PSWW Principal Solar Inc (PK)

 

As filed with the Securities and Exchange Commission on June 15, 2015

 

Registration No. 333-203075

 

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Amendment No. 5

to

FORM S-1

 

REGISTRATION STATEMENT

UNDER THE SECURITIES ACT OF 1933

 

PRINCIPAL SOLAR, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware (State or other jurisdiction of Incorporation)

4911 (Primary Standard Industrial Classification Code)

27-3096175 (I.R.S. Employer Identification No.)

 

211 N. Ervay, Suite 300

Dallas, Texas 75201

(855) 774-7799

(Address and Telephone Number of Registrant’s Principal

Executive Offices and Principal Place of Business)

 

 

Michael Gorton

Chief Executive Officer

211 N. Ervay, Suite 300

Dallas, Texas 75201

(855) 774-7799

 (Name, Address and Telephone Number of Agent for Service)

 

Copies of communications to:

 

Quentin Faust	Joe Hoffman	Jonathan R. Zimmerman
Settle & Pou, PC	Andrews Kurth LLP	Faegre Baker Daniels LLP
3333 Lee Parkway	1717 Main Street #3700	90 South Seventh Street
Eighth Floor	Dallas, TX 75201	Minneapolis, MN 55402
Dallas, TX 75219	Phone: (214) 659-4400	Phone: (612) 766-7000
Phone: (214) 520-3300	Fax: (214) 659-4401	Fax: (612) 766-1600
Fax: (214) 526-4145

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box ☐

 

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

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  ☒

  

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of Securities to  be Registered	Proposed Maximum Aggregate Offering Price (1)	Amount of Registration Fee (2)
Common Stock, $.01 par value	$ 15,525,000	$1,804

  

(1)	Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended. Includes offering price of any additional shares that the underwriters have the option to purchase.

 

( 2)	Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price. The Registrant previously paid a registration fee of $3,675.

 

Pricing for the shares was determined as described herein in the section entitled "Determination of Offering Price" in the table of contents.

 

The Registrant hereby amends its Registration Statement, on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

The information in this Prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This Prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state or other jurisdiction where the offer or sale is not permitted.

 

PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION DATED JUNE 15, 2015

 

1,500,000 Shares

 

 

PRINCIPAL SOLAR, INC.

Common Stock

_________________________________

 

We are offering shares of our common stock, and anticipate the public offering price will be between $7.00 and $9.00 per share. Our $0.01 par value common stock ("Common Stock") is currently quoted on the OTC Pink® market maintained by OTC Markets Group, Inc. under the symbol “PSWW”. The last reported trading price of our shares on June 12, 2015, was $14.00 following a 1:4 reverse stock split effected May 6, 2015, and described elsewhere herein. In conjunction with this offering, our Common Stock has been approved for listing on the Nasdaq Capital Market under the symbol "PSWW".

 

We are an “emerging growth company” as the term is used in the Jumpstart Our Business Startups Act of 2012 and, as such, have elected to comply with certain reduced public company reporting requirements. Please refer to discussions under “Risk Factors” below concerning how and when we may lose emerging growth company status and the various exemptions that are available to us.

 

Investing in our Common Stock involves risks, including those described herein under "Risk Factors".

_________________________________________

 

Neither the Securities and Exchange Commission nor any state securities regulators has approved or disapproved of these securities or determined the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

_________________________________________

 

	Per Share	Total
Price to the public	$	$
Underwriting discount and commissions(1)	$	$
Proceeds, before expenses, to us	$	$

 

⁽¹⁾ In addition to the underwriting discounts and commissions, we have agreed to pay up to $500,000 of the fees and expenses of the underwriters in connection with this offering, which includes the fees and expenses of the underwriter's counsel. See "Underwriting" for more information.

 

We have granted the underwriters an option to purchase up to 225,000 additional shares of our Common Stock to cover over-allotments, if any, within 45 days of the date of this prospectus.

 

The underwriters expect to deliver the shares on or about __, 2015.

  

Northland Capital Markets

The date of this prospectus is ___, 2015

 

 

TABLE OF CONTENTS

 

	PAGE
Forward-Looking Statements	1
Prospectus Summary	2
Risk Factors	12
Use of Proceeds	32
Dividend Policy	32
Determination of Offering Price	33
Capitalization	33
Dilution	33
Description of Business	35
Description of Property	66
Legal Proceedings	67
Directors, Executive Officers, Promoters and Control Persons	68
Executive and Director Compensation	76
Security Ownership of Certain Beneficial Owners and Management	79
Indemnification of Directors and Officers	81
Management's Discussion and Analysis of Financial Condition and Results of Operations	82
Certain Relationships and Related Transactions	94
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	97
Description of Capital Stock	98
Shares Available for Future Sale	101
Underwriting	102
Market for Common Equity and Related Stockholder Matters	105
Additional Information	107
Legal Matters	107
Experts	107
Financial Statements	F-1

 

You should rely only on the information contained in this Prospectus. We have not authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. No offers are being made hereby in any jurisdiction where the offer or sale is not permitted. You should assume that the information in this Prospectus is accurate only as of the date on the cover. Our business, financial condition, results of operations and prospects may have changed since that date.

 

Unless otherwise indicated, information contained in this Prospectus concerning our industry, including our market opportunity, is based on information from independent industry analysts, third-party sources and management. Management estimates are derived from publicly-available information released by independent industry analysts and third party sources, as well as data from our internal research, and are based on assumptions made by us using data and our knowledge of such industry and market, which we believe to be reasonable. In addition, while we believe the market opportunity information included in this Prospectus is generally reliable and is based on reasonable assumptions, such data involves risks and uncertainties and is subject to change based on various factors, including those discussed under the heading “Risk Factors.”

 

For investors outside the United States: we have not taken any action to permit a public offering of the shares of our common stock or the possession or distribution of this Prospectus in any jurisdiction where action for that purpose is required, other than the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this Prospectus.

 

Northland Capital Markets is the trade name for certain capital markets and investment banking services of Northland Securities, Inc., member FINRA/SIPC.

 

 

FORWARD-LOOKING STATEMENTS

 

All statements contained in this Prospectus, other than statements of historical facts, that address future activities, events or developments, are forward-looking statements, including, but not limited to, statements containing the words "anticipates", "believes", "expects", "intends", "forecasts", "plans", "future", "strategy" or words of similar meaning. Forward-looking statements are subject to risks and uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward-looking statements. These statements are based on certain assumptions and analyses made by us in light of our experience and our assessment of historical trends, current conditions and expected future developments as well as other factors we believe are appropriate under the circumstances. Whether actual results will conform to the expectations and predictions of management, however, is subject to a number of risks and uncertainties that may cause actual results to differ materially.

 

You should read the matters described in “Risk Factors” herein and the other cautionary statements made in this Prospectus as being applicable to all related forward-looking statements wherever they appear in this Prospectus. We cannot assure you that the forward-looking statements in this Prospectus will prove to be accurate and, therefore, prospective investors are encouraged not to place undue reliance on forward-looking statements. You should read this Prospectus completely.

 

Consequently, all of the forward-looking statements made in this Prospectus are qualified by these cautionary statements, and there can be no assurance that the actual results anticipated by management will be realized or, even if substantially realized, that they will have the expected consequences to or effects on our business operations.

 

With respect to any forward-looking statement that includes a statement of its underlying assumptions or basis, we caution that, while we believe such assumptions or basis to be reasonable and have formed them in good faith, assumed facts or basis almost always vary from actual results, and the differences between assumed facts or basis and actual results can be material depending on the circumstances. When, in any forward-looking statement, we or our management express an expectation or belief as to future results, that expectation or belief is expressed in good faith and is believed to have a reasonable basis, but there can be no assurance that the stated expectation or belief will result or be achieved or accomplished. All subsequent written and oral forward-looking statements attributable to us, or anyone acting on our behalf, are expressly qualified in their entirety by the cautionary statements. Except as required by applicable law, including the securities laws of the United States and/or if the existing disclosure fundamentally or materially changes, we do not undertake any obligation to publicly release any revisions to any forward-looking statements to reflect events or circumstances after the date of this Prospectus or to reflect unanticipated events that may occur.

 

Information regarding market and industry statistics contained in this prospectus is included based on information available to us that we believe is accurate.  It is generally based on academic and other publications that are not produced for purposes of securities offerings or economic analysis.  Forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and the additional uncertainties accompanying any estimates of future market size, revenue and market acceptance of products and services.  

 

 

To date, we have completed the acquisition of four entities (including three solar power production companies), and are in the process of acquiring additional solar projects.  We have begun to create what we call the “world’s first distributed solar utility” - although there are many individual solar projects in operation throughout the world, we don’t believe that anyone has previously attempted to bring together multiple, disparate, geographically diverse solar projects under common ownership thereby building a complete utility-scale solar power generation company. Our business plan begins with a rollup strategy.  We are in the process of acquiring cash flow positive solar assets from around the country with the goal of consolidating those assets into a distributed generation business. We utilize a partnership strategy that leverages creative deal making expertise and our team of energy industry personnel with significant experience in the industry.   Our strategy is to couple fifty years of electric utility expertise with business expertise, entrepreneurial innovation, financial know-how and solar engineering to create a new era in electricity generation.  The Company hopes to become the recognized leader in solar energy delivery by consolidating a significant share of the fragmented solar market to gain significant momentum and, when grid parity (i.e., solar power being as expensive if not cheaper than traditionally generated energy) has arrived, building large scale projects with an ultimate goal of generating gigawatts (a billion watts or "GW") of cost effective, clean electricity with the goal of stabilizing electrical prices and preserving natural resources.   Acquisitions   As of the date of this Prospectus, the Company has completed the acquisition of three solar power production facilities amounting to just under 3,200 kilowatts ("KW").  Moving forward, management plans to negotiate with entities that manage and own projects in the 10 megawatt (ten million watts or "MW") range up to 100 MW. As the assets under Company management increase, the Company hopes that its resources and market momentum, as well as its access to additional capital once public, will enable the acquisition of larger entities.   Principal Sunrise IV IS (fka "IS 46")(pending)   In November 2014, the Company entered into a Membership Interest Purchase Agreement ("MIPA") with Innovative Solar Systems, LLC, a solar developer operating primarily in North Carolina, to acquire Innovative Solar 46, LLC ("PS IV"), the owner of a 78.5mw AC solar project to be built in Cumberland County, North Carolina. PS IV holds a single and intangible asset, a 15-year PPA with Duke Energy Progress, Inc. ("Duke"). PS IV does not have, nor has it ever had, any other assets, any liabilities, any employees, any revenues, or any operations of any kind. As such, PS IV is not a "business" as defined in the accounting literature, and it has no historical financial statements. PSI agreed to pay Innovative Solar Systems, LLC $6,280,000 for 100% of the membership interest of PS IV in a series of payments of approximately $300,000 per month between execution of the MIPA and the financial close (the point at which all project financing is arranged), and a balloon payment at financial close sufficient to having cumulatively paid 70% of the $6,280,000 price. The remaining 30% of the purchase price will be paid in installments of $150,000 per month through the project's commercial operation date. At March 31, 2015, a total of $2,070,000 had been paid, and failure by the Company to make any of the future scheduled payments may result in the loss of all payments made through such date. The Company is working with engineering and construction firms on final designs, and the total cost of the project based upon the preliminary work is expected to be approximately $164 million, including an estimated $5 million from this offering. The Company is in discussion with multiple parties to provide the acquisition, construction, and permanent financing for the project, however, no assurance can be given that adequate financing on terms acceptable, or even available, to the Company will be obtained. Closing of the acquisition is expected to occur no later than June 22, 2015 (as extended), and construction is expected to be completed in late 2015.   On April 27, 2015, the Company entered into an Engineering, Procurement, and Construction Agreement with Alpha Technologies Services to build PS IV. The agreement provides for construction of the project for a fixed price of approximately $73 million to be paid in a series of progress payments, but excludes major portions of the materials that the Company will purchase directly from suppliers and the substation connecting the project to the local utility. Payments under the agreement are expected to be funded from separate construction financing yet to be arranged by the Company. The targeted date for the project achieving mechanical completion is December 18, 2015, and the contractor will provide a two-year warranty upon completion.

 

 

 

Principal Sunrise V (fka "IS 42")(pending)   On March 2, 2015, the Company entered into a MIPA with Innovative Solar Systems, LLC, a solar developer operating primarily in North Carolina, to acquire Innovative Solar 42, LLC ("PS V"), the owner of a 72.9mw AC solar project to be built in Fayetteville, North Carolina. PS V holds a single and intangible asset, a 10-year PPA with Duke Energy Progress, Inc. PS V does not have, nor has it ever had, any other assets, any liabilities, any employees, any revenues, or any operations of any kind. As such, PS V is not a "business" as defined in the accounting literature, and it has no historical financial statements. PSI agreed to pay Innovative Solar Systems, LLC $5,832,000 for 100% of the membership interest of PS V in a series of payments of approximately $300,000 per month between execution of the MIPA and the financial close (the point at which all project financing is arranged), and a balloon payment at financial close sufficient to having cumulatively paid 70% of the $5,832,000 purchase price. The remaining 30% of the purchase price will be paid in installments of $150,000 per month through the project's commercial operation date. At March 31, 2015, a total of $870,000 had been paid, and failure by the Company to make any of the future scheduled payments may result in the loss of all payments made through such date. The Company is working with engineering and construction firms on final designs, and the total cost of the project based upon the preliminary work is expected to be approximately $153 million. The Company is in discussion with multiple parties to provide the acquisition, construction, and permanent financing for the project, however, no assurance can be given that adequate financing on terms acceptable, or even available, to the Company will be obtained. Closing of the acquisition is expected to occur no later than August 30, 2015, and construction is expected to be completed in early 2016.   White Papers, Standards and Thought Leadership   Over the past two years, via the acquisition and expansion of the Principal Solar Institute (www.PrincipalSolarInstitute.org) (the Company’s industry website), the Company has become one of the most prolific authors in the solar industry. The Company has produced multiple white papers and dozens of articles on solar and solar-related topics. The Institute also regularly hosts industry experts to conduct valuable and relevant webinars. The long-term goal is to publish an authoritative library of papers and webinars, which will represent a single source and resource for understanding the solar industry. In the fall of 2012, the Company launched the Principal Solar Ratings System, an industry-first ratings system that allows easy, unbiased, comprehensive analysis and comparison of PV modules and solar power generation systems. The Institute built the Ratings system by bringing together a standards committee consisting in the view of our management, of some of the best-known and highly regarded individuals in the sector.   Construction of Commercial Distributed Generation ("DG") Facilities.   Contemporaneous with the on-going acquisition phase of the Company’s growth plan, the Company hopes to selectively and opportunistically build, own and operate solar PV production facilities based on management’s contacts as well as via the relationships and pipeline of partners.   The Company plans to target large commercial enterprises whose facilities can accommodate at least 1 MW of solar on their property and/or offer significant promotional impact for the Company through the target’s well-known brand in its community.   Gigawatt Scale Projects.   Solar energy does not become a serious contender in the industry until power plants can be built which compete with traditional power generation.  In order to compete, electricity produced must be priced so that larger plants makes sense, and, just as important, there must be demonstrable evidence from an engineering perspective, that larger plants which can withstand the forces of mother nature for extended periods. Construction on a gigawatt scale must be an engineering project with the ultimate goal of saving critical natural resources and more importantly, dollars.  The Company will promote solar energy’s inherent, long-term strategic advantage to generate electricity in a more reliable and redundant distributed mode with the goal of fundamentally mitigating electricity disruptions (brown outs, black outs) that often plague a highly centralized mode of generation (such as we have today in the US).  The Company anticipates that each GW scale project will cost approximately $1.50 to $1.60 per watt to construct or approximately $1.5 to $1.6 billion per GW.

 

 

 

Principal Solar Texas was incorporated in Texas in July 2010 (“Principal Solar Texas”). Effective as of March 7, 2011, the Company, Principal Solar Texas, the shareholders of Principal Solar Texas who included certain of our officers and directors (as described in greater detail below under “Certain Relationships and Related Transactions”), and Pegasus Funds LLC (the then holder of certain shares of our preferred stock) entered into an Exchange Agreement.  Pursuant to the Exchange Agreement, the shareholders of Principal Solar Texas exchanged all 2,607,684 shares of that company’s outstanding common stock for 2,607,684 newly issued shares of the Company, constituting approximately 82% of the Company’s post-exchange outstanding shares and Pegasus Funds LLC exchanged its preferred stock for 534,654 shares of the Company’s common stock (the “Preferred Stock Exchange”). Immediately subsequent to the consummation of the transactions contemplated by the Exchange Agreement, including, but not limited to a 1:40 reverse stock split (the “Reverse Split”, effective with FINRA on May 25, 2011), the stockholders of the Company prior to the Exchange Agreement held 157,322 shares of our common stock, representing approximately 1.25% of our outstanding common stock.  Subsequent to the closing of the Exchange in April 2011, we merged Principal Solar Texas into the Company with the Company surviving the merger.  Unless otherwise stated or the context would require otherwise, all share amounts disclosed throughout this Prospectus retroactively take into account the Reverse Split.   On May 5, 2015, the Company's Board of Directors and stockholders representing a majority of the shares outstanding on that date voted to effect a 1:4 reverse stock split (the "May 2015 Reverse"). Unless otherwise stated or the context would require otherwise, all share amounts disclosed throughout this filing retroactively take into account the May 2015 Reverse, and all resulting fractional share amounts have been rounded to the nearest whole share. On May 6, 2015, the Company amended its Certificate of Incorporation with the State of Delaware reflecting the May 2015 Reverse.    The Exchange is described in greater detail below under “Description of Business” – “Organizational History” – “Exchange Agreement”.

 

 

 

RISK FACTORS

 

The securities offered herein are highly speculative and should only be purchased by persons who can afford to lose their entire investment in us. You should carefully consider the following risks together with all other information in this Prospectus before deciding to become a holder of our common stock. If any of the following risks actually occur, our business and financial results could be negatively affected to a significant extent.

 

General Risks

 

We will require additional financing to continue our business operations and continue our business plan.

 

In addition to the proceeds from this offering, the Company will need additional funds in an amount of approximately $697 million in project financing required to build and operate the solar projects whose acquisitions are pending. The Company anticipates the need for approximately $5 million of additional funding for its administrative need over the next 24 months (as described in greater detail below under “Management's Discussion and Analysis of Financial Condition And Results of Operations”), which includes $800,000 required for the Company to pay its expenses associated with being a public reporting company over the next 24 months.  We anticipate obtaining this funding through the sale of debt or equity securities (subsequent to the effectiveness of our Registration Statement) and/or through traditional bank funding. If we are unable to obtain the additional funding, the value of our securities, if any, would likely become worthless and we may be forced to abandon our business plan.

 

We may have difficulty obtaining future funding sources, and we may have to accept terms that would adversely affect stockholders.

 

We will need to raise funds from additional financing. We have no commitments for any future financing and any financing commitments may result in dilution to our existing stockholders. We may have difficulty obtaining additional funding, and we may have to accept terms that would adversely affect our stockholders. For example, the terms of any future financings may impose restrictions on our right to declare dividends or on the manner in which we conduct our business. Additionally, we may obtain funding by issuing convertible notes, which if converted into shares of our common stock would dilute our then stockholders’ interests. Lending institutions or private investors may impose restrictions on a future decision by us to make capital expenditures, acquisitions or significant asset sales. If we are unable to raise additional funds, we may be forced to curtail or even abandon our business plan.

 

Our ability to grow and compete in the future will be adversely affected if adequate capital is not available.

 

The ability of our business to grow and compete depends on the availability of adequate capital, which in turn depends in large part on our cash flow from operations and the availability of equity and debt financing. Our cash flow from operations may not be sufficient or we may not be able to obtain equity or debt financing on acceptable terms or at all to implement our growth strategy. As a result, adequate capital may not be available to finance our current growth plans, take advantage of business opportunities or respond to competitive pressures, any of which could harm our business.

 

Because our management will have broad discretion over the use of the proceeds from this offering, you may not agree with how we use the proceeds.

 

The principal purposes of this offering are to acquire the minority interest in our subsidiary, Powerhouse One, LLC ("Powerhouse One"), repay debt, fund potential acquisitions and project financing, and increase our capitalization and financial flexibility, in order of priority as determined by management and as proceeds are available. We will have broad discretion over the uses of the net proceeds from this offering. Accordingly, you will be relying on the judgment of our management with regard to the use of the proceeds of this offering, and you will not have the opportunity, as part of your investment decision, to influence how the proceeds are being used.

 

 

Our auditor has expressed uncertainty about our ability to continue as a going concern.

 

The Company has consistently generated significant negative cash flows from operating activities, negative working capital and has an accumulated deficit. Because of the above, we have been issued an opinion by our auditors that substantial concern exists as to whether we can continue as a going concern. As such, it may be more difficult to attract investors.

 

Stockholders who hold unregistered “restricted securities” will be subject to resale restrictions pursuant to Rule 144, due to the fact that we are deemed to be a former “shell company.”

 

Pursuant to Rule 144 of the Securities Act of 1933, as amended (“Rule 144”), a “shell company” is defined as a company that has no or nominal operations; and, either no or nominal assets; assets consisting solely of cash and cash equivalents; or assets consisting of any amount of cash and cash equivalents and nominal other assets. While we do not believe that we are currently a “shell company”, we were previously a “shell company” and as such are deemed to be a former “shell company” pursuant to Rule 144, and as such, sales of our securities pursuant to Rule 144 may not be able to be made until we are subject to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act"), and have filed all of our required periodic reports for at least the previous one year period prior to any sale pursuant to Rule 144; and a period of at least twelve months has elapsed from the date “Form 10 information” has been filed with the Commission reflecting the Company’s status as a non-“shell company.” Because we are deemed to be a former “shell company”, none of our non-registered “restricted securities” will be eligible to be sold pursuant to Rule 144, until at least a year after the date that our Registration Statement is filed with the Commission, any non-registered securities we sell in the future or issue to consultants or employees, in consideration for services rendered or for any other purpose will have no liquidity until and unless such securities are registered with the Commission and/or until a year after we have complied with the requirements of Rule 144. As a result, it may be harder for us to fund our operations and pay our consultants with our securities instead of cash. Furthermore, it will be harder for us to obtain funding through the sale of debt or equity securities unless we agree to register such securities with the Commission, which could cause us to expend additional resources in the future. Our status as a former “shell company” could prevent us from raising additional funds, engaging consultants, and using our securities to pay for any acquisitions, which could cause the value of our securities, if any, to decline in value or become worthless.

 

The recently enacted JOBS Act will allow us to postpone the date by which we must comply with certain laws and regulations and to reduce the amount of information provided in reports filed with the SEC. We cannot be certain if the reduced disclosure requirements applicable to “emerging growth companies” will make our common stock less attractive to investors.

 

We are and we will remain an "emerging growth company" until the earliest to occur of (i) the last day of the fiscal year during which our total annual revenues equal or exceed $1 billion (subject to adjustment for inflation), (ii) the last day of the fiscal year following the fifth anniversary of our initial public offering, (iii) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt securities, or (iv) the date on which we are deemed a "large accelerated filer" (with at least $700 million in public float) under the Exchange Act. For so long as we remain an "emerging growth company" as defined in the JOBS Act, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not "emerging growth companies" as described in further detail in the risk factors below. We cannot predict if investors will find our common stock less attractive because we will rely on some or all of these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. If we avail ourselves of certain exemptions from various reporting requirements, as is currently our plan, our reduced disclosure may make it more difficult for investors and securities analysts to evaluate us and may result in less investor confidence.

  

 

The recently enacted JOBS Act will also allow the Company to postpone the date by which it must comply with certain laws and regulations intended to protect investors and to reduce the amount of information provided in reports filed with the SEC.

 

As an "emerging growth company", we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies. These provisions include:

 

●

only two years of audited financial statements in addition to any required unaudited interim financial statements with correspondingly reduced “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” disclosure

●

reduced disclosure about our executive compensation arrangements

●

no requirement that we hold non-binding advisory votes on executive compensation or golden parachute arrangements

●

exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting

 

We have taken advantage of some of these reduced burdens, and thus the information we provide our stockholders may be different from what you might receive from other public companies in which you hold shares.

 

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are choosing to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

 

Notwithstanding the above, we are also currently a “smaller reporting company”, meaning that we are not an investment company, an asset-backed issuer, or a majority-owned subsidiary of a parent company that is not a smaller reporting company and have a public float of less than $75 million and annual revenues of less than $50 million during the most recently completed fiscal year. In the event that we are still considered a “smaller reporting company”, at such time are we cease being an “emerging growth company”, the disclosure we will be required to provide in our SEC filings will increase, but will still be less than it would be if we were not considered either an “emerging growth company” or a “smaller reporting company”.  Specifically, similar to “emerging growth companies”, “smaller reporting companies” are able to provide simplified executive compensation disclosures in their filings; are exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that independent registered public accounting firms provide an attestation report on the effectiveness of internal control over financial reporting; and have certain other decreased disclosure obligations in their SEC filings, including, among other things, only being required to provide two years of audited financial statements in annual reports.  Decreased disclosures in our SEC filings due to our status as an “emerging growth company” or “smaller reporting company” may make it harder for investors to analyze the Company’s results of operations and financial prospects.

 

The preparation of our financial statements involves use of estimates, judgments and assumptions, and our financial statements may be materially affected if our estimates prove to be inaccurate.

 

Financial statements prepared in accordance with U.S. GAAP require the use of estimates, judgments, and assumptions that affect the reported amounts. Different estimates, judgments, and assumptions reasonably could be used that would have a material effect on the financial statements, and changes in these estimates, judgments, and assumptions are likely to occur from period to period in the future. These estimates, judgments, and assumptions are inherently uncertain, and, if they prove to be wrong, then we face the risk that charges to income will be required. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of the accounting estimates, judgments, and assumptions that we believe are the most critical to an understanding of our business, financial condition, and results of operations.

