XZERES reports 61% sequential revenue growth in third fiscal quarter
By Steven Ralston, CFA
This week, XZERES (OTC Markets:XPWR) filed its 10-Q quarterly report for its third fiscal quarter ending November 30, 2012. Impressively, quarterly revenues increased 61.3% sequentially to a record $1,912,850 from $1,186,101 reinitiating double-digit sequential quarterly growth. However, again the gross profit margin was pressured, declining 401 basis points sequentially to 11.7%, primarily due to significantly higher shipping costs incurred by inefficient delivery schedules. XZERES benefited from the working capital injections from recent financings, specifically the $510,000 purchase order debt financing agreement signed in late May, a $1.5 million financing facility announced in early August and a private offering of units (Series A Convertible Preferred stock and warrants) for $1.5 million in October. Management continues to concentrate on lowering operating expenses reflected by the 12.1% sequential decline in G&A expense, although sales expense increased 61.2% and Engineering/R&D increased 89.8%. Nevertheless, total operating expenses declined 0.7% sequentially to $1.71 million, following a 9.1% sequential decline the prior quarter. XZERES quarterly loss sequentially expanded 10.2% to $1.78 million or $0.07 per diluted share.
The company continues to be challenged by a limited working capital position and requires additional working capital to fulfill the existing backlog of orders. Management has demonstrated its ability to execute through this liquidity event, including creatively utilizing an alternative form of funding (collateral-based purchase order financing). Financing activities provided $3,765,588 during the first nine months of fiscal 2013. However, additional working capital is needed, especially to achieve efficient delivery schedules with regular shipping costs.
Since revenue traction has been demonstrated for two consecutive quarters, the company’s sales profile is expected to once again experience sequential growth. XZERES has a strong presence in the United Kingdom and continues to actively pursue opportunities in Vietnam, the Caribbean and Italy. In addition, XZERES continues to upgrade its small wind systems. Recent system improvements that have increased the average power production output, and as a result, a price increase has been implemented. Ultimately, the growing revenue stream should manifest itself into positive earnings. Our price target of $0.60 is derived from utilizing a price-to-sales valuation ratio of 2.2 on normalized annual sales of $7.95 million.
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