UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

[X]	ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended February 28, 2014
[  ]	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
	For the transition period from _________ to ________
	Commission file number: 000-54742

XZERES Corp.
(Exact name of registrant as specified in its charter)
Nevada	74-2329327
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
9025 SW Hillman Court, Suite 3126 Wilsonville, OR	97070
(Address of principal executive offices)	(Zip Code)
Registrant’s telephone number: 503-388-7350

Securities registered under Section 12(b) of the Exchange Act:
Title of each class	Name of each exchange on which registered
none	not applicable
Securities registered under Section 12(g) of the Exchange Act:
Title of class
Common Stock, par value $0.001 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [ X ]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ X ] No [ ]

Indicate by checkmark 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 [ X ] 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 [ X ] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. $15,956,958

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. 43,366,913 as of June 10, 2014.

TABLE OF CONTENTS
		Page
PART I
Item 1.	Business	3
Item 2.	Properties	13
Item 3.	Legal Proceedings	13
PART II
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities	14
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 8.	Financial Statements and Supplementary Data	22
Item 9.	Changes In and Disagreements With Accountants on Accounting and Financial Disclosure	23
Item 9A.	Controls and Procedures	23
Item 9B.	Other Information	23
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	24
Item 11.	Executive Compensation	27
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	31
Item 13.	Certain Relationships and Related Transactions, and Director Independence	32
Item 14.	Principal Accountant Fees and Services	32
PART IV
Item 15.	Exhibits, Financial Statement Schedules	33

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PART I

Item 1. Business

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. XZERES Capital Corp. and XZERES Wind Japan Limited had not yet started operations as of February 28, 2014.

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.

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 or acquire new turbine systems to complement our existing product line.

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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. 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 costs, extend the life of their electrical equipment and electronics via improved surge suppression, reduce their carbon footprint and, depending upon the type of customer and the application, provide significant energy savings. We sell our product line of power efficiency devices targeted at small to medium-sized businesses. Going forward, we intend to develop or acquire new products in the area of power efficiency to complement our existing product line.

Wind Power

The demand for alternative means of electricity generation has increased due to the rising cost of energy and consumer awareness of environmental issues. According to the American Wind Energy Association (“AWEA”), wind power remains one of the most rapidly growing means of alternative electricity generation. State and federal incentives have significantly reduced barriers to wind power development as well as the payback period for investments in small wind turbines for homeowners and small businesses.

While many customers are attracted to renewable energy for the positive environmental attributes, the ultimate decision often centers on a cost/benefit and investment return analysis.  Governmental and private (utility-sponsored) incentives play an important role by lowering the effective cost to the end user of a wind power system and thereby making a purchase more attractive.  Such incentives take the form of Feed-in-Tariffs, significant tax breaks or even cash incentives to purchasers of wind power systems.  As a result of such incentives, the effective price or cost to the user is greatly reduced making the return on investment much more attractive by lowering the time period it takes to generate enough energy to recover the total cost of the system. 

Wind is a form of solar energy. Winds are caused by the uneven heating of the atmosphere by the sun, the irregularities of the earth's surface, and rotation of the earth. Wind flow patterns are modified by the earth's terrain, bodies of water, man-made structures, and vegetation.

The terms wind energy or wind power describe the process by which the wind is used to generate mechanical power or electricity. Wind turbines convert the kinetic energy in the wind into mechanical power. A generator can convert this mechanical power into electricity.

Modern wind turbines fall into two basic groups: the horizontal-axis variety and the vertical-axis design.  Horizontal-axis wind turbines typically either have two or three blades.

Single small turbines, below 100 kilowatts, are often used for homes, farms, telecommunications dishes, or water pumping. Small turbines are sometimes used in connection with diesel generators, batteries, and photovoltaic systems. These systems are called hybrid wind systems and are typically used in remote, off-grid locations, where a connection to the utility grid is not available. 

Wind Power Industry

The U.S. Department of Energy's Wind and Hydropower Technologies Program is working with wind industry partners to develop clean, domestic, innovative wind energy technologies that can compete with conventional fuel sources. Program efforts have culminated in some of the industry's leading products today and have contributed to record-breaking industry growth.

The U.S. has been a leader in new wind capacity, installing a record 13,000 Megawatts (MW) in 2012, up over 80% from 2011 and bringing total installed capacity to 60 GW at 2012 year end.  To highlight the recent market acceleration; it took 25 years to reach 10 GW, which occurred in 2006. But it only took four years to grow from 20 GW (2008) to 60GW (2012). And last year – for the first time ever – wind power provided the largest share of new electric capacity (42 percent) in the United States. 60 GW of installed capacity is the equivalent of taking 17.5 million cars off the road in terms of carbon pollution.

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Much of the Wind Industry to date is made up of large, utility-scale turbines.  However, small wind turbines (<100kW) are now benefitting from many of the same high-growth factors driving large turbines, which include:

· Persistent, high energy costs;

· Improved technology leading to significantly more efficient turbines;

· Incentive programs; and

· General improvement in attitudes toward alternative energy solutions and a general increased sense of responsibility in lessening dependence on fossil fuels.

The U.S., Europe and China continue to dominate the world’s wind power installations. The U.S., U.K., Germany, China, Spain, India and Denmark have made the largest investments in wind-generated electricity according to the World Wind Energy Association. The World Wind Energy Association estimated total world-wide installed capacity at year-end 2012 of 282 Gigawatts (GW), up from 121.2 GW at the end of 2008, implying a net growth rate of more than 23% per year.

The U.S. continues to lead the world as one of the fastest-growing wind power markets, according to a report from the U.S. Department of Energy (DOE) by Lawrence Berkeley National Laboratory (LBNL). The states with the most wind production are Texas, California, Iowa, Minnesota, and Oklahoma.

A new assessment from the National Renewable Energy Laboratory showed U.S. wind resources are larger than previously estimated. Highlights of the analysis reveal Onshore U.S. wind resources could generate nearly 37,000,000 gigawatt hours (GWh) annually, more than nine times the current total U.S. electricity consumption.

In 2008, the DOE published a report that examined the technical feasibility of using wind energy to generate 20% of the nation’s electricity demand by 2030. The report, "20% Wind Energy by 2030: Increasing Wind Energy's Contribution to U.S. Electricity Supply," includes contributions from DOE and its national laboratories, the wind industry, electric utilities, and other groups. The report examines the costs, major impacts, and challenges associated with producing 20% wind energy or 300 GW of wind generating capacity by 2030.

The report's conclusions include:

· Reaching 20% wind energy will require enhanced transmission infrastructure, streamlined siting and permitting regimes, improved reliability and operability of wind systems, and increased U.S. wind manufacturing capacity.

· Achieving 20% wind energy will require the number of annual turbine installations to increase nearly 3-fold by 2017.

· Integrating 20% wind energy into the grid can be done reliably for less than 0.5 cents per kWh.

· Achieving 20 percent wind energy is not limited by the availability of raw materials.

· Addressing transmission challenges such as siting and cost allocation of new transmission lines to access the Nation's best wind resources will be required to achieve 20% wind energy.

Apart from regulatory issues and externalities, decisions to invest in wind energy generally depend on the cost of alternative sources of energy. Natural gas, oil and coal prices, and the main production technologies with significant fuel costs are often determinants in the choice of the level of wind energy.

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Our Markets

Small Wind Turbines

According to the World Wind Energy Association (WWEA), total installed capacity of small wind systems around the world reached 678 MW at the end of 2012.  China, the UK, and the United Stated account for the largest share of small turbines.  The average output of one megawatt of wind power is equivalent to the average electricity consumption of about 250 American households.  DOE studies have concluded that onshore wind resources in the U.S. could generate nearly 37,000,000 gigawatt-hours, more than nine times current total U.S. electricity consumption.

World-wide, growth in small wind systems has been strong, averaging 30%+ over the past few years, and is expected to continue growing at a similar pace until 2015 (according to the WWEA).  Several developments are contributing to the industry's growth.  We feel that the small wind industry has reached a tipping point, where increased system performance, better incentives, expanded applications, and higher energy costs will combine to make small wind-generated energy increasingly attractive, thereby supporting the anticipated growth world-wide. Additionally, we anticipate that the rapid growth will make established companies in this industry attractive acquisition targets for larger companies.

The small wind industry is also becoming more organized with respect to standards and certifications.  Such efforts by the industry help promote better performing systems as well as enable end customers to better evaluate key metrics, such as performance, across the various product choices on the market.  We believe this to be a very positive evolution as we have engineered our systems to the highest standards and performance and have successfully achieved certifications in key markets, such as the U.S. and UK.

The foregoing market and industry data was collected from the AWEA and WWEA annual reports, publicly available on their websites.  We did not pay for the report and it was not prepared for our use.  The AWEA and WWEA allow the data to be used with proper attribution.

For the U.S. market, we continue to focus our sales efforts on rural home owners and rural small businesses, especially farms and ranches.  We expect that a typical U.S. customer will have one or more acres of property that consistently experiences at least an average wind speed in the range of 9.8 to 11.5 mph, which is known as a Class 2 Wind.  According to the American Wind Energy Association (AWEA), approximately 25 million homes in the U.S. have an acre or more of property and 35% of those homes have Class 2 Winds or better, generating a potential market of 12 million units.  We have directed our U.S. efforts on specific states where either state incentives are more attractive and help compliment the federal tax credit incentives and/or where wind resources are better, for example, Oregon, Wisconsin, New York, Iowa, Minnesota, Kansas, and Oklahoma.  Both factors help drive market demand as potential customers will experience a better economic return for purchasing a wind turbine.  Our US sales efforts are focused on a “3 Legged Stool” concept where each of the legs of the stool are represented by Incentives, Wind Resources, and Utility Rates. Although a wind project with all three legs of the stool will deliver the best economic return, a project that just captures two of those elements—such as a good wind resource and high utility rates or good incentives and high utility rates—can also produce a desirable financial return for the customer.

During fiscal year ended February 28, 2014, we continued to focus more of our efforts on expanding our global sales and marketing reach.  Demand drivers vary around the world.  Developed areas, like the United Kingdom (UK) and Japan, are very similar to the U.S. in that customer economics, such as incentives, paybacks, and internal rates of return, play a central role in a customer’s decision.  In less developed or remote areas, access to reliable power is a key driver. Factors such as a poor or non-existent utility grids or volatile diesel prices and costly maintenance for off-grid solutions, contribute to the increasing demand for renewable energy options such as wind power.

We established a wholly-owned subsidiary in Ireland for the purposes of serving the European market, particularly the United Kingdom (UK).  We opened a sales office for our subsidiary in Birmingham, England, and have local sales and sales support personnel staffed in this location. In addition, we recently established a wholly-owned subsidiary in Japan, including a sales office and initial support staff.  We have specifically targeted the UK and Japanese markets due to their outstanding environments for small wind systems, namely strong wind speeds and the world’s most attractive feed-in-tariff incentive regimes.  These factors along with our previously announced FITCO program, are expected to generate substantial growth for our products in the UK and Japan.

While we anticipate the UK, Japan, and the U.S. to remain major near-term drivers in our business, we also have extended our global efforts into other areas, which has been significantly augmented with our acquisition of the Skystream product line during the fiscal year ended February 28, 2014.  Skystream enjoyed a substantial global footprint with dealers located all over the world as well as strong brand recognition.

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Power Management

We began initial sales of a power efficiency product line during the fiscal year ended February 29, 2012. During most of fiscal 2013, we focused our efforts on product certification, refining our manufacturing process, and creating better tools for analyzing a prospective customer site. With those significant internal enhancements completed, we began to aggressively market and sell the products during the fiscal year ended February 28, 2014 and we believe there is significant, growing customer interest in these solutions.

Our power efficiency products are designed to help customers reduce their excess power factor penalty charges incurred from their utility providers. When implementing these products, customers that experience these additional charges will see reductions in their power bills. We focus our efforts on small-to-medium sized businesses in a wide range of vertical markets. While power factor correction and energy management products have been generally available for large businesses for some time, we feel the smaller to medium sized portion of the market has been largely under-served with a technology solution applicable to their specific needs and at a reasonable cost that enables an attractive ROI. An increasing number our dealers and potential customers are beginning to recognize the ability of our PE products to help drive savings in their energy bills and we anticipate this business becoming a more meaningful aspect of our overall business.

Our Products

Wind Turbines

The wind turbine systems we offer for sale are comprised of our own, proprietary design that uses both our own internally engineered components as well as standard third party engineered components integrated into a single system. Leveraging an outsourced manufacturing model, we currently assemble these wind turbine systems from component parts manufactured by third-party suppliers at our leased facility at 9026 SW Hillman in Wilsonville, Oregon. We sell the assembled wind turbine systems, the towers on which the turbines are mounted, and related components and accessories.