 

 

The Company and its subsidiaries have had material weaknesses and significant deficiencies in our internal control over financial reporting that we have not addressed. Any material weaknesses or significant deficiencies in our internal controls could result in a material misstatement in our financial statements as well as result in our inability to file periodic reports timely as required by federal securities laws, which could have a material adverse effect on our business and stock price.

 

We are required to design, implement, and maintain effective controls over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of a company's annual or interim financial statements will not be prevented or detected on a timely basis.

 

The Company and its subsidiaries have disclosed material weaknesses in their internal control over financial reporting that related to the adequacy of our financial and accounting organization support for our financial accounting and reporting needs. These weaknesses mainly resulted from a lack of sufficient personnel, and contributed to deficiencies related to: (1) proper segregation of duties to ensure adequate review of financial transactions; (2) written policies and procedures surrounding the accumulation and summarization of financial transactions; and (3) documentation evidencing the controls that do exist were operating effectively. As of the date of this filing, we have not remediated these material weaknesses.

 

We cannot be certain that in the future that we will not continue to have or identify new material weaknesses in our internal control over financial reporting or that we will successfully remediate any such material weaknesses. The Company and its subsidiaries may have weaknesses in our internal controls that could result in a material misstatement in our annual or interim consolidated financial statements, or cause us to fail to meet our obligations to file periodic financial reports with the SEC. Any of these failures could result in adverse consequences that could materially and adversely affect our business, including potential action by the SEC against us, possible defaults under our debt agreements, stockholder lawsuits, delisting of our stock and general damage to our reputation.

  

We lack a significant operating history focusing on our current business strategy which you can use to evaluate us, making share ownership in our Company risky.

 

Our Company lacks a long-standing operating history focusing on our current business strategy which investors can use to evaluate our Company’s previous results. Therefore, ownership in our Company is risky because we have no significant business history, and it is hard to predict what the outcome of our business operations will be in the future.

 

If we make any acquisitions in the future, they may disrupt or have a negative impact on our business.

 

We have an acquisition of a solar project in progress. In the event our pending acquisition closes, or if we make other acquisitions in the future, funding permitting (for which there can be no assurance), we could have difficulty integrating the acquired companies' personnel and operations with our own. We do not anticipate that any acquisitions or mergers we may enter into in the future would result in a change of control of the Company.  In addition, the key personnel of the acquired business may not be willing to work for us. We cannot predict the effect expansion may have on our core business. Regardless of whether we are successful in making an acquisition, the negotiations could disrupt our ongoing business, distract our management and employees and increase our expenses. In addition to the risks described above, acquisitions are accompanied by a number of inherent risks, including, without limitation, the following:

 

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the difficulty of integrating acquired companies, concepts and operations

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the potential disruption of the ongoing businesses and distraction of our management and the management of acquired companies

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difficulties in maintaining uniform standards, controls, procedures and policies

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the potential impairment of relationships with employees and customers as a result of any integration of new management personnel

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the potential inability to manage an increased number of locations and employees

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our ability to successfully manage the companies and/or concepts acquired

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the failure to realize efficiencies, synergies and cost savings

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the effect of any government regulations which relate to the business acquired

 

 

Additionally, any properties or facilities that we acquire may be subject to unknown liabilities, such as undisclosed environmental contamination, for which we would have no recourse, or only limited recourse, to the former owners of such properties. As a result, if a liability were asserted against us based upon ownership of an acquired property, we might be required to pay significant sums to settle it, which could adversely affect our financial results and cash flow.

 

Our business could be severely impaired if, and to the extent that, we are unable to succeed in addressing any of these risks or other problems encountered in connection with an acquisition, many of which cannot be presently identified. These risks and problems could disrupt our ongoing business, distract our management and employees, increase our expenses and adversely affect our results of operations.

 

We depend on our executive officers and if we were to lose any of such individuals, we will be forced to expend significant resources to locate replacements, and the loss of such individuals could have a material adverse effect on our operations.

 

Our performance is substantially dependent upon the performance of Michael Gorton, our Chairman and Chief Executive Officer, David N. Pilotte, our Chief Financial Officer, Kenneth G. Allen our Chief Operations Officer, R. Michael Martin, our Executive Vice President of Business Development, and Dan Bedell, our Executive Vice President of Corporate Development (the “Executives”).  We rely on the Executives’ and especially Mr. Gorton’s discretion in the direction of our business and guidance regarding the agreements we enter into. The loss of the services of any of the Executives, but in particular Mr. Gorton, would have a material adverse effect on our business, results of operations, and financial condition.  In addition, the absence of any one of the Executives, but especially Mr. Gorton, will force us to seek a replacement who may have less experience or who may not understand our business as well, or we may not be able to find a suitable replacement at all.  Without the expertise of any of the Executives, or an immediate and qualified successor, we may be forced to curtail or scale back our operations thereby decreasing the value of our securities.  The Company has employment agreements with Mr. Gorton, Mr. Martin, and Mr. Pilotte, each as described below under “Executive and Director Compensation” – “Employment Agreements”. The agreements with Mr. Gorton and Mr. Martin provide that either can resign at any time, and our agreement with Mr. Pilotte provides that he can resign upon 60 days written notice. The Company does not maintain “key man” life insurance on any Executives.

 

In the event Mr. Gorton’s or Mr. Martin’s employment agreements are terminated by the Company without cause or Mr. Gorton or Mr. Martin resigns for any reason or dies, we owe them (or their heirs or estates as applicable) significant amounts of severance pay.

 

As described below under “Executive and Director Compensation” – “Employment Agreements”, effective January 1, 2012, the Company entered into an Employment Agreement with Michael Gorton to serve as the Company’s Chief Executive Officer and effective January 1, 2011, the Company entered into an Employment Agreement with R. Michael Martin to serve as the Company’s Executive Vice President Business Development (collectively Mr. Gorton and Mr. Martin, the “Key Executives”).  The agreements remain in effect until the Board of Directors terminates the employment of the Key Executives with the Company or the Key Executives resign with 30 days’ notice.  Pursuant to the agreements, the Company agreed to pay Mr. Gorton $22,000 per month ($264,000 per year, as adjusted from time-to-time) during the term of the agreement and an additional $2,000 per month for the first 18 months of the agreement to repay accrued compensation due to Mr. Gorton. We agree to pay Mr. Martin $16,000 per month ($192,000 per year, as adjusted from time-to-time) during the term of the agreement and reimburse him for up to $170 of monthly cell phone expenses and up to $1,000 in health insurance premiums.  The Company can terminate either agreement at any time with or without cause, provided that if the Company terminates an agreement without cause, it is required to pay the Key Executive, all salary due as of the date of such termination, plus either one year of severance pay (Mr. Gorton) or six months of severance pay (Mr. Martin) (at his then applicable salary) and all unvested options held by the Key Executive, if any, vest immediately. Termination for cause under the agreements include the Key Executive’s willful misconduct or habitual neglect in the performance of his duties, conviction for any felony involving fraud, dishonesty or moral turpitude, a material breach of the agreement which remains uncured for 10 days after written notice of such breach by the Company, the material violation of the Company’s policies, or the material dishonesty, moral turpitude, fraud or misrepresentation with respect to the Key Executive’s duties under the applicable agreement.  In the event a Key Executive resigns from the Company for any reason, or upon the Key Executive’s death, the Company is required to pay the Key Executive (or as applicable his heirs or estate), all salary due as of the date of such termination, plus one year of severance pay (Mr. Gorton) or six months of severance pay (Mr. Martin) (at his then applicable salary) and all unvested options held by the Key Executive, if any, vest immediately.  In the event of the termination of a Key Executive’s employment agreement for cause or disability, the Company is only required to pay him any salary and other benefits earned as of the date of termination.  The requirement to pay the Key Executives’ severance pay required under these Employment Agreements could prevent a change of control, even if in the best interests of the Company, provide incentives for the Company not to terminate Mr. Gorton and/or Mr. Martin, and could, if we are forced to pay such severance pay, have an adverse effect on our liquidity and cash flows.

 

 

Our executive officers and directors, and our largest stockholder possess significant voting control over the Company.

 

Our executive officers and directors own in aggregate 1,700,111 shares of common stock (not including shares issuable upon exercise of outstanding options) or approximately 30.3% of our outstanding common stock as of the date of this filing.

 

Additionally, our largest stockholder, Steuben Investment Company II, L.P. (“Steuben”), beneficially owns 1,234,325 shares of our common stock. As such, Steuben beneficially owns 22.0% of our voting stock.

 

Accordingly, such executive officers and directors, and separately, Steuben, possess significant influence over the matters submitted to the stockholders for approval.  These matters include the election of directors, mergers, consolidations, the sale of all or substantially all of our assets, and also the power to prevent or cause a change in control.  This level of control by the executive officers and directors, and separately, Steuben, gives them substantial ability to determine our future as a business.  The ability to exercise significant voting control may result in decisions that may not be made in the best interests of the Company’s stockholders and/or may eventually make the value of any investment in us worthless. Any investor who purchases shares in the Company will be a minority stockholder and as such will have little say in the direction of the Company and the election of directors. As a potential investor in the Company, you should keep in mind that even if you own shares of the Company's common stock and wish to vote them at annual or special stockholder meetings, your shares will likely have little effect on the outcome of corporate decisions.

 

A significant portion of our revenues comes from only one solar installation.

 

Historically, more than 96% of our consolidated power generation revenue arose from our Powerhouse One solar installation under an index-priced PPA having a fixed premium of $0.12 per kilowatt hour ("kWh") over the GSA-1 scheduled rate (currently approximately $0.10 per kWh) through 2021, and a market rate based upon the then current GSA-1 scheduled rate for the remaining 10 years of the initial 20 year term ending in 2031. The buyer and counterparty of the PPA is Fayetteville Public Utility of Lincoln County Tennessee. A similar percentage of the accounts receivable also stems from this single relationship. As a result, if the installation were unable to generate power for any reason, our revenues would be significantly adversely affected. Additionally, once such PPA expires, if we are unable to enter into similar PPAs or otherwise generate revenues from other sources our results of operations will be materially adversely affected and the value of our common stock may decline in value.

 

 

Our growth will place significant strains on our resources.

 

Our growth is expected to place a significant strain on our managerial, operational and financial resources.  Further, in connection with our planned growth, we will be required to manage multiple relationships with various suppliers, partners and third parties.  These requirements will be exacerbated in the event of our further growth or increases in the number of our contracts. Our systems, procedures or controls may not be adequate to support our operations or enable us to achieve the rapid execution necessary to successfully offer our services and implement our business plan in the event of future growth.  Our future operating results will also depend on our ability to add additional personnel commensurate with the growth of our business.  If we are unable to manage growth effectively, our business, results of operations and financial condition will be adversely affected.

 

We believe that certain prior corporate actions undertaken by us pursuant to the purported authority and approval of our preferred stock holders, including our March 2011 reverse stock split, were completed without effective stockholder approval and in violation of state statutes.

 

In March 2011, the Company paid approximately $89,007 to Pegasus Funds LLC (“Pegasus”) and issued two shares of Series A Super Voting Preferred Stock (the “Series A Super”) for finding a public shell company, for structuring the Principal Solar Exchange Agreement, and as compensation for monies paid by Pegasus in connection with the renewal of the Company’s charter.  Among other powers provided to the Series A Super by the Board of Directors was that each share of Series A Super provided the holder thereof the right to vote a number of voting shares equal to the total number of shares of authorized common stock of the Company on any and all stockholder matters (effectively providing such Series A Super stockholders majority voting control over the Company). Subsequently in March 2011, we, with the approval of our Board of Directors and the Series A Super stockholders (purporting to vote a majority of our outstanding voting shares) affected a 1 for 40 reverse split of our outstanding shares such that, each share of common stock of the Company then outstanding, par value $0.01 per share was exchanged for one-fortieth (0.025) of a share of common stock, which reverse stock split became effective with FINRA on May 25, 2011.

 

In connection with the due diligence associated with the preparation and filing of a registration statement, it came to the attention of our current management (who were appointed subsequent to the purported approval of the reverse stock split by the holders of the Series A Super as described above), that no preferred stock designation setting the preferences and rights (including the voting rights) of the Series A Super was ever filed with the Secretary of State of New York (where the Company was then domiciled) and as such Pegasus, as the holder of the Series A Super, did not obtain any valid voting rights associated with such Series A Super or have any rights in connection therewith. Consequently, the purported approval by Pegasus of the reverse split in March 2011 was not valid and such corporate action was in effect taken without valid stockholder approval in contravention of New York law.

 

Notwithstanding the above, the documentation relating to the reverse split was filed with, and accepted by, the Secretary of State of New York and approved by FINRA. Additionally, in October 2012 the Company re-domiciled to Delaware and adopted a new Certificate of Incorporation in connection with re-domiciling. As such, we believe that the reverse stock split was effectively retroactively approved by stockholders of the Company in connection with such re-domiciling (due to the approval by the Company’s stockholders of a new Certificate of Incorporation retroactively reflecting such reverse stock split). We could face liability and claims and could be forced to pay damages, take remedial actions, or further ratify the reverse stock split in the future, which costs and expenses could have a material adverse effect on our results of operations and liquidity. Furthermore, the fact that certain of our corporate actions were not affected properly, the perception in the marketplace that such corporate actions were not affected properly, or uncertainties associated therewith, could raise questions about our corporate governance and controls and procedures and result in the trading value of our common stock, if any, being lower than companies without similar issues.

 

 

Our Certificate of Incorporation and Bylaws limit the liability of, and provide indemnification for, our officers and directors.

 

Our Certificate of Incorporation generally limits our officers’ and directors’ personal liability to the Company and its stockholders for breach of a fiduciary duty as an officer or director except for breach of the duty of loyalty or acts or omissions not made in good faith or which involve intentional misconduct or a knowing violation of law. Our Certificate of Incorporation and Bylaws, provide indemnification for our officers and directors to the fullest extent authorized by the Delaware General Corporation Law against all expense, liability, and loss, including attorney's fees, judgments, fines excise taxes or penalties and amounts to be paid in settlement reasonably incurred or suffered by an officer or director in connection with any action, suit or proceeding, whether civil or criminal, administrative or investigative (hereinafter a "Proceeding") to which the officer or director is made a party or is threatened to be made a party, or in which the officer or director is involved by reason of the fact that he is or was an officer or director of the Company, or is or was serving at the request of the Company whether the basis of the Proceeding is an alleged action in an official capacity as an officer or director, or in any other capacity while serving as an officer or director. Thus, the Company may be prevented from recovering damages for certain alleged errors or omissions by the officers and directors for liabilities incurred in connection with their good faith acts for the Company.  Such an indemnification payment might deplete the Company's assets. Stockholders who have questions regarding the fiduciary obligations of the officers and directors of the Company should consult with independent legal counsel. It is the position of the SEC that exculpation from and indemnification for liabilities arising under the Securities Act and the rules and regulations thereunder is against public policy and therefore unenforceable.

 

Risks Relating to the Company’s Current and Planned Operations

 

Our failure to respond to rapid change in the market for solar and alternative energy products could have an adverse effect on our results of operations.

 

Our future success will depend significantly on our ability to acquire, develop, license and build solar energy facilities that keep pace with technological developments and evolving industry standards. Our delay or failure to develop or acquire technological improvements, adapt the facilities we own to technological changes or provide technology that appeals to our customers may result in us not being able to successfully compete in the marketplace or the loss of customers which could ultimately cause us to cease operations.

 

If we experience significant delays, cost overruns or technical difficulties associated with the construction or operation of our facilities, our business plans, prospects, results of operations and financial condition will suffer.

 

Completing the construction of and maintaining solar PV production facilities are and will be subject to significant risks, including risks of delays, equipment failure, cost overruns and installation issues. In the future, we may experience delivery and installation delays of key pieces of equipment, which may make it impossible for us to complete construction in a timely fashion, if at all.  Significant future construction delays or technical difficulties due to our operations or those of our future partners may hurt our reputation and/or force us to scale back and/or abandon our business plans.

 

Solar energy products have never been sold on a mass market commercial basis, and we do not know whether they will be accepted by the market.

 

The solar energy market is at a relatively early stage of development and the extent to which the generation of electricity on a utility scale using solar modules will be widely adopted is uncertain. If the products and services we hope to sell are not accepted by the market, our business plans, prospects, results of operations and financial condition will suffer. The development of a successful market for our proposed products and our ability to market and sell our products and services at an attractive price to potential customers may be affected by a number of factors, many of which are beyond our control, including, but not limited to:

 

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Demand for solar power and alternative energy sources in general

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The efficiency, size, complexity and power output of current and future solar power technologies

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Competition from conventional energy sources and alternative distributed generation technologies, such as wind energy

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Our failure to develop and maintain successful relationships with suppliers, distributors, systems integrators and other resellers, as well as strategic partners

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Our failure to develop and maintain successful relationships with suppliers, distributors, systems integrators and other resellers, as well as strategic partners

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Customer acceptance of our products and offerings

 

 

We will depend on a limited number of third-party suppliers for our key materials, and any disruptions from such suppliers could prevent us from selling cost-effective products.

 

We plan to purchase the PV components that we plan to install and use from a limited number of third-party suppliers. We do not currently have in place any supply contracts with any suppliers. If we fail to maintain our relationships with our suppliers, or fail to secure additional supply sources from other PV component suppliers that meet our quality, quantity and cost requirements in a timely manner, we may be unable to obtain the parts that we will require and/or such parts may be available only at a higher cost or after a long delay. We may be unable to identify new suppliers in a timely manner and materials and components from new suppliers may also be less suited for our installations and/or have higher failure rates. Any of these factors could cause delays which could result in lost revenue.

 

Technological changes in the solar power industry could render our products and facilities obsolete.

 

Technological changes in the solar power industry could cause our operations to become uncompetitive or obsolete, which could have a material adverse effect on our operations and planned operations. The solar power industry is rapidly evolving and highly competitive. Our efforts may be rendered obsolete by the technological advances of other technology, and other technologies may prove more advantageous for the commercialization of solar power products. If this occurs, our future sales and profits, if any, could be diminished.

 

The reduction or elimination of government subsidies and economic incentives for solar electricity applications could reduce demand for future products.

 

The reduction, elimination, or expiration of government subsidies and economic incentives for solar electricity could result in the diminished competitiveness of solar energy relative to conventional and non-solar renewable sources of energy, which would negatively affect the growth of the solar energy industry overall and our future revenues. We believe that the near-term growth of the market for solar energy applications depends significantly on the availability and size of government and economic incentives. As a result, federal, state and local governmental bodies, have provided subsidies in the form of tariffs, rebates, tax write-offs and other incentives to end-users, distributors, systems integrators and manufacturers of PV products. For example, certain markets in the United States have been strong supporters of PV products and systems, and political changes could result in significant reductions or the elimination of incentives. Many of these government incentives could expire, phase-out over time, exhaust the allocated funding or require renewal by the applicable authority. A reduction, elimination or expiration of government subsidies and economic incentives for solar electricity could result in the diminished competitiveness of solar energy, which would, in turn, negatively impact our revenues and financial condition.

 

 

Existing regulations and policies and changes to these regulations and policies may present technical, regulatory and economic barriers to the purchase and use of PV products.

 

The market for electricity generation products is heavily influenced by foreign, federal, state and local government regulations and policies concerning the electric utility industry, as well as policies promulgated by electric utilities. These regulations and policies often relate to electricity pricing and technical interconnection of customer-owned electricity generation. In the United States and in a number of other countries, these regulations and policies have been modified in the past and may be modified again in the future. These regulations and policies could deter end-user purchases of PV products and investment in the research and development of PV technology. For example, without a mandated regulatory exception for PV systems, utility customers are often charged fees for putting distributed power generation on the electric utility grid. These fees could increase and make solar power less desirable, thereby harming our business, prospects, results of operations and financial condition. In addition, electricity generated by PV systems mostly competes with expensive peak hour electricity, rather than the less expensive average price of electricity. Modifications to the peak hour pricing policies of utilities, such as to a flat rate pricing, would require PV systems to achieve lower prices in order to compete with the price of electricity from other sources.

 

We anticipate that our solar arrays and their installation will be subject to oversight and regulation in accordance with national and local ordinances relating to building codes, safety, environmental protection, utility interconnection and metering and related matters. It is difficult to track the requirements of individual states and design equipment to comply with the varying standards. Any new government regulations or utility policies pertaining to our solar arrays may result in significant additional expenses to us, our partners and our customers and, as a result, could cause a significant reduction in demand for our products and services.

 

We may be vulnerable to the efforts of electric utility companies lobbying to protect their revenue streams and from competition from such electric utility companies.

 

Electric utility companies could lobby for a change in the relevant legislation in their markets to protect their current revenue streams. Any adverse changes to the regulations and policies of the solar energy industry could deter end-user purchases of PV products and investment in the research and development of PV technology. In addition, electricity generated by PV systems mostly competes with expensive peak hour electricity, rather than the less expensive average price of electricity. Modifications to the peak hour pricing policies of utilities, such as flat rate pricing, would require PV systems to achieve lower prices in order to compete with the price of electricity. Any changes to government regulations or utility policies that favors electric utility companies could reduce our competitiveness and cause a significant reduction in demand for our products and services.

 

Our operating results are likely to fluctuate significantly quarter-to-quarter and year-to-year.

 

As a result of our limited operating history and the rapidly changing nature of the markets in which we compete, our quarterly and annual revenues and operating results, if any, are likely to fluctuate from period-to-period. These fluctuations may be caused by a number of factors, many of which are beyond our control. These factors include the following, as well as others discussed elsewhere in this section:

 

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how and when we introduce new products, facilities and services and enhance our then existing products, facilities and services

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our ability to attract and retain new customers and satisfy our customers' demands

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our ability to establish and maintain strategic relationships

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our ability to attract, train and retain key personnel

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the emergence and success of new and existing competition

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varying operating costs and capital expenditures related to the expansion of our business operations and infrastructure, including the hiring of new employees

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changes in the mix of products and services that we offer to our customers

 

 

In addition, because the market for our products and services is relatively new and rapidly changing, it is difficult to predict future financial results.

  

For these reasons, you should not rely on period-to-period comparisons of our financial results, if any, as indications of future results. Our future operating results, if any, could fall below the expectations of public market analysts or investors and significantly reduce the market price of our common stock. Fluctuations in our operating results will likely increase the volatility of our stock price.

 

The high cost or inaccessibility of financing for solar energy projects may adversely affect demand for our products.

 

If financing for solar energy projects becomes more costly or becomes inaccessible in the future, the growth of the market for solar energy applications may be materially and adversely affected which could adversely affect demand for our products and services and materially reduce our future revenue. In addition, rising interest rates could render existing financings more expensive, as well as present an obstacle for potential financings that would otherwise spur the growth of the PV industry. We believe that the availability of financing could have a significant effect on the level of the demand and cost of solar energy projects.

 

Our failure to make timely principal and interest payments on our debt could have an adverse effect on our results of operations.

 

Our primary revenue-generating asset is Powerhouse One, acquired in 2013. As described elsewhere in this filing, the acquisition was financed with debt which debt is secured by a pledge of all of the assets of Powerhouse One, and further guaranteed by the Company. Historically, we have generated net losses and used, rather than generated, cash in operations. As such, we may not be able to generate sufficient cash flow moving forward to repay our outstanding debt. Our failure to make timely payments of principal and interest could result in adverse proceedings by our lender including, but not limited to, foreclosure of the assets securing such debt leaving the Company with no ability to continue operations or generate revenues. Further, in 2014 and 2015 the Company sold convertible secured notes to three of our Board members and an unrelated individual which come due in September 2015 and July 2015, respectively and , at the option of the holders, can be settled in either cash or shares of our Common Stock. If one or more of the note holders choose to settle such debts in cash, and the Company does not then have cash sufficient to settle the notes, one or both of the note holders could initiate collection efforts further impairing the Company's cash flow. Our failure to generate sufficient cash to repay our debts or obtain funding to satisfy such obligations, through the sale of equity or additional debt securities or the sale of assets, would result in our failure to repay our debts as they become due, could result in the foreclosure of our assets and our securities becoming worthless.

 

 

Competition in the PV industry can be intense, thereby potentially exerting downward pressure on systems level profit margins industry-wide, which could reduce our revenues, profitability and adversely affect our results of operations.

 

The PV market is intensely competitive and rapidly evolving. The number of PV product manufacturers, suppliers and installers has rapidly increased due to the growth of actual and forecasted demand for PV products and the relatively low barriers to entry. The weakened demand for PV modules due to weakened macroeconomic conditions, combined with the increased supply of PV modules due to production capacity expansion by PV module manufacturers worldwide in recent years, has caused the price of PV modules to decline. Aided by such lower module prices, competitors have in many cases been willing and able to bid aggressively for new solar projects, using low cost assumptions as the basis for such bids. Intense competition can result in an environment in which pricing falls rapidly, thereby further increasing demand for solar solutions but constraining the ability for project developers and/or vertically-integrated solar companies to sustain meaningful and consistent profitability. Accordingly, while we believe our systems offerings and experience are positively differentiated in many cases from that of our competitors, we may be unable to develop or maintain a sufficient magnitude of new systems projects worldwide at economically attractive rates of return, and may not be able to achieve meaningful profitability. We expect that the prices of PV products, including PV modules, may continue to decline over time due to increased supply of PV products, reduced manufacturing costs from economies of scale, and the advancement of manufacturing technologies. If we fail to attract and retain customers in our target markets for our future planned products and services, our results of operations, if any, will be adversely affected.

