By Steven Ralston, CFA
On October 15, 2012, XZERES (OTC Markets:XPWR) filed its 10-Q quarterly report for its second fiscal quarter ending August 31, 2012. Impressively, quarterly revenues increased 82.7% sequentially to $1,186,101 from $649,041, dramatically breaking the streak of three negative consecutive sequential quarterly comparisons. Though the gross profit margin was pressured and declined 668 basis points sequentially to 15.7%, the company benefited from the working capital injections from recent financings, specifically the $510,000 purchase order debt financing agreement signed in late May and the $1.5 million financing facility announced in early August. The company also aggressively reduced expenses reflected by the 77.2% sequential decline in sales expense and the 12.9% decline in marketing expense, although G&A expenditures increased 13.9%. Overall, total operating expenses declined 9.1% to $1.72 million. XZERES quarterly loss narrowed to $1.61 million or $0.06 per diluted share.
The company’s backlog continues to grow, driven primarily by the UK market. As of July 12, 2012, backlog was at a record high, exceeding $3.9 million. XZERES has a strong presence in the United Kingdom and has significant potential in Asia, especially Vietnam. The company continues to receive additional orders, including more multiple system orders per customer.
Management is concentrating on lowering operating expenses and has set a goal of reaching profitability sometime during fiscal 2013. Though the company continues to be challenged by a limited working capital position, management has demonstrated its ability to execute through this liquidity event by creatively utilizing an alternative form of funding, namely collateral-based purchase order financing.
Since revenue traction has been demonstrated, the company’s sales profile is expected to once again experience sequential growth through management’s execution of its multiple channel distribution business model for small wind systems. Ultimately, the growing revenue stream should manifest itself into positive earnings. In deriving our higher price target of $0.60, we are now using normalized annual sales of $4.7 million and a price-to-sales valuation ratio of 3.8.
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