We currently assemble and offer for sale two wind turbine systems, a 2.4kW system and a 10kW system. Both systems are tower mounted and generate electrical output for use on site where installed and can also be connected to the electrical grid. When connected to the electrical grid, a configuration referred to as an on-grid application, our wind turbine system is integrated into the site’s existing electrical power connection to the main grid. This configuration allows a customer to draw electrical power from either the wind turbine system or the main grid or both, depending upon the customer’s need and the wind turbine system’s current output. In many jurisdictions within the U.S., power generated by the wind turbine system in excess of the customer’s current needs can be sent back into the main grid and the customer can receive a credit from their utility provider. Credit is not universally available, however, and specific net-metering rules for local area jurisdictions vary widely.

In addition, both our 2.4kW and 10kW systems can be further configured to link to a battery system that will store electrical power generated by the wind turbine system in excess of the customer’s current demands. That stored power can then be drawn from the battery system by the customer when needed.

We also offer both our wind turbine systems in a configuration suitable for marine applications. Here the system receives marine-grade protective coatings and components designed to withstand high salinity and high humidity conditions as typically found in coastal environments.

Our wind power systems are installed on towers, which can range in height from 34 feet to 160 feet, depending on the specific site characteristics. We source towers from third party tower manufacturers, designed and built to our specifications.

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We also offer for sale, but do not manufacture, other products that work with our wind turbine systems and provide value to our customers, including devices to protect our wind turbine systems from lightning strikes and equipment needed to connect our wind turbine systems to the main electrical grid or to battery storage systems.

At present, our 10kW wind turbine system integrates with standard off-the-shelf equipment needed to connect our systems to the main electrical grid, including those from SMA America, LLC and Outback Power and are provided as part of our overall solution to our customers. Standard off-the-shelf equipment means stock merchandise that is readily available through vendors in the industry.

In addition, both products allow remote access data monitoring of the turbine. This allows our customers and us to have an easier time of troubleshooting any problems that may arise along with install any new controller software updates.

We believe our current products compare as technology leaders in this market, and we will work to advance this leadership position through the continual development of performance improvements. For example, the power curves, which measure the performance of a system often exceed the claimed power curves on similar sized machines from competitors in the field. Every manufacturer states the specifications on performance of its turbines, known as a “power curve” which plots power output verses wind speed, based on product testing. Those specifications are published by each manufacturer in much of the same way a manufacturer details the specifications of an automobile. We are then able to compare the specifications of other manufactured turbines to our own turbines. Our power curves have been independently validated by independent testing facilities, while many manufacturer curves are only based on internal testing. Using this published data, we can plot our curve on the same graph as competitor curves and can show that our products produce more power at a given wind speed than some other competitors with the same nominal rating. We can also use the same data to predict the annual energy production of competing machines assuming a standard distribution of wind resource availability. This energy production, calculated based on published power curves by multiple manufacturers, is used in conjunction with published pricing of competing machines to show that our product has a superior return on investment.

There can be no assurance that we will be able to maintain any technological leadership or successfully exploit that leadership position to the benefit of our shareholders.

Acquisition of Skystream product. During the second fiscal quarter, on July 9, 2013, we announced we had acquired certain assets of Southwest Windpower, which included its popular Skystream product, the 2.4kW system. 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 for the Skystream turbine. We began marketing and selling the product shortly after closing the acquisition and we expect it to contribute to our overall revenue growth. According to Southwest’s records, the Skystream product generated approximately $9mil in revenue during 2012. There can be no assurance that we will be able to generate similar levels of revenue with the product, but we have begun selling the system, continue to actively sign up former Southwest dealers as XZERES dealers, and continue to experience an increasing level of interest and quoting activity for the Skystream product.

Power Efficiency

Beginning in fiscal year ended February 29, 2012, we introduced a new product line in the power efficiency category as a result of our April 2011 acquisition. Our power efficiency products are offered both as part of a solution to our existing turbine customers, and as a stand-alone product. These products are designed to improve the "power factor" and reduce the amount of reactive power being drawn at a location. By making this improvement, these power management devices can enhance the efficiency of inductive motors. The significance of power factor lies in the fact that utility companies supply customers with volt-amperes but bill them for watts. Power factors below 1.0 require a utility to generate more than the minimum volt-amperes necessary to supply the real power (watts). This increases generation and transmission costs. Utilities typically charge additional costs to business customers who have a power factor below some limit. Our products are designed to help reduce these added charges and hence save the customer money. We target business customers where the characteristics of their utility bill relative the specific product we are offering for their solution will yield a payback to the customer within 36 months or less. We offer a wide range of product sizes designed to enable us to target businesses with an annual utility spend as low as $12,000 to as high as $500,000.

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Distribution of Products

We sell our products directly to consumers as well as through dealers and distributors. We currently maintain a sales force of 6 people in the U.S. and UK, who focus on direct and indirect channels within their assigned territories.

Dealers are often contractors who provide various construction services for small business and homeowners and have experience with installing renewable energy systems, such as wind and solar. They provide a vital link to potential end users of renewable energy equipment and alleviate manufacturers from having to provide large field service operations for conducting sales and service. Thus, part of our sales and marketing effort is designed to support, educate, and provide training seminars for dealers.

Our dealers can range from small, 1-2 person operations to larger, regional or national companies. We work to establish agreements with dealers already familiar with our products as well as to bring in new dealers. Although the dealer agreement and terms differ, many of our dealers have signed on to sell both our turbine products and our power efficiency products.

We employ an additional three personnel assigned to building, maintaining, and enhancing our sophisticated website and other marketing tools, which we use for marketing and sales purposes and lead generation.

Competition

We compete with a number of established manufacturers, importers, and distributors who sell wind turbine systems and related equipment. Some if these companies enjoy strong brand recognition in specific regions. Some of these manufacturers, importers, and distributors also have strong financial, distribution, advertising, and marketing resources. However, with our recent acquisition of Skystream, which we believe enjoyed the strongest global brand presence in the small wind industry, along with our new financial lending partners, we now believe our brand presence and capabilities are greater than many of the key competitors.

Our primary competitors of similarly sized, horizontal access wind turbines that compete in our market and sell 2.5 to 10 kilowatt systems are:

§ Bergey WindPower (“Bergey”) - The XL.1 (1 kW) is smaller than any of our models. The Excel (10kW) is similar in size to our turbine and has been in the market for many years. Bergey sells to its own network of dealers/installers and directly to consumers.

§ Gaia, Ltd. – A European company that sells an 11kW turbine and is well established in the European marketplace.

Over the past several years, new companies have entered the small wind marketplace, in both horizontal and vertical-access system designs. Many of these newer companies have yet to demonstrate field-tested, proven equipment nor achieve the critical certifications that have now become much more prevalent and necessary to effectively compete in the small wind industry.

Developing successful products for the small wind market requires, among other things, industry knowledge and expertise, which we believe provides a significant barrier to entry. In addition, having proven, 3^rd party certified, and field-tested equipment is perhaps the most important factor in customer purchase decisions and an even greater barrier to entry. While numerous small wind providers have emerged more recently, very few meet this requirement of certified equipment out in the field that has been running for an extended period of time and delivered on the promised energy output. Thus, we believe there are relatively few companies that meet the necessary customer/dealer standards to currently compete in the small wind industry.

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We compete primarily on the basis of quality, technology advantages, ability to timely deliver product, field-proven experience and price (on a per kWh basis). We believe that our success will depend upon our ability to remain competitive in our product areas.

In addition to direct competition from other manufacturers of small wind turbine systems, we face indirect competition from other sources of energy, including both traditional delivery of electrical power over the grid and other sources of small renewable energy, such as small solar panel systems. Generally speaking, the strength of one technology over another in a particular instance is a function of the specific application, location, and total cost/benefit characteristics. Whatever technology solution can provide the best electrical output at the lowest cost in a particular environment will tend to be favored.

Principal Suppliers and Customers

We outsource the manufacturing on most of the various system components and then conduct assembly and final test internally at our facility in Oregon. Our key suppliers include our alternator, controller, and blade suppliers. We have standard NDA (Non-Disclosure) and IP (intellectual-property) rights agreements in place with each supplier used. There are no written supply agreements in place with any of our key suppliers. We purchase necessary components on a purchase order basis. Although we are dependent on our key suppliers, we also believe each would be replaceable if necessary.

We consider our customer relationship with Gale Force Infrastructure Fund to be critical to our forward growth plans. Gale Force was formed by key investors to provide project funding support in key markets, such as the UK and Japan. Gale Force is the critical funding partner on a program we refer to as FITCO. FITCO is a program where investors (Gale Force), project developers, and XZERES (as the turbine equipment supplier) have come together to provide a solution to land owners that makes it very financially attractive to install an XZERES system. The investors and project developers have committed substantial resources and set significant goals for this effort and we anticipate it will enable XZERES to sell a substantially higher volume of turbines in calendar 2014. While the program has taken longer than anticipated to ramp, it did provide initial benefits during fiscal year 2014. Based on the current volume of identified projects and signed lease contracts with land owners, we expect increasing contribution from this effort as we move forward, with the greater contributions beginning in the summer of 2014 and beyond. All sales under this program will be completed at normal product pricing.

Intellectual Property

We own the rights to six issued patents and five applications filed in the United States for patent protection on key technology innovations. In addition, we own 3 trademarks and 2 applications for trademark registrations. We will also apply for copyright protection in the United States and other jurisdictions where appropriate. We also may elect to avoid filing for patent protection on other aspects of our systems because of difficulty protecting the patent or disclosure of proprietary information that would result from the patent process, which is determined to be better remaining as trade secrets. There can be no assurance that we will receive any additional patents in the United States or elsewhere. Further, there can be no assurance that the patents we currently hold or future potential patents will be enforceable.

We will continue to obtain confidentiality agreements where necessary from our various suppliers. We will also seek confidentiality agreements with any consultants that we use.

We intend to assert our rights under trade secret, unfair competition, trademark and copyright laws to protect our intellectual property, including product design, proprietary manufacturing processes and technologies, product research and concepts and recognized trademarks. These rights will be protected through the acquisition of patents and trademark registrations, the maintenance of trade secrets, the development of trade dress, and, where appropriate, litigation against those who are, in our opinion, infringing these rights.

While there can be no assurance that patents, copyrights, registered trademarks or other measures will protect our proprietary information, subject to our financial, legal and business constraints, we intend to assert our intellectual property rights against infringers.

We estimate we will spend approximately $50,000 on counsel and filing fees in the next twelve months and on intellectual property protection regarding the designs for our small wind turbine systems and related equipment.

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Regulatory Matters and Government Incentives

Many state and local governments have implemented a diverse set of initiatives and incentive programs for wind equipment purchases. State incentives can take the form of net metering, rebates, tax credits, and feed in tariffs:

§ Net metering allows customers to connect renewable generation equipment to their utility power system. The utility takes any excess energy produced and credits it back to the customer on a net basis. The utility in essence banks your energy for free. There are over 40 states that have net metering in all or part of the state. All public utilities are required to make net metering available as defined by the Energy Policy Act of 2005.

§ Rebates are cash payments that are usually given to the customer, who must wait until the project is completed and inspected to get paid. The rebate is deducted from the project cost billed to the customer. Rebates can be based on rated power, swept area, blade length, installed cost, or projected energy generation.

§ Tax credits can be based on project cost or per kW of rated capacity. Some tax credit programs have caps on maximum dollars per project or year. Some must be taken over several years and some are transferable.

§ Feed in tariffs, or production incentives as they are often called, are above-market payments for energy generated from renewable energy. These are more common in International markets, but interest levels are growing in the United States. There are several U.S. states with some form of feed-in tariff on the utility or state level.

As of May 2014, most states have tax or other financial incentives of some type, such as credits, sales tax exemption, property tax exemption, productivity incentives such as grants or rebates, loan programs, or other subsidies to support wind energy development and use. Certain incentive programs offer up-front grants, such as New York and Oregon and favor higher production machines such as our 2.4kW and 10kW systems.

Under present law, a federal-level investment tax credit (ITC) is available to help consumers purchase small wind turbines for home, farm, or business use. Owners of small wind systems with 100 kilowatts (kW) of capacity or less can receive a credit for 30% of the total installed cost of the system.

The ITC, written into law through the Emergency Economic Stabilization Act of 2008, is available for equipment installed from October 3, 2008 through December 31, 2016. The value of the credit is now uncapped, through the American Recovery and Reinvestment Act of 2009.

The Energy Independence and Security Act of 2007, passed in December 2007, contained benefits for renewable energy systems in general, of which wind power systems would qualify. Those provisions included Technical Assistance Grants, Renewable Energy Construction Grants, and Express Loans for Renewable Energy and Energy Efficiency (Small Businesses). Each of those programs could further benefit customers that install a wind power system. We view such policy initiatives as generally positive for the wind industry and the company, but do not expect that this particular piece of legislation is immediately material to our business prospects. The ITC is the government program that has the greatest impact on domestic sales.