 

Additionally, we may also face competition from new entrants to the PV market, including those that offer more advanced technological solutions or that have greater financial resources than us. In addition, our competitors may also enter into the PV manufacturing business, which may provide them with cost advantages. Furthermore, the entire PV industry also faces competition from conventional energy and non-solar renewable energy providers.

 

Many of our existing and potential competitors have substantially greater financial, technical, manufacturing and other resources than we do. The greater size of many of our competitors provides them with cost advantages as a result of their economies of scale and their ability to obtain volume discounts and purchase raw materials at lower prices. As a result, such competitors may have stronger bargaining power with their suppliers and have an advantage over us in pricing as well as securing a sufficient supply of PV components during times of shortage. Many of our competitors also have better brand name recognition, more established distribution networks, larger customer bases or more in-depth knowledge of the target markets. As a result, they may be able to devote greater resources to the research and development, promotion and sale of their products and respond more quickly to evolving industry standards and changes in market conditions as compared to us. Our failure to adapt to changing market conditions and to compete successfully with existing or future competitors would have a material adverse effect on our business, prospects and results of operations.

 

The PV industry may not be able to compete successfully with conventional power generation or other sources of renewable energy.

 

Although the PV industry has experienced advances in recent years, it still comprises a relatively small portion of the total power generation market and competes with other sources of renewable energy, as well as conventional power generation. Many factors may affect the viability of widespread adoption of PV technology, including the following:

 

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cost-effectiveness of solar energy compared to conventional power generation and other renewable energy sources

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performance and reliability of solar modules compared to conventional power generation and other renewable energy sources and products

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availability and size of government subsidies and incentives to support the development of the solar energy industry

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success of other renewable energy generation technologies such as hydroelectric, wind, geothermal and biomass

●

fluctuations in economic and market conditions that affect the viability of conventional power generation and other renewable energy sources, such as increases or decreases in the prices of oil, natural gas and other fossil fuels

 

 

As a result of any of the foregoing factors, our financial condition, results of operations, business and/or prospects could be materially adversely affected.

  

Installed components, parts and equipment associated with the Company’s solar facilities may fail.

 

Components, parts and other equipment associated with the Company’s solar generation facilities may fail in the future.  Such components, parts and equipment may not be covered by insurance and may require the Company to take such affected facilities offline for a period of time.  Such failed components, parts and equipment may be cost prohibitive to replace and could cause the Company to be forced to abandon and shut down applicable affected facilities. If any one of the above were to occur it could have a material adverse effect on the Company’s revenues, operations, cash flow and could in turn cause the value of the Company’s common stock to decline in value or become worthless.

 

If PV technology is not suitable for widespread adoption at economically attractive rates of return, or if sufficient additional demand for solar power generation does not develop or takes longer to develop than we anticipate our results of operations may be adversely affected.

 

The solar energy market is at a relatively early stage of development in comparison to fossil fuel-based electricity generation. If PV technology proves unsuitable for widespread adoption at economically attractive rates of return or if additional demand for solar power generation systems fails to develop sufficiently or takes longer to develop than we anticipate, we may be unable to grow our business or generate sufficient net revenues to sustain profitability. Many factors may affect the viability and widespread adoption of PV technology and demand for solar power generation systems, including the following:

 

●

cost-effectiveness of the electricity generated by PV power systems compared to conventional energy sources, such as natural gas and coal, and other non-solar renewable energy sources, such as wind

●

performance, reliability and availability of energy generated by PV systems compared to conventional and other non-solar renewable energy sources and products

●

success of other renewable energy generation technologies, such as hydroelectric, tidal, wind, geothermal, solar thermal, concentrated PV, and biomass

●

fluctuations in economic and market conditions that affect the price of, and demand for, conventional and non-solar renewable energy sources, such as increases or decreases in the price of natural gas, coal, oil, and other fossil fuels

●

fluctuations in capital expenditures by end-users of solar power and systems which tend to decrease when the economy slows and when interest rates increase

●

availability, substance, and magnitude of support programs including government targets, subsidies, incentives, and renewable portfolio standards to accelerate the development of the solar energy industry

 

Environmental obligations and liabilities could have a substantial negative impact on our financial condition, cash flows, and profitability.

 

Our operations involve the use, handling, generation, processing, storage, transportation, and disposal of hazardous materials and are subject to extensive environmental laws and regulations at the national, state, local, and international levels. These environmental laws and regulations include those governing the discharge of pollutants into the air and water, the use, management, and disposal of hazardous materials and wastes, the cleanup of contaminated sites, and occupational health and safety. As we expand our business our environmental compliance burden will continue to increase both in terms of magnitude and complexity. We will incur significant costs and capital expenditures in complying with these laws and regulations. In addition, violations of, or liabilities under, environmental laws or permits may result in restrictions being imposed on our operating activities or in our being subjected to substantial fines, penalties, criminal proceedings, third party property damage or personal injury claims, cleanup costs, or other costs. Such solutions could also result in substantial delay or termination of projects under construction within our systems business, which could adversely impact our results of operations. While we believe we are currently in substantial compliance with applicable environmental requirements, future developments such as more aggressive enforcement policies, the implementation of new, more stringent laws and regulations, or the discovery of presently unknown environmental conditions may require expenditures that could have a material adverse effect on our business, results of operations, and financial condition.

 

 

We may be unable to acquire or lease land, obtain necessary interconnection and transmission rights, and/or obtain the approvals, licenses, permits and electric transmission grid interconnection and transmission rights necessary to build and operate our planned PV power plants in a timely and cost effective manner, and regulatory agencies, local communities, labor unions or other third parties may delay, prevent, or increase the cost of construction and operation of the PV plants we intend to build.

 

In order to construct and operate our planned PV plants, we need to acquire or lease land and rights of way, obtain interconnection rights, and obtain all necessary local, county, state, federal, and foreign approvals, licenses, and permits as well as rights to interconnect the plants to the transmission grid and transmit energy generated from the plant. We may be unable to acquire the land or lease interests needed, may not obtain satisfactory interconnection rights, may not receive or retain the requisite approvals, permits, licenses and interconnection and transmission rights, or may encounter other problems which could delay or prevent us from successfully constructing and operating PV plants.

 

Our proposed PV plants may be located on or require access through public lands administered by federal and state agencies pursuant to competitive public leasing and right-of-way procedures and processes. The authorization for the use, construction, and operation of PV plants and associated transmission facilities on federal, state, and private lands will also require the assessment and evaluation of mineral rights, private rights-of-way, and other easements; environmental, agricultural, cultural, recreational, and aesthetic impacts; and the likely mitigation of adverse impacts to these and other resources and uses. The inability to obtain the required permits and, potentially, excessive delay in obtaining such permits due, for example, to litigation or third party appeals, could prevent us from successfully constructing and operating PV plants in a timely manner. Moreover, project approvals subject to project modifications and conditions, including mitigation requirements and costs, could affect the financial success of a given project.

 

Lack of transmission capacity availability, potential upgrade costs to the transmission grid, and other systems constraints could significantly impact our ability to build PV plants and generate solar electricity power sales.

 

In order to deliver electricity from our PV plants to our customers, our projects generally need to connect to the transmission grid. The lack of available capacity on the transmission grid could substantially impact our projects and cause reductions in project size, delays in project implementation, increases in costs from transmission upgrades, and potential forfeitures of any deposit we have made with respect to a given project. These transmission issues, as well as issues relating to the availability of large systems such as transformers and switchgear, could significantly impact our ability to build PV plants and generate solar electricity sales.

 

 

Our operations and planned operations are largely dependent on us and third parties arranging financing from various sources, which may not be available or may only be available on unfavorable terms or in insufficient amounts.

 

The construction of the small, medium and large utility-scale solar power projects is expected in many cases to require project financing, including non-recourse project debt financing in the bank loan market and institutional debt capital markets. Uncertainties exist as to whether such future projects will be able to access the debt markets in a magnitude sufficient to finance their construction. If we are unable to arrange such financing or if it is only available on unfavorable terms, we may be unable to fully execute our business plan. In addition, we generally expect to fund projects by raising project capital from third parties. Such funding sources may not be available or may only be available in insufficient amounts, in which case our ability to fund our projects may be delayed or limited and our business, financial condition, or results of operations may be adversely affected.

 

Developing solar power projects may require significant upfront investment prior to commencing construction, which could adversely affect our business and results of operations.

 

The length of time between the identification of land and the commercial operation of a PV power plant project, vary substantially and can take many months or years. As a result of these long project cycles, we may need to make significant upfront investments of resources (including, for example, payments for land rights, large transmission and other deposits or other payments, which may be non-refundable) in advance of commencing construction and the receipt of any revenue, much of which will not be recognized for several additional months or years following contract signing. Our liquidity may be adversely affected to the extent the project sale market weakens and we are unable to sell our future solar projects on pricing, terms and timing commercially acceptable to us.

 

We may not be able to obtain long-term contracts for the sale of power produced by our projects at prices and on other terms favorable to attract financing and other investments.

 

Obtaining long-term contracts for the sale of power produced by the solar projects PPAs at prices and on other terms favorable to us is essential for us to grow our operations and complete our business plan. We must compete for PPAs against other developers of solar and renewable energy projects. Further, other sources of power, such as natural gas-fired power plants, have historically been cheaper than the cost of solar power and power from certain types of projects, such as natural gas-fired power plants, can be delivered on a firm basis. The inability to compete successfully against other power producers or otherwise enter into PPAs favorable to us would negatively affect our ability to develop and finance our projects and negatively impact our revenue. In addition, the availability of PPAs is a function of a number of economic, regulatory, tax and public policy factors.

 

Our estimates and business plan are built around the assumption that grid parity will occur within the next few years.

 

The Company has built its management team and Board of Directors and has constructed its business plan around the belief that grid parity (i.e., solar power being the same cost, if not cheaper than traditionally generated energy) will happen within the U.S. in the next few years.  In the event that grid parity does not occur within the US in the next few years, the Company’s business plan, results of operations and cash flow could be adversely effected, and we could be forced to curtail, scale back or abandon our business plan.

 

If our customers delay or cancel equipment purchases, we may be required to modify or cancel contractual arrangements with our suppliers which may result in the loss of deposits or pre-paid advances.

 

As a result of our customer delays or contract terminations, we reschedule or cancel, from time to time, purchase orders with our vendors to procure materials and, in certain cases, we are required to forfeit deposits and/or reimburse the vendor for costs incurred to the date of termination. In cases where we are not able to cancel or modify vendor purchase orders due to customer delays or terminations, our purchase commitments may exceed our order backlog requirements and we may be unable to redeploy the undelivered equipment. In addition, we expect that we may be required to pay advances to vendors in the future without being able to recover that advance if the vendor is placed in bankruptcy, becomes insolvent or otherwise experiences financial distress.

 

 

Delays in deliveries, or cancellations of orders, for products of all of our segments could cause us to have inventories in excess of our short-term needs and may delay our ability to recognize, or prevent us from recognizing, revenue on contracts in our order backlog. Alternatively, we may be required to sell products below our historical selling prices. Contract breaches or cancellation of orders may require us to reschedule and/or cancel additional commitments to vendors in the future and require that we write-down any inventory purchased that we are unable to deploy or require that we sell products at prices that are below our historical prices, which would also have a negative impact on our gross margins.

 

If we are unable to secure financing to acquire, build, and operate our planned acquisitions of PS IV and PS V, we could lose amounts paid to date under the Membership Interest Purchase Agreements.

 

We are acquiring, pursuant to MIPAs, solar projects owned by a special purpose entity formed by the project's original developer. Under the MIPAs, we are obligated to make monthly payments of $600,000 until the closing of construction and permanent financing for the project. Funding such payments is dependent upon proceeds from this offering or the continued sale of our equity or debt securities in one or more private placements. At March 31, 2015, a total of $2,940,000 had been paid, and failure by the Company to make any of the future scheduled payments to the seller may result in the loss of all payments made through such date.

 

The proposed PS VI and PS VII development projects are highly speculative, may use significant resources, may be unsuccessful and could expose us to unforeseen liabilities.

 

We have entered into binding term sheets for the development of and the acquisition of ownership interests in solar projects in Texas and North Carolina. These projects are highly speculative and may involve significant cash expenditures, debt incurrence, additional operating losses and expenses and compliance risks that could have a material adverse effect on our financial condition and results of operations. There is no guarantee that we will enter into definitive agreements for these development projects or be able to obtain the necessary financing to complete the proposed transactions.

 

The development projects involve risks that PS VI and PS VII will not perform in accordance with expectations; that we may become liable for unforeseen financial or business liabilities of the acquired businesses, including liabilities for failure to comply with governmental regulations; that the expected synergies associated with development projects will not be achieved; and that business judgments concerning the value, strengths and weaknesses of PS VI and PS VII will prove incorrect, which could have an material adverse effect on our financial condition and results of operations.

 

Risks Relating To Our Securities

 

The market for our common stock is volatile, sporadic and illiquid.

 

Our common stock is currently quoted on the OTC Pink® market maintained by OTC Markets Group, Inc. and, in connection with this offering, has been approved for listing on the NASDAQ under the symbol “PSWW”. The market for our common stock is, and will likely continue to be, volatile, sporadic and illiquid. We anticipate that the market for our common stock will be subject to wide fluctuations in response to several factors, including, but not limited to:

 

●

actual or anticipated variations in our results of operations

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our ability or inability to generate new revenues

●

increased competition

●

conditions and trends in the market for energy and renewable energy, including solar power, in general

 

Furthermore, our stock price may be impacted by factors that are unrelated or disproportionate to our operating performance. These market fluctuations, as well as general economic, political and market conditions, such as recessions, interest rates or international currency fluctuations may adversely affect the market price of our Common Stock.

 

FINRA sales practice requirements may limit a stockholder’s ability to buy and sell our stock.

 

FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives, and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for certain customers. FINRA requirements will likely make it more difficult for broker-dealers to recommend that their customers buy our Common Stock, which may have the effect of reducing the level of trading activity in the shares, resulting in fewer broker-dealers may be willing to make a market in our shares, potentially reducing a stockholder’s ability to resell shares of our Common Stock.

 

 

Until we list our Common Stock on the Nasdaq Capital Market (“NASDAQ”), our Common Stock will be deemed a “penny stock” which makes it more difficult for our investors to sell their shares.

 

Until our Common Stock is listed on NASDAQ, our Common Stock is subject to the “penny stock” rules adopted under Section 15(g) of the Exchange Act.  The penny stock rules generally apply to companies whose common stock is not listed on a national securities exchange and trades at less than $5.00 per share, other than companies that have had average revenue of at least $6,000,000 for the last three years or that have tangible net worth of at least $5,000,000 ($2,000,000 if the company has been operating for three or more years).  These rules require, among other things, that brokers who trade penny stock to persons other than “established customers” complete certain documentation, make suitability inquiries of investors, and provide investors with certain information concerning trading in the security, including a risk disclosure document and quote information under certain circumstances.  Many brokers have decided not to trade penny stocks because of the requirements of the penny stock rules and, as a result, the number of broker-dealers willing to act as market makers in such securities is limited.  If we remain subject to the penny stock rules for any significant period, it could have an adverse effect on the market, if any, for our shares.  If our shares are subject to the penny stock rules, investors will find it more difficult to dispose of our securities.

 

Stockholders may be diluted significantly through our efforts to obtain financing and satisfy obligations through the issuance of additional shares of our common stock.

 

We have no committed source of financing. Wherever possible, our Board of Directors expect to use non-cash consideration to satisfy obligations. In many instances, we believe that the non-cash consideration will consist of restricted shares of our common stock. Our Board of Directors has authority, without action or vote of the stockholders, to issue all or part of the authorized but unissued shares of common stock. In addition, we have and in the future may raise capital by selling shares of our common stock at a discount to market. These actions will result in dilution of the ownership interests of existing stockholders, may dilute common stock book value, and that dilution may be material. Such issuances may also serve to enhance existing management’s ability to maintain control of the Company because the shares may be issued to parties or entities committed to supporting existing management.

 

We have not paid, and we are unlikely to pay in the near future, cash dividends on our Common Stock. As a result, your only opportunity to achieve a return on your investment is if the price of our Common Stock appreciates.

 

We have never paid cash dividends on our Common Stock, and we do not anticipate doing so in the foreseeable future. The payment of dividends by us will depend on our future earnings, financial condition, and such other business and economic factors as our management may consider relevant. As a result, your only opportunity to achieve a return on your investment will be if the market price of our Common Stock appreciates and you sell your shares at a profit.

 

State securities laws may limit secondary trading, which may restrict the states in which and conditions under which you can sell shares of our Common Stock.

 

Secondary trading in our common stock may not be possible in any state until the common stock is qualified for sale under the applicable securities laws of the state or there is confirmation that an exemption, such as listing in certain recognized securities manuals, is available for secondary trading in the state. If we fail to register or qualify, or to obtain or verify an exemption for the secondary trading of, the common stock in any particular state, the common stock cannot be offered or sold to, or purchased by, a resident of that state. In the event that a significant number of states refuse to permit secondary trading in our common stock, the liquidity for our common stock could be significantly impacted.

 

 

Significant sales of our Common Stock, or the perception that significant sales may occur in the future, could adversely affect the market price for our shares.

 

Sales of substantial amounts of our Common Stock in the public market by us or our stockholders could adversely affect the prevailing market price of our shares and could cause the market price to remain low for a substantial amount of time. We cannot foresee the impact of such potential sales on the market, but it is possible that if a significant percentage of such available shares were attempted to be sold within a short period of time, the market for our shares would be adversely affected. It is also unclear whether the market for our Common Stock could absorb a large number of attempted sales in a short period of time, regardless of the price at which they might be offered. Even if a substantial number of sales do not occur within a short period of time, the mere existence of this “market overhang” could have a negative impact on the market for our shares and our ability to raise additional capital.

 

Because we are not subject to compliance with rules requiring the adoption of certain corporate governance measures, our stockholders have limited protections against interested director transactions, conflicts of interest and similar matters.

 

The Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"), as well as rule changes proposed and enacted by the SEC, the New York Stock Exchanges and the NASDAQ Stock Market, as a result of Sarbanes-Oxley, require the implementation of various measures relating to corporate governance. These measures are designed to enhance the integrity of corporate management and the securities markets and apply to securities that are listed on those exchanges or the NASDAQ. Because we are not presently required to comply with many of the corporate governance provisions, and because we are only now developing and implementing such measures, our stockholders do not have the full protection such corporate governance measures are designed to afford stockholders.

 

We will incur significant increased costs as a result of operating as a public reporting company as well as in connection with Section 404 of Sarbanes Oxley.

 

We will incur legal, accounting and other expenses in connection with our expected future status as a reporting public company. Sarbanes-Oxley and rules subsequently implemented by the SEC have imposed various requirements on public companies, including required changes in corporate governance practices. As such, our management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and make some activities more time-consuming and costly. Sarbanes-Oxley requires, among other things, that we maintain effective internal controls for financial reporting and disclosure of controls and procedures. In particular, we must perform system and process evaluation and testing of our internal controls over financial reporting to allow management to report on the effectiveness of our internal controls over financial reporting. Our testing may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses. Our compliance with Section 404 of Sarbanes-Oxley and our future status as a reporting public company will require that we incur substantial accounting, legal and filing expenses and expend significant management efforts. We currently do not have an internal audit group, and we may need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. Moreover, if we are not able to comply with the requirements of Section 404 of Sarbanes-Oxley in a timely manner, the market price of our stock, if any, could decline, and we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which would require additional financial and management resources.

 

Delaware law and our Certificate of Incorporation authorize us to issue shares of stock, which shares may cause substantial dilution to our existing stockholders.

 

We have authorized capital stock consisting of 300,000,000 shares of common stock, $0.01 par value per share, and 100,000,000 shares of preferred stock, $0.01 par value per share (“Preferred Stock”). As of the date of this filing, we have 5,604,181 shares of common stock issued and outstanding, 250,000 shares of Preferred Stock issued and outstanding, and we have a contract to issue and additional 250,000 shares of our Preferred Stock.  As a result, our Board of Directors has the ability to issue a large number of additional shares of common stock without stockholder approval, which if issued could cause substantial dilution to our then stockholders.  Additionally, shares of Preferred Stock may be issued by our Board of Directors without stockholder approval with voting powers, and such preferences and relative, participating, optional or other special rights and powers as determined by our Board of Directors, which may be greater than the shares of common stock currently outstanding.  As a result, shares of Preferred Stock may be issued by our Board of Directors which cause the holders to have super majority voting power over our shares, provide the holders of the Preferred Stock the right to convert the shares of Preferred Stock they hold into shares of our common stock, which may cause substantial dilution to our then common stock stockholders and/or have other rights and preferences greater than those of our common stock stockholders. Investors should keep in mind that the Board of Directors has the authority to issue additional shares of common stock and Preferred Stock, which could cause substantial dilution to our existing stockholders.  Additionally, the dilutive effect of any Preferred Stock, which we may issue may be exacerbated given the fact that such Preferred Stock may have super majority voting rights and/or other rights or preferences which could provide the preferred stockholders with voting control over us subsequent to this Offering and/or give those holders the power to prevent or cause a change in control.  As a result, the issuance of shares of common stock and/or Preferred Stock may cause the value of our securities to decrease and/or become worthless.

 

 

We have established preferred stock, which our Board of Directors can designate and issue without stockholder approval.

 

The Company has 100,000,000 shares of Preferred Stock authorized. Shares of preferred stock of the Company may be issued from time to time in one or more series, each of which shall have distinctive designation or title as shall be determined by the Board of Directors of the Company prior to the issuance of any shares thereof. The preferred stock shall have such voting powers, full or limited, or no voting powers, and such preferences and relative, participating, optional or other special rights and such qualifications, limitations or restrictions thereof as adopted by the Board of Directors. Because the Board of directors is able to designate the powers and preferences of the preferred stock without the vote of a majority of the Company’s stockholders, stockholders of the Company will have no control over what designations and preferences the Company’s preferred stock will have. As a result of this, the Company’s stockholders may have less control over the designations and preferences of the preferred stock and as a result the operations of the Company.

 

We may face substantial penalties under a Registration Rights Agreement and Letter Agreement relating to a requirement to make information publicly available to allow our largest stockholder the ability to sell under Rule 144.

 

Pursuant to the Registration Rights Agreement with Steuben, the Company was obligated to file a registration statement and to take all necessary actions to maintain the availability for Steuben to sell its securities pursuant to Rule 144 for a period ending two years from the date the registration statement became effective, February 3, 2015. If the Company fails to take all necessary actions to maintain the availability to Steuben of Rule 144 for a period ending February 3, 2017, the Company may be obligated to pay to Steuben a penalty of $216,000, thus negatively impacting its cash and its results of operations.

 

We may have contingent liability arising out of possible violations of the Securities Act in connection with the presentation which we furnished as Exhibit 99.1 to our Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 5, 2014.

 

On May 5, 2014, we furnished, as Exhibit 99.1 to a Current Report on Form 8-K, a copy of a presentation provided by our Chief Executive Officer, Michael Gorton, to a small gathering of current investors and bankers designed to educate them about the Company. The furnishing of the presentation publicly may have constituted the communication of an “offer to sell” as described in Section 5(c) of the Securities Act. As such, the public communication of the information set forth in the presentation may have constituted a violation of Section 5 of the Securities Act. We could have a contingent liability arising out of the possible violation of the Securities Act in connection with such presentation. Any liability would depend upon the number of shares purchased by the ‘recipients’ of the presentation that may have constituted a violation of Section 5 of the Securities Act. If a claim were brought by any such ‘recipients’ of such presentation and a court were to conclude that the public dissemination of such presentation constituted a violation of Section 5 of the Securities Act, we could be required to repurchase the shares sold to investors who reviewed such presentation, at the original purchase price, plus statutory interest from the date of purchase, for claims brought during a period of one year from the date of their purchase of common stock. We could also incur considerable expense in contesting any such claims. Such payments and expenses, if required, could significantly reduce the amount of working capital we have available for our operations and business plan, delay or prevent us from completing our plan of operations, or force us to raise additional funding, which funding may not be available on favorable terms, if at all. Additionally, the value of our securities will likely decline in value in the event we are deemed to have liability, or are required to make payments or pay expenses in connection with the above.

 

 

You should not rely on any information set forth in the presentation attached as Exhibit 99.1 to our Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 5, 2014, in making an investment decision. You should rely only on statements made in this filing in determining whether to purchase our shares.

 

As described in the risk factor above, the presentation may have constituted the communication of an “offer to sell” in violation of Section 5 of the Securities Act. The presentation did not contain complete information regarding the Company, including a discussion of various risks and uncertainties regarding an investment in the Company, described in this filing. As a result, the presentation should not be considered in connection with your investment decision in this offering and you should instead make your investment decision only after reading this entire filing carefully. The information in this filing clarifies, supersedes and replaces the information set forth in the presentation. Furthermore, and notwithstanding the above, investors should not rely on the information describing “Pipeline 2014 Acquisitions” as set forth in page 11 of the presentation as being accurate. As described elsewhere herein, the Company has not entered into any definitive agreements or understandings in connection with any such acquisitions described in the presentation or otherwise, and no acquisitions are currently ‘probable’ at this time.

 

Our public offering may not be completed, completed within an acceptable timeframe, or generate enough proceeds to meet our obligations and business plan.

 

We are expecting the proceeds from our public offering to satisfy certain short-term debt, equity, and future acquisition financing needs and fund our ongoing business plan. If the offering is not completed, not completed on an acceptable timeframe (within the next 60 days), or does not generate sufficient proceeds, net of fees and expenses, to satisfy our need, our operations, future plans, and share price could be negatively impacted making it difficult, or impossible, to continue in operation.

 

You will suffer immediate and substantial dilution in the net tangible book value of the common stock you purchase.

