of Contents Income. For the three months ended May 31, 2011 and 2010, we generated gross revenue of $1,017,217 and $4,385, respectively. Our revenue growth during the period ended May 31, 2011 was attributable to our ongoing efforts to sell our wind turbine systems, which began last year. Our initial selling efforts began toward the end of our first quarter last year (ending May 31, 2010) and resulted in growing sales during each of the subsequent quarters, including the recently completed quarter ending May 31, 2011. Operating Expenses. Our Operating Expenses during the three month period ended May 31, 2011 equaled $2,235,947, consisting of $325,817 in sales expense, $92,668 in marketing costs, $639,583 in R&D/Engineering expenses, and $1,177,879 in general and administrative expenses. We had other expense of $14,187 for the period. Therefore, we recorded a net loss of $1,998,698 for the three months ended May 31, 2011. Inclusive in our net loss was non-cash compensation in the amount of $264,763. Our Operating Expenses during the three month period ended May 31, 2010 equaled $654,006, consisting of $23,034 in sales expense, $35,596 in marketing costs, $177,667 in R&D/Engineering expenses, and $408,709 in general and administrative expenses. We had other income of $1,074 for the period. We therefore, recorded a net loss of $641,256 for the three months ended May 31, 2010. The substantial increase in our net loss for the period ended May 31, 2011 over the same period in 2010 is attributable to the costs attributable to commencing our business operations as a small wind turbine manufacturing and sales company. Net Loss. We recorded a net loss of $1,998,698 for the three months ended May 31, 2011 as compared to a net loss of $641,256 for the three months ended May 31, 2010. The substantial increase in our net loss for the period over the same period in 2010 is attributable to the costs attributable to commencing our business operations as a small wind turbine manufacturing and sales company. We expect further net losses in the near future as a result of increased operating expenses until we are able to increase the sale of our products and achieve higher revenues. Liquidity and Capital Resources As of May 31, 2011, we had total current assets of $3,177,589, consisting primarily of $283,842 in cash and cash equivalents, $650,000 in subscription receivables, $1,279,475 in accounts receivable, $803,172 in inventories, $40,066 in inventory deposits, and $121,034 in prepaid expenses. Our total current liabilities as of May 31, 2011 were $1,059,043. Thus, we have working capital of $2,118,546 as of May 31, 2011. As of May 31, 2011, we had total assets of $5,191,787. Operating activities used $2,362,032 and $1,068,506 in cash for the three months ended May 30, 2011 and May 31, 2010, respectively. Our net loss of $1,998,698, our inventory purchasing of $300,623, and an increase in accounts receivable of $645,806, were the primary components of our negative operating cash flow for the three months ended May 31, 2011. Investing Activities used $75,155 in cash during the three month period ending May 31, 2011, as a result of the purchase of computer, machinery and equipment, as compared to $101,435 cash used for the three months ended May 31, 2010. Financing Activities generated $2,356,961 and $3,823,709 in cash for the three months ended May 31, 2011 and 2010, respectively, consisting entirely of proceeds from the issuance of new common shares and related party note payable. After the period ended, on June 27, 2011, we announced that we had arranged for a $1.0 million credit facility to fund against our accounts receivable, which we anticipate will provide us with additional liquidity. As of May 31, 2011, the ability to continue the implementation of our business plan over the next twelve months is contingent upon us either generating sufficient revenues from our ongoing operations to fund our business, obtaining additional financing, or some combination of revenues and additional financing. 6 Table of Contents Off Balance Sheet Arrangements As of July 8th, there were no off balance sheet arrangements. Going Concern We have incurred losses since inception, and have not yet received revenues from sales of products or services. 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. |