State Regulations Governing Power Produced

Each state is responsible for regulating the sale, installation and interconnection of alternative energy within their state. Currently, there is no Federal-level regulation that specifically controls the sale, distribution and installation of small wind turbines beyond general small business regulations. The Public Utility Regulatory Policies Act of 1978 or PURPA, requires utilities to interconnect and purchase energy from small wind systems. Individual utilities are permitted to regulate that process.

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Local Regulations Surrounding Small Wind Turbine Use

Individuals and small businesses interested in small wind turbine use are subject to local regulations and involve public utility companies, inspectors, permits, site evaluation for placement, tower height and aesthetic concerns, and restrictions regarding professional versus do-it-yourself installation. The AWEA offers a Model Zoning Ordinance to help local officials update ordinances governing small wind turbine installations. However, states often have unique subsidies or other programs designed to encourage on-site electricity generation. Existing state laws and local regulations continue to evolve in order to encourage and maintain safe, effective and efficient use of small wind energy systems.

Environmental Studies and Regulations

Overall, studies have shown wind energy has a low impact on the environment and does not generate air, or water pollution, global warming pollutants or waste. According to the American Wind Energy Association, although wind turbines have positive impacts, there are a few studies indicating negative impacts on the environment.

Wind turbines and energy plants are generally known to be quiet, unobtrusive and non-threatening to both humans and wildlife. Recent studies that indicate negative impacts on humans and wildlife include: birds and bats colliding with wind turbines, noticeable “whooshing” or low frequency sounds and shadow flicker. Shadow flicker occurs when the blades of a turbine pass in front of the sun to create a recurring shadow on an object.

The wind energy industry is partnering with conservation groups and government agencies and conducts ongoing land use and avian studies at wind sites across the country. Pre- and post-construction efforts to protect land and wildlife include wildlife consultants, surveys, and various state, federal land use, fish and wildlife agencies.

We have not incurred and do not anticipate incurring any expenses associated with environmental laws. In addition, many of the above mentioned environmental concerns are more applicable to large, utility-scale turbines, rather than small wind turbines.

Research and Development Expenditures

We incurred a research and development expense of $1,599,482 incurred in the fiscal year ended Feb 28, 2014 compared to $1,161,509 for the prior fiscal year. This expense was largely associated with compensation paid to our engineering staff as well as outside consultants and fees associated with general product enhancements. We do anticipate some moderate increases in these expenditures for Fiscal 2015 as compared to Fiscal 2014. We expect that our research and development expense over the next twelve months will approximate $1.7 million, none of which will be borne directly by our customers.

Subsidiaries

We currently have four, wholly-owned, subsidiaries. Our XZERES Wind Europe Ltd., headquartered in Dublin, Ireland was established to support sales and marketing activities throughout Europe and specifically the UK market. XZERES Energy Services Corp., a domestic subsidiary, was established to support our direct-sales efforts in the U.S. market where we assist in the project management and coordination of the system installation for the customer and/or dealer. XZERES Wind Japan Ltd., headquartered in Tokyo, Japan was established to support sales and marketing activities in Japan. XZERES Capital Corp., a domestic subsidiary, was established to support our new U.S. leasing program, which would include owning a portion of the long-term lease revenue in conjunction with outside investors. XZERES Capital Corp. and XZERES Wind Japan Limited had not yet started operations as of February 28, 2014.

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Employees

As of May 29, 2014, we have 37 full time employees, including 8 technical and engineering personnel, 10 sales and marketing personnel, and the balance in executive, manufacturing or general administration. Additional individuals have been and may continue to be engaged as outside consultants to provide additional assistance in our operations on an as-needed basis.

We may further expand our current management team and employee headcount in the future to retain skilled directors, officers, and employees with experience relevant to our business focus. Specifically, we are actively seeking to hire additional personnel for both sales and for technical and engineering.  

There are no collective bargaining contracts covering any of our employees. We believe our relationship with our employees is satisfactory.

Item 2. Properties

We maintain our corporate office at 9026 SW Hillman, Suite 3126, Wilsonville, OR 97070.

On May 1, 2014, we entered into a new, amended lease for the use of approximately 13,558 square feet located at 9025 SW Hillman Court, Suites #3126 and 3122, and 13,074 square feet located at 9730 SW Hillman Ct, Suite 640, both locations in Wilsonville, Oregon. We use approximately 6,452 square feet as office space and the balance, approximately 20,180 square feet, as shop floor space to conduct final testing of components, product assembly, and shipping and receiving.

Our lease for these three suites expires in July 31, 2017 with an option for up to two (2) renewal terms of two (2) years each. As of May 1, 2014, our rent for all three suites was $13,865 per month. Our total rent expense on both suites for the next 12 months is anticipated to be $166,380.

In addition, we rent office space, on a month-to-month basis in Birmingham UK to support our sales team in the UK. We pay a monthly rate of £1,296 for the UK office.

Item 3. Legal Proceedings 

In December of 2013, our XZERES Energy Services subsidiary received notice of a non-monetary default judgment related to a turbine customer in Texas, named TSNT Enterprises, Inc. It was a project handled by one of our dealers in the area, who was named in the lawsuit and has been defending the claims. A trial will be necessary to determine to what extent TSNT incurred any damages. We dispute TSNT's calculation of loss-of-use damages, which we contend is not technically possible. We have proposed a global settlement (primarily funded by the dealer) to resolve this matter. Regardless of the outcome of the settlement negotiations or trial, we do not expect TSNT's disputed claim to have a material impact on our operations.  

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PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our common stock is currently eligible to be quoted on the Financial Industry Regulatory Authority’s Over the Counter Bulletin Board (“OTCBB”) under the symbol “XPWR.” At present there is a very limited public market for our common stock.

The following table sets forth the range of high and low bid quotations for our common stock for each of the periods indicated as reported by the OTCBB. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. 

Fiscal Year Ending February 28, 2014
Quarter Ended	High $	Low $
February 28, 2014	$0.73	$0.50
November 30, 2013	$0.65	$0.38
August 31, 2013	$0.86	$0.27
May 31, 2013	$0.27	$0.14

Fiscal Year Ending February 28, 2013
Quarter Ended	High $	Low $
February 28, 2013	$0.42	$0.0185
November 30, 2012	$0.40	$0.201
August 31, 2012	$0.382	$0.30
May 31, 2012	$0.50	$0.31

Penny Stock

The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a market price of less than $5.00, other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock, to deliver a standardized risk disclosure document prepared by the SEC, that: (a) contains a description of the nature and level of risk in the market for penny stocks in both public offerings and secondary trading; (b) contains a description of the broker's or dealer's duties to the customer and of the rights and remedies available to the customer with respect to a violation of such duties or other requirements of the securities laws; (c) contains a brief, clear, narrative description of a dealer market, including bid and ask prices for penny stocks and the significance of the spread between the bid and ask price; (d) contains a toll-free telephone number for inquiries on disciplinary actions; (e) defines significant terms in the disclosure document or in the conduct of trading in penny stocks; and (f) contains such other information and is in such form, including language, type size and format, as the SEC shall require by rule or regulation.

The broker-dealer also must provide, prior to effecting any transaction in a penny stock, the customer with (a) bid and offer quotations for the penny stock; (b) the compensation of the broker-dealer and its salesperson in the transaction; (c) the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and (d) a monthly account statement showing the market value of each penny stock held in the customer's account.

In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written acknowledgment of the receipt of a risk disclosure statement, a written agreement as to transactions involving penny stocks, and a signed and dated copy of a written suitability statement.

These disclosure requirements may have the effect of reducing the trading activity for our common stock. Therefore, stockholders may have difficulty selling our securities.

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Outstanding Options, Warrants or Convertible Debt

As of May 29, 2014, we have issued warrants to purchase a total of 32,494,564 shares of our common stock. None of our warrants are subject to any cashless exercise provisions. 3,188,967 warrants have a $1.50 per share strike price and expire March 18, 2016. 656,250 warrants have a $1.00 per share strike price and expire October 21, 2014. 3,419,525 warrants have a $0.80 per share strike price and expire February 27, 2015. 95,000 warrants have a $0.80 per share strike price and expire May 27, 2015. 600,000 warrants have a $0.35 per share strike price and expire August 6, 2014. 2,142,857 warrants have a $0.385 per share strike price and expire October 19, 2017 and are subject to an exercise price adjustment under certain conditions. 128,572 warrants have a $0.385 per share strike price and expire January 15, 2016. 1,435,000 warrants have a $0.35 per share strike price and expire May 10, 2016. 15,190,000 warrants have a $0.35 per share strike price and expire March 29, 2017 and are subject to an exercise price adjustment under certain conditions. 493,393 warrants have a $0.35 per share strike price and expire October 9, 2017 and are subject to an exercise price adjustment under certain conditions. 2,500,000 warrants have a $0.385 per share strike price and expire December 16, 2016 and are subject to an exercise price adjustment under certain conditions. 2,645,000 warrants have a $0.35 per share strike price and expire April 17, 2018 and are subject to an exercise price adjustment under certain conditions. The exercise price for all the warrants would be adjusted for any stock splits.

As of May 29, 2014, $946,174 of our current non-secured debt is convertible into common shares at $0.35 per share, at the holder’s option. In addition, $1,625,000 of our senior secured debt can be converted into 3,250,000 warrants, exercisable at $0.35 per share.

As of May 29, 2014, we have issued a total of 3,385,000 options to employees with an average strike price of $0.618 per share and 700,000 options to a former employee at a strike price of $0.60 per share.

Holders of Our Common Stock

As of May 29, 2014, there were 43,366,913 shares of our common stock issued and outstanding held by 341 stockholders of record based upon a shareholder list provided by our transfer agent. Our transfer agent is Corporate Stock Transfer, Inc. located at 3200 Cherry Creek Drive South, Suite 430, Denver, CO 80209 and their telephone number is (303) 282-5800. In addition, we have issued 1,428,571 shares of Series A preferred stock, which can be converted into 4,285,714 number of common shares.

Dividends

There are no restrictions in our articles of incorporation or bylaws that prevent us from declaring dividends.  The Nevada Revised Statutes, however, do prohibit us from declaring dividends where after giving effect to the distribution of the dividend:

1.	we would not be able to pay our debts as they become due in the usual course of business, or;
2.	our total assets would be less than the sum of our total liabilities plus the amount that would be needed to satisfy the rights of shareholders who have preferential rights superior to those receiving the distribution.

We did not declare any dividends in the fiscal year ended February 28, 2014, and we do not plan to declare any dividends in the foreseeable future.

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Securities Authorized for Issuance under Equity Compensation Plans

On May 25, 2011, we updated our existing stock option plan to provide for qualified non-qualified stock options equal to a maximum of fifteen percent (15%) of our total issued and outstanding shares of common stock as of May 20, 2011, which is equal to 2,823,199 total shares available to be optioned. Previously, the options available under our Plan were calculated as fifteen percent (15%) of our shares issued and outstanding as of July 1, 2010. During fiscal year 2014, we amended the option plan to increase the available issuance of common shares up to 4,000,000. This amendment will require shareholder ratification at the next annual meeting. As of May 29, 2014, we have granted a total of 3,385,000 options under the Plan.

Plan Category	Number of Securities to be Issued upon Exercise of Outstanding Options	Weighted-Average Exercise Price of Outstanding Options	Number of Securities Remaining Available for Future Issuance Under Current Equity Compensation Plan
Issued Options	3,385,000 (1)	$0.618	615,000 (2)

(1) Represents outstanding options issued (both vested and unvested) granted pursuant to our amended fiscal year 2014 Equity Incentive Plan.

(2) Represents shares remaining available for future issuance under our fiscal year 2014 Equity Incentive Plan.

Recent sales of unregistered securities

During the fiscal year ending February 28, 2014, the following equity-related transactions occurred concerning securities which were sold or issued by us without the registration of the securities under the U.S. Securities Act of 1933, as amended (the “Securities Act”) in reliance on exemptions from such registration requirements:

• 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.

• 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, plus accrued interest in the amount of $197,924

None of the above listed private sales was a public offering based upon the following factors: (i) each issuance of securities was an isolated private transaction; (ii) a limited number of securities were issued to a limited number of offerees; (iii) there was no public solicitation; (iv) each offeree was an “accredited investor”, (v) the investment intent of the offerees; and (vi) the restriction on transferability of the securities issued. The proceeds from the private offerings will be used for working capital, general corporate expenses and acquisitions.

All the foregoing securities were issued in reliance upon exemption from registration pursuant to section 4(2) of the Securities Act and/or Rule 506 of Regulation D.

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Item 7. 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 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.