 

The initial public offering price of our common stock is substantially higher than the pro forma as adjusted net tangible book value per share of our outstanding common stock immediately after the closing of this offering. Purchasers of common stock in this offering will experience immediate dilution of approximately $6.49 per share, based on the assumed initial public offering price of $8.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus. In the past, we issued options and warrants to acquire common stock at prices significantly below the assumed initial public offering price. To the extent these outstanding options and warrants are ultimately exercised, investors purchasing common stock in this offering will sustain further dilution. For a further description of the dilution that you will experience immediately after this offering, see the section entitled “Dilution” for additional information.

 

We have 250,000 shares of our $.01 par value series A preferred stock (“Series A Preferred”) outstanding that contain certain liquidation preferences, conversion features, and mandatory redemption requirements.

 

On May 15, 2015, we entered into a Purchase and Sale Agreement with SMCDLB, LLC (the “Purchaser”). Pursuant to the Agreement, we sold 250,000 shares of our restricted Series A Preferred to the Purchaser and, upon the occurrence of an initial public offering (which is being affected through this Registration Statement) and certain other conditions, we may sell an additional 250,000 shares of our Series A Preferred at $4.00 per share. The Series A Preferred includes a 12% dividend rate that shall be paid in additional shares of Series A Preferred at a price of $4.00 per share. The Series A Preferred contains a $4.00 per share plus unpaid dividends liquidation preference in the event of any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, or any sale, merger, consolidation, reorganization or other transaction which results in a change of control of the Company. The Series A Preferred also have discretionary conversion features upon the receipt of funds by the Company from an initial public offering and mandatory redemption requirements following closing of this offering or in an event of default as defined in the certificate of designation for the Series A Preferred. The Company may not, without the approval of the holders of the Preferred, alter, amend or repeal the Company's certificate of incorporation or bylaws, issue securities that are senior or pari passu to the Series A, incur or create indebtedness, guaranty indebtedness, initiate bankruptcy proceedings, redeem stock or pay dividends on stock, repurchase stock or effect a stock split or restructuring of the Company's common stock. These restrictions could materially impact the ability of the Company to operate, including its ability to raise capital and incur indebtedness, which is critical for the ability of the Company to operate. In the event the Company is not permitted to incur debt or raise capital, it could be forced out of operation. In addition, the issuance of the additional shares of Series A Preferred or common stock in lieu of dividends would be highly dilutive to our common stockholders, including investors purchasing securities in this offering.

 

Please read this Prospectus carefully.  You should rely only on the information contained in this Prospectus.  We have not authorized anyone to provide you with different information.  You should not assume that the information provided by the Prospectus is accurate as of any date other than the date on the front of this Prospectus.

 

  

USE OF PROCEEDS

 

We estimate the net proceeds from the sale of shares of our Common Stock in this offering, after deducting underwriting discounts but before estimated offering expenses payable by us, will be approximately $10.4 million, or $12.1 million if the underwriters exercise their over-allotment option in full assuming a public offering price of $8.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus. Expenses of this offering are expected to be approximately $750,000.

 

A $1.00 increase (decrease) in the assumed initial public offering price of $8.00 per share would increase (decrease) the net proceeds to us from this offering by approximately $1.4 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

We intend to use the net proceeds from this offering as follows:

 

●

unless converted earlier, up to $2.0 million plus accrued and unpaid dividends to redeem preferred stock that will reduce the need for project financing for PS IV

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unless converted earlier, approximately $1.3 million to repay indebtedness consisting of $1,250,000 8% senior secured debt due September 2, 2015

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approximately $50,000 to repay 12% convertible notes due July 31, 2015

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approximately $630,000 to repay 12% convertible notes payable to related parties due September 30, 2015

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then, to the extent proceeds are available, approximately $5.0 million for project financing for PS IV

●

then, to the extent proceeds are available, approximately $767 thousand to acquire the minority interest in our subsidiary, Powerhouse One

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then, to the extent proceeds are available, the remainder for working capital, general and administrative expenses and other general corporate purposes

 

This expected use of net proceeds from this offering represents our intentions based upon our current plans and business conditions, which could change in the future as our plans and business conditions evolve. The amounts and timing of our actual expenditures may vary significantly depending on numerous factors, including the progress of our development, the status and closing of the proposed acquisitions, and any additional projects that we may enter into with third parties, as well as any unforeseen cash needs. As a result, our management will retain broad discretion over the allocation of the net proceeds from this offering. Pending the use of proceeds described herein, we intend to invest the net proceeds from this offering in short-term investment grade interest bearing securities and guaranteed obligations of the U.S. government.

 

We may not be able to complete the acquisitions pending on a timely basis or at all. This offering is not conditioned upon the completion of the acquisitions, and, to the extent either acquisition is not completed, we expect to use the net proceeds from this offering that otherwise would have been used for the acquisitions pending to fund other acquisition opportunities that may become available or for general corporate purposes.

 

DIVIDEND POLICY

 

To date, we have not declared or paid any dividends on our outstanding shares. We currently do not anticipate paying any cash dividends in the foreseeable future on our common stock. Although we intend to retain our earnings to finance our operations and future growth, our Board of Directors will have discretion to declare and pay dividends in the future. Payment of dividends in the future will depend upon our earnings, capital requirements and other factors, which our Board of Directors may deem relevant.

 

 

  

DETERMINATION OF OFFERING PRICE

 

The public offering price of the securities offered by this prospectus was determined through a negotiation between us and the underwriters. In determining the initial public offering price of the shares, we considered several factors including the following:

 

●

our limited operating history

●

the industry in which we operate

●

the offering prices and subsequent stock price performance of those within our peer group

●

our business structure and operations

●

our financing needs and the amount of proceeds desired

●

the price at which investors might be willing to participate in the offering

●

prevailing market conditions, including the history and prospects for our industry

●

our future prospects and expected growth rate

●

the experience of our management

●

our capital structure

 

Therefore, the public offering price of the shares does not necessarily bear any relationship to established valuation criteria like book value and may not be indicative of prices that may prevail at any time or from time to time in the public market for the Common Stock. No valuation or appraisal has been prepared for our business.  You cannot be sure that a public market for any of our securities will develop and continue or that the securities will ever trade at a price at or higher than the offering price in this offering.

 

CAPITALIZATION

 

The following table sets forth our cash and cash equivalents and capitalization as of March 31, 2015, on an actual basis and on an as adjusted basis giving effect to the pro forma adjustments, the sale and issuance of 1,500,000 shares in this offering, assuming a public offering price of $8.00 per share which is the midpoint of the estimated price range set forth on the cover page hereof, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

		March 31, 2015
		Actual				Pro Forma Adjustments				As Adjusted
Cash and equivalents		$	565,675			$	8,679,417			$	9,245,092
Convertible notes payable		$	680,000			$	(680,000	)		$	-
Current portion of acquisition note payable, net of discount			249,816								249,816
Convertible debenture, net			201,389				(201,389	)			-
Acquisition note payable, net of discount			4,345,799								4,345,799
Stockholders' equity (deficit)
Common stock			56,042				15,000				71,042
Additional paid-in capital			11,989,559				10,385,559				22,374,559
Accumulated deficit			(11,705,802	)							(11,705,802	)
Noncontrolling interest in subsidiary			839,194				(839,194	)			-
Total stockholders' equity			1,178,993				9,560,806				10,739,799
Total capitalization		$	6,655,997			$	8,679,417			$	15,335,414

 

A $1.00 increase (decrease) in the assumed initial public offering price of $8.00 per share, which is the midpoint of the range listed on the cover page of this prospectus, would increase (decrease) the as adjusted amount of each of cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $ 1.4 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

DILUTION 

 

The table below illustrates the effect of the shares of Common Stock offered hereby on our net tangible book value per common share. Net tangible book value per common share is determined by subtracting our total liabilities from our total tangible assets, less preferred stock equity (if applicable), and dividing the remainder by the aggregate number of shares of Common Stock and nonvoting common stock outstanding.

 

As of March 31, 2015, our net tangible book value was $1,178,993 or $0.21 per common share. Assuming shares are sold in this offering at a public offering price of $8.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, and after deducting the underwriting discount and estimated offering expenses payable by us in the amount of $1.6 million, the estimated net proceeds from the offering will be $10.4 million or $12.1 million if the underwriters option is exercised in full. Based on the estimated net proceeds from the offering, our pro forma net tangible book value as of March 31, 2015, would have been $10,739,799, or $1.51 per share. On a per common share basis, this represents an immediate increase in the net tangible book value to existing shareholders of $1.30.

 

 

The following table presents the pro forma impact of this offering on the net tangible book value per common share as of March 31, 2015.

 

		March 31, 2015
		Actual				Pro Forma
Net Tangible Book Value Per Common Share		(unaudited)					(1)
Net Tangible book value		$	1,178,993			$	10,739,799
Total shares outstanding			5,604,181				7,104,181
Tangible book value per common share		$	0.21			$	1.51

 

 

(1)	Pro forma information reflects estimated net proceeds from the offering of $10.4 million net of underwriting discounts and estimated offering expenses of $1.6 million from the sale of shares.

 

Because the assumed public offering price of $8.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus is greater than the pro forma net tangible book value per common share after the offering, the purchasers of the common stock in this offering will experience immediate dilution in the net tangible book value per common share in an amount equal to $6.49.

 

The following table summarizes, as of March 31, 2015, on a pro forma as adjusted basis, the number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid by our existing stockholders and by new investors, based upon an assumed initial public offering price of $8.00 per share, and before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

		Shares Purchased								Total Consideration								Average
		Number				Percent				Amount				Percent				Share Price
Existing Holders			5,604,181				79%			$	9,079,497				43%			$	1.62
New Investors			1,500,000				21%				12,000,000				57%			$	8.00
Total			7,104,181				100%			$	21,079,497				100%			$	2.96

 

A $1.00 increase (decrease) in the assumed initial public offering price of $8.00 per share, which is the midpoint of the range listed on the cover in this prospectus, would increase (decrease) the total consideration paid by new investors by $1.5 million, and increase (decrease) the percentage of total consideration paid by new investors by approximately 3%, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

The total number of shares of our common stock reflected in the discussion and tables above is based on 5,604,181 shares of our common stock outstanding, as of March 31, 2015, and excludes:

  

●

exercise of the underwriters’ over-allotment option

●

exercise of any options, warrants or conversion rights outstanding as of that date

●

any securities, options, warrants or conversion rights issued subsequent to that date

 

 

DESCRIPTION OF BUSINESS

 

Organizational History

 

Principal Solar, Inc. is the successor company to Kupper Parker Communications, Inc. (“KPCG”), having been created in March 2011 through a reverse merger undertaken pursuant to an Exchange Agreement dated as of March 7, 2011 between Principal Solar, Inc. (a Texas corporation, “Principal Solar Texas”) and KPCG. Upon completion of the transactions contemplated by the Exchange Agreement as described in more detail below, KPCG’s name was changed to Principal Solar, Inc.

 

The Company was originally incorporated under the laws of the State of New York on February 25, 1972 under the name Greenstone Ad Agency, Inc. and subsequently changed its name to Greenstone & Rabasca Advertising, Inc. On December 16, 1988, the Company changed its name to Greenstone Rabasca Roberts, Inc. In April 1991, the then stockholders of the Company approved a name change to Greenstone Roberts Advertising, Inc. On July 29, 1997, the Company filed a Certificate of Amendment to effect a 10:1 forward stock split.

  

In September 2000, the Company completed a reverse merger with Kupper Parker Communications, Inc. based in Melville, New York that operated as a traditional advertising agency without offering additional "below the line" marketing communications services, such as public relations services, direct marketing and database marketing services, and sales promotion services. Under the terms of the merger agreement, KPCG management assumed management of the merged operations, and the resulting merged operations were renamed Kupper Parker Communications, Incorporated.

 

On March 15, 2011, a Certificate of Amendment was filed increasing the Company’s authorized stock from 31 million shares to 301 million shares consisting of 300 million shares of common stock and 1 million shares of preferred stock.

 

On April 25, 2011, the Company merged with Principal Solar Texas with the Company surviving the merger.

 

On September 27, 2012, the Company formed a wholly owned Delaware subsidiary, Principal Solar, Inc. (“Principal Solar Delaware”), with 400 million shares of common stock authorized for issuance.

 

On October 24, 2012, the Company merged with Principal Solar Delaware with Principal Solar Delaware being the survivor and the name of the Company became “Principal Solar, Inc.” as a result of the merger.

 

The Company previously filed reports with the Securities and Exchange Commission pursuant to Section 13 and 15(d) of the Exchange Act of 1934, as amended; and in May 2005, the Company (then known as Kupper Parker Communications, Incorporated) filed a Form 15 with the Securities and Exchange Commission which suspended the Company’s requirement to file such reports.  Subsequent to a Registration Statement, which became effective on February 3, 2015, the Company was once again subject to the reporting requirements of Section 13 and 15(d) of the Exchange Act of 1934, as amended.

 

In March 2011, the Company paid approximately $89,007 to Pegasus Funds LLC (“Pegasus”) and issued two shares of Series A Super Voting Preferred Stock (the “Series A Super”) for finding a public shell company and for structuring the Principal Solar Exchange Agreement and as compensation for monies paid by Pegasus in connection with the renewal of the Company’s charter.  The designation of the Series A Super was never filed with the Secretary of State of New York and as such, the Series A Super never became effective with New York.  The Board of Directors approved the following rights and privileges for the Series A Super:

 

●

The total number of Series A Super was two (2) shares

●

The Series A Super was not entitled to receive any special dividends

●

The Series A Super ranked senior to all other preferred or common stock outstanding of the Company

●

The Series A Super had a par value of $1.00 per share

●

Each share of Series A Super was redeemable by the Company at any time for $110,000;

●

The Series A Super had no liquidation preference

●

Each share of Series A Super provided the holder thereof the right to vote a number of voting shares equal to the total number of shares of authorized common stock of the Company on any and all stockholder matters

 

In March of 2011, KPCG management and Pegasus, as the holder of our Series A Super, agreed to a 1 for 40 reverse split of the outstanding shares such that, each share of common stock then outstanding, par value $0.01 of the Company was exchanged for one-fortieth (0.025) of a share of common stock, which became effective with FINRA on May 25, 2011. In lieu of the issuance of any fractional shares that would otherwise result from the reverse stock split, the Company rounded any resulting fractional shares up to the nearest whole share.  As described above, no Series A Super designation was ever filed with New York, and as such, the rights and privileges described above as approved by the Board of Directors in connection with the Series A Super were never valid or effective and the Series A Super never had any valid voting rights. Consequently, we face risks, including risks associated with the fact that the reverse split was not validly approved by our stockholders, as described in greater detail above under “Risk Factors” – “We believe that certain prior corporate actions undertaken by us pursuant to the purported authority and approval of our preferred stock holders, including our March 2011 reverse stock split, were completed without effective stockholder approval and in violation of state statutes.”

 

 

Effective in October 2012, the Company redomiciled into a Delaware corporation by way of the merger of the Company into its wholly-owned Delaware subsidiary, Principal Solar, Inc. In connection with the redomiciling, the Company increased its authorized common stock to 300,000,000 shares of common stock, $0.01 par value per share and authorized 100,000,000 shares of Class A Preferred Stock, par value $0.01 per share.  Unless otherwise stated or the context would require otherwise, all share amounts disclosed throughout this Prospectus retroactively take into account the reverse split.

 

Exchange Agreement

 

Principal Solar Texas was incorporated in Texas in July 2010 (“Principal Solar Texas”). Effective as of March 7, 2011, the Company, Principal Solar Texas, the stockholders of Principal Solar Texas who included certain of our officers and directors (as described in greater detail below under “Certain Relationships and Related Transactions”), and Pegasus entered into an Exchange Agreement (the “Exchange Agreement”).  Pursuant to the Exchange Agreement, the stockholders of Principal Solar Texas exchanged all 2,607,684 shares of that company’s outstanding common stock for 2,607,684 newly issued shares of the Company, constituting approximately 82% of the Company’s post-exchange outstanding shares, when factoring in the Preferred Stock Exchange (defined below).

 

Additionally, a required term and condition of the Exchange Agreement was the exchange by Pegasus of the two shares of Principal Solar Texas Series A Super which it held for 534,654 shares of the Company’s common stock (the “Preferred Stock Exchange”). As of the date of this Prospectus, Pegasus is not a greater than 5% shareholder of the Company.

 

Immediately subsequent to the consummation of the transactions contemplated by the Exchange Agreement, including, but not limited to the reverse stock split, the stockholders of the Company prior to the Exchange Agreement held 39,331 shares of our common stock, representing approximately 1.25% of our outstanding common stock at the time.

 

 Subsequent to the closing of the Exchange Agreement in April 2011, we merged Principal Solar Texas into the Company with the Company surviving the merger, and we changed the name to Principal Solar, Inc.

 

May 2015 Reverse

 

On May 5, 2015, the Company's Board of Directors and stockholders representing a majority of the shares outstanding on that date voted to effect a 1:4 reverse stock split (the "May 2015 Reverse"). Unless otherwise stated or the context would require otherwise, all share amounts disclosed throughout these financial statements retroactively take into account the May 2015 Reverse, and all resulting fractional share amounts have been rounded to the nearest whole share. On May 6, 2015, the Company amended its Certificate of Incorporation with the State of Delaware reflecting the May 2015 Reverse.

 

  

Business Strategies

 

Our primary objective is to build a significant, innovative and valuable solar company. We are currently employing our business expertise, our Board of Directors, advisory team and employee expertise with the goal of accelerating growth in an industry that we believe is ripe for consolidation today based upon our management’s observation that the solar industry has many unrelated participants (i.e., that it is "fragmented"), our observation of the industry's rapid expansion and growing acceptance of solar generation, and the observable declining costs for solar panels and inverters. These observations have caused us to believe the solar industry is on the brink of building very large scale projects in the next two to three years due to the number of projects currently proposed. The Company plans to:

 

	1.	Aggregate the large community of fragmented solar entities in an accelerating acquisition strategy with the goal of creating a large balance sheet of solar electricity generation.
	2.	Establish thought leadership by networking with, in the view of our management, some of the best-known and highly regarded individuals in the sector, who author white papers, define standards and host webinars at www.PrincipalSolarInstitute.org.

	3.	Develop new commercial utility-scale solar projects leveraging our existing partnerships and relationships and those of our Board members and advisors, many of whom have spent decades in management roles within the traditional utility or energy industries, to make introductions to solar project developers, financiers, and utility industry executives with whom we hope to negotiate power purchase agreements, interconnection agreements, and other agreements.
	4.	Build an entity capable of creating innovative large-scale solar projects by hiring capable and experienced engineers and engaging developers experienced in the design and construction of large-scale solar projects, both domestically and abroad; by hiring capable executives in accounting, legal, real estate, etc., necessary to manage such an endeavor; and by obtaining financing from commercial banks, non-bank lenders (assuming such financing is available), and one or more public or private offerings of our equity securities in combination sufficient to fund the project. We expect such financing needs could fall within the range of $1.5 to $2.0 billion, which funding may not be available on favorable terms, if it all.

 

To date, we have completed the acquisition of four entities (including three solar power production companies).  We have begun to create what we call the “world’s first distributed solar utility” - although there are many individual solar projects in operation throughout the world, we don’t believe that anyone has previously attempted to bring together multiple, disparate, geographically diverse solar projects under common ownership thereby building a complete utility-scale solar power generation company. Our business plan begins with a rollup strategy.  We are in the process of acquiring cash flow positive solar assets from around the country with the goal of consolidating those assets into a distributed generation business. We utilize a partnership strategy that leverages creative deal making expertise and our team of energy industry personnel with significant experience in the industry.

 

Our strategy is to couple fifty years of electric utility expertise with business expertise, entrepreneurial innovation, financial know-how, and solar engineering to create a new era in electricity generation.  We hope to become the recognized leader in solar energy delivery by consolidating a significant share of the fragmented solar market to gain significant momentum and, when grid parity (i.e., solar power being as expensive if not cheaper than traditionally generated energy) has arrived, building large scale projects with an ultimate goal of generating gigawatts (GW) of cost effective, clean electricity with the goal of stabilizing electrical prices and preserving natural resources.

 

In states where insolation (sunshine) is high, land is relatively inexpensive or unproductive and electricity rates are high, solar facilities are being built today – supported by local and federal incentives.  These plants produce electricity at rates that compete with and in many cases, beat local utility rates.  For comparative analysis, the Solar Energy Industries Association ("SEIA") estimates a 1 megawatt facility will power approximately 169 homes under full load conditions.

 

As described in this Prospectus, the Company is actively seeking financing for both its administrative needs (meeting ongoing financial and administrative obligations, hiring experts in each of the functional areas necessary to support our business plan, and funding acquisition and due diligence efforts necessary to find and evaluate individual projects) and to build large-scale projects. Regarding a timeline over which each of these will occur, nothing can happen until the Company obtains additional financing. All of the Company's activities and development work, both from an administrative perspective and in order to build individual large-scale projects, is 100% dependent upon first securing sufficient financing, and the timeframe of obtaining additional financing in sufficient amounts cannot be determined.

 

 

The final development and construction of an individual project is complex and involves multiple parties including engineering firms, consulting firms, due diligence firms, construction firms, financiers, and the Company itself, to name a few. A potential timetable necessary to find, secure, construct, and make operational an individual large-scale project is situation-dependent based upon aspects including, but not limited to:

 

●

the project's stage of development at the time we find it

●

the project's scale, expected to fall generally between 15MW and 100MW (larger projects take longer)

●

the project's purchaser of electricity and their pipeline of projects under development

●

the geographic location of the project (other solar development activity in the region impacts the financiers acceptance of the project);

●

specific characteristics of the land upon which the project is built including topography, current groundcover (wooded, agricultural production, or other), environmental aspects, etc.

●

proximity of transmission lines impacts infrastructure needed to be developed as a part of the project

●

lead times existing at that point in time on key component materials

●

the availability and timing of financing for the project

●

the availability of construction firms experienced in the region and their current workload

●

our own management's available bandwidth at that particular point in time to acquire and oversee multiple projects

 

The timing of each of the above aspects can take anywhere from several weeks to several months to complete; is based upon a thorough evaluation of the aspects above, taken individually and as a whole; and can be estimated on a project-by-project basis only after a specific project is identified and evaluated. Therefore, no specific timeline can be provided at this time. As specific projects are identified and evaluated and financing is obtained, the Company will provide more detailed timelines in its future public filings. In general, from the point in time a specific project is identified and evaluated by the Company and the decision is made to proceed, it can take between five and twelve months to arrange financing, complete construction, perform testing, and begin to generate revenue. But even that general timeframe varies depending upon the factors listed above.

 

Acquisitions

 

As of the date of this Prospectus, the Company has completed the acquisition of three solar power production facilities amounting to just under 3.2 MW.  Moving forward, management plans to negotiate with entities that manage and own projects generally in the range of 10 MW to 100 MW. As the assets under Company management increase, the Company hopes that its resources and market momentum, as well as its access to additional capital once public, will enable a series of significant acquisitions.

 

The Company is continually seeking and evaluating solar projects for acquisition and, at any point in time, it has a pipeline of potential acquisitions in stages of development ranging from "speculative" to "funding." As each project is evaluated, some will be discarded and others will move along in the evaluation process to due diligence. As such, the pipeline itself is dynamic and can be expected to change frequently.

 

The Company's current pipeline of projects includes projects totaling nearly 2,500 MW (DC) of power located across the southern U.S. In each case, the PPAs run for periods of 10 to 15 years and are with counterparties we consider to be among those having the highest credit ratings in the region.

 

 

Principal Sunrise IV

 

In November 2014, the Company entered into a Membership Interest Purchase Agreement ("MIPA") with Innovative Solar Systems, LLC, a solar developer operating primarily in North Carolina, to acquire Innovative Solar 46, LLC ("PS IV"), the owner of a 78.5mw AC solar project to be built in Cumberland County, North Carolina. PS IV holds a single and intangible asset, a 15-year PPA with Duke Energy Progress, Inc. PS IV does not have, nor has it ever had, any other assets, any liabilities, any employees, any revenues, or any operations of any kind. As such, PS IV is not a "business" as defined in the accounting literature, and it has no historical financial statements. PSI agreed to pay Innovative Solar Systems, LLC $6,280,000 for 100% of the membership interest of PS IV in a series of payments of approximately $300,000 per month between execution of the MIPA and the financial close (the point at which all project financing is arranged), and a balloon payment at financial close sufficient to having cumulatively paid 70% of the $6,280,000 price. The remaining 30% of the purchase price will be paid in installments of $150,000 per month through the project's commercial operation date. At March 31, 2015, A total of $2,070,000 had been paid, and failure by the Company to make any of the future scheduled payments may result in the loss of all payments made through such date. The Company is working with engineering and construction firms on final designs, and the total cost of the project based upon the preliminary work is expected to be approximately $164 million, including an estimated $5 million from a public offering in progress. The Company is in discussion with multiple parties to provide the acquisition, construction, and permanent financing for the project, however, no assurance can be given that adequate financing on terms acceptable, or even available, to the Company will be obtained. Closing of the acquisition is expected to occur no later than June 22, 2015 (as extended), and construction is expected to be completed in late 2015.

 

On April 27, 2015, the Company entered into an Engineering, Procurement, and Construction Agreement with Alpha Technologies Services to build PS IV. The agreement provides for construction of the project for a fixed price of approximately $73 million to be paid in a series of progress payments, but excludes major portions of the materials that the Company will purchase directly from suppliers and the substation connecting the project to the local utility. Payments under the agreement are expected to be funded from separate construction financing yet to be arranged by the Company. The targeted date for the project achieving mechanical completion is December 18, 2015, and the contractor will provide a two-year warranty upon completion.

