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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") 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. 6 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 nine months ended November 30, 2012 and 2011 Overview. Since launching our wind products in early 2010, we have continued to build 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. Those efforts have resulted in more orders and more multiple system orders per customer and enabled us to generate record revenues in the November 2012 quarter. We are also actively pursuing opportunities in additional markets, including areas in Asia, the Caribbean and other parts of Europe. We anticipate those new markets to contribute to our growth in the upcoming fiscal year. We have also continued to lower our operating expenses as reflected in the most recent quarter. 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 during the quarter with the October closing of our Series A preferred investment. 7 We believe that the existing and growing sales backlog, current pipeline, and the greater overall interest in our products will contribute to further growth in our revenues going forward. 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, 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 expects to achieve further growth in its business in calendar 2013, provided we are able to obtain sufficient working capital. Other Quarter Highlights. During the period ended November 30, 2012, we incurred significantly higher shipping costs due to the timing of filling working capital needs combined with our commitment to meet certain customer delivery schedules. This negatively impacted our gross margin levels well below prior levels. We anticipate shipping costs to return to a more normal level going forward. In addition, we recently implemented a price increase as a result of recent system improvements that have further enhanced the average power production output. The combination of improved pricing and normal shipping costs is expected to substantially improve our margins going forward. We also continued to lower our cash operating costs in the period ended November 30,2012. We incurred $397,439 in non-cash expenses associated with option and stock awards during the period. Excluding that non-cash expense, we lowered our cash-based expenses by more than 42% from the prior year. Income. For the three months ended November 30, 2012 and 2011, we generated gross revenue of $1,912,850 and $927,451, respectively. For the nine months ended November 30, 2012 and 2011, we generated gross revenue of $3,747,992 and $3,312,569, respectively. Our revenue increase during the three months ended November 30, 2012 is a result of improved liquidity which enabled us to fulfill part of the previous order backlog. Our management will continue to work on obtaining the additional working capital as needed, whether through equity or debt capital or a combination thereof. 8 Operating Expenses. Our Operating Expenses during the three month period ended November 30, 2012 equaled $1,707,015 consisting of $154,708 in sales expense, $61,869 in marketing costs, $198,135 in R&D/Engineering expenses, and $1,292,303 in general and administrative expenses. We had other expense of $34,171 for the period. Therefore, we recorded a net loss of $1,517,594 for the three months ended November 30, 2012. Inclusive in our net loss was non-cash expenses in the amount of $397,439. Our Operating Expenses during the three month period ended November 30, 2011 equaled $2,368,517, consisting of $562,266 in sales expense, $87,120 in marketing costs, $554,556 in R&D/Engineering expenses, and $1,164,575 in general and administrative expenses. We had other expense of $12,940 for the period. Therefore, we recorded a net loss of $2,130,515 for the three months ended November 30, 2011. Inclusive in our net loss was non-cash compensation in the amount of $86,836. The decrease in our net loss for the period ended November 30, 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. Our Operating Expenses during the nine month period ended November 30, 2012 equaled $5,317,087 consisting of $671,626 in sales expense, $165,766 in marketing costs, $426,826 in R&D/Engineering fees, and $4,052,869 in general and administrative expenses. We had other expense of $151,461 for the period. Therefore, we recorded a net loss of $4,913,547 for the nine months ended November 30, 2012. Our Operating Expenses during the nine month period ended November 30, 2011 equaled $6,675,191, consisting of $1,259,057 in sales expense, $283,012 in marketing costs, $1,765,190 in R&D/Engineering fees, and $3,367,932 in general and administrative expenses. We had other expense of $40,573 for the period. Therefore, we recorded a net loss of $5,892,154 for the nine months ended November 30, 2011. 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 25% reduction in our cash operating costs during the nine months ending November 30, 2012. We anticipate further declines in some of our operating expenses going forward. Liquidity and Capital Resources As of November 30, 2012, we had total current assets of $1,868,428,consisting primarily of $89,048 in cash and cash equivalents, $360,712 in accounts receivable, $975,188 in inventories and $255,391 in prepaid expenses. Our total current liabilities as of November 30, 2012 were $5,134,624. Thus, we have negative working capital of $3,266,196 as of November 30, 2012. As of November 30, 2012, we had total assets of $4,112,100. Operating activities used $3,764,994 and $4,921,109 in cash for the nine months ended November 30, 2012 and November 30, 2011, respectively. Our net loss of $4,913,546 was the primary component of our negative operating cash flow for the nine months ended November 30, 2012. Investing Activities used $114,573 in cash during the nine month period ending November 30, 2012, primarily as a result of an increase in notes receivable Financing Activities generated $3,777,232 in cash from purchase order financing and the issuance of preferred shares in the nine months ended November 30, 2012 while $4,730,961 in cash for the nine months ended November 30, 2011 was entirely generated from the issuance of new common shares and repayment of a related party note payable. As of November 30, 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. 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. 9 Off Balance Sheet Arrangements As of January 22, 2013,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. |