Results of Operations for the Years Ended February 28, 2014 and February 28, 2013

Although revenue declined approximately 10% compared to the prior year, fiscal year 2014 was critical in terms of key milestones. The Company successfully secured a much larger credit facility and complimented that new line with equity capital, all from the same group of strategic investors. This improved working capital position helped dramatically improve the supply chain and material lead time, as well as allowed us to build sufficient inventory to better support overall sales activities and shorten lead times. The new financial support also enabled us to purchase the Skystream product during the year, which we believe adds significant value to the Company. Skystream was the most widely deployed small wind system in the world (with over 8500 machines flying in over 110 different countries on all 7 continents). We believe the Skystream product is one of the most iconic brands in the industry and provides us with much greater brand awareness in general and a much broader global footprint, something we are already beginning to leverage.

In addition to the direct financial support, the Company’s new strategic investors have also worked closely with us to help create financing support options for end customers via programs such as domestic leasing and FITCO. We believe these activities are important to the Company’s future growth, particularly given how the small wind industry is evolving in key markets. The early adopters, those capable of covering the upfront capital investment required to install a system, is a segment that has become increasingly saturated in many areas. However, we believe there is a much greater market opportunity for potential projects that need support in funding the upfront investment. The Company now has the ability to offer attractive financing solutions in key markets. We implemented these programs toward the end of the fiscal year and anticipate these activities to have a significantly greater impact going forward.

While it can be difficult to predict when a new customer or investment project will have their site ready for product delivery (i.e., all permits approved etc.), we believe that the large and growing pipeline of projects from our FITCO activities along with the greater overall interest in our products will contribute to higher revenues in fiscal year 2015.  Potential risks to this outlook include: local permitting timelines, the ability of our suppliers to ramp production, 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.

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Our power efficiency products generally do not receive incentives and are not subject to lengthy permitting processes or installation needs. However, it generally takes longer 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 have several active pilot systems under evaluation by large organizations that could result in multiple sales. We expect this business to experience rapid growth in fiscal year 2015, albeit from a low base.

Income. We recorded $4,054,957 in revenues for the fiscal year ended February 28, 2014, compared with $4,516,616 in revenues for the year ended February 28, 2013. Our revenue decline during fiscal year 2014 was attributable to our severe working capital limitations at the beginning of the year immediately followed by the longer than anticipated time needed to ramp up our key marketing initiatives, such as FITCO.  Our turbine products represented the bulk of the revenue at 97% during the year.

Operating Expenses and Net Loss. Our Operating Expenses during fiscal year 2014 equaled $8,140,843, consisting of $888,179 in sales expense, $397,635 in marketing costs, $1,599,482 in R&D/Engineering expenses, and $5,255,547 in general and administrative expenses. Our total operating expenses included $964,304 of non-cash expenses in the form of expensed employee options, shares and warrants issued to consultants during the year for various services provided. We had other expenses of $1,460,530 for the period.  Therefore, we recorded a net loss of $9,496,573 for the fiscal year ended February 28, 2014. Our Operating Expenses during fiscal year 2013 equaled $7,291,615, consisting of $809,025 in sales expense, $182,492 in marketing costs, $1,161,509 in R&D/Engineering expenses, and $5,138,589 in general and administrative expenses. Our total operating expenses included $816,974 of non-cash expenses in the form of expensed employee options, shares issued to consultants during the year for various services provided and shares issued to pay off trade debt. We had other expenses of $227,320 for the period.  Therefore, we recorded a net loss of $7,599,207 for the fiscal year ended February 28, 2013. The substantial increase in our net loss for the period ended February 28, 2014 over the same period in 2013 is primarily attributable to the increased interest cost associated with our new loan facility used to fund the business along with the slight increased associated with our acquisition of the Skystream product line during the year.

General Outlook:

While our fiscal year ending February 28, 2014 revenue was disappointing, we believe the general outlook for the current year is strong. We have applied significant resources toward developing key programs and creating a foundation for substantial growth. In addition, we anticipate important new markets to begin contributing this year, thanks in part to our Skystream acquisition but also from prior efforts to target new markets. While precise forecasting can be a challenge and we have already experienced a longer ramp up time on some of the mentioned programs than we originally anticipated, we do anticipate increasing revenue contribution as we operate through the balance of the current fiscal year. Some of the key sales initiatives in our near-term forecast include:

• UK FITCO – We have been actively promoting the FITCO program in the UK since the fall of last year. It did contribute to revenues in the final 2 quarters of the year, although at a moderate level. The program enables a landowner to receive a turbine and the power it generates for free while the investor partner (Gale Force) collects the available Feed-In-Tariff payouts. Gale Force has committed significant funding resources for the UK effort, with the focus on purchasing the XZERES 10kW turbine. We are working with a number of project partners in the country who assist in identifying quality sites, meeting with the landowner, and securing the lease contract for Gale Force. Once the site has planning and connection approval, Gale Force then purchases the system from us and we assist in arranging for installation. Gale Force and the Project partners have already secured a large volume of sites awaiting permit approvals and are working toward reaching a minimum monthly goal of 15-30 systems. The average equipment sales price from Xzeres is approximately $55,000.

• Domestic Sales and Lease - We recently launched a new 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.

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• Japan Sales & FITCO – Japan introduced a new, attractive, feed-in-tariff (FIT) last year. We have been actively working through the certification process to have our systems approved for the FIT in Japan. 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. Our project financing partners, Gale Force, also intend to support a FITCO model (similar to the UK effort) for this new market. We have already established a wholly-owned subsidiary in Japan and started early pre-selling activity. We intend to install our first system in the country in June of this year, which will serve as a useful selling tool for potential customers and dealers alike. Between direct sales activities and the FITCO program, we believe we can ramp the Japan market to equal or stronger levels than the UK efforts by late summer or early fall of this year.

• Skystream – The acquisition of the Skystream product has 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. While the product was off the market for approximately 8 months before we purchased it, we have re-engaged numerous dealers around the world and continue to see increased quoting and pipeline momentum and expect it to be a strong contributor to our forward growth.

• 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, we recently received our first commercial order for an initial project that we expect to be installed by July of this year.

• 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:

During late fiscal year 2014, we incurred additional warranty expenses associated with a system part where the manufacturing partner did not conform to our specifications. For now, we have expensed the cost of replacements, but are working with the partner to potentially recoup some of those costs. The added warranty costs were charged to our cost of goods sold and substantially contributed to our below average gross margins at the end of fiscal year 2014.

Looking ahead into fiscal 2015, we anticipate warranty costs to substantially improve over the past two years of unusual impacts. In addition, we have implemented several system cost improvements that should further enhance margins. Further, we believe we will achieve synergies with the Skystream product both on the gross margin side and operating margin side, thereby enhancing our overall bottom line.

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Liquidity and Capital Resources

At February 28, 2014, we had $5,924,654 in current assets, consisting primarily of $1,880,398 in accounts receivable, $3,569,804 in inventories and inventory deposits, and $426,179 in prepaid expenses. Our total current liabilities as of February 28, 2014 were $13,379,421. Thus, we have negative working capital of $7,454,767.  As of February 28, 2014 we had total assets of $8,074,924.

Cash Flows from Operating Activities. Operating Activities used $12,276,939 in cash for the fiscal year ended February 28, 2014. Our net loss of $9,496,573 as well as increases in accounts receivables and inventories were the primary components of our negative operating cash flow for the period. Operating activities used cash of $4,624,210 in the prior fiscal year.

Cash Flows from Investing Activities. Investing Activities used $12,080 in cash during the fiscal year ended February 28, 2014 as a result of the purchase of computers, machinery and equipment.  Investing activities used $207,620 in cash in the prior fiscal year.

Cash Flows from Financing Activities. Financing Activities generated $12,395,034 and $4,525,544 in cash for the fiscal year ended February 28, 2014 and February 28, 2013, respectively, consisting of proceeds from the issuance of equity and debt along with warrant exercises for fiscal year 2014.

As of February 28, 2014, 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.

Subsequent to our fiscal year end, on April 16, 2014, we entered into a third amendment on our existing credit facility, which further increased the total funding availability up to $11,033,000 in debt financing. As additional consideration for the additional increase, we issued the financing parties warrants to purchase up to an additional 2,645,000 shares of our common stock, exercisable at any time during four years from the date of issue, at an exercise price of $0.35 per share

We do not anticipate paying dividends into the foreseeable future.

Off Balance Sheet Arrangements

As of May 30, 2014, there were no off balance sheet arrangements.

Going Concern

Our financial statements have been prepared assuming that we will continue as a going concern which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. We have incurred a loss of 9,680,926 and have incurred cumulative losses of $31,519,086 for the fiscal year ended February 28, 2014, and expect to incur further losses in the development of our business and have been dependent on funding operations through the issuance of debt, convertible debt and private sale of equity securities. These conditions raise substantial doubt about our ability to continue as a going concern. Management’s plans include continuing to finance operations through the private or public placement of debt and/or equity securities and the reduction of expenditures. However, no assurance can be given at this time as to whether we will be able to achieve these objectives. The financial statements do not include any adjustment relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.

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Critical Accounting Policies

In December 2001, the SEC requested that all registrants list their most “critical accounting polices” in the Management Discussion and Analysis. The SEC indicated that a “critical accounting policy” is one which is both important to the portrayal of a company’s financial condition and results, and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Warranty Reserve – We currently reserve 2% on all new equipment sales to cover potential future warranty claims. There can be no assurance that such provision for estimated product warranty expenses will be sufficient to cover our warranty exposure in the future. We cannot ensure that our efforts to reduce our risk through warranty disclaimers will effectively limit our liability. Any significant incurrence of warranty expense in excess of estimates could have a material adverse effect on our business, including our operating results, financial condition and cash flow. In addition, if our warranty reserve is understated, it would affect (overstate) net income.

Revenue Recognition - The Company recognizes revenue when products are shipped from the factory and collection is reasonably assured. XZERES sells wind turbines 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.

Intellectual Property - Intellectual property consists of product designs with an infinite life. The Company annually evaluates the fair value of the intellectual property to determine whether events and circumstances warrant a revision to the fair value of these assets. If the intellectual property requires an impairment adjustment, it would affect the balance sheet and statement of operations as assets would be overstated and income would be either overstated or understated depending on a negative or positive adjustment.

Fair Value - Stock-based compensation is accounted for at fair value in accordance with SFAS No. 123 and 123 (R) (ASC 718). The Company’s financial instruments consist of cash and cash equivalents, loans to a related party, accrued expenses and credit card payables. 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. If the fair values of our assets are overstated, it would affect the balance sheet and statement of operations as assets would be overstated and income would be overstated.

Recently Issued 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.

21

Item 8. Financial Statements and Supplementary Data

Index to Financial Statements Required by Article 8 of Regulation S-X:

Audited Financial Statements:
F-1	Report of Report of Independent Registered Public Accounting Firm
F-2	Balance Sheets as of February 28, 2014 and February 28, 2013;
F-3	Statements of Operations for the Fiscal years ended 2014 and 2013;
F-4	Statement of Stockholders’ Deficit for the Fiscal years ended 2014 and 2013;
F-5	Statements of Cash Flows for the Fiscal years ended 2014 and 2013;
F-6	Notes to Financial Statements

22

Silberstein Ungar, PLLC CPAs and Business Advisors

Phone (248) 203-0080

Fax (248) 281-0940

30600 Telegraph Road, Suite 2175

Bingham Farms, MI 48025-4586

www.sucpas.com

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

XZERES Corp.

Wilsonville, Oregon

We have audited the accompanying consolidated balance sheets of XZERES Corp. as of February 28, 2014 and February 28, 2013, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company has determined that it is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of XZERES Corp. as of February 28, 2014 and February 28, 2013 and the results of its operations and cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that XZERES Corp. will continue as a going concern. As discussed in Note 19 to the financial statements, the Company has incurred losses from operations, has negative working capital, and is in need of additional capital to grow its operations so that it can become profitable. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans with regard to these matters are described in Note 19. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Silberstein Ungar, PLLC

Silberstein Ungar, PLLC

Bingham Farms, Michigan

June 13, 2014

F-1

XZERES CORP.