 

Principal Sunrise V

 

On March 2, 2015, the Company entered into a MIPA with Innovative Solar Systems, LLC, a solar developer operating primarily in North Carolina, to acquire Innovative Solar 42, LLC ("PS V"), the owner of a 72.9mw AC solar project to be built in Fayetteville, North Carolina. PS V holds a single and intangible asset, a 10-year power purchase agreement ("PPA") with Duke Energy Progress, Inc. PS V does not have, nor has it ever had, any other assets, any liabilities, any employees, any revenues, or any operations of any kind. As such, PS V is not a "business" as defined in the accounting literature, and it has no historical financial statements. PSI agreed to pay Innovative Solar Systems, LLC $5,832,000 for 100% of the membership interest of PS V in a series of payments of approximately $300,000 per month between execution of the MIPA and the financial close (the point at which all project financing is arranged), and a balloon payment at financial close sufficient to having cumulatively paid 70% of the $5,832,000 purchase price. The remaining 30% of the purchase price will be paid in installments of $150,000 per month through the project's commercial operation date. At March 31, 2015, a total of $870,000 had been paid, and failure by the Company to make any of the future scheduled payments may result in the loss of all payments made through such date. The Company is working with engineering and construction firms on final designs, and the total cost of the project based upon the preliminary work is expected to be approximately $153 million. The Company is in discussion with multiple parties to provide the acquisition, construction, and permanent financing for the project, however, no assurance can be given that adequate financing on terms acceptable, or even available, to the Company will be obtained. Closing of the acquisition is expected to occur no later than August 30, 2015, and construction is expected to be completed in early 2016.

 

Principal Sunrise VI

 

On June 5, 2015, the Company entered into a binding term sheet regarding a joint development effort with Energy Surety Partners, LLC of Phoenix, AZ ("ESP"). Pursuant to the joint development effort, the Company and ESP will jointly develop up to 500 MW DC comprised of three separate solar projects in the panhandle of Texas. The first of these projects, Principal Sunrise VI ("PS VI"), is a 150 MW dc solar project located on a 1,000 acre site near Amarillo, Texas. Offtakers are expected to be individual merchants with a high demand for electricity and retail electric providers selling at retail prices to individual end-users, both signing multi-year power purchase agreements. With ready access to land, transmission lines, and some of the best sunshine in the country (known in the industry as "insolation"), we believe these projects represent significant opportunities in solar.

 

The Company and ESP have documented in a term sheet the separate responsibilities of each party and the preliminary economic terms between the parties, and each has agreed to be bound by those parameters in formal contracts to be prepared and executed on or before June 30, 2015 (as extended). Preliminary estimates developed jointly by the parties reflect an expected total capital investment of approximately $800 million based upon today's component pricing. The construction schedule has not yet been determined, but the Company expects the projects to reach commercial operation in a time range from mid-2016 through 2017.

 

Principal Sunrise VII

 

On June 9, 2015, the Company entered into a binding term sheet with Innovative Solar Systems, LLC, a solar developer operating primarily in North Carolina, to acquire Innovative Solar 37, LLC ("Principal Solar VII" or "PS VII"), the owner of a 78.7 MW AC solar project to be built in Anson County, North Carolina. PS VII holds a 10-year flat rate power purchase agreement with Duke. PSI will acquire 100% of the membership interest of PS VII in a series of payments of approximately $300,000 per month between execution of the MIPA to be negotiated between the parties on or before June 30, 2015, and the financial close (the point at which all project financing is arranged). Payments will also include a balloon payment at financial close sufficient to having cumulatively paid 78% of the $5.5 million purchase price. The remaining 22% of the purchase price will be paid in installments of $150,000 per month through the project's commercial operation date. The total cost of the project, based upon the preliminary work, is expected to be approximately $140 million for which the Company has not yet begun to source financing.

 

There continues to be significant uncertainty as to the ultimate acquisition of all or any of the individual projects in the current pipeline. In order to complete the acquisition of any of the projects in the current pipeline, the Company must arrange financing, and to acquire all currently identified projects would require the Company to arrange hundreds of millions in project financing. There can be no assurance that any projects in the Company's current pipeline will ultimately be acquired or, if acquired, that such projects will be successful.

 

 

Gigawatt Scale Projects.

 

Solar energy will not become a serious contender in the industry until power plants can be built which compete with traditional power generation.  In order to compete, electricity produced must be priced so that larger plants makes sense, and, just as important, there must be demonstrable evidence from an engineering perspective, that larger plants can withstand the forces of mother nature for extended periods. Construction on a gigawatt scale must be an engineering project with the ultimate goal of saving critical natural resources and more importantly: dollars.  The Company will promote solar energy’s inherent, long-term strategic advantage to generate electricity in a more reliable and redundant distributed mode with the goal of fundamentally mitigating electricity disruptions (brown outs, black outs) that often plague a highly centralized mode of generation (such as we have today in the US).  The Company anticipates that each utility scale project will cost approximately $1.50 to $1.60 per watt to construct or approximately $1.5 to $1.6 billion per GW.

 

The Company has built its management team and Board around the belief that grid parity will happen within the next few years.  We believe that the desert southwest will become a major resource for the supply of affordable energy to the United States.  Company engineering and management has already begun working with its Board of Directors, advisors, and legal team to design its own large GW scale projects. The desert southwest has the highest number of days with sunshine in the U.S. It is important to note that a 10 megawatt facility (for example) would cost roughly the same amount in New York as it would in the desert southwest, but the facility in the desert would be exposed to more sunshine and would thus generate more electricity and more revenue.

 

How a Solar Energy System Works:

 

●

Solar PV panels are installed (sometimes mounted on a commercial building’s roof and sometimes at a standalone location chosen to be a power generation plant), where the panels collect energy from the sun in the form of DC electricity.

●

The direct current electricity is then converted by an inverter into AC electricity and sold back to the local or regional power utility.

●

The AC electricity can be fed directly into the commercial building itself, for use by the tenant and/or owner of the building, similar to its use by the local electricity provider or in the case of a power generation plan, fed directly into the power grid. Since the solar energy system works in tandem with the electricity provider, the commercial user will continue to get electricity from the provider when the user needs more than the solar energy system can provide (e.g. during overcast weather and at night, when the PV panel cannot collect energy from the sun).

 

Power Generation

 

The power generated by a power station is measured in multiples of the watt, typically megawatts (million of watts) or gigawatts (a billion watts). Power stations vary greatly in capacity depending on the type of power plant and on historical, geographical and economic factors. The rated capacity of a power station is nearly the maximum electrical power that that power station can produce. Some power plants are run at almost exactly their rated capacity all the time, as a non-load-following base load power plant, except at times of scheduled or unscheduled maintenance. However, many power plants usually produce much less power than their rated capacity.

 

 

In some cases a power plant produces much less power than its rated capacity because it uses an intermittent energy source (such as solar power). Operators try to pull maximum available power from such power plants, because their marginal cost is practically zero, but the available power varies widely—in particular, it may be zero during heavy storms or at night.

 

Industry

 

According to the U.S. Energy Information Administration’s Annual Energy Outlook 2014, the retail electricity sales are projected to grow by 25 percent (0.8 percent per year) from 3,686 billion kilowatt hours in 2012 to 4,623 billion kWh in 2040. Residential electricity sales are also projected to grow by 21 percent to 1,640 billion kWh in 2040, spurred by population growth and continued population shifts to warmer regions with greater cooling requirements. With an aging population of generation facilities worldwide, steps will need to be taken to meet the projected energy demand.  Because of new uses for electricity and growth in developing nations, the world has demanded more electricity year after year.  This trend is expected to accelerate in the near future.  According to a March 11, 2011 article posted on Energy & Capital, an energy think tank website, energy demand will increase by 50% in the next 25 years.  The supply of fossil fuels and uranium (used for nuclear power generation) will likely be depleted at an alarming rate as generation facilities step up to meet the demand.  Bloomberg in a March 13, 2012 article posted on its website, projected that solar generation is poised to not only compete with traditional generation methods, but in many cases, will produce less expensive electricity. We believe this creates the perfect situation for solar to become a part of the existing infrastructure and extend the longevity of traditional generation fuels.

 

The chart below shows total energy production in terms of an energy unit known as the British Thermal Unit ("BTU").  Most scientists work in BTUs.  The conversion from BTUs to kilowatt hours is 10,000 BTU to 2.9 kWh.

 

 

 

 

First described in Albert Einstein’s Nobel Prize winning paper on the photoelectric effect, solar power has now been around for over one hundred years.  In the last 30 years, we have seen exponential drops in the cost of solar electricity production.  These drops are quickly driving the technology to a point where solar will be cost competitive with traditional generation, on the grid. Stated another way, we believe that solar may be cost competitive with nuclear, coal and natural gas within three years – without subsidies.  The term of art for this event is “Grid Parity.” Using today’s technology, and simple math, one can calculate that a single west Texas County (Brewster County for example) could supply several times the needs for today’s electricity demand in the U.S.  (Brewster County = 6,182 square miles; solar density is 160 MW per square mile; 6,182 x 160 = 989 GW of potential electricity).  Similarly, a small portion of the Sahara could produce enough solar electricity to meet the demands of Africa, Europe and parts of Asia.

 

 

 

The chart above shows the startling drop in the cost of producing crystalline solar PV panels from 1977 through 2012.  Our analysis suggests that grid parity will occur when the cost of PV panels reaches $0.52 per watt. As of March 2015, the price is averaging approximately $0.571 per watt, comparable to the trend forecasted amount in the chart above.  The chart below shows how the price of solar has dropped in the last three years.  If the trend line shown below continues, we expect solar will be cost competitive with natural gas fired generation in 2015.

 

 

 

 

Beginning in 2009 PVXchange (a PV distributor and industry monitoring company) monitored the average cost of solar modules (spot price) from manufacturers in China, Germany and Japan. We have published several white papers based on the analysis of the long term (1980 – 2012) data and the shorter term data provided by PVXchange’s research for 2009 – 2014 as shown in the graph above.  During the period shown in the chart above, the cost of electricity has seen annual escalations in price.  The chart below uses U.S. Energy Information Administration (“EIA”) data to depict the retail cost of electricity during the period beginning in 2002 and ending in 2014.

 

 

Over the last 4 years alone, the cost of electricity has escalated 25% while the cost of solar has decreased by 66%.  We do not believe that solar generation will replace traditional fossil fuel electricity production, but instead that solar power will become an important part of the equation.

 

 

The U.S. power generation sector is at the convergence of several crossroads. According to a March 22, 2013, Frequently Asked Questions document published by the U.S. Energy Information Administration, about 540 gigawatts, nearly 51% of all generating capacity in the United States, were at least 30 years old at the end of 2012.  Fossil fuels, especially coal and oil, are increasingly unpopular due to pollution, availability and national security issues associated with country of origin.  Although cleaner and relatively reliable, nuclear has never caught on as a primary resource.  Prior to the March 2011 Fukushima accident in Japan, nuclear appeared to be entering a period of resurgence.  It is currently unclear how this incident will impact the American plans for nuclear, though one can expect the already high expense of bringing nuclear online to be impacted. Because the fuel for solar energy will last as long as the sun continues to shine, solar can be considered a permanent source of electricity.  Renewable generation will extend existing resources while the world’s engineers work on nuclear fusion and other long-term technologies that have much more limitless fuel supplies.

 

Solar Power

 

Except in US states where legislatures have required renewable energy, most utilities have not embraced renewables, which represents both an opportunity and a challenge.  Opportunities clearly come from being able to fill a demand for power, while the challenge comes from the resistance to new technology. A quick look at how generation has changed over time clarifies an important trend leading to the value of renewable energy and its role in the future.

 

Natural gas, coal and nuclear have grown, while oil has almost been completely eliminated.  Using data from the EIA, these charts show resources for electricity generation.

 

A quick glance at the data below from the EIA shows that currently, solar makes up the smallest part of the renewable sector.  This is largely because solar has been significantly more expensive than traditional generation, a weakness that is quickly being remedied as costs drop and efficiency increases.

 

 

 

 

GTM Research gathers a complete account of industry trends in the U.S. PV industry and produces a quarterly report.  In their report for the third quarter of 2014, they show the following findings:

 

●

New installations of PV in 2014 totaled 3,966 megawatts through the third quarter, up 50% from the same period of 2013 which installed 2,647MW

●

Cumulative operating PV capacity in the U.S. now stands at 16,100MW

●

6,500MW of PV were forecasted to be installed in 2014, up from 4,372MW in 2013, a 49% growth rate

●

36% of all new electric generating capacity through the first three quarters of 2014 came from solar

 

Governmental Incentives

 

Largely due to the an increasing concern for and desire to curb industrial pollution in the US, the past few years have seen significant policies aimed to increase the use of renewable energy.  Included in these governmental incentives are 30% Federal Grant money for capital costs (expired in December 2013), Investment Tax Credits and accelerated depreciation schedules.  Local incentives are also encouraging growth in many states around the country.  It is important to note that our business plan does not rely on subsidies, but we do recognize the impact those subsidies have had on improving solar economics.  Currently, there are three kinds of policies which governments use to increase the use of renewable energy:

 

1. Tax Credits: A federal Investment Tax Credit ("ITC") of 30% is in effect for solar power until the end of 2016.  Management expects this to expire, or be reduced at that time; however, we believe solar will have reached grid parity before December 2016.  Some states like North Carolina also offer an in-state tax credit that is further encouraging solar development.

 

2.  Power Production: Many states have Renewable Portfolio Standards ("RPS"), which require electricity providers to generate or acquire a percentage of generation from renewable sources. However, many RPS programs have “escape clauses” if renewable generation exceeds a cost threshold. California, for example, has aggressive goals of achieving 33% renewable generation before 2020.  Some states have delayed compliance and others lack enforcement procedures. Still, many states continue to announce RPS standards.  Because of the favorable projections for solar PV efficiency improvement and lowered costs, most analysts currently forecast that nearly all states will meet RPS mandates.

 

 

3.  Trading Markets:  A number of states have built a Renewable Energy Certificate program ("REC")* into their Renewable Portfolio Standards.  This allows electricity providers to sell renewable energy credits and use their proceeds for construction.  Some states have made REC markets mandatory, requiring electricity providers to produce or acquire renewable generation to reduce reliance on fossil fuels to generate electricity.  The REC market has become quite hot over the past few years, and the Company intends to capitalize on REC market inefficiency wherever possible.

 

*Renewable Electricity Certificates / Renewable Energy Certificates are tradable energy commodities that represent proof that 1 megawatt-hour of electricity was generated from an eligible source such as a PV power plant.  These can be purchased to replace Renewable Portfolio Standard requirements to generate power with renewable energy.

 

Further Business Strategies

 

As previously described, the Company has a four-pronged strategy with the goal of becoming one of the world’s leading solar generation companies.  Key elements of the business plan include:

 

1.

Continually author and co-author white papers and contemporaneous articles on solar energy while simultaneously developing and promoting webinars which educate the energy sector and general public on the solar industry.  The white papers focus on technical and market issues and are being published on the web as well as through traditional engineering and technical publications.  Management is using these papers and webinars to bring PSI to the forefront as a recognized expert in the sector.  All published papers are hosted on www.PrincipalSolarInstitute.org.  Webinars are regularly promoted and archived on the same Institute site.

 

2.

Our primary business model today is the acquisition of existing solar power generation assets nationwide.  Because of federal, state and local subsidies, we believe that hundreds of such assets exist that are cash flow positive.  Management believes the Company can achieve significant growth through proper due diligence and the acquisition of available assets.

 

3.

Acquired assets or companies will provide access to additional qualified projects. This will allow the Company to opportunistically build its own solar projects.  The primary goal of these type projects is to further build our balance sheet, increase revenue and further extend and expand valuable relationships.

 

4.

As grid parity moves closer, we are is utilizing our unique resources to begin plans and strategic discussions to build a large GW scale project.  Through its management team, Board members, and advisors, many of whom have spent decades in management roles within some of the largest and best known traditional utilities (TXU Corp., Oncor), energy companies (Hunt Consolidated Energy), and others (Electronic Data Systems, Luminant Worldwide Corporation, McKinsey & Company and 7-Eleven) management believes it has strong enough contacts in some of the world’s largest companies and in the decision making segments of utilities and governments that give us the opportunities to build gigawatt scale projects in key global locations.

 

Project Pipeline

 

According to a February 2015 listing from the Solar Energy Industry Association, there are over 550 major solar projects of 1 MW and above that are either operating, under construction or under development in the United States, representing over 35 GW of total capacity.  The Company is continuously evaluating prospective developer partners and acquisition targets.

 

 

 

The Company’s strategic acquisition plan revolves around an understanding of how the solar market has developed in the last 10 years.  In the earlier years, installations were built almost exclusively by members of the early solar movement that believed in the dream of renewable power.  The economics of these installations were almost always negative.  This was somewhat helped by state and federal incentives, but for the most part, no installations made sense from a capitalist perspective.  In the last 10 years, the manufacturing costs have dramatically fallen, while efficiencies have increased.  Simultaneous with the trends in solar, the cost of electricity has steadily climbed.  The question of solar being able to compete with traditional power generation (“grid parity”) has become a viable debate in recent years.  According to EIA Monthly Electricity Reports, as of 2014 6GW of large solar PV projects have become operational since 2010.

 

Non-Residential Projects by System Size* (2010-2015)

 

  

This data from industry analysts supports our own experience in the market that there are more than enough solar projects ripe for acquisition and quality partnerships to build.  The Company has worked to develop its due diligence process while simultaneously also building financial relationships and credibility in the industry.  The Company considerations for evaluating acquisitions are shown below.

 

Key Project Assessment Criteria

 

●

Power Purchase Agreement.  The PPA is a legal agreement between the project builder-owner-operator, and the purchaser of electricity.  PPAs have been around as long as utilities have been selling electricity.  They represent the source of revenue in the acquisition.  It is important to evaluate not only the legal quality of the document, but also the credit quality and stability of the buyer of electricity that is party to that PPA.

 

 

●

Location. Location is important for several factors.  The Company will evaluate location for local regulatory factors that could impact our projects and for local environmental factors that impact the amount of electricity a project may produce.  SolarBuzz lists the 10 states below (as of January 14, 2014) where non-residential projects are most prevalent and select international locations may be considered:

 

California	Utah
Nevada	New Jersey
Arizona	New Mexico
North Carolina	Colorado
Texas	Florida

 

●

Solar Renewable Energy Certificates.  Solar Renewable Energy Certificates ("SREC") vary from state to state and are constantly changing.  They represent fees paid for generation of electricity from a renewable source.  There is considerable market uncertainty concerning the value of SRECs.  Principal Solar intends to take a conservative approach concerning SRECs and limit our risk exposure through pre-sales and forward contracts where available. An SREC is a certificate, issued by that state in which the solar system is operating, representing the “green attributes” of one MWh of electricity generated from a solar energy system.  SREC’s are bought and sold in each state’s SREC market like a commodity and can even be sold from certain state-to-state markets.   The sale of SRECs is intended to promote the growth of distributed solar by shortening the time it takes to earn a return on investment.  The SREC is sold separately from the electricity and represents the "solar" aspect of the electricity that was produced. The value of an SREC is determined by the market subject to supply and demand constraints.  SRECs can be sold to electricity suppliers needing to meet their solar Renewable Portfolio Standards requirement. The market is typically capped by a fine or solar alternative compliance payment ("SACP") paid by any electricity suppliers for every SREC they fall short of in connection with applicable requirements.

 

●

Panels. While many manufacturers are producing panels, we will only undertake acquisitions with builder owner operators that have built utilizing panels from larger and more financially-stable manufacturers. Currently, the Company does not have a primary supplier, but has strong relationships with major players in the industry including GCL, the world’s leading solar cell manufacturer. Along with doing business with the largest manufacturers, it is important to evaluate the quality of the warranty provided.  Principal Solar will seek hardware backed by financially strong manufacturers who have minimized warranty financial risk through investment grade reinsurance partners.

 

●

Inverters.  Inverters are a critical component in solar installation; they also tend to be the weak link because they fail in 10 to 15 years while the panels, with no moving parts, tend to last 30 to 40 years.  For this reason, it is preferable to have extended service contracts which cover failure during the term of the PPA.

 

●

Operations and Maintenance.  Our engineering team is tasked with inspection of projects and evaluation of existing maintenance contracts. Ongoing maintenance will be conducted through third party operations and maintenance organizations to minimize costs.  This has been done in each of the three solar generation acquisitions the Company has completed to date.  Because of the nature of the existing assets, no maintenance contracts are currently in place.

 

●

Insurance.  Panel manufacturers typically include warranties covering hail damage, but not wind and flooding, nor do they cover injuries from electric shock.  Our acquisition criterion includes an evaluation of the current insurance policy in place.

 

●

Deal Structure.  We plan for acquisitions to be funded with third party financing through non-dilutive special purpose vehicles (i.e. a 5 year partnership flip, sale leaseback, and inverted lease – we have included a brief description of these vehicles below).  Additionally, we have been approved to list our Common Stock on the NASDAQ and we expect to have access to various capital market strategies to help support acquisitions through the issuance of debt and equity securities.

 

 

●

Tax Strategies.  Our finance model assumes various tax benefits and strategies to include bonus depreciation, accelerated depreciation schedules and investment tax credits.  For example, Modified Accelerated Cost Recovery System ("MACRS") allows tangible property to be depreciated on an accelerated basis. Solar projects qualify for MACRS treatment and are depreciated, for tax purposes, over the course of six years. In recent years, Congressional legislation has amplified the tax benefits related to accelerated depreciation to include a 50% first-year ‘bonus depreciation’ provision for qualified renewable energy systems. The bonus depreciation incentive expired at the end of 2014, however, as in prior years, it may be extended and applied retroactively to January 1, 2015.   The 50% first-year bonus depreciation provision, first enacted in 2008, was extended in February 2009 (retroactively for the entire 2009 tax year) under the same terms as originally enacted by the American Recovery and Reinvestment Act of 2009 (House of Representatives Resolution ("H.R.1"). It was renewed again in September 2010 (retroactively for the entire 2010 tax year) by the Small Business Jobs Act of 2010 (H.R. 5297). In December 2010 the provision for bonus depreciation was amended and extended yet again by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (H.R. 4853). Under these amendments, eligible property placed in service after September 8, 2010 and before January 1, 2012 was permitted to qualify for 100% first-year bonus depreciation. The December 2010 amendments also permitted bonus depreciation to be claimed for property placed in service during 2012, but reduced the allowable amount from 100% to 50% of the eligible basis. The 50% first-year bonus depreciation allowance was further extended for property placed in service during 2013 by the American Taxpayer Relief Act of 2012 (H.R. 8, Sec. 331) in January 2013, and extended again through December 31, 2014 (retroactively for the entire 2014 tax year), by the "Tax Increase Prevention Act of 2014" (Sec. 125 of H.R. 5771).

 

●

Valuation.  All acquisitions will be made at fair valuations based on discounting the value of the PPA revenue and overall project cash flows.  Additionally, we focus on assets that are accretive to cash flow.  This is possible because of economies of scale, prudent transaction structuring, and understanding market dislocations in the pricing of electricity and renewable energy credits.

 

●

Leverage. Many times, builder owner operators utilize loans to fund construction of facilities, which are guaranteed by the owner and, sometimes, their financial partners.  We plan to finance projects through subsidiary special purpose vehicles. Utilizing these common project finance structures we believe that we will be able to finance projects on a limited or no recourse basis.

 

White Papers, Standards and Thought Leadership

 

Over the past two years via the acquisition of and expansion of the Principal Solar Institute (www.principalsolarinstitute.org) (the Company’s solar industry website), the Company has become one of the most prolific authors in the solar industry.  The Company has produced multiple white papers and dozens of articles on solar and solar-related topics.  The Institute also regularly hosts industry experts to conduct valuable and relevant webinars.  The long-term goal is to publish an authoritative library of papers and webinars that will represent a single source and resource for understanding the solar industry.  In the fall of 2012, the Company launched the Principal Solar Ratings System, an industry-first ratings system that allows easy, unbiased, comprehensive analysis and comparison of PV modules and solar power generation systems. The Institute built the Ratings system by bringing together a standards committee consisting in the view of our management, of some of the best-known and highly regarded individuals in the sector.

 

 

 

The list of papers currently published (☑ ) and pending (●) on www.PrincipalSolarInstitute.org:

	☑	Turning Green Into Greener: Solar 101
	☑	Shining Light on Renewable Energy in Developing Countries

	☑	Navigating Environmental and Regulatory Issues to Reduce Risk
	☑	Interfacing with the Electrical Grid

	☑	Next Generation Vehicles: Addressing Air Quality, Fuel and Efficiency
	☑	Energy Efficiency and Sustainability in the Organic Food Supply

	☑	DOD Takes Aggressive Lead / Early Adopter
	☑	The Capitalist Case for Solar Energy.

	☑	Solutions for the Texas Energy Shortage.
	☑	Feed-In Tariffs: The Proven Road Not Taken.

	☑	Investing in the Power of the Sun
	☑	Solar Goes Mainstream Why Distributed Solar Makes Sense Today for Large Electricity Buyers.

 

	●	Electricity Transmission using microwave and Laser Technology.
	●	How Will Solar Reach Grid Parity?

	●	Best Locations for Building Solar
	●	Regulatory environment for Solar

	●	Solar and natural gas – the perfect complimentary pair
	●	Solar in the Future – Geosynchronous Based Generation

	●	Evaluation of Future U.S. Electricity Needs
	●	Solar as a tool for Metropolitan Water Districts

	●	Storage of Electricity
	●	Building an International Network of Solar Generation Plants

	●	Advantages of Solar Over:  Coal / Nuclear / Natural Gas
	●	Advantages of PV over Thin Film and Solar Thermal.

	●	Solar for Land Reclamation Areas
	●	Desalination of the World’s Water Supplies

	●	Off-Grid Solar
	●	PV Efficiency Projections

	●	DC Transmission Lines and Other technologies for the National Grid
	●	Solar power and recharged vehicles.

 

 

 The Company regularly evaluates and seeks out well-known and highly regarded individuals and think tanks for collaboration as co-authors for white papers.  Final editing and publishing is done by us through our Principal Solar Institute website (www.PrincipalSolarInstitute.org).  The authoring process takes approximately six weeks.

 

Along with the publication of papers and webinars, the Company plans to become an industry focal point for solar vendors and buyers.  In January 2011, the Company acquired Capstone Solar, an entity focused on bringing together vendors and buyers in an online webinar environment.  Capstone Solar has been integrated into the Company’s marketing and business development operations and is a component of the Principal Solar Institute (the Company’s solar industry website).

 

Our goal is to operate the Principal Solar Institute as an unbiased standalone division. Due to the fact that we do not produce nor sell PV modules, we believe that developing a scientifically based objective rating system designed to analyze and compare products manufactured by others, promotes competition, transparency, and integrity within the industry.

 

Principal Solar Institute PV Module Rating

 

Like a barrel of oil, a PV module also represents a
consumable quantity of energy over its lifetime. Unlike a barrel of oil, the power generated by a solar module is further dependent upon a wide-range of design characteristics, manufacturing variables, and installation and location specific aspects. Day and night cycles, installation latitude, and seasonal variation in sunlight and temperature predictably influence the module's power generation output. Additionally, the varying effects of weather—primarily cloud cover, dust, and rain, are location specific and all reduce the module's output. Beyond these location specific influencers, there are manufacturing and design characteristics of the module itself that will differentiate modules within a manufacturer’s offerings and between manufacturers, even under identical environmental conditions. Examples of these design characteristics are the individual solar cell's efficiency that, when placed together, form a module; the productive area of the module (i.e., influenced by the shape and spacing of individual cells); how the module reacts to temperature and humidity, how the module degrades and over what period of time, and its expected failure rate.

 

As the solar industry has grown, individuals and installers have developed an assortment of disparate methods for selecting PV modules. Many of these methods rely upon product specification sheets or marketing brochures provided by the manufacturers. We believe that analysis of such an inconsistent dataset is ineffective because it does not typically include details about the relative productivity and non-uniform availability of key specifications for comparison. We believe that this variety of criteria makes it difficult to adequately identify an optimal PV module and often leads to inconsistent or arbitrary selection of PV modules.

 

The Principal Solar Institute PV Module Ratings ("Ratings") are designed to allow large-scale solar consumers to make informed, intelligent comparisons and decisions when selecting PV modules. The goal of the Principal Solar Institute PV Module Rating is to define the standard for comparing critical characteristics of PV modules between different manufacturers, as well as across manufacturer's individual product lines.

 

To arrive at the PSI PV Module Rating number, we first calculate the amount of energy that a particular PV module is expected to produce over a 25-year lifetime. This “Lifetime Energy Production” ("LEP") differs between module models because of module design characteristics and differences in manufacturing processes used to produce them. Secondly, we calculate the amount of energy that an ideal module would produce if all of the manufacturing processes were optimized. Thirdly, the PSI PV Module Rating is the ratio of the specific module’s LEP to that of the ideal module.

 

Our Rating is a tabular shortcut that we believe can be used to quickly scan thousands of PV modules to find the most productive, and allow a quick and simple cost-benefit analysis, and it has been used by residential installers to explain to customers why more expensive PV modules may actually be better in a cost benefit analysis. We have used our energy production metric in our own project analysis and due diligence, and it can be used by commercial installers in both residential and commercial situations, those requesting construction proposals ("RFPs"), municipalities in order to establish efficiency guidelines, and by literally thousands of companies and entities worldwide of all sizes and description.

 

 

An individual Rating is a number, for example "9.2". As a relative measure, it means nothing except in comparison to the Rating of another PV module, for example "8.7". Furthermore, only when considering the price of the two PV modules being compared can a buyer determine which module has a higher value in their project. A PV module with a slightly lower Rating but with a significantly lower price could produce a higher value for the buyer over the life of the project.

 

The Rating Process

 

Principal Solar Institute does no independent testing of its own. Instead, it takes the plethora of data published by a PV module's manufacturer including those items we consider significant contributing factors in estimating the lifetime energy production of a PV module which include the module's 1) maximum power, 2) manufacturing tolerances, 3) temperature coefficient, 4) nominal operating cell temperature, 5) low light efficiency, 6) degradation rate, and 7) total area efficiency. Each of these significant contributing factors is described further in items 1-7 below, respectively.

 

To apply the Company's proprietary collection of standard engineering algorithms, our analyst inserts that data made available by the manufacturer into the appropriate engineering algorithm reflecting that particular energy production significant contributing factor (much like inputting a numerical value into a mathematical formula), sums the output from algorithms covering all of significant contributing factors, and thereby determines the calculated 25-year expected LEP of that individual model of PV module. The resulting LEP is then divided by the LEP of an idealized PV module created by the Company to create a relative Rating number for the PV module being reviewed.

 

Location and installation specific aspects conspire to reduce the accuracy of the calculated LEP, but such would affect all modules situated in the same environment similarly. Thus, it is possible to divide the LEP by the energy produced by a theoretical ideal PV module and create a numerical value –the "Rating"– that specifies a relative performance measure across a large number of modules offered by manufacturers around the world. The Rating does not attempt to measure the actual influence of the location and installation specific aspects of module performance but, instead, uses its proprietary collection of standard engineering algorithms, including a standard model of sunlight intensity and temperature applied against the manufacturer's published data, to calculate their relative effects on individual PV modules.

 

Beyond the simple "power value" specified by the module's manufacturer (for example, "300W"), the additional aspects of the module's design and performance characteristics are generally all published by the module's manufacturer, but they cannot be directly referenced to calculate energy production because of the expected range of sunlight and temperature possibilities. However, using the Rating established by Principal Solar Institute, it is a simple process to compare modules on a relative basis. One example of a useful comparison is a cost-benefit analysis based on dollars per energy units produced. A PV module buyer can simply divide the cost of a module by its Rating to obtain a relative cost proportional to the energy production.

 

Our PV Module ranking ("Ranking") is simply the ordinal sort of our Ratings. A higher Rated PV module will have a greater Ranking than a lower Rated PV module.  Our Ratings have not yet gained widespread acceptance.

 

The significant contributing factors in estimating the LEP of a PV module are described in the sections below, along with an explanation of how each affects the Rating. There is no weighting of the factors. Instead, each factor has an identifiable effect, power reduction or power increase, and that effect is used with our proprietary collection of standard engineering algorithms to estimate the energy produced over the PV module's lifetime. These algorithms use a standard model of daily sunlight intensity which varies from dawn to dusk, and temperatures that are characteristic of the time of day and seasons.

 

 

1— ACTUAL TESTED MAXIMUM POWER VS. ADVERTISED POWER

 

Generally, PV module manufacturers advertise a power value for each of their products, for example, "300W", and that power value is a primary factor in the design of any solar power system. The advertised value is useful for marketing and buyer convenience but, by multiplying the module's voltage and current at maximum power, both published by the module's manufacturer, a module advertised as 300W might have an actual tested maximum power of 299.83W. While the difference may be small in a residential project or a small solar array, in a utility scale project deploying tens-of-thousands or hundreds-of-thousands of modules, that small difference can be meaningful. Modules with higher tested maximum power values produce more energy than those with lower maximum power values.

 

2— NEGATIVE POWER TOLERANCE (manufacturing tolerances)

 

In all manufacturing processes, products exhibit a deviation from their design target. In PV module production, this is called the "power tolerance" and is published by the module manufacturer most usually as a variation such as ± 3 percent. Higher quality production lines control this variation better and manufacture products with less variances (i.e., a smaller or "tighter" tolerance). A smaller tolerance is better for the customer since PV systems assembled from arrays of such PV modules are more likely to meet the overall system design specifications. The PV module Rating takes this characteristic into account by subtracting the negative end of the power tolerance range (i.e. the negative 3%) from the manufacturers published power value, and then calculating the energy produced and its input to determining the Rating. By subtracting the negative end of the power tolerance in our calculation, we assume, for purposes of our calculations, that the modules may all produce at the bottom end of the power tolerance level; and we thereby provide a more conservative measure in the Rating. We believe it is better for consumers and easier for designers to engineer a system if the power tolerances are narrower. We further believe a conservative Rating will result in the overall system performing better when compared to its design, and that the system will have a greater LEP because some of the PV modules will actually perform better than their negative power tolerance.

 

The Negative Power Tolerance value is used to calculate the impact on energy production by using daily varying sunlight intensity and time in order to convert power (W) to energy (kWh). A zero negative power tolerance results in no loss of energy production, while increasingly larger negative power tolerance will result in an increasingly greater loss of energy production.

 

3— TEMPERATURE COEFFICIENT AT MAXIMUM POWER

 

Solar cells produce less power at higher temperatures due, in part, to 1) thermal heating from ambient conditions and 2) local heating resulting from the module's nominal operating cell temperatures (described below). Temperature coefficients, a measure of the panel's sensitivity to temperature changes, are empirically determined and used to describe the negative effect of increased temperature on PV module power. A higher temperature coefficient has more impact on energy production in warmer climates or where the PV modules are mounted in high-temperature locations, such as a dark roof. For the manufacturer to determine and publish the temperature coefficient of its modules, a sampling of PV modules from each product line must be tested by an independent lab at a specific illumination over a prescribed range of temperatures. Products with a higher (absolute) temperature coefficient will have a lower LEP. All information used in the PV module Rating relating to temperature coefficient comes directly from manufacturer supplied information.

 

 

4— NOMINAL OPERATING CELL TEMPERATURE

 

In addition to the influence of ambient temperature, PV modules themselves generate heat when operating and that heat also reduces the energy the modules produce. Generally, as a PV module collects more solar energy at times when more sunlight is available, the temperature of the solar cells increases because of the increased current flow. At standard conditions, this characteristic operating temperature is called the nominal operating cell temperature NOCT. A higher NOCT amplifies the negative effect caused by the temperature coefficient. Module manufacturers determine and publish the module's NOCT by employing an independent testing lab applying standard test conditions.

 

Like all parameters used in calculating the Rating, the module's manufacturer employs an independent laboratory to test and publish the NOCT of various panels by introducing a PV cell into an isolated environment having a stabilized temperature of 25°C (77°F), and measuring the rise in temperature of the cell itself over a standard period of time in the standard test condition. All information used in the PV module Rating relating to nominal operating cell temperature comes directly from manufacturer supplied information.

 

5— LOW LIGHT EFFICIENCY (POWER AT LOW ILLUMINATION / POWER AT HIGH ILLUMINATION RATIO)

 

Most of the time, PV modules do not operate under optimum insolation (i.e., with maximum exposure to the sun). Peak sunlight is available for a limited time each day, and much of the power produced by PV modules is produced under off-peak conditions. Cloud cover also creates non-ideal operating conditions. Some PV modules perform better than others in off-peak conditions. Recognizing the significance of this characteristic is important in selecting a superior PV module—one with higher Lifetime Energy Production. In order to calculate the impact on LEP, power must be measured at two different illumination levels, and we have included the power at low illumination and power at high illumination ratio characteristic in the Principal Solar Institute PV Module Rating. In order to determine and publish the power at low illumination and power at high illumination ratio, the module manufacturer employs an independent testing lab using a calibrated solar spectral equivalent light source of low illumination (200W per meter squared) and high illumination (1000 watts per meter squared). Temperature and other test conditions are held constant during this test. Because of module manufacturing differences, the ratio of power produced at these two test conditions differs from the expected of 0.2 (calculated as 200W/1000W). Results from these measurements are used to determine a characteristic called the insolation response function of the PV module. The insolation response combined with the daily insolation is a key component of the LEP. All information used in the PV module Rating relating to low light efficiency comes directly from manufacturer supplied information.

 

To incorporate the ratio in the calculation of energy, the Institute uses a standard model of insolation that includes a full daily range of intensities. In this way, modules with superior Low Light Efficiency (i.e. efficiencies greater than the expected 0.2) will have a greater energy production during times of low light and a greater LEP.

 

6— ANNUAL POWER REDUCTION

 

Solar cells comprising PV modules and the protective materials covering them degrade over time, resulting in a reduction in yearly power production. As maximum power decreases, so does the amount of energy that is produced at specific conditions. Some manufacturers provide a numerical value for annual power loss in their datasheets, but generally the significant metric for consumers is the warrantied power. Warrantied power performance is used to calculate LEP and contributes to a PV module’s rating.

 

To convert this to an impact on energy production, the Institute, in computing the Rating, reduces energy production in accordance with the manufacturers’ performance warranty. The annual power reduction is used with time and our model of insolation and temperature to covert power (W) to energy (kWh). The annual energy reductions are added linearly over the 25-year expected lifetime of a PV module. All information used in the PV module Rating relating to annual power reduction comes directly from manufacturer supplied information.

 

 

7— TOTAL AREA EFFICIENCY

 

PV modules are assembled from arrays of solar cells, and it is not always possible for the manufacturer to cover the entire surface of a module with solar cells. The degree of coverage is called total area efficiency and is calculated by dividing the module power by its total surface area. Since more concentrated wattage in a PV module improves design flexibility and efficient use of space—especially on rooftops—a higher total area efficiency increases a PV module’s rating. The area of PV modules is published by the module's manufacturer. The LEP, as calculated by the combined energy impacts of characteristics 1-6 above, is divided by this area to create the area efficiency. Modules with higher area efficiency will harvest more energy from a specific area than those with lower Area Efficiencies. All information used in the PV module Rating relating to total area efficiency comes directly from manufacturer supplied information.

 

8— FAILURE RATE

 

Several PV module tests done by the module's manufacturers do not have a direct impact upon the average cost of electricity but, instead, measure the expected durability of the PV module in long term operation and can indicate whether the PV module is less reliable and is likely to fail or have reduced power during normal use, causing a loss of production. The manufacturer also gathers reliability data through customer's field reports. Though a manufacturer’s warranty can reduce the cost of a PV module failure, it cannot eliminate the risk or the associated loss of electricity production and loss of revenue. Manufacturers generally do not publish their reliability data, and we do not attempt to measure or consider reliability aspects in our Rating system.

 

Integrity of the Approach

 

We believe the Principal Solar Institute PV Module Ratings are unbiased in the sense that we run all PV modules through the same algorithms, with no bias toward results. Since all modules are rated based initially on information supplied by the manufacturer, we believe that by using the same criteria for each module evaluated we eliminate our ability to effect the results of the review process. It is our opinion that by being consistent in the application of a standard and uniform algorithm to all modules we evaluate, and by using data supplied by manufacturers, we are being consistent and unbiased in our evaluation of any individual PV module.

 

Ratings Acceptance

 

The acceptance level of the ratings is a rather subjective concept. We are encouraging adoption of our PV module Ratings by taking advantage of frequent educational opportunities including presentations at trade shows, webinars, white papers, etc., and we have commentary from our Internet community that indicate their appreciation of and interest in using our PV module Ratings. We do not, however, have any goals or milestones for acceptance or a timeline during which we plan to attempt to increase the adoption of the Ratings.

 

While only one municipality has formally adopted the ratings (Solarize Frederick County, Maryland) and requires solar installers to submit a Principal Solar Institute PV Module Rating along with new installation requests, reference to the ratings has also appeared in trade journals, technical publications, and blogs. Additionally, we receive regular inquiries from consumers looking for ratings. Our website, www.principalsolarinstitute.org, is receiving more than 11,000 views per month representing more than 2,000 unique visitors, and we have approximately 2,600 subscribers to our periodic distributions. Additionally, we have had some inquiries from manufacturers regarding the ratings and no specific complaints or concerns about the resulting ratings.

 

 

Sales and Marketing

 

The Company’s business development team is focused on analyzing the solar market and companies, pursuing relevant acquisition discussions and expanding the Company’s network of advisors and partners. The Company has developed relationships with trainers, solar vendors and financing entities to broaden access to builder owner operators that meet the criteria in each stage of the acquisition plan.  We currently have strong relationships with several such entities that are providing a robust pipeline of targets as well as utilizing our data sources for partner identification.

 

The Company has deployed version 1.0 of its website (www.PrincipalSolar.com).  The key feature of the site is the tie in to the Principal Solar Institute (www.PrincipalSolarInstitute.org) which presents the library of Company-developed white papers, and other relevant resources and news in the solar and renewable energy fields.

 

The Company is also aligning itself with strategic partners who are actively promoting the expansion and adoption of renewable energy.  These partners include think tanks, policy organizations, major energy companies, commercial developers and local community leaders. The Company believes that collaboration with other stakeholders in the transforming energy business will accelerate its visibility and success.

 

Acquisition and Financing Structures

 

Financial Structure Overview

 

We plan to use a variety of legal and financial structures in the development and acquisition of solar power production capacity. The most common structures currently used in the industry are direct equity, a partnership flip, a sale leaseback, and an inverted lease.  Each structure will be tailored to maximize each individual project and to achieve the highest probably of risk adjusted returns above our investment threshold.

  

Direct Equity: With direct equity, the project will be structured much like a traditional leveraged buy-out acquisition.  At the simplest level, this will utilize a senior lender with an amortizing loan, preferably with a 10 to 20 year amortization schedule and an equity partner and/or equity provided directly by the Company.  Cash flows will be divided based on a pro-rata split after debt service.

 

Partnership Flip: With the partnership flip, the Company will utilize a partner that co-invests in a project typically motivated by tax credits to drive their returns. One partner will receive the majority of tax benefits from the project until a certain trigger point. On the trigger, ownership flips and the Company will receive the majority of project cash flows.  This flip can be time-contingent (usually a minimum period of 5 years per IRS regulations) or yield contingent (usually approximately an 8 or 9% internal rate of return).

 

Sale-Leaseback: Used frequently in corporate real estate transactions, there is a sale of the asset by one party to another.  A sale leaseback is the disposal of a building, land, or other property to a buyer under special arrangements for simultaneously leasing it on a long-term basis to the original seller, usually with an option to renew the lease.

 

Inverted Lease or Lease Pass-through: The inverted lease is almost the opposite of the sale-leaseback structure.  The buyer directs lease payments to the seller. The Investment Tax Credit ("ITC") is then passed-through from lessor to lessee.  Typically the lessee will retain a preferred return and a percentage of project cash flows. This is a highly complex structure with a very important feature: there are multiple 'levers' available to the various parties.  There can be a negotiated ITC split, a different split on up-front investment, and yet another split on any potential loss allocations. A lessee may own up to 49% of the lessor.  In cases where the lessee may have tax liability for gains outside of the transaction, the lessee may be able to capture a loss allocation on its investment.  This loss allocation means that it may be in the investors’ interest to have a severely underperforming project. Inverted lease structures are much more complicated than provided for here.

 

 

Competition

 

There are currently five types of competitors for the Company:

 

1.

Traditional power generation companies – this group represents the largest power generation in the energy sector.  They typically generate electricity using fossil fuels (e.g. coal and natural gas), nuclear, and hydro. The Company views these companies as potential partners.   The Company plans to bring solar expertise to an industry that is historically slow to move.   With 30+ year life expectancies for their fossil-based energy generation facilities, traditional power companies are far more deliberate in allocating new funding to power plants.  Power generators need to be able to sell their generation to utilities to justify the capital expense of building a new plant.  By demonstrating the ability to own and operate solar facilities, the Company believes that it can become an attractive partner for traditional power generators looking to expand into renewable energy, but reluctant to independently commit to a new power source.

 

2.

Solar Thermal – has been deployed on a limited scale to-date around the country.  More efficient than PV, it has moving parts, which can cause efficiency and cost issues in the long term.  Over the last few years, less and less solar thermal is being commissioned due primarily to the decrease in cost of solar PV.

 

3.

PV Installers – The Company is aware of regional solar installers in various markets in the US.  Most actually represent partners more than competitors due to our generally complementary business strategies.

 

4.

Independent Power Producers ("IPPs") and Large Solar PPA Developers  – Independent Power Producers are owners and operators of power plants, including solar power plants, who sell electricity via PPAs to local utilities.  A small number of IPP’s have begun adding solar to their portfolios (Recurrent and Sun Edison for example).  While these firms represent a source of competition for the Company, their presence in the marketplace actually legitimizes the goals of the Company.  The large solar developers who own PPAs and sell the resulting electricity have become de facto IPP’s.

 

5.

Wind Farms –Wind generation had a phase of popularity that has slowed considerably.  Because of problems with gearing and maintenance, many wind farms have closed. Gearing problems and maintenance continue to plague wind turbines, yet new technologies make this form of generation profitable in many locations and wind development does continue.   In contrast to solar, wind tends to be more dependable at night and this is not when additional generating capacity is needed.   Peak demand across America’s population growth areas (South and West) occurs during hot summer days which favors solar.  During these times, many utilities must buy peak power from inefficient, older power plants at higher prices.   Overnight, only the most efficient, cost-effective power plants are needed in order to provide the base load of electricity generation demanded by customers.   Solar PV and wind provide the majority of their power output at very different times and therefore don’t really compete.

  

As described above, there are several competitive technologies.  Below we will focus on companies that fall under “Independent Power Producers ("IPPs") and Large Solar PPA Developers” above.  There are several notable players in this space which is just now beginning to grow in the U.S.  The American Solar Energy Society ("ASES") is the national trade association for all solar related companies.  Market research suggests that there are few companies with pure solar business models similar to that of the Company.  The Company has recently re-evaluated the competitive landscape of the market and each of the competitors mentioned below is helping to grow this business sector, and may in fact become viable strategic partners and/or acquisition targets for the Company as we grow.

 

 

●

Canadian Solar (NASDAQ: CSIQ). Canadian Solar is a major solar module manufacturer with manufacturing facilities in Canada and China. The company’s primary revenue source is the sale of solar modules, but it has recently begun to develop solar projects as well. As of August 2014, roughly 30% of the company’s revenue was being generated by its Total Solutions business, which includes project development and project construction. Canadian Solar has built a pipeline of over 1 GW DC worth of solar projects. The primary business model is to develop or co-develop projects, deploy Canadian Solar modules and sell the operating project to an Independent Power Producer or other investor.

 

Canadian Solar is more likely a partner to Principal Solar than a competitor, but their desire to deploy their modules via their project development business matches well with Principal Solar’s desire to finance, own and operate solar projects.

 

●

Solar City (NASDAQ SCTY). Among its primary services, the company designs, finances and installs solar energy systems, performs energy efficiency audits, and retrofits and builds charging stations for electric vehicles. Solar City’s primary business model is the solar lease. Solar City installs solar systems on residential and commercial buildings, which they own, and they sell the resulting power to the homeowner/business owner. Solar City generated almost $255 Million in 2014 on solar leases and the sale of solar systems.

 

Solar City is a reasonable comparison for Principal Solar in that Solar City owns solar systems and sells electricity via PPAs. Solar City targets residential and commercial customers, creating a high volume, transaction-based model, where Principal Solar targets utility scale solar projects, utilizing a low-volume, high-value business model.

 

●

TerraForm Power (NASDAQ: TERP). TerraForm is a solar "yieldco" (a publicly traded company that is formed to own operating assets that produce a predictable cash flow), spun off from SunEdison. In effect, SunEdison, a solar project developer, places its solar projects in the TerraForm yieldco. The yieldco went public in July, and has a current market cap of over $3 Billion. TerraForm’s initial portfolio was just over 800 MW, which included 322 MW of operating projects, 270 MW of acquisitions, and approximately 190 MW of projects under construction.

 

TerraForm's business model is similar to that of Principal Solar’s business model. TerraForm, like Principal Solar, bases its valuation on the value of its booked solar assets. As a yieldco, TerraForm demonstrates the valuation of large solar projects in a publicly-traded company.

 

●

First Solar (NASDAQ FSLR). From First Solar’s SEC filings: First Solar, Inc. manufactures and sells PV solar modules with an advanced thin-film semiconductor technology, and it designs, constructs, and sells PV solar power systems. The Company is a thin-film PV solar module manufacturer and a PV solar module manufacturer. It operates its business in two segments: components segment and systems segment. Its components segment involves the design, manufacture, and sale of solar modules, which convert sunlight into electricity. Its systems business involves the sale of its solar modules coupled with the engineering, procurement and construction of the solar PV power plant.

 

First Solar, like Canadian Solar, is a solar module manufacturer that uses its project business as a means to generate additional revenue and as a vehicle for placing their solar modules into the market place. First Solar has a market cap of over $7 billion, making them the largest solar company in the United States. Like Canadian solar, first Solar is more likely a partner for Principal Solar than a competitor, but comparisons are still meaningful.

 

While the Company clearly recognizes the competition, ultimately we believe there are several things that differentiate the Company from the competition as discussed previously.  Like the utility industry (which according to the American Power Association’s 2010-11 Annual Directory & Statistical Report, includes 3,269 electricity providers nationwide serving 143,265,021 customers in the United States), we do not anticipate one big winner or even one big provider.  Instead, our management believes that the solar industry will be controlled by companies in and persons familiar with the existing traditional power industry. On that assumption, we have built a management team of Board members and executives, who come from the traditional energy industry. We believe that gives us a significant advantage. 

 

 

 

The solar energy industry is intensely competitive and rapidly evolving. The number of PV product manufacturers, suppliers, and installers has rapidly increased due to the growth of actual and forecasted demand for PV products and the relatively low barriers to entry. We expect that the prices of PV products, including PV modules, may continue to decline over time due to increased supply of PV products, reduced manufacturing costs from economies of scale, and the advancement of manufacturing technologies.