CONSOLIDATED BALANCE SHEETS

AS OF FEBRUARY 28, 2014 AND FEBRUARY 28, 2013

ASSETS	2014			2013
Current Assets
Cash and cash equivalents	$	43,495		$	—
Accounts and notes receivable, net - current portion		1,880,398			180,559
Inventories		2,809,035			751,524
Inventory deposits		760,769			142,200
Deferred financing costs – current portion		4,778			46,625
Prepaid expenses		426,179			73,471
Total Current Assets		5,924,654			1,194,379
Property and Equipment, net		222,457			320,579
Other Assets
Accounts and notes receivable – net of current portion		107,405			106,113
Deferred financing costs – net of current portion		—			4,778
Intellectual property		1,802,210			1,802,210
Website development costs, net		—			4,117
Deposits		18,198			18,198
Total Other Assets		1,927,813			1, 935,416
TOTAL ASSETS	$	8,074,924		$	3,450,374
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
LIABILITIES
Current Liabilities
Accounts payable	$	1,698,001		$	2,434,147
Accrued expenses		821,708			880,957
Customer deposits		81,569			234,413
Warranty reserve		189,577			150,629
VAT & sales tax payable		105,984			—
Notes payable – related parties - current portion, net of debt discount of $53,987		925,192			—
Notes payable – current portion, net of debt discount of $547,774 and $31,650		9,557,390			2,068,350
Total Current Liabilities		13,379,421			5,768,496
Long-Term  Liabilities
Due to factor – related party		—			235,040
Notes payable – net of current portion		—			160,000
Notes payable – related parties		—			690,000
Total  Long-Term Liabilities		—			1,085,040
TOTAL LIABILITIES		13,379,421			6,853,536
STOCKHOLDERS’ EQUITY (DEFICIT)
Preferred stock, par $0.001, 5,000,000 shares authorized, 1,428,571 Series A shares issued and outstanding		1,429			1,429
Common stock, par $0.001, 100,000,000 shares authorized, 43,126,913 and 28,392,827 shares issued and outstanding, respectively		43,129			28,394
Stock warrants		6,280,172			4,273,130
Additional paid in capital		19,706,899			14,070,918
Accumulated other comprehensive income (loss)		(1,393	)		61,127
Accumulated deficit		(31,334,733	)		(21,838,160	)
Total Stockholders’ Equity (Deficit)		(5,304,497	)		(3,403,162	)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)	$	8,074,924		$	3,450,374

 See accompanying notes to consolidated financial statements.

F-2

XZERES CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED FEBRUARY 28, 2014 AND FEBRUARY 28, 2013 

	Year Ended February 28, 2014			Year Ended February 28, 2013
GROSS REVENUES	$	4,054,957		$	4,516,616
COST OF GOODS SOLD		3,950,157			4,596,888
GROSS PROFIT		104,800			(80,272	)
OPERATING EXPENSES
General and administrative expenses		5,255,547			5,138,589
Marketing		397,635			182,492
Sales expense		888,179			809,025
Engineering/R&D expense		1,599,482			1,161,509
Gain on Acquisition		(562,368	)		—
TOTAL OPERATING EXPENSES		7,578,475			7,291,615
LOSS FROM OPERATIONS		(7,473,675	)		(7,371,887	)
OTHER INCOME (EXPENSE)
Interest expense		(1,210,847	)		(297,671	)
Amortization of debt discount		(818,132	)		—
Other income (expense)		6,081			70,351
TOTAL OTHER INCOME (EXPENSE)		(2,022,898	)		(227,320	)
LOSS BEFORE PROVISION FOR INCOME TAXES AND OTHER COMPREHENSIVE INCOME (LOSS)		(9,496,573	)		(7,599,207	)
PROVISION FOR INCOME TAXES		0			0
NET LOSS		(9,496,573	)		(7,599,207	)
DEEMED DIVIDEND		0			(259,285	)
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS		(9,496,573	)		(7,858,492	)
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency adjustment gain (loss)		(62,520	)		69,604
COMPREHENSIVE INCOME (LOSS)	$	(9,559,093	)	$	(7,788,888	)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: BASIC AND DILUTED		32,743,337			26,868,029
NET LOSS PER SHARE: BASIC AND DILUTED	$	(0.29	)	$	(0.29	)

See accompanying notes to consolidated financial statements.

F-3

XZERES CORP.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)

AS OF FEBRUARY 28, 2014

	Preferred Stock				Common Stock				Stock			Additional Paid in			Accum. Comp Income			Accumulated
	Shares		Amount		Shares		Amount		Warrants			Capital			(loss)			Deficit			Total
Balance, February 29, 2012		0		0		25,500,414	$	25,501	$	3,791,031		$	11,790,160			(8,477	)		(13,979,668	)	$	1,618,547
Shares issued in connection with private placements		1,428,571		1,429		—		—		345,000			1,153,571			—			—			1,500,000
Deemed Dividend		—		—		—		—		—			259,285			—			—			259,285
Shares issued for consulting services		—		—		1,508,644		1,509		—			600,641			—			—			602,150
Shares issued for payoff of trade debt		—		—		206,718		207		—			80,892			—			—			81,099
Shares issued for note conversion		—		—		1,177,051		1,177		—			102,823			—			—			104,000
Warrants issued for PO Financing		—		—		—		—		85,204			—			—			—			85,204
Stock options issued to employees		—		—		—		—		—			135,441			—			—			135,441
Warrant Modification		—		—		—		—		51,895			(51,895	)		—			—			0
Cumulative Translation Adjustment		—		—		—		—		—			—			69,604			—			69,604
Net loss for the year ended February 28, 2013		—		—		—		—		—			—						(7,858,492	)		(7,858,492	)
Balance, February 28, 2013		1,428,571		1,429		28,392,827		28,394		4,273,130			14,070,918			61,127			(21,838,160	)		(3,403,162	)
Shares issued in connection with private placements		—		—		5,000,000		5,000		1,173,000			1,072,000			—			—			2,250,000
Deemed dividend		—		—		—		—		—			—			—			—			—
Shares issued for consulting services		—		—		542,500		543		—			111,832			—			—			112,375
Shares issued for payoff of trade debt		—		—		385,715		386		—			144,851			—			—			145,237
Shares issued for warrant exercise		—		—		7,627,875		7,628		(1,510,431	)		4,214,853			—			—			2,712,050
Stock options issued to employees		—		—		—		—		—			(104,300	)		—			—			(104,300	)
Warrants issued for advisory services		—		—		—		—		956,229			—			—			—			956,229
Warrants issued in connection with debt financing		—		—		—		—		1,388,244			—			—			—			1,388,244
Note conversion		—		—		565,496		565		—			197,358			—			—			197,923
Equity issuance cost		—		—		300,000		300		—			(300	)		—			—			—
Additional shares issued for prior offering		—		—		312,500		313		—			(313	)		—			—			—
Cumulative translation adjustment		—		—		—		—		—			—			(62,520	)		—			(62,520	)
Net loss for the year ended February 28, 2014		—		—		—		—		—			—						(9,496,573	)		(9,496,573	)
Balance, February 28, 2014		1,428,571	$	1,429		43,126,913	$	43,129	$	6,280,172		$	19,706,899		$	(1,393	)	$	(31,334,733	)	$	(5,304,497	)

See accompanying notes to consolidated financial statements.

F-4

XZERES CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED FEBRUARY 28, 2014 AND FEBRUARY 28, 2013

	Year Ended February 28, 2014			Year Ended February 28, 2013
Cash Flows from Operating Activities:
Net loss for the period	$	(9,496,573	)	$	(7,599,207	)
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:
Amortization of debt discount		818,132			—
Issuance of warrants for advisory services		956,229			—
Share-based compensation		(104,300	)		135,441
Issuance of common shares for consulting services		112,375			602,150
Depreciation and amortization expense		114,319			189,704
Bad debt expense		85,294			120,613
Gain on acquisition		(562,368	)		—
Changes in Assets and Liabilities
Accounts and notes receivable		(1,786,425	)		718,354
Subscription receivable		—			80,000
Prepaid expenses		(352,708	)		270,134
Inventory		(840,822	)		76,664
Inventory deposit		(618,569	)		(72,108	)
Accounts payable		(590,909	)		337,895
Accrued expenses		(2,702	)		771,406
Customer deposits		(152,844	)		(286,045	)
VAT & sales tax payable		105,984			(32,822	)
Warranty reserve		38,948			63,611
Net Cash Used in Operating Activities		(12,276,939	)		(4,624,210	)
Cash Flows from Investing Activities:
Acquisitions of property and equipment		(12,080	)		(108,620	)
Deferred financing costs		—			(99,000	)
Net Cash Used in Investing Activities		(12,080	)		(207,620	)
Cash Flows from Financing Activities:
Proceeds from issuance of common shares		2,250,000			—
Proceeds from exercise of warrants		2,712,050			—
Net increase in notes and loans payable, net of debt discount		7,432,984			3,025,544
Proceeds from issuance of preferred shares		—			1,500,000
Net Cash Provided by Financing Activities		12,395,034			4,525,544
Foreign Currency Effect on Cash		(62,520	)		69,604
Net (Decrease) in Cash and Cash Equivalents		43,495			(236,682	)
Cash and Cash Equivalents – Beginning		0			236,682
Cash and Cash Equivalents – Ending	$	43,495		$	0
Supplemental Cash Flow Information:
Cash paid for interest	$	44,080		$	171,572
Cash paid for income taxes		0		$	0

See accompanying notes to consolidated financial statements.

F-5

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 28, 2014

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 financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the SEC. In the opinion of management, all adjustments necessary in order for the financial statements to be not misleading have been reflected herein.

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.

Fair Value of Financial Instruments

The Company’s financial instruments consist of cash and cash equivalents, accounts and notes receivable, inventories, inventory deposits, deferred financing costs, 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.

F-6

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 28, 2014

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 $43,495 and $0 at February 28, 2014 and February 28, 2013, respectively.

Advertising Costs

The Company’s policy regarding advertising is to expense advertising when incurred. XZERES incurred advertising expense of $94,639 and $48,440 during the fiscal years ended February 28, 2014 and February 28, 2013, 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.

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.

F-7

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 28, 2014

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 fiscal year ended February 28, 2014, 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 32,743,337 for the year ended February 28, 2014. Common stock equivalents were not included in the computation of diluted earnings per share for the fiscal year ended February 28, 2014, 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.

NOTE 2 - ACQUISITION COSTS

On July 2, 2013, the Company entered into an Asset Purchase Agreement (the “Acquisition”) to acquire substantially all of the remaining assets of Southwest Windpower Inc., consisting primarily of inventory, intellectual property and product designs for the Skystream wind turbine. Under the terms of the Acquisition, the Company paid $654,321 in cash. The assets had been foreclosed on and the Company acquired them in a private UCC sale.

The purchase price was allocated as follows:

Description	Amount
Inventory	$	1,216,689
Gain on purchase		(562,368	)
Total	$	654,321

F-8

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 28, 2014

NOTE 3 – ACCOUNTS AND NOTES RECEIVABLE

Accounts receivable are generated from sales of wind turbine systems and power efficiency products. As of February 28, 2014, accounts receivable were substantially comprised of balances due from end customers and dealers.

Notes receivable are generated from sales of wind turbine systems. At February 28, 2014, notes receivable were comprised of balances due from eight 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 February 28, 2014 and February 28, 2013 an allowance for doubtful accounts of $228,881 and $143,587, respectively, has been provided.

		February 28, 2014			February 28, 2013
Accounts and notes receivable	$	2,216,684		$	430,259
Less: Allowance for doubtful accounts		(228,881	)		(143,587	)
Accounts and notes receivable, net		1,987,803			286,672
Less: Current Portion		1,880,398			180,559
Long-term portion	$	107,405		$	106,113

NOTE 4 – PREPAID EXPENSES

Prepaid expenses consisted of the following:

	February 28, 2014		February 28, 2013
Software licenses	$	11,399	$	11,558
Consulting		414,780		61,913
Total prepaid expenses	$	426,179	$	73,471

NOTE 5 – 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.

Deferred financing costs consisted of the following:

	February 28, 2014			February 28, 2013
Deferred financing costs	$	99,000		$	99,000
Less: accumulated amortization		(94,222	)		(47,597	)
Deferred financing costs, net	$	4,778		$	51,403

F-9

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 28, 2014

NOTE 6 – 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 $760,769 and $142,200 at February 28, 2014 and 2013, respectively.

Inventories consisted of the following:

	February 28, 2014		February 28, 2013
Finished goods	$	776,327	$	324,888
Parts and supplies		2,032,708		426,636
Total Inventories	$	2,809,035	$	751,524

NOTE 7 – PROPERTY AND EQUIPMENT

Property and equipment are being depreciated over their estimated useful lives using the straight-line method of depreciation for book purposes.

	February 28, 2014			February 28, 2013
Furniture	$	51,684		$	48,624
Computer equipment		174,263			171,318
Shop machinery and equipment		199,721			194,215
Testing site & equipment		31,389			31,389
Molds & tooling		77,515			76,947
Vehicles		10,998			10,998
Subtotal		545,571			533,491
Less: accumulated depreciation		(323,114	)		(212,912	)
Property and equipment, net	$	222,457		$	320,579

Depreciation expense totaled $110,202 and $96,899 for the years ended February 28, 2014 and February 28, 2013, respectively.

NOTE 8 – INTELLECTUAL PROPERTY

Intellectual property consists of product designs with an infinite life, including the designs for wind turbines and 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. Management has determined that the intangible assets as of February 28, 2014 were not impaired.

F-10

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 28, 2014

NOTE 9 – WEBSITE DEVELOPMENT COSTS

The Company has capitalized certain costs incurred in developing their website, which consisted of the following: 

	February 28, 2014			February 28, 2013
Website development costs	$	21,175		$	21,175
Less: Accumulated amortization		(21,175	)		(17,058	)
Website development costs, net	$	0		$	4,117

The Company began amortizing the website costs, using the straight-line method over the estimated useful life of 3 years, once it was put into service in September 2010. Ongoing updates to the website are expensed as incurred.

Amortization expense totaled $4,117 and $7,058 for the years ended February 28, 2014 and February 28, 2013, respectively.

NOTE 10 – ACCRUED EXPENSES

Accrued expenses consisted of the following:

	February 28, 2014		February 28, 2013
Wages	$	44,156	$	93,545
Payroll taxes		414,768		693,421
Benefits		6,658		8,441
Interest		356,126		85,550
Total accrued expenses	$	821,708	$	880,957

NOTE 11 – 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 $81,569 at February 28, 2014 and $234,413 at February 28, 2013.

NOTE 12 – 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-11

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 28, 2014

NOTE 12 – WARRANTY RESERVE (CONTINUED)

Warranty reserve balances by year were as follows at February 28, 2014 and February 28, 2013:

	February 28, 2014		February 28, 2013
FY 2011	$	16,223	$	16,223
FY 2012		55,063		55,063
FY 2013		79,343		79,343
FY 2014		38,948		—
Reserve balance, end of year	$	189,577	$	150,629

Warranty expense amounted to $553,816 and $609,928 for years ended February 28, 2014 and February 28, 2013, respectively. Warranty expense for fiscal 2013 was substantially higher than normal due to specific system improvements. During late Fiscal 2013, we incurred significant unusual warranty expenses associated with further improvements made to our latest 10kW wind turbine.  We initially released our latest version of our 10kW system (the 442SR) in fiscal 2012.  Subsequent to initial sales and early deliveries we then made further improvements and needed to fix the early systems that had been delivered.  We have substantially completed that effort at this point.  During fiscal 2014, we also incurred higher warranty expenses associated with a system part where the manufacturing partner did not conform to our specifications. For now, we have expensed the cost of replacements, but are working with the partner to potentially recoup some of those costs. We do not believe the higher warranty costs incurred are indicative of our ongoing warranty exposure and hence we will maintain our existing warranty reserve assumptions. The added warranty was charged to our cost of goods sold and substantially contributed to our below average gross margins for fiscal 2014 and 2013.

NOTE 13 – CAPITAL STOCK

Common Stock

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.

F-12

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 28, 2014

NOTE 13 – CAPITAL STOCK (CONTINUED)

During the fiscal year ending February 28, 2013, the following share-related transactions occurred:

• 206,718 Common Shares valued at $81,099 were issued in payment of an account payable.

• 1,508,644 common shares were issued for consulting services to multiple providers. The shares were valued at various market prices ranging between $0.35 and $0.45 per share. The combined value of the shares was $602,150, all of which was expensed during Fiscal 2013.

• 1,174,051 common shares were issued in connection with the conversion of the prior outstanding convertible note in the amount of $104,000.

Total common shares issued and outstanding at February 28, 2014 were 43,126,913.

Preferred Stock 

• On October 19, 2012 the Company sold 1,428,571 shares of the Series A Convertible Preferred stock at a price per share of $1.05 for total proceeds of $1,500,000. The sale of the Series A Convertible Preferred stock included the issuance of 2,142,857 warrants. Based upon the Black Scholes pricing module the warrants have a fair value of $0.2106 per warrant. The portion of the proceeds allocated to warrants is $345,000. Each Preferred share is convertible into three shares of common stock. A deemed dividend of $259,285 was recorded which represents the intrinsic value of the conversion feature on the date of issuance. In addition, we filed an amendment to our articles of incorporation establishing the new Preferred Shares.

NOTE 14 – STOCK OPTIONS AND WARRANTS

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 recently 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 granted 2,375,000 new qualified options during the fiscal year ending February 28, 2014. During the same period, 1,085,000 qualified options were canceled due to terminations and the Company also issued a non-qualified option for 700,000 to its former Chairman under a settlement arrangement. The Company did not grant any stock options to employees in fiscal 2013. The Company has estimated the fair value of employee options issued in fiscal 2014 as of the grant dates at $590,588 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 expiration of the option.

F-13

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 28, 2014

NOTE 14 – STOCK OPTIONS AND WARRANTS (CONTINUED)

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 $161,625 and $463,357 during fiscal years 2014 and 2013, respectively. The negative expense values reflect reversals of prior options expensed related to a terminated employee. Unrecognized expense of $578,890 remains to be recognized through 2017.

A summary of changes in stock options during the years ended February 28, 2014 and February 28, 2013 is as follows:

	Stock Options			Weighted Average Exercise Price		Expiry Date
Outstanding, February 28, 2012		2,475,000		$	1.13	FY 2019
Issued		0			0
Exercised		0			0
Expired/Cancelled		(380,000	)		1.13
Outstanding, February 29, 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 28, 2014		3,385,000		$	0.618

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.

F-14

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 28, 2014

NOTE 14 – STOCK OPTIONS AND WARRANTS (CONTINUED)

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 in fiscal 2013 and fiscal 2012 were valued using the Black-Scholes pricing model.

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 August 31, 2013 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. The debt discount is being amortized over the term of the financing. The unamortized portion of the debt discount was $644,996 at February 28, 2014. 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.

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. The issuance of the warrants in connection with the Preferred Stock triggered a reset provision on 1,777,225 previously issued warrants resulting in a modification of value of $51,895. 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. The unamortized portion of the debt discount was $31,650 at February 28, 2013.

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.

F-15

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 28, 2014

NOTE 14 – STOCK OPTIONS AND WARRANTS (CONTINUED)

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

A summary of changes in share purchase warrants during the years ended February 28, 2014, and February 28, 2013 is as follows:

	Number of Warrants			Weighted Average Exercise Price		Expiry Date
Outstanding, February 28, 2011		2,584,318		$	1.328	Various through 3/18/2016
Issued		6,457,649			1.063	Various through 3/18/2016
Exercised		0
Cancelled/Expired		0
Outstanding, February 29, 2012		9,041,967			1.14
Issued		2,837,857			0.39	Various through 10/22/2017
Exercised		0
Cancelled/Expired		0
Outstanding, February 28, 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

F-16

 XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 28, 2014

NOTE 15 – INCOME TAXES

For the period ended February 28, 2014, 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 $31,520,000 at February 28, 2014, 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:

	February 28, 2014			February 28, 2013
Federal income tax benefit attributable to:
Current operations	$	3,312,772		$	2,585,000
Less: valuation allowance		(3,312,772	)		(2,585,000	)
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:

	February 28, 2014			February 28, 2013
Deferred tax asset attributable to:
Net operating loss carryover	$	10,650,772		$	7,338,000
Less: valuation allowance		(10,650,772	)		(7,338,000	)
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 $31,520,000 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.

NOTE 16 – COMMITMENTS AND CONTINGENCIES

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 $229,043 and $298,364 for the fiscal years ended February 28, 2014 and February 28, 2013, respectively.

F-17

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 28, 2014

 NOTE 17 – NOTES PAYABLE – RELATED PARTIES

Notes payable – related parties consists of three separate notes:

	February 28, 2014		February 28, 2013
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, 2013 at 10% interest per annum. 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, 2014, when all remaining principal and interest are due. Under the new terms, outstanding accrued interest was added to principal as of the amendment date.  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, 2014, $27,096 has been amortized and the balance is shown net of a $21,676 remaining debt discount.	$	540,148	$	520,000
On August 25, 2011, the Company entered into a purchase and sale factoring agreement with a related party whereby the Company sells certain accounts receivable to the factor. Under the terms of this agreement, the factor made advances to the Company based on certain international accounts receivable. Interest was computed at 8% of the factored amount for the period the factored accounts receivable remain outstanding.  The agreement was initially due to expire on December 15, 2012, and was extended on April 1, 2013 under a new simple note agreement at 10%. Monthly payments of $2,159 are due under the note until October 1, 2014, when all remaining principal and interest are due. Under the note, outstanding accrued interest was added to principal as of the amendment date.  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 holding the right to purchase 250,000 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, 2014, $13,006 has been amortized and the balance is shown net of a $10,404 remaining debt discount.	$	234,407	$	235,040
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 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, 2014, $27,385 has been amortized and the balance is shown net of a $21,907 remaining debt discount.		150,637		170,000
Totals		925,192		925,040
Less: current maturities		925,192		0
Long-term portion		0	$	925,040

F-18

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 28, 2014

NOTE 18 – NOTES PAYABLE

Notes Payable consists of four separate notes:

	February 28, 2014			February 28, 2013
Note payable dated August 6, 2012. The Company entered into a purchase order (PO) financing agreement which provided $1,500,000 in debt financing. This agreement also enabled us to receive a portion of the funds owed by customers in advance of when the customer is required to pay the balance (usually prior to shipment or delivery).  We will be required to submit customer orders as collateral for the funds received under the agreement.  Once the products are shipped and the end customer pays the remaining balance, those funds are then used to pay back the amount of the particular PO financed.  The amount repaid is then available for us to borrow against other of our accounts receivable.  The agreement calls for a 16% annual interest rate on any funds outstanding.  As additional consideration for the financing agreement, we issued the financing party warrants to purchase up to 600,000 shares of our common stock, exercisable at any time during the 24 months from the date of issue, at an exercise price of $0.35 per share. 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. The note was amended in March 2013 to include the outstanding accrued interest to date. Under the new terms, interest remains at 16%, and monthly payments are due as follows: month 1 - $275,000; month 4 and 5 - $30,000; months 6–11 - $60,000; and month 12 - $105,000. As of February 28, 2014, the balance is shown net of a fully amortized debt discount which was originally calculated at $75,960. The February 28, 2013 balance is shown net of an unamortized debt discount of $31,650.	$	1,105,000		$	1,408,350
Notes 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. Borrowings were originally due December 31, 2012, but notes were combined on April 1, 2013 under a simple promissory note due October 1, 2014. Under the new terms, the interest rate is 10% per annum, and monthly payments are due as follows: April 15, 2013 - month 1 - $160,000; months 2-5 - $20,000; months 6–10 - $80,000; month 11 - $20,000; and month 12 – all accrued interest. Under the new terms, outstanding accrued interest was added to principal as of the amendment date.	$	382,153		$	660,000
Promissory note bearing a 12% annual interest rate originally due December 31, 2012. Unsecured. The note was amended on April 1, 2013 to include the outstanding accrued interest to date. Under the new terms, interest remains at 12%, and monthly payments of $1,981 are due May 1, 2013 until October 1, 2014, when all remaining principal and interest are due. Under the new terms, outstanding accrued interest was added to principal as of the amendment date. 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 December 10, 2013, principal and accrued interest of $197,923 was completely converted into 565,496 shares of common stock.		0		$	160,000
On April 3, 2013, the Company entered into a new credit facility, which provided up to $6,500,000 in debt financing.  The agreement calls for a 10% annual interest rate on any funds outstanding.  During the year ended February 28, 2014, the available credit was increased twice to a total of $8,733,000. As additional consideration for the original financing agreement and the increases in available credit, the financing parties were issued warrants to purchase up to 10,070,000 shares of our common stock, exercisable at any time during four years from the date of issuance, at an exercise price of $0.35 per share. As required by ASC 470-20, the Company valued the warrants and recorded a debt discount to market available at the time of issuance. The discounts are amortized over the life of the loan. As of February 28, 2014, $718,997 has been amortized and the balance is shown net of a $547,774 remaining debt discount.	$	8,070,237
Totals		9,557,390			2,228,350
Less: current maturities		(9,557,390	)		(2,068,350	)
Long-term portion	$	0		$	160,000

A promissory note was originated on June 14, 2012 in the amount of $100,000 with an 8% interest rate. The unpaid principal and accrued interest was due on the maturity date of March 18, 2013. After 180 days, the unpaid note principal and accrued interest could be converted to common stock at the option of the lender at 58% of the average of the lowest three trading prices for the common stock during the ten trading day period ending on the latest complete trading day prior to the conversion date. The convertible note payable along with $4,000 in accrued interest was converted into 1,177,051 shares of common stock on January 24, 2013.