 

Many of our existing and potential competitors have substantially greater financial, technical, manufacturing and other resources than we do. The greater size of many of our competitors provides them with cost advantages as a result of their economies of scale and their ability to obtain volume discounts and purchase raw materials at lower prices. As a result, such competitors may have stronger bargaining power with their suppliers and have an advantage over us in pricing as well as securing sufficient supply of PV components during times of shortage. Many of our competitors also have better brand name recognition, more established distribution networks, larger customer bases or more in-depth knowledge of the target markets. As a result, they may be able to devote greater resources to the research and development, promotion and sale and respond more quickly to evolving industry standards and changes in market conditions as compared to us. Our failure to adapt to changing market conditions and to compete successfully with existing or future competitors would have a material adverse effect on our business, prospects and results of operations.

 

Another key differentiating point between the Company and the primary IPPs and Large Solar PPA Developers can be broken into two parts: 1) many of the companies on this list are backed by a parent company with non-solar goals; Principal Solar is not faced with the conflict of maintaining combustion generation in addition to solar generation, and 2) the other companies on this list are not building a business based on the sale of electricity to off-takers. By needing to develop new projects and/or by needing to constantly deploy new capital to make transactional profit, these companies may be constrained by the other portions of their business or motivated to make decisions that could be seen as detrimental to their solar portfolios.

 

Principal Suppliers

 

Most parts for building solar generation facilities come from China, Japan, Germany and the U.S. The Company will not manufacture solar PV modules, inverters or other components used in its solar energy systems itself, but will instead purchase those components directly from manufacturers or, in some cases, from third-party distributors.  The Company intends to purchase solar PV modules manufactured by GCL Solar and others.  The Company plans to purchase inverters manufactured by SMA Solar Technology and others.  The Company plans to purchase the components used in its solar energy systems on a purchase order basis from a select group of manufacturers or suppliers.

 

If the Company is unable to purchase from any of these sources, the Company believes it would not have difficulty in securing alternative supply sources, because all of the components used in its solar energy systems will be available from a number of different sources globally.  With that said, the world-wide market for solar PV modules has, from time to time experienced shortages of supply that have increased prices and affected availability .

 

Material Acquisitions

 

To date, the Company has completed four acquisitions and has one acquisition in progress.  The first, a small Texas based technology company named Capstone Solar was acquired in January 2011 because of its unique webinar technology, its access to industry vendors, and its marketing expertise.  Capstone Solar has been integrated into the Company’s marketing and business development operations, continues to run webinars and is a component of the Principal Solar Institute website. The next three acquisitions have been entities that own PPAs (each acquisition is described in greater detail below).  In total, the production facilities acquired to date amount to just under 3,500 kilowatts.

 

 

Capstone Solar

 

Capstone Solar (“Capstone”) was acquired by Principal Solar Texas pursuant to a Share Exchange Agreement entered into with the shareholders of Capstone, Rick Borry (our current IT consultant), and Dan Bedell (our EVP of Strategic and Corporate Development) in January 2011 in consideration for 125,000 shares of the restricted common stock of Principal Solar Texas.  Capstone did not have any significant revenue generating activity prior to its acquisition and the Company received no profits during 2011 or 2012.

 

SunGen Mill 77 LLC and SunGen StepGuys LLC

 

Pursuant to a Limited Liability Company Membership Purchase Agreement (the “Membership Purchase Agreement”), entered into with the sole owner of SunGen Mill 77 LLC and SunGen StepGuys LLC (the “SunGen Entities”) and Talmage Solar Engineering (“Talmage”) in September 2011, we acquired the SunGen Entities in consideration for $1,000 in cash and the satisfaction of $841,154 of outstanding liabilities payable by the SunGen Entities to Talmage in consideration for 110,041 shares of our restricted common stock issued to Talmage.  The SunGen Entities own and operate certain solar power generation facilities, described in greater detail below under “Description of Property”.  The Company and Talmage also entered into a Maintenance & Operations Agreement at closing to provide for Talmage to perform certain services in connection with the facilities acquired by the Company pursuant to the Membership Purchase Agreement (the “Maintenance Agreement”).  Pursuant to the Maintenance Agreement, which has a term of five years (beginning September 2011), subject to automatic renewals unless either party terminates the agreement with 30 days prior written notice, and in consideration for the services agreed to be performed by Talmage, a service fee of $12 per kWh per year.

 

Power generated by each of these two facilities (3% of consolidated revenues in the year ended December 31, 2014) is sold pursuant to an Energy Management Services Contract (an executory contract), not a PPA. Pursuant to the agreement, all electricity generated is sold to the users upon whose property the solar facility is installed at a floating price reflecting a 10% discount to electricity prices in the area and for a term expiring in 2025, with an option for the purchaser to extend for two additional terms of 25 years each. Due to record winter storms and snowstorms in Massachusetts in the December 2014 / January 2015 timeframe, their impact on the ongoing maintenance program including seemingly insurmountable roof leaks, and resulting tension with the landlord, the Company determined the Mill 77 project was no longer economically desirable and has arranged to uninstall the project. Costs to uninstall the project total approximately $18,000, and the write-off of the asset was approximately $114,000. The actual removal of the project from the rooftop will occur when the weather permits. The agreement with the landlord to uninstall the project resolved all claims, if any, and relieved both parties of all future obligations. The impact on future revenue is insignificant.

 

Powerhouse One

 

Effective December 31, 2012, the Company entered into a Purchase and Sale Agreement (as amended from time to time) with Vis Solis, Inc., a Tennessee limited liability company, and AstroSol, Inc., a Tennessee corporation (together "Co-Sellers"), the members of Powerhouse One, LLC (“Powerhouse”), whereby, effective June 17, 2013, 89% of the outstanding membership interest of Powerhouse was exchanged for $6,200,000 in cash.  Powerhouse owns and operates a ground mounted solar electric generation facility consisting of four projects: Lincoln Farm I, II, III and IV (each a separate wholly-owned Tennessee limited liability company), located in Fayetteville, Tennessee.  The project was designed as a 3 MW facility providing approximately 4.5 million Kilowatt hours of electricity per year. At the time of acquisition, the four solar arrays owned by Powerhouse had a remaining estimated useful life of 23 years (being first placed in service in 2011. Power generated by the facility is sold to a utility in Fayetteville Tennessee under an index-priced PPA having a fixed premium of $0.12 per kilowatt-hour over the GSA-1 scheduled rate (currently approximately $0.10 per kWh) through 2021, and a market rate based upon the then current GSA-1 scheduled rate for the remaining 10 years of the initial 20 year term ending in 2031.

 

 

In connection with the acquisition, Powerhouse, and certain of its subsidiaries, entered into a Loan and Security Agreement with Bridge Bank, NA (“Bridge Bank” and the “Loan Agreement”).  Pursuant to the Loan Agreement, Powerhouse borrowed $5,050,000 from Bridge Bank, which bears interest at 7.5% per annum, with monthly interest payable in arrears, and certain amortization payments due quarterly in an amount of between $55,514 to $77,574 (increasing during the term of the loan).  The amount borrowed was used to pay the purchase price of the Powerhouse acquisition. The amount borrowed under the Loan Agreement is due on the fourth anniversary of the loan date (June 17, 2017), can be prepaid at any time with thirty (30) days prior written notice, provided that an additional 7% of the principal amount of the loan is due if the loan is repaid within the first year of the loan, 6% is due if repaid within the second year of the loan, 5% is due if the loan is repaid within the third year of the loan and no additional amount is due if repaid three years from the date of the loan.  The Loan Agreement required a commitment fee of 1% of the loan amount, an underwriting fee of 1.75% of the loan amount and a yearly annual portfolio management fee of 0.16% of the original amount of the loan.  Pursuant to the Loan Agreement and a separate Pledge and Security Agreement, all of the membership interests of Powerhouse and all of the assets of Powerhouse were pledged as security to secure the repayment of the loan.  The Loan Agreement requires certain affirmative and negative covenants, including requiring Powerhouse to maintain a debt coverage ratio of not less than 1.10:1; prohibiting any sales or transfers of assets of Powerhouse without the approval of Bridge Bank; prohibiting any change in control of Powerhouse; and prohibiting Powerhouse from granting any other party a security interest over its assets.

 

Pursuant to a Guaranty Agreement, the Company agreed to guaranty the repayment of the loan made pursuant to the Loan Agreement and the performance by Powerhouse of the Loan Agreement.

 

Effective June 17, 2013, we granted a warrant to purchase 37,763 shares of our common stock to Bridge Bank in connection with the acquisition of Powerhouse.  The warrant has an exercise price of $4.00 per share, cashless exercise rights, redemption rights providing the Company the right to redeem the warrant for $604,200, anti-dilution rights associated with offerings of equity securities, a term expiring on the first to occur, of the 10 year anniversary of the grant, the closing of the Company’s initial public offering (which is being affected pursuant to the Registration Statement of which this Prospectus is a part), or the liquidation of the Company (each a “Termination Event”), and the warrant is automatically exercised on a cashless basis upon a Termination Event.  The Company also provided the holder registration rights in connection with the grant of the warrant.

 

As part of the acquisition, the Company received the right to acquire the Co-Sellers' remaining 11% interest within one year from the acquisition date for an amount of $766,827. As additional consideration for the right to purchase the remaining interest in Powerhouse, we issued 11,503 shares of our restricted common stock valued at $4.00 per share or $46,010 to the Co-Sellers. In June 2014, the option to acquire the remaining 11% non-controlling interest of Powerhouse One from the Co-Sellers expired. However, the parties have re-confirmed their intent to transfer the non-controlling interest to the Company over the next several months as the Company obtains sufficient financing to do so, and on the same terms contained in the option as if it were still in full force and effect, provided that nothing has been finalized to date and such transaction may not ultimately be completed. The Company does not believe there are any material risks to the Company if the acquisition is not completed.

 

Principal Sunrise IV (pending)

 

In November 2014, the Company entered into a Membership Interest Purchase Agreement ("MIPA") with Innovative Solar Systems, LLC, a solar developer operating primarily in North Carolina, to acquire Innovative Solar 46, LLC ("PS IV"), the owner of a 78.5mw AC solar project to be built in Cumberland County, North Carolina. PS IV holds a single and intangible asset, a 15-year PPA with Duke Energy Progress, Inc. PS IV does not have, nor has it ever had, any other assets, any liabilities, any employees, any revenues, or any operations of any kind. As such, PS IV is not a "business" as defined in the accounting literature, and it has no historical financial statements. PSI agreed to pay Innovative Solar Systems, LLC $6,280,000 for 100% of the membership interest of PS IV in a series of payments of approximately $300,000 per month between execution of the MIPA and the financial close (the point at which all project financing is arranged), and a balloon payment at financial close sufficient to having cumulatively paid 70% of the $6,280,000 price. The remaining 30% of the purchase price will be paid in installments of $150,000 per month through the project's commercial operation date. At March 31, 2015, A total of $2,070,000 had been paid, and failure by the Company to make any of the future scheduled payments may result in the loss of all payments made through such date. The Company is working with engineering and construction firms on final designs, and the total cost of the project based upon the preliminary work is expected to be approximately $164 million, including an estimated $5 million from a public offering in progress. The Company is in discussion with multiple parties to provide the acquisition, construction, and permanent financing for the project, however, no assurance can be given that adequate financing on terms acceptable, or even available, to the Company will be obtained. Closing of the acquisition is expected to occur no later than June 22, 2015 (as extended), and construction is expected to be completed in late 2015.

 

 

On April 27, 2015, the Company entered into an Engineering, Procurement, and Construction Agreement with Alpha Technologies Services to build PS IV. The agreement provides for construction of the project for a fixed price of approximately $73 million to be paid in a series of progress payments, but excludes major portions of the materials that the Company will purchase directly from suppliers and the substation connecting the project to the local utility. Payments under the agreement are expected to be funded from separate construction financing yet to be arranged by the Company. The targeted date for the project achieving mechanical completion is December 18, 2015, and the contractor will provide a two-year warranty upon completion.

   

Principal Sunrise V (pending)

 

On March 2, 2015, the Company entered into a MIPA with Innovative Solar Systems, LLC, a solar developer operating primarily in North Carolina, to acquire Innovative Solar 42, LLC ("PS V"), the owner of a 72.9mw AC solar project to be built in Fayetteville, North Carolina. PS V holds a single and intangible asset, a 10-year power purchase agreement ("PPA") with Duke Energy Progress, Inc. PS V does not have, nor has it ever had, any other assets, any liabilities, any employees, any revenues, or any operations of any kind. As such, PS V is not a "business" as defined in the accounting literature, and it has no historical financial statements. PSI agreed to pay Innovative Solar Systems, LLC $5,832,000 for 100% of the membership interest of PS V in a series of payments of approximately $300,000 per month between execution of the MIPA and the financial close (the point at which all project financing is arranged), and a balloon payment at financial close sufficient to having cumulatively paid 70% of the $5,832,000 purchase price. The remaining 30% of the purchase price will be paid in installments of $150,000 per month through the project's commercial operation date. At March 31, 2015, a total of $870,000 had been paid, and failure by the Company to make any of the future scheduled payments may result in the loss of all payments made through such date. The Company is working with engineering and construction firms on final designs, and the total cost of the project based upon preliminary work is expected to be approximately $153 million. The Company is in discussion with multiple parties to provide the acquisition, construction, and permanent financing for the project, however, no assurance can be given that adequate financing on terms acceptable, or even available, to the Company will be obtained. Closing of the acquisition is expected to occur no later than August 30, 2015, and construction is expected to be completed in early 2016.

 

Principal Sunrise VI (pending)

 

On June 5, 2015, the Company entered into a binding term sheet regarding a joint development effort with Energy Surety Partners, LLC of Phoenix, AZ ("ESP"). Pursuant to the joint development effort, the Company and ESP will jointly develop up to 500 MW DC comprised of three separate solar projects in the panhandle of Texas. The first of these projects, Principal Sunrise VI, is a 150 MW dc solar project located on a 1,000 acre site near Amarillo, Texas. Offtakers are expected to be individual merchants with a high demand for electricity and retail electric providers selling at retail prices to individual end-users, both signing multi-year power purchase agreements. With ready access to land, transmission lines, and some of the best sunshine in the country (known in the industry as "insolation"), we believe these projects represent significant opportunities in solar.

 

The Company and ESP have documented in a term sheet the separate responsibilities of each party and the preliminary economic terms between the parties, and each has agreed to be bound by those parameters in formal contracts to be prepared and executed on or before June 30, 2015 (as extended). Preliminary estimates developed jointly by the parties reflect an expected total capital investment of approximately $800 million based upon today's component pricing. The construction schedule has not yet been determined, but the Company expects the projects to reach commercial operation in a time range from mid-2016 through 2017.

 

Principal Sunrise VII (pending)

 

On June 9, 2015, the Company entered into a binding term sheet with Innovative Solar Systems, LLC, a solar developer operating primarily in North, to acquire Innovative Solar 37, LLC ("Principal Solar VII" or "PS VII"), the owner of a 78.7 MW AC solar project to be built in Anson County, North Carolina. PS VII holds a 10-year flat rate power purchase agreement with Duke. PSI will acquire 100% of the membership interest of PS VII in a series of payments of approximately $300,000 per month between execution of the MIPA to be negotiated between the parties on or before June 30, 2015, and the financial close (the point at which all project financing is arranged). Payments will also include a balloon payment at financial close sufficient to having cumulatively paid 78% of the $5.5 million purchase price. The remaining 22% of the purchase price will be paid in installments of $150,000 per month through the project's commercial operation date. The total cost of the project, based upon the preliminary work, is expected to be approximately $140 million for which the Company has not yet begun to source financing.

  

 

Solar Project Pipeline

 

The table below presents our current solar project pipeline. As individual projects are further evaluated, some will inevitably fall out, while others may proceed to funding and ultimately construction. Individual projects can fail at any step in the progression. As we expect to increase our business development activities, we also anticipate projects will come, go, and be replaced within our ever-changing solar project pipeline.

 

All elements in the table below are our initial estimates and subject to change.

 

	Project Summary			PSI Project Summary Statistics (Millions)							PSI Payback	Owner-ship
Project	Loc	DC MW	Status	COD Date	PPA Term	Total Cost ($M)	Fed/State Tax Equity / After-Tax IRR	Non-Tax Equity / IRR	PSI Equity / IRR	Debt / Costs	Years	%
PS IV	NC	100	Funding	Dec-15	15	$165.0	$90.2	$12.4	$12.2	$50.2	15	70%
							7.2%	17.7%	18.7%	5.6%
PS V	NC	92	Funding	Mar-16	10	$153.3	$88.7	$10.3	$10.3	$44.0	13	71%
							8.1%	18.1%	19.1%	6.0%
PS VI	NC	96	Funding	Oct-16	10	$140.0	$65.6	$15.2	$15.2	$44.0	13	69%
							7.8%	10.7%	10.9%	6.0%
NG 6	TX	7	ENG	Jun-16		$13.1	$6.0	$0.0	$2.1	$5.0	13	62%
							8.6%	0.0%	13.0%	6.0%
PS VII	TX	150	EVAL	Jun-16		$239.4	$126.8	$15.3	$19.2	$78.1	5	67%
							8.1%	12.4%	10.9%	5.5%
TER 2	TX	150	EVAL	Oct-16		$239.4	$128.7	$15.1	$18.8	$76.8	9	68%
							8.4%	12.4%	10.5%	5.5%
TER 3	TX	200	EVAL	Mar-17		$318.3	$161.4	$27.9	$27.9	$101.1	6	68%
							8.1%	12.5%	23.5%	5.5%
ME	TX	200	EVAL	Mar-17		$318.4	$165.7	$25.9	$25.9	$100.8	17	68%
							9.0%	26.9%	26.9%	6.0%
SO	Mid-East	1,500	SPEC
Totals		2,495				$1,587.0	$833.0	$122.1	$131.7	$500.1		68%

 

Consulting Agreement for Project Financing

 

Effective December 4, 2013, we entered into a Consulting Agreement with Carlyle Capital Markets, Inc. (“Carlyle”).  Pursuant to the agreement Carlyle agreed to provide us non-exclusive consulting services in connection with financing and other services.  The agreement has a term of two years, automatically renewable for additional one year periods thereafter unless either party provides the other written notice of their intent to terminate no later than 60 nor more than 90 days prior to end of the then current term.  The agreement can be terminated by the Company with thirty days prior written notice at any time after the nine month anniversary of the agreement in the event less than $50 million has been raised by the Company through sources introduced to the Company by Carlyle and at any time for ‘cause’ as defined in the agreement.  Pursuant to the agreement we agreed to pay Carlyle (a) 3% of the gross amount received by the Company or its affiliates upon the sale of any Investment Tax Credits associated with any solar project; (b) 4% of the first $20 million, 3% of the next $25 million, and 2% of any remaining amounts of the aggregate gross purchase price paid by any funding source directly or indirectly introduced to the Company or its affiliates by Carlyle, and 1% of any gross purchase price paid by any funding source introduced by any person other than Carlyle; (c) 4% of the gross amount of tax credits associated with any solar project; (d) 3% of any debt securities purchased by investors introduced to the Company or its affiliates by Carlyle and 1% of debt securities purchased by persons introduced to the Company or its affiliates from persons other than Carlyle, provided that Carlyle shall only be due a 1.5% fee in connection with any financing for which Friedman, Luzzatto & Co. (“FLCO”) serves as Placement Agent, plus 1% of the total amount of the project if FLCO serves as Placement Agent; (e) 2% of the amount of any loan or grant obtained by the Company or its affiliates from any federal or state governmental agency or entity; and (f) a monthly monitoring fee of $1,000 for each solar project.  Carlyle is due the fees described above during the term of the agreement, for any contract entered into during the term of the agreement (even if not closed until after the termination of the agreement), and for any transaction closed within 12 months following the termination of the agreement (including agreements not entered into until after such termination).  After the expiration of 12 months from the termination date, Carlyle will be due 1% of the total gross purchase or investment amount for any transaction which the Company or its affiliates undertake with any person or entity introduced to the Company by Carlyle during the original term of the agreement and 1% of the total gross purchase or investment amount relating to any follow on funding of any source first introduced to the Company by Carlyle who provided funding to the Company during the term, not to exceed 150% of the total amount of funding provided by such financing source during the term. Neither Carlyle nor FLCO have a role in this offering, and neither will directly benefit from the offering.

 

 

Employees

 

As of the date of this Prospectus, the Company has two full-time employees consisting of our CEO and EVP Business Development.  The Company also retains outside consultants from time to time as the need arises. Management believes its relations with employees and consultants are good and as a matter of fundamental philosophy, plans to continue to build a strong corporate culture.  No employees are covered by a collective bargaining agreement.

 

Insurance

 

The Company has directors and officers as well as general liability and property insurance currently in place.  While the Company believes that these insurance policies will be adequate, there can be no assurance that such coverage will fully protect the Company against all losses which the Company might sustain.

 

Effect of Existing or Probable Governmental Regulations on the Business

 

The solar energy systems are subject to oversight and regulation under local ordinances; building, zoning and fire codes; environmental protection regulation; utility interconnection requirements for metering; and other rules and regulations. The Company plans to attempt to keep up-to-date about these requirements on a national, state and local level and will be required to design, install and construct solar energy systems to comply with varying standards. The Company plans to engage design and engineering teams to design and install solar energy systems to comply with these varying standards as well as to minimize the installation and operating costs of each system. Certain jurisdictions may have ordinances that prevent or increase the cost of installation of our solar energy systems. In addition, new government regulations or utility policies pertaining to the installation and construction of solar energy systems are unpredictable and may result in significant additional expenses or delays that could cause a significant reduction in demand for solar energy systems.

 

The Company’s operations will also be subject to generally applicable laws and regulations relating to discharge of materials into the environment and protection of the environment; however, because the Company’s operations are not planned to typically involve any such discharge, we believe that there will be no material effects on our business relating to our compliance with such environmental laws and regulations.

 

Websites/Intellectual Property

 

We have 3 websites, plus 7 domains that forward to those 3 websites:

 

	1.	www.principalsolar.com
		●	www.Principlesolar.com

 

	2.	www.principalsolarinstitute.org
		●	www.principalsolarinstitute.com

		●	www.Definitivesolar.com
		●	www.capstonesolar.com

 

	3.	www.psiratings.org
		●	www.Psiratings.com

		●	www.Psrating.com
		●	www.Psratings.com

 

 

The information on, or that may be accessed through, our websites is not incorporated by reference into this Prospectus and should not be considered a part hereof.

  

Subsidiaries

 

The Company has three direct subsidiaries: SunGen Mill 77, LLC, a Maine limited liability company; SunGen StepGuys, LLC, a Maine limited liability company; and Power House One, LLC, a Tennessee limited liability company.  Additionally, the Company also does business under the name “Principal Solar Institute”. Unless otherwise stated or the context requires otherwise, all references herein to the Company, we or us, include the operations of our subsidiaries.

 

 

DESCRIPTION OF PROPERTY

 

Through our SunGen StepGuys, LLC, wholly-owned subsidiary, we own and operate a roof mounted solar electric generation facility located in Alfred, Maine.  The project was designed as a 111 kilowatt DC that is operating at 120/208 volts providing approximately 124,000 kilowatt hours of electricity per year.  The Company does not have a formal lease agreement in place for this property. See also the description of Solar Leases, below.

 

Through Powerhouse One, LLC, our 89% owned subsidiary, we own and operate a ground mounted solar electric generation facility consisting of four projects: Lincoln Farm I, II, III and IV (each a separate wholly-owned Tennessee limited liability company), located in Fayetteville, Tennessee.  The project was designed as a 3 MW facility providing approximately 4.5 million Kilowatt hours of electricity per year. We have lease agreements in place evidencing our rights to this property which provide for us to pay 4% of the monthly net energy revenues generated by the PV facilities to the lessors, include standard mutual indemnification provisions and extend until November 1, 2031, renewable for two additional periods of five years each (provided that either party does not provide the other at least six months’ notice prior to the end of any then term of their intent to terminate), provided that we can terminate the leases at any time without penalty.  See also the description of Solar Leases, below. The leases also include a right of first refusal for lessor to be provided the right to purchase the Company’s facilities in the event the Company desires to sell such systems during the term of the leases. The rights to the leases associated with this property have been pledged to Bridge Bank as collateral for the repayment of the amount owed pursuant to the Loan Agreement, described above under “Description of Business” - “Material Acquisitions” - “Powerhouse One”.

 

The Company maintains approximately 88 square feet of office space located in Dallas, Texas pursuant to a sublease agreement.  Pursuant to the sublease, we are provided the right to use certain office space, conference room facilities and kitchen facilities.  The sublease that was entered into on July 1, 2012, is on a month-to-month basis, terminable with 30 days prior written notice.  The monthly rental cost under the sublease is $500.

 

Solar Leases

 

The Company's solar arrays sit on properties subject to long-term real estate leases (or similar agreements in the case of a rooftop installation as described above) with initial terms equal to the PPA and having one or more renewal options. Rental payments under the leases vary in type between a percentage of revenue or, in the case of a rooftop installation, no separate charge. The Company's current solar array installations are as follows:

 

Installation	Location	kW	Date	Term	Rent
Powerhouse One	Fayetteville, TN	3,000	Aug 2011	20 yr. + 2 5-yr renewals	4% of revenue
SunGen StepGuys LLC	Alfred, ME	111	Sep 2009	25 yr. + 2 25-yr renewals	None

 

The Company recognized expenses of $38,894 and $11,086 in rent under the Powerhouse One lease in 2014 and 2013, respectively, respectively.

 

In the case of a roof mounted system, the Company is obligated to remove such installations at the end of the lease terms. As the expected termination dates are decades off; there is little experience de-installing solar arrays anywhere in the world; and, costs are expected to be minimal; such removal costs have not been separately accounted for except, in the case of Mill 77 being removed, the cost to uninstall the projected totals approximately $18,000 and such amount has been accrued.