Future maturities of note and loan debt are as follows at February 28, 2014:

FY 2015	$	11,084,343
Thereafter		0
Total	$	11,084,343

The Company incurred total interest expense of $1,210,847 and $297,671 for fiscal years ended February 28, 2014 and February 28, 2013, respectively. Interest expense includes finance charges related to vendors in addition to actual note interest. The Company’s senior lender has continued to support its activities, including increasing the available borrowing capacity on 3 separate occasions.  While the lender has not waived any default provisions under credit facility and the Company is currently in default, we believe the senior lender remains generally supportive of our near-term growth efforts.

F-19

XZERES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 28, 2014

NOTE 19 – 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 20 – SUPPLEMENTAL CASH FLOWS

Supplemental Non-Cash Investing and Financing Activities:	2014		2013
Modification of warrants		0	$	51,895
Shares issued in payment of trade debt	$	145,237	$	81,099
Debt discount from fair value of embedded conversion feature	$	1,388,244	$	85,204
Issuance of common shares for convertible debt and accrued interest	$	197,923	$	104,000
Shares issued for prepaid consulting services	$	112,375	$	0
Warrants and options issued for prepaid consulting	$	956,229	$	0
Deemed dividend		0	$	259,285

NOTE 21 – CONCENTRATIONS

Credit risk- Financial instruments that potentially subject the Company to concentrations of credit risk consist of demand deposits with a financial institution. At February 28, 2014, there are no balances 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 February 28, 2014. Generally, the Company does not require collateral or other securities to support its accounts receivable.

Major Customer

The Company has one major customer that accounted for approximately 38% and $1,527,000 of sales for the year ended February 28, 2014. The Company expects to maintain this relationship with the customer.

Major Vendor

The Company has one major vendor that accounted for approximately 17% and $632,348 of cost of sales for the year ended February 28, 2014. The Company expects to maintain this relationship with the vendor.

NOTE 22 – SUBSEQUENT EVENTS

Subsequent to our fiscal year end, on April 16, 2013, we entered into a third amendment on our existing credit facility, which further increased the total funding availability up to $11,033,000 in debt financing.  As additional consideration for the increase, we issued the financing parties warrants to purchase up to an additional 2,645,000 shares of our common stock, exercisable at any time during four years from the date of issue, at an exercise price of $0.35 per share

In accordance with ASC 855-10, the Company has analyzed its operations subsequent to February 28, 2014 to the date these financial statements were issued, and determined that it does not have any material subsequent events to disclose in these financial statements other than the even described above.

F-20

Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

No events occurred that require disclosure under Item 307 and 308 of Regulation S-K during the fiscal year ending February 28, 2014.

Item 9A. 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 effective for the year ended February 28, 2014.

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 effective as of February 28, 2014.

There were no changes in our internal control over financial reporting during the year ended February 28, 2014, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information

None.

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PART III

Item 10. Directors, Executive Officers and Corporate Governance

The following information sets forth the names, ages, and positions of our current directors and executive officers as of May 30, 2014.

Name	Age	Position(s) and Office(s) Held
Frank Greco	61	Chief Executive Officer, President, Director
Steve Shum	43	Chief Financial Officer and Director
William N. Hagler	82	Director
Robert N. Garff	62	Director

Set forth below is a brief description of the background and business experience of each of our current executive officers and directors.

Frank Greco joined us as our Chief Executive Officer and a member of our Board of Directors on August 25, 2010. Effective May 3, 2011, Mr. Frank Greco also assumed the office of president. Mr. Greco is responsible for all aspects of XZERES Corp.’s business and his initial focus will be on domestic and global sales growth, product portfolio expansion and optimization of products and channels. We first hired Mr. Greco July 1, 2010, to serve as our executive vice president of business development. Previously, from April 2004 to March 2010, Mr. Greco was Chief Executive Officer and a Director of Southwest Windpower Inc., a manufacturer of small wind turbines competitive with our smaller product, 2.5kW wind turbine system. As CEO of Southwest Windpower, Mr. Greco oversaw all aspects of the business, including operations, material planning, marketing and sales, plant engineering and human resources. It is Mr. Greco’s general industry experience and his experience while serving as CEO of Southwest Windpower, Inc., including his participation its launch of two new product platforms, its establishment of European operations and a joint venture in China, and its establishment of domestic and international patents and trademarks, that led us to conclude that Mr. Greco should be our CEO and a director. Mr. Greco holds bachelor’s degrees in Business Administration & Behavioral Science, awarded by the University of Illinois in 1984, and in Plant Engineering, awarded by St. Joseph’s College in 1988.

Steven Shum is our CFO, corporate secretary, and a member of our Board of Directors. Mr. Shum first joined us October 21, 2008. From October 2008 through March 26, 2010, Mr. Shum was our sole director, at which time Mr. David Baker joined our board. From October 21, 2008, through April 12, 2010, Mr. Shum was our sole officer, at which time he resigned all offices except for his current roles as CFO and corporate secretary.

Since 2004, Mr. Shum has been a Managing Principal of Core Fund Management, L.P. and the Fund Manager of Core Fund, L.P. Mr. Shum's tenure includes 15 years in the financial services industry where he has an extensive background in equity research, macroeconomics, and management. Prior to joining Core Fund, he spent four years as founder and Executive Vice President of Revere Data, which created a patented equity research application. In addition to Revere Data, from 1999 to 2003, Mr. Shum was the senior investment analyst and co-portfolio manager with DNB Capital Management. Mr. Shum earned a BS in both Finance and General Management from Portland State University, awarded in 1992.

There was no particular or specific experience, qualification, attribute or skill that led us to the conclusion that Mr. Shum should serve as a member of our board of directors.

William N. (Bill) Hagler was appointed to our Board of Directors effective February 4, 2013. Mr. Hagler graduated from North Carolina State University in 1955 with a Bachelor of Science Degree in Industrial Engineering. He is currently President of Hagler Oil and Gas Company and President and co-founder of Red Hills Manufacturing Co. Between 1955 and 2008 he held various positions in the petroleum refining and marketing, petrochemical manufacturing and electric power production industries. In addition, he has served as an Independent Director for three companies in the past and is currently serving as a Director of a California-based crude oil production company.

Bill is a past member of the New Mexico Environmental Improvement Board, a 25 year member of the Farmington, New Mexico (Electric) Utility Commission and is currently serving as President of the New Mexico Utility Shareholder's Alliance.

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Robert N. Garff joined the board in November 2012.  Mr.Garff worked in the financial services industry for 35 years.  He worked for Goldman Sachs and Merrill Lynch in Institutional Fixed Income Trading and Sales.  He worked for Merrill Lynch, Morgan Stanley Smith Barney, and UBS Financial Services in Private Wealth Management. Mr. Garff has been an active investor in early and development stage companies for the past 30 years.  Mr. Garff earned a BA in Finance from The University of Utah in 1974 and an MBA from The University of Michigan in 1976.

Directors

Our bylaws authorize no less than one (1) director. We currently have four Directors.

Family Relationships

There are no family relationships between or among the directors, executive officers or persons nominated or chosen by the Company to become directors or executive officers.

Other Key Personnel

John M. McCoury, CTO (VP Engineering) – Mr. McCoury joined Xzeres in May of 2011 as the company CTO, briefly filled in at the COO position for part of fiscal year 2014, but more recently stepped back to focus on engineering and product development. Mr. McCoury is an accomplished aerospace and renewable energy executive with 30 years of experience in design, analysis, testing, certification, lean manufacturing, supply chain and program management. Prior to joining XZERES in 2011, Mr. McCoury spent the previous three years in renewable energy technology where he was Vice President of Engineering and Products with Frontier Wind where he was the GM in Sacramento and in charge of the companies engineering and new product development focusing on new technologies for utility class wind turbines. He has served as an FAA Structures Designated Engineering Representative for 13 years. Prior to his focus on renewables, Mr. McCoury has been an industry leader in aircraft startup companies most notably as the director of Structures and Materials at Eclipse Aviation Corporation, where he also served as deputy to the vice president of Engineering. Mr. McCoury joined Eclipse in 2000, as the sixteenth employee in this startup venture. He was responsible for the development and certification of the friction stir welding process used to manufacture the Eclipse 500—the first time this advanced manufacturing process was FAA-approved for use in primary structural assembly of aircraft. Mr. McCoury’s previous experience includes serving as chief engineer for the NASA Stratospheric Observatory for Infrared Astronomy program for Universities Space Research Association, technical director for Chrysler Technologies Airborne Systems (now L-3 Communications), and structural analysis lead on the B-2 Bomber program at both Northrop and LTV. He is a graduate of the Colorado School of Mines and holds a B.S. degree in mechanical engineering.

Involvement in Certain Legal Proceedings

To the best of our knowledge, during the past 10 years, none of the following occurred with respect to our present or former director, executive officer, or employee: (1) any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; (2) any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); (3) being subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his or her involvement in any type of business, securities or banking activities; and (4) being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.

Term of Office

Our Directors are appointed for a one year term to hold office until the next annual general meeting of our shareholders or until removed from office in accordance with our bylaws. Our officers are appointed by our board of directors and hold office until removed by the board.

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Committees of the Board

Audit Committee

We do not have a separately-designated standing audit committee. The entire Board of Directors performs the functions of an audit committee, but no written charter governs the actions of the Board when performing the functions of what would generally be performed by an audit committee. The Board approves the selection of our independent accountants and meets and interacts with the independent accountants to discuss issues related to financial reporting. In addition, the Board reviews the scope and results of the audit with the independent accountants, reviews with management and the independent accountants our annual operating results, considers the adequacy of our internal accounting procedures and considers other auditing and accounting matters including fees to be paid to the independent auditor and the performance of the independent auditor.

Compensation Committee

We recently created a compensation committee and designated our two outside directors as members of the committee.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires our directors and executive officers and persons who beneficially own more than ten percent of a registered class of our equity securities to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other equity securities of our company. Officers, directors and greater than ten percent beneficial shareholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. To the best of our knowledge based solely on a review of Forms 3, 4, and 5 (and any amendments thereof) received by us during or with respect to the year ended February 28, 2014, the following persons have failed to file, on a timely basis, the identified reports required by Section 16(a) of the Exchange Act during fiscal year ended February 28, 2014:

Name and principal position	Number of late reports	Transactions not timely reported	Known failures to file a required form
Frank Greco CEO, President & Director	0	0	0
Steve Shum CFO & Director	0	0	0
William N. Hagler Director	0	0	0
Robert N. Garff Director	0	0	0

Code of Ethics

As of February 28, 2014, we had not adopted a Code of Ethics for Financial Executives, which would include our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions.

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Item 11. Executive Compensation

Frank Greco - On August 25, 2010, Frank Greco became our Chief Executive Officer pursuant to a written employment agreement dated August 25, 2010. As our President and Chief Executive Officer, Mr. Greco is responsible for all aspects of XZERES Corp.’s business and his initial focus will be on domestic and global sales growth, product portfolio expansion and optimization of products and channels.

Our written employment agreement with Frank Greco provides for an initial term of approximately four years and further provides for a compensation package that includes a base salary at an initial annual rate of Two Hundred Thousand Dollars ($200,000), payable bi-weekly, plus increases and performance bonuses to be awarded in the event the Company hits certain milestones as stated in the written agreement. On or about March 1, 2012 we amended the agreement to extend the initial term for an additional two years, which provides for an increase in the annual base salary to Two Hundred Thirty-Seven Thousand and Nine Hundred Dollars ($237,900), payable bi-weekly, plus performance bonuses in those additional two years (Fiscal 2016 and 2017). We also granted Mr. Greco a qualified option to purchase a total of 320,000 shares of our common stock at a strike price of $1.25. This option vests at a rate of 25% per year, starting on the first anniversary of the grant. We have also granted Mr. Greco a non-qualified option to purchase an additional 655,000 shares of our common stock at a strike price of $1.25 per share. The non-qualified option as to 55,000 shares vests at a rate of 25% per year, starting on the first anniversary of the grant. The non-qualified option as to the remaining 600,000 shares vests at a rate of 150,000 per year at the end of each of the next four fiscal years, starting with February 29, 2012, but only in the event the Company achieves certain performance milestones as stated in the written Stock Option Agreement. Also on August 25, 2010, we granted Mr. Greco a second qualified option to purchase 20,000 shares of our common stock at a strike price of $1.25 per share, which option vests immediately. On May 25, 2011, we granted Mr. Greco options to purchase a total of 125,000 shares of our common stock at an exercise price of $1.25 per share, all of which vested immediately, and which will expire if not exercised on or before five years from the date of grant.

On May 29, the Company agreed to revise Mr. Greco’s options whereby Mr. Greco surrendered his existing options and we issued a new option to purchase 975,000 shares at an exercise price of $0.35 per share, part of which vests immediately and the balance will vest over the next two years.

Mr. Greco is also entitled to other ancillary employment benefits such as vacation time and health insurance as stated in his written employment agreement.

John McCoury - On April 29, 2011, John McCoury became our Chief Technical Officer pursuant to a written employment agreement dated April 29, 2011. On March 18^th, 2013 Mr. McCoury accepted a new role of Chief Operating Officer and we simultaneously amended his employment agreement. Subsequently, in late fiscal 2013, Mr. McCoury elected to step back from that role in order to focus more on engineering and product development.

Our amended written employment agreement with John McCoury provides for a compensation package that includes a base salary at an annual rate of Two Hundred Ten Thousand Dollars ($210,000), payable bi-weekly, plus a 15% annual bonuses commensurate with meeting company and personal goals which will be documented in quarterly reviews between Executive and CEO. We also granted Mr. McCoury a qualified option to purchase a total of 1,000,000 shares of our common stock at a strike price of $0.35. This option vests at a rate of 25% per year, starting on the first anniversary of Mr. McCoury’s original hire date.

Mr. McCoury is also entitled to other ancillary employment benefits such as vacation time and health insurance as stated in his written employment agreement.

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Summary Compensation Table

The table below summarizes all compensation awarded to, earned by, or paid to each named executive officer for our last two completed fiscal years for all services rendered to us.

SUMMARY COMPENSATION TABLE
Name and principal position	Year	Salary ($)	Bonus ($)	Stock Awards ($)	Option Awards ($)3	Non-Equity Incentive Plan Compensation ($)	Nonqualified Deferred Compensation Earnings ($)	All Other Compensation ($)	Total ($)
Frank Greco, CEO, President and Director1	2014 2013	$237,900 $200,000	0 42,900	0 0	$0 $0	0 0	0 0	0 0	$237,900 $242,900
John McCoury CTO, Former Chief Operating Officer	2014 2013	$203,169 $197,205	44,723 0	0 0	$0 $0	0 0	0 0	0 0	$247,892 $197,205
Steven Shum, CFO and Director	2014 2013	$156,000 $156,000	0 0	0 0	$0 $0	0 0	0 0	0 0	$156,000 $156,000
David Baker, Former Chairman2	2014 2013	$0 $176,200	0 110,000	0 0	$0 $0	0 0	0 0	0 0	$0 $286,200

(1)	Mr. Greco joined our Board of Directors on August 25, 2010.
(2)	Mr. Baker joined our Board of Directors as its Chairman on March 26, 2010 and resigned on December 13, 2012.
(3)	The Company has estimated the fair value of the options as of the grant dates 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 four years.  The calculations and underlying assumptions are found at note 14 to our audited financial statements.

Narrative Disclosure to the Summary Compensation Table

The Board of Directors, with the approval of the Company’s senior lender, may award bonuses to our employees, including officers and directors, from time to time.

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Outstanding Equity Awards At Fiscal Year-end Table

The table below summarizes all unexercised options, stock that has not vested, and equity incentive plan awards for each named executive officer outstanding as of the end of our last completed fiscal year.

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
OPTION AWARDS
Name	Number of Securities Underlying Unexercised Options (#) Exercisable	Number of Securities Underlying Unexercised Options  (#) Unexercisable	Equity Incentive  Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)	Option Exercise  Price  ($)	Option Expiration Date
Frank Greco	487,500	0	487,500	$0.35	August 25, 2015
John McCoury	500,000	0	500,000	$0.35	April 29, 2015
Steven Shum	200,000	0	0	$0.85	March 25, 2015

Stock Option Grants

On August 25, 2010, we executed a written stock option agreement that granted Mr. Greco a qualified option to purchase a total of 320,000 shares of our common stock at a strike price of $1.25.  This option vests at a rate of 25% per year, starting on the first anniversary of the grant.  We have also granted Mr. Greco a non-qualified option to purchase an additional 655,000 shares of our common stock at a strike price of $1.25 per share.  The non-qualified option as to 55,000 shares vests at a rate of 25% per year, starting on the first anniversary of the grant.  The non-qualified option as to the remaining 600,000 shares vests at a rate of 150,000 per year at the end of each of the next four fiscal years, starting with February 29, 2012, but only in the event the Company achieves certain performance milestones as stated in the written Stock Option Agreement.  Also on August 25, 2010, we granted Mr. Greco a second qualified option to purchase 20,000 shares of our common stock at a strike price of $1.25 per share, which option vests immediately. On May 25, 2011, we granted Mr. Greco options to purchase a total of 125,000 shares of our common stock at an exercise price of $1.25 per share, all of which vested immediately, and which will expire if not exercised on or before five years from the date of grant. On May 29, 2013 the Company agreed to revise Mr. Greco’s options whereby Mr. Greco surrendered his existing options and we issued a new option to purchase 975,000 shares at an exercise price of $0.35 per share, part of which vests immediately and the balance will vest over the next two years.

On April 29, 2011, we executed a written stock option agreement that granted Mr. McCoury a qualified option to purchase a total of 100,000 shares of our common stock at a strike price of $1.25.  This option vests at a rate of 25% per year, starting on the first anniversary of the grant.  In March 2013, we amended Mr. McCoury’s role and employment agreement, which provided for the issuance of a qualified option to purchase a total of 1,000,000 shares of our common stock at a strike price of $0.35. This option vests at a rate of 25% per year, starting on the first anniversary of Mr. McCoury’s original hire date. In addition, Mr. McCoury surrendered his initial option to purchase 100,000 of our shares.

On March, 25, 2010, we granted Steven Shum, our current CFO, corporate secretary and member of our Board of Directors, options that will allow him to purchase up to 200,000 shares of our common stock at an exercise price of $0.85 per share.  The options are fully vested.

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Director Compensation

The table below summarizes all compensation of our directors as of the fiscal year ended February 28, 2014.

DIRECTOR COMPENSATION
Name	Fees Earned or Paid in Cash ($)	Stock Awards ($)	Option Awards ($)	Non-Equity Incentive Plan Compensation ($)	Non-Qualified Deferred Compensation Earnings ($)	All Other Compensation ($)	Total ($)
Frank Greco	0	0	0	00	0	0	0
Steven Shum	0	0	0	00	0	0	0
William N Hagler	0	0	0	00	0	0	0
Robert N. Garff	0	0	0	00	0	0	0

Narrative Disclosure to the Director Compensation Table

Our directors do not currently receive any compensation from the Company for their service as members of the Board of Directors of the Company.  

On March, 25, 2010, we granted Steven Shum, our current CFO, corporate secretary and member of our Board of Directors, options that will allow him to purchase up to 200,000 shares of our common stock at an exercise price of $0.85 per share.  The options are fully vested.

Mr. Shum continues to serve as our interim CFO until such time we find a permanent CFO. We do not have a written employment or consulting agreement with Mr. Shum, but he has agreed to remain our interim CFO until the permanent replacement is hired. In late 2010, we agreed to partially compensate Mr. Shum in cash of not more than $12,000 per month for his continued service as our interim CFO, which we expect to continue until the replacement is hired.

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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The following table sets forth, as of June 10, 2014, the beneficial ownership of our common stock by each executive officer and director, by each person known by us to beneficially own more than 5% of the our common stock and by the executive officers and directors as a group. Except as otherwise indicated, all shares are owned directly and the percentage shown is based on 43,366,913 shares of common stock issued and outstanding on June 10, 2014:

Name and address of beneficial owner (1)	Title of Class	Amount of beneficial ownership	Percent of class
Executive Officers & Directors:
William N. Hagler 2 P.O. Box 35 Farmington, NM 87489	Common	2,629,203	5.76%
Robert N. Garff 3 1 Leeward Glen Lafayette, CA 94549	Common	2,658,443	5.92%
Steven Shum4,5 9025 SW Hillman, Suite 3126 Wilsonville, OR 97070	Common	4,221,997	9.60%
Frank Greco6 9025 SW Hillman, Suite 3126 Wilsonville, OR 97070	Common	487,500	1.11%
Total of All Directors and Executive Officers:	Common	10,127,193	22.39%
More Than 5% Beneficial Owners:
Paul DeBruce 7 411 Nichols Road, suite 217 Kansas City, MO 64112	Common	11,319,219	22.53%
Ron Elvidge 8 1343 Locust Street, #204 Walnut Creek, CA 94596	Common	6,428,571	12.91%
Ravago Holdings American Inc. 9 1900 Summit Tower Blvd Suite 900 Orlando, FL 32810	Common	5,370,560	12.07%
Hofflich & Associates 10 12707 High Bluff Dr., Suite 200 San Diego, CA 92130	Common	6,000,000	12.15%
Max Advisors, LLC 11 430 East 56th Street, 4G New York, NY 10022	Common	6,000,000	12.15%
James W. Duffy12 339 Auburn St, 2nd Floor Newton, MA 02466	Common	2,685,280	6.11%
David Baker 13 PO Box 16282201 Sioux Falls, SD 57186	Common	3,433,994	7.79%
Core Fund, L.P. 1500 SW 1st Ave. Suite 910 Portland, OR 97201	Common	3,517,491	7.98%

1. As used in this table, "beneficial ownership" means the sole or shared power to vote, or to direct the voting of, a security, or the sole or shared investment power with respect to a security (i.e., the power to dispose of, or to direct the disposition of, a security). In addition, for purposes of this table, a person is deemed, as of any date, to have "beneficial ownership" of any security that such person has the right to acquire within 60 days after such date.

2.	Includes convertible notes and warrants held that can be converted or exercised at any time at holder’s option.
3.	Includes convertible notes and warrants held that can be converted or exercised at any time at holder’s option.
4.	Includes the 3,517,491 shares held by Core Fund, L.P.  Mr. Steven Shum is the manager of Core Fund, L.P. and, in that capacity, is the sole beneficial owner of the shares.  Also includes convertible notes and warrants held that can be converted or exercised at any time at holder’s option.

5. On March 25, 2010, as compensation for services rendered, we awarded Mr. Shum fully vested options to purchase up to 200,000 shares of our common stock, all of which are fully vested and, therefore, may be exercised immediately.

6.	On August 25, 2010, we entered into agreements with Frank Greco, CEO and member of our board of directors, which include options to purchase up to 995,000 shares of our common stock, 487,500 of which are fully vested and, therefore, may be exercised immediately.
7.	Includes warrants to purchase 6,874,775 shares at various prices ranging from $0.35 per share to $0.385 per share.
8.	Represents Series A Preferred shares on an as converted basis.  Also includes warrants to purchase 2,142,857 shares at $0.385 per share
9.	Includes warrants to purchase 1,117,227 shares at $0.35 per share.
10.	Includes warrants to purchase 6,000,000 shares at $0.35 per share.
11.	Includes warrants to purchase 6,000,000 shares at $0.35 per share.
12.	Includes warrants to purchase 558,613 shares at $0.35 per share
13.	Includes Options to purchase 700,000 shares at $0.60 per share.

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Item 13. Certain Relationships and Related Transactions, and Director Independence

Except as disclosed herein, none of our directors or executive officers, nor any proposed nominee for election as a director, nor any person who beneficially owns, directly or indirectly, shares carrying more than 5% of the voting rights attached to all of our outstanding shares, nor any members of the immediate family (including spouse, parents, children, siblings, and in-laws) of any of the foregoing persons has any material interest, direct or indirect, in any transaction since our incorporation or in any presently proposed transaction which, in either case, has or will materially affect us. We currently have two independent directors on our board.

We and certain members of senior management have entered into employment agreements and option agreements. The terms and conditions of these agreements are more fully described in the section of this annual report titled “Executive Compensation” above.

Item 14. Principal Accounting Fees and Services

Below is the table of Audit Fees (amounts in US$) billed by our auditor in connection with the audit and reviews of the Company’s annual financial statements and quarterly 10-Q’s for the years ended:

Financial Statements for the Year Ended February 28,		Audit Services		Audit Related Fees		Tax Fees		Other Fees
	2014	$	49,100		—		—		—
	2013	$	41,100		—		—		—

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PART IV

Item 15. Exhibits, Financial Statements Schedules

(a) Financial Statements and Schedules

The following financial statements and schedules listed below are included in this Form 10-K.

Financial Statements (See Item 8)

(b) Exhibits

Exhibit Number	Description
3.1	Articles of Incorporation (1)
3.2	Bylaws(1)
31.1	Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a), 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
101**	The following materials from the Company’s Quarterly Report on Form 10-K for the year ended February 28, 2014 formatted in Extensible Business Reporting Language (XBRL).

⁽¹⁾ Incorporated by reference to Registration Statement on Form S-1 filed

**Provided herewith

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SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

XZERES Corp.

By: /s/Frank Greco

Title: President, Chief Executive Officer, Principal Executive Officer and Director

Date:  June 13, 2014

By: /s/Steven Shum

Title: Chief Financial Officer, Principal Financial Officer, Principal Accounting Officer and Director

Date:   June 13, 2014

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