 

  

LEGAL PROCEEDINGS

 

Legacy Liabilities

 

The $1,003,839 of liabilities arising from the reverse merger as shown in the Company’s March 31, 2015, balance sheet, represent long term real estate leases which had been abandoned, general unsecured liabilities, commercial liens, and tax liens filed with various states associated with the Company’s pre-reverse merger operations that were unknowingly assumed in the March 2011 reverse merger transaction (the "Legacy Liabilities"). The statute of limitations for most of such liabilities is five years and for most liens is ten years, subject to renewal at the lien holders’ option, depending upon the jurisdiction.  Although the liens accrue interest at between 8% and 12% per year, the Company has ceased accruing interest as it believes the liability recorded to date is adequate to cover the ultimate claims that may, one day, be presented. Liabilities not associated with a lien have been accrued based upon management’s estimation of the amount to be paid.  Liabilities associated with a lien have been accrued at face value.  Management believes all such liabilities are subject to certain indemnification obligations by Pegasus Funds, LLC (and/or its affiliates or related parties) to which (including its assigns) the Company issued 534,654 shares of its common stock as part of the reverse merger transaction.  As of the date of this filing, and to the best knowledge of the Company, without independent confirmation, Pegasus Funds, LLC (and its related parties) beneficially owns less than 5% of our outstanding Common Stock. However, as the Company is obligor, the Company has recorded the liability. To date, only one lien holder has approached the Company concerning payment.  Such lien holder is pursuing the former management of the Company first through litigation.  To the extent such lien holder recovers the liability from the former management; the lien against the Company will be reduced.

 

In March 2015, the Company entered into a settlement agreement with Pegasus Funds LLC ("Pegasus") regarding its indemnification of the Company relating to the Legacy Liabilities. In the settlement agreement, the Company agreed to accept the return of 215,154 shares of the original 534,654 shares of its Common Stock issued to Pegasus and its principals and affiliates in acquiring the shell company, Kupper Parker Communications, Inc., which later became Principal Solar, Inc. As the shares of Common Stock were initially issued in a common stock for preferred stock share exchange with Pegasus, the shares returned by Pegasus will be cancelled without further accounting recognition. Cancellation of the shares will be recognized for accounting purposes once they are received from Pegasus.

 

In the settlement with Pegasus, the Company preserved its rights to pursue the individual(s) serving as officers of Kupper Parker Communications, Inc. prior to the exchange of shares, who had agreed in the Exchange Agreement to "satisfy and assume liability for the payment of any additional liabilities not identified" in the agreement. In April 2015 the Company filed a lawsuit against the remaining individual serving as an officer of Kupper Parker Communications, Inc. prior to the exchange of shares seeking an amount of $991,371 plus accruing interest and legal fees. Any recovery from the lawsuit is uncertain at this time, and such recovery would in no way diminish our potential obligation to third parties.

 

From time to time, we may become party to litigation or other legal proceedings that we consider to be a part of the ordinary course of our business. We are not currently involved in legal proceedings that could reasonably be expected to have a material adverse effect on our business, prospects, financial condition or results of operations. We may become involved in material legal proceedings in the future.

 

  

DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS

 

Directors are elected to hold office until the next annual meeting of stockholders or until their successors are duly elected and qualified.  Officers serve at the discretion of the Board of Directors.  The Company has assembled a leadership team with a strong mix of senior executive experience across energy, consulting, procurement, corporate development, technology, sales and marketing.

 

The Company is founded on the philosophy of strong business ethics and work fundamentals.  Set forth below is a summary of our executive officers’ and directors’ business experience for the past 5 years.  The experience and background of each of the directors, as summarized below, were significant factors in their previously being nominated as directors of the Company.

 

Name		Age		Position		Since
Michael Gorton		57		Chief Executive Officer and Chairman		July 2010
David N. Pilotte		57		Chief Financial Officer		January 2014
Kenneth G. Allen		72		Chief Operations Officer		March 2011
R. Michael Martin		54		Executive Vice President Business Development		June 2011
Dan Bedell		40		Executive Vice President Strategic and Corporate Development, Senior Director Principal Solar Institute		October 2011
Margaret Keliher		60		Director		March 2011
Ronald B. Seidel		68		Director		January 2011
Jeffrey M. Heller		75		Director		May 2013
Brenda Jackson		64		Director		October 2013
Guillermo Marmol		62		Director		January 2014
Garrett Boone		72		Director		September 2014
Scott Olson		45		Director		April 14, 2015

 

EXECUTIVES

 

Michael Gorton, Chief Executive Officer and Chairman

 

Mr. Gorton has served as our Chief Executive Officer and Chairman since July 2010.

 

In 2002, Mr. Gorton became the founding CEO of TelaDoc, a company focused on solving the efficiency paradigm for a subsection of healthcare.  Under the TelaDoc model, members had access to telephonic physicians who could review medical records, treat and prescribe medication.  When Mr. Gorton left the company in 2009, it had over a million paying members nationwide. Mr. Gorton consulted with clients on a range of topics between 2009 and July 2010 when he joined our pre-merger company, Principal Solar, Inc. (a Texas corporation) as its CEO. Mr. Gorton then became the CEO of the Company, Principal Solar, Inc. (a Delaware corporation), upon the merger with Kupper Parker Communications, Inc. in March 2011.

 

Prior to founding TelaDoc, Mr. Gorton founded such enterprises as the Texas Acceleration Group (“TAG”), an entity formed to assist startup companies; Palo Duro Records to promote an unknown country artist: Shelley Laine; and Internet Global (“iGlobal”), an entity designed to deliver Internet access, the world's first DSL network, and the nation's first voice over Internet phone ("VOIP").

 

In 1981, Mr. Gorton joined Dallas Power and Light that later merged into Texas Utilities ("TXU") where he started as a project engineer dealing with power plants, distribution, transformer management, and integration of renewable energy into the grid. Mr. Gorton left TXU in 1992.

 

Mr. Gorton earned his B.S. in Engineering from Texas Tech, his M.S. in Physics from the University of Texas at Dallas, and his Juris Doctorate from Texas Wesleyan University (recently acquired by Texas A&M University). He also serves on the Advisory Council and is an Ex Officio Member of the Development Board of the School of Natural Sciences and Mathematics at the University of Texas at Dallas.

 

 

David N. Pilotte, Chief Financial Officer

 

Mr. Pilotte, has been our Chief Financial Officer since January 2014, and has been engaged by the Company under a Professional Services Agreement with DNP Financial, LLC.

 

In 1996, Mr. Pilotte formed this independent consulting practice through which he advises small- and middle-market companies on matters of accounting, corporate finance, public reporting, due diligence, debt restructuring, and profit improvement. From April 2010 to October 2013, Mr. Pilotte's assignments included serving as CFO of Calpian, Inc., an OTC traded company engaged in electronic payments in the U.S. and India. Prior assignments since 1996 have included serving as CFO, COO, Chief Restructuring Officer, Corporate Controller, and interim executive for other OTC, NASDAQ, and Amex listed firms and private companies. Mr. Pilotte started his career with Arthur Andersen & Company in 1984.

 

Mr. Pilotte holds a bachelor’s degree in finance from the University of Florida, an MBA with concentrations in management and accounting from the University of Houston, and has been a CPA in Texas since 1986.

 

Kenneth G. Allen, Chief Operations Officer

 

Since January 2010, Mr. Allen has served as Chief Operations Officer of our predecessor, Principal Solar Texas, and has served as the Chief Operations Officer of the Company since March 2011.

 

From 2001 through July 2009, Mr. Allen served as Plant Manager of Texas Independent Energy, an operator of two 1GW scale traditional utility plants in Texas.  From 1969 to 1999, Mr. Allen served as Plant Manager/Engineer of TXU Energy.

 

Mr. Allen earned his B.S. in Electrical Engineering from New Mexico State University.

 

R. Michael Martin, Executive Vice President Business Development

 

Mr. Martin has served as the Executive Vice President Business Development since June 2011.

 

From 2005 to July 2009, Mr. Martin served as a strategic sales executive for Aquire, Inc., a software company, where he led the sales of Aquire's strategic workforce management solutions to its largest customers.  Prior to Acquire, Inc., Mr. Martin served as VP of Business Development and similar roles at Initiate Systems and i2 Technologies.

 

Mr. Martin graduated from The University of Texas at Austin in 1983 with a Bachelor of Business Administration in International Business.

 

Dan Bedell, Executive Vice President Strategic and Corporate Development and Sr. Director Principal Solar Institute

 

Dan Bedell joined Principal Solar in October 2011 as EVP Marketing and Corporate Development following Principal Solar’s acquisition of Capstone Solar.

 

Since January 2013, Mr. Bedell has also served as the Director of Program Management for ReachLocal, an Internet marketing company.  From December 2011 to December 2012, Mr. Bedell served as a management consultant to Accretive Solutions.  From April 2008 to October 2011, Mr. Bedell served as a program management consultant for Lehigh Hanson, a building materials company.

 

 

Mr. Bedell holds his B.B.A. in Economics from the University of North Texas where he graduated cum laude and spent a semester studying international finance in the UK.

  

DIRECTORS

 

Michael Gorton – Chairman (see bio above)

 

Qualifications as Director:

 

Mr. Gorton has extensive industry knowledge as well as a deep knowledge as our founder, of our history, strategy and culture.  Having led us as CEO and founder, Mr. Gorton has been the driving force behind the strategy and operations that have led to our growth thus far.

 

Margaret Keliher, Director

 

Judge Keliher has been a director of the Company since March 2011 and chairs the Audit Committee.

 

Judge Keliher has served as the Executive Director of Texas Business for Clean Air since 2007 and director at the Texas Institute. In 2002 Judge Keliher was appointed to an unexpired term as Dallas County Judge by the County Commissioners Court. She served as Dallas County Judge until 2007.

 

Judge Keliher earned a Bachelor’s degree in accounting from the University of Virginia, and graduated cum laude from the Southern Methodist University School of Law. She started her career as a Certified Public Accountant with Deloitte.

 

Qualifications as Director:

 

Judge Keliher brings a unique combination of legal and accounting expertise to the Board.  As a result of her many accomplishments, Judge Keliher is a well-respected businesswoman in the State of Texas, and has numerous business contacts.  Her name and credibility bring great value to the Board and the Company.

 

Ronald B. Seidel, Director

 

Mr. Seidel has served as a director of the Company since January 2011, and is a member of the Audit Committee.

 

Mr. Seidel began serving as President of RBS Energy Consulting in 2007, working with private equity, investment banks, and the government on electric energy issues primarily in the Electric Reliability Council of Texas "ERCOT") market. Prior to his consultancy, Mr. Seidel was an executive responsible for building and managing a broad range of electric utilities including 33 years with Texas Utilities, one of the nations’ largest electric utilities.

 

Mr. Seidel holds his Mechanical Engineering degree from New Mexico State University; he earned his Master of Business Administration from the Cox School of Business at Southern Methodist University; is a registered professional engineer in Texas; and has held a U.S. Nuclear Regulatory Commission Senior Reactor Operator license.

 

Qualifications as Director:

 

With his extensive background in electric energy issues and capital markets, Mr. Seidel brings a unique portfolio of business expertise to us.   His service and leadership with leading organizations in financial and operational roles reflects his expertise in navigating opportunities that complex organizations such as us face.

 

 

Jeffrey M. Heller, Director

 

Mr. Heller has been a director of the Company since May 2013, and is a member of the Audit Committee.

 

Mr. Heller is an investor and advisor at MHT Partners, a middle market investment bank located in Dallas and Boston. Prior to his retirement in 2008, Mr. Heller served as vice chairman and COO of Electronic Data Systems, a global technology services company, where he worked for nearly 40 years.

 

Qualifications as Director:

 

Mr. Heller has had a long and successful career in the technology sector serving in various capacities, having been the President, Chief Operating Officer and Vice Chairman at EDS.  Mr. Heller’s background brings insights into corporate structure and project development, along with expansion and corporate growth.

 

Brenda Jackson, Director

 

Ms. Jackson has been a director of the Company since October 2013, she chairs the Compensation Committee, and is a member of the Nominating/Corporate Governance Committee.

 

Before retiring in June 2013, Brenda Jackson was senior vice president and chief customer officer for Oncor, an electric utility in Texas, where she worked for 40 years.

 

Ms. Jackson earned her B.S. from Prairie View A&M College and holds a graduate finance certificate from Southern Methodist University in Dallas.

 

Qualifications as Director:

 

Ms. Jackson spent forty years serving in various roles in the electric power industry.  She has a tremendous amount of experience overseeing customer operations and customer service.  Her service and leadership, as well as the contacts that she has developed, are an asset to our Company.

 

Guillermo Marmol, Director

 

Mr. Marmol has been a director of the Company since January 2014, and is a member of the Compensation Committee.

 

Mr. Marmol has served as President of Marmol & Associates, a consulting firm that provides advisory services and investment capital to early stage technology companies, since 2007. Prior to that, he served as Division Vice President and a member of the Executive Committee of Electronic Data Systems Corporation, a global technology services company, as a director and Chief Executive Officer of Luminant Worldwide Corporation, an internet professional services company, and as Vice President and Chair of the Operating Committee of Perot Systems Corporation, an information technology and business solutions company. He began his career at McKinsey & Company, a management consulting firm, rising to increasingly senior positions with the firm, including the positions of Director and Senior Partner.

 

Mr. Marmol has a B.A. in Engineering and Applied Physics from Harvard College, and an MBA from the Harvard Business School.

 

Qualifications as Director:

 

Mr. Marmol’s extensive business experience, connections, and business acumen are an asset to the Company.

 

 

Garrett Boone, Director

 

Mr. Boone has been a director of the Company since September 2014 and chairs the Nominating/Corporate Governance Committee.

 

In 1978, Mr. Boone co-founded The Container Store, served as its Chairman and Chief Executive Officer until September 2007, and remains its Chairman Emeritus.

 

In 2006, Garrett Boone co-founded Texas Business for Clean Air, an effort to derail a fast track initiative to construct 11 out dated coal-burning energy plants in North Texas. A part of its mission is to promote "clean air is good for business in Texas."

 

Mr. Boone is the CEO of Innisfree Investments LLC (a family office), and sits on the Boards of The Trinity Trust, The Boone Family Foundation, the North Texas Commission Clean Air Task Force, and the Company. He is Chairman of the Board for TreeHouse, Inc., a new retail concept that provides sustainable, healthy, energy efficient solutions for the home. He is highly involved in the Great Trinity Forest plans, Paddling Trails and Bird Count Initiatives, and is a member of the advisory boards for The Dallas Women’s Foundation and Teach for America- Dallas–Ft. Worth. He is an advocate for public education and served on the Dallas Independent School District ("DISD") Star Commission to share business best practices within DISD.

 

Mr. Boone has a Bachelors of Arts in European History from Rice University and a Masters of Arts in History from the University of Texas at Austin.

 

Qualifications as Director:

 

Mr. Boone’s extensive business experience, connections, and business acumen are an asset to the Company.

 

Scott Olson, Director

 

Mr. Olson has been a director of the Company since April 2015.

 

Mr. Olson has more than 17 years of diverse legal and business experience. From 1998 to 2006, he practiced law with three separate firms, including serving as managing shareholder of the Dallas office of Greenberg Traurig, LLP, an international law firm, until 2006. While at the firm, Mr. Olson also served as Global Co-head of Greenberg's Structured Finance & Derivatives Group, representing banks, borrowers, investors, servicing companies and other parties.

 

From 2006 to 2010, Mr. Olson was Managing Director of a Dallas based asset based hedge fund, PBL Capital, which managed over a billion dollars in investments.

 

Since 2010, Mr. Olson has taken on the role of advisor and/or investor in a variety of business opportunities including food manufacturing, environmentally safe chemicals manufacturing and sales, insurance and renewable energy. Scott also serves as a director in each private business.

 

Mr. Olson holds a JD from Vanderbilt University Law School and served on the Vanderbilt Law School Board from 2009 through 2011. Mr. Olson received a BS in Accounting from the University of Alabama at Birmingham where he graduated magna cum laude and was awarded the Hugo Black Fellowship Award and, in 2005, was recognized as UAB Outstanding Young Alumni of the Year.

 

Qualifications as Director:

 

In evaluating Mr. Olson's candidacy, the Company's Nominating / Corporate governance Committee considered his background and experience in transactional finance, large-scale project development, law, and international business and his financial acumen adds further strength and diversity to the Board of Directors.

 

 

Family Relationships

 

There are no family relationships among our directors or executive officers.

 

Involvement in Certain Legal Proceedings

 

Our directors, executive officers and control persons have not been involved in any of the following events during the past ten years:

 

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 involvement in any type of business, securities or banking activities; or

 

4.	being found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.

 

Independence of Directors

 

Even though the Company is not currently required to maintain independent directors, management believes that, with the exception of Messrs. Gorton and Olson, all Board members are independent.

 

Committees of the Board OF DIRECTORS

 

Our Company recently established Nominating / Corporate Governance, Compensation, and Audit committees and has developed written committee charters for each of the committees. Heretofore, the functions of those committees were adequately performed by the entire Board of Directors.

 

Audit Committee

 

The Audit Committee is responsible for, among other matters: (i) appointing, retaining, and evaluating our independent registered public accounting firm and approving all services to be performed by them, (ii) overseeing our independent registered public accounting firm’s qualifications, independence and performance, (iii) overseeing the financial reporting process and discussing with management and our independent registered public accounting firm the interim and annual financial statements that we file with the SEC, (iv) reviewing and monitoring our accounting principles, accounting policies, financial and accounting controls and compliance with legal and regulatory requirements, (v) establishing procedures for the confidential anonymous submission of concerns regarding questionable accounting, internal controls or auditing matters, and (vi) reviewing and approving related person transactions.

 

Our Audit Committee consists of Ms. Keliher, and Messrs. Heller and Seidel. We believe each of these individuals qualify as independent directors according to NASDAQ Rule 5605(a)(2) entitled "Board of Directors and Committees" with respect to audit committee membership. We also believe that Ms. Keliher and Mr. Heller each qualify as an “audit committee financial expert,” as such term is defined in Item 401(h) of Regulation S-K.

 

 

Nominating / Corporate Governance

 

Our Nominating / Corporate Governance Committee is responsible for, among other matters: (i) overseeing the organization of our Board of Directors to discharge the board’s duties and responsibilities properly and efficiently, (ii) identifying best practices and recommending corporate governance principles, (iii) developing and recommending to our Board of Directors a set of corporate governance guidelines and principles applicable to us, and (iv) reviewing and approving proposed conflicted transactions between us and an affiliated party

 

Our Nominating / Corporate Governance Committee consists of Ms. Jackson and Mr. Boone. We believe each of these individuals qualify as independent directors according to NASDAQ Rule 5605(a)(2) entitled "Board of Directors and Committees".

 

A stockholder who wishes to communicate with our Board of Directors may do so by directing a written request addressed to our Chief Executive Officer, at the address appearing on the first page of this Prospectus.

 

Compensation

 

 Our Compensation Committee is responsible for, among other matters: (i) reviewing and approving our Chief Executive Officer’s and other executive officers’ annual base salaries, incentive compensation plans, including the specific goals and amounts, equity compensation, employment agreements, severance arrangements and change in control agreements, and any other benefits, compensation or arrangements, (ii) administering our equity compensation plan, (iii) overseeing our overall compensation philosophy, compensation plan and benefits programs, and (iv) preparing the compensation committee report included in our annual proxy statement.

 

Our Compensation Committee consists of Ms. Jackson Mr. Marmol. We believe each of these individuals qualify as independent directors according to NASDAQ Rule 5605(a)(2) entitled "Board of Directors and Committees" and each is an outside director as defined pursuant to Section 162(m) of the Internal Revenue Code.

 

CODE OF BUSINESS CONDUCT

 

We have adopted a Code of Business Conduct covering all of our officers, Directors and employees in order to promote:

 

●

honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships

●

full, fair, accurate, timely, and understandable, disclosure in reports and documents we file with the SEC and other authoritative bodies

●

compliance with applicable governmental laws, rules, and regulations

●

the prompt internal reporting of violations of the code to an appropriate person or persons identified in the Code

●

adherence to the code

 

A copy of the Code of Business Conduct has been posted on our website at www.PrincipalSolar.com and is available, without charge, to any person upon written request sent to: Secretary, Principal Solar, Inc., at our mailing address 2560 King Arthur Blvd Suite 124 PMB 65, Lewisville, TX 75056.  We intend to disclose amendments to, or waivers from, a provision in our Code of Business Conduct by posting such information on our website: www.PrincipalSolar.com.

 

Risk Oversight

 

Effective risk oversight is an important priority of the Board of Directors. Because risks are considered in virtually every business decision, the Board of Directors discusses risk throughout the year generally or in connection with specific proposed actions. The Board of Directors’ approach to risk oversight includes understanding the critical risks in the Company’s business and strategy, evaluating the Company’s risk management processes, allocating responsibilities for risk oversight among the full Board of Directors, and fostering an appropriate culture of integrity and compliance with legal responsibilities.

 

 

Election of Directors and Vacancies

 

The Company’s Bylaws provide that the Board of Directors has the sole authority to determine the number of members of the Board of Directors of the Company.  There are no agreements with respect to the election of directors. Our Bylaws further provide that vacancies on our Board of Directors may be filled by the affirmative vote of a majority of the remaining directors even if such majority is less than a quorum, or by the plurality of votes cast at a meeting of stockholders.

 

  

EXECUTIVE AND DIRECTOR COMPENSATION

 

The following summary compensation table indicates the cash and non-cash compensation earned during the fiscal years ended December 31, 2014, 2013 and 2012 by (i) our Chief Executive Officer (principal executive officer), (ii) our Chief Financial Officer (principal financial officer), and (iii) up to two additional most highly compensated executive officers other than our CEO and CFO who were serving as executive officers at the end of our last completed fiscal year whose total compensation exceeded $100,000 during such fiscal year ends.

 

Name and Position	Year		Salary ($)				Bonus ($)				Stock Awards ($)				Option Awards ($)(1)				All Other Comp ($)				Total ($)(2)
Michael Gorton, CEO (3)	2014		$	288,000			$	-			$	-			$	-			$	-			$	288,000
	2013		$	270,000			$	-			$	-			$	-			$	-			$	270,000
	2012		$	264,000			$	-			$	-			$	-			$	-			$	264,000
David N. Pilotte, CFO (5)	2014		$	363,932			$	-			$	-			$	400,000			$	-			$	763,932
R. Michael Martin, EVP (4)	2014		$	216,000			$	-			$	-			$	11,112			$	-			$	227,112
	2013		$	193,500			$	-			$	-			$	-			$	-			$	193,500
	2012		$	168,000			$	-			$	-			$	-			$	-			$	168,000

 

 

(1)	The amounts shown in this column indicate the grant date fair value of option awards granted in the subject year computed in accordance with Financial Accounting Standards Board ("FASB') Accounting Standards Codification ("ASC") Topic 718 entitled "Compensation-Stock Compensation".
(2)	Does not include perquisites and other personal benefits, or property, unless the aggregate amount of such compensation is more than $10,000.  None of our executive officers received any Non-Equity Incentive Plan Compensation or Nonqualified Deferred Compensation Earnings during the periods presented.

(3)	Amounts include salary of $144,000, $54,000, and $22,000 which were accrued but unpaid for fiscal 2014, 2013, and 2012, respectively.

(4)	Amounts include salary of $54,000, $35,289, and $13,500 which were accrued but unpaid for fiscal 2014, 2013, and 2012, respectively.
(5)	Served as CFO since January 14, 2014. Includes $288,404 which was accrued but unpaid for fiscal 2014.

 

Director Compensation

 

Set forth below is the compensation received by each of our directors during the last fiscal year, other than executive directors whose compensation is reported in the table above.

 

 

Name		Fees Earned or Paid in Cash ($)				Stock Awards ($)				Vested Option Awards ($)(1)				Non-Equity Incentive Plan Compensation ($)				Nonqualified Deferred Compensation Earnings ($)				All Other Compensation ($)				Total ($)
Gil Marmol			-				-				36,000				-				-				-				36,000
Garrett Boone			-				-				12,000				-				-				-				12,000
Jeffrey M. Heller			-				-				35,468				-				-				-				35,468
Brenda Jackson			-				-				35,480				-				-				-				35,480

 

(1)	The amounts shown in this column indicate the grant date fair value of option awards granted in the subject year computed in accordance with ASC Topic 718.

 

 

Our current policy is to compensate directors with a grant of options to acquire 72,000 shares of our Common Stock when joining the Board and upon their re-election every two years thereafter. The options vest over the Director's two year term. Additionally, the Company reimburses reasonable travel expenses for attendance at Board meetings.

 

Employment Agreements

 

Effective January 1, 2012, the Company entered into an Employment Agreement with Michael Gorton to serve as the Company’s Chief Executive Officer.  The agreement remains in effect until the Board of Directors terminates Mr. Gorton’s employment with the Company or Mr. Gorton resigns with 30 days’ notice.  Pursuant to the agreement, the Company agreed to pay Mr. Gorton (a) $24,000 per month ($288,000 per year, as adjusted from time-to-time) during the term of the agreement; and (b) an additional $2,000 per month for the first 18 months of the agreement to repay accrued compensation due to Mr. Gorton. Additionally pursuant to the agreement, the Company agreed to reimburse up to $170 of monthly cell phone expenses and up to $1,000 in health insurance premiums.  Mr. Gorton is provided four weeks of vacation per year pursuant to the agreement.  The Company can terminate the agreement at any time with or without cause, provided that if the Company terminates the agreement without cause, it is required to pay Mr. Gorton, all salary due as of the date of such termination, plus one year of severance pay (at his then applicable salary) and all unvested options held by Mr. Gorton, if any, vest immediately. Termination for cause under the agreement includes Mr. Gorton’s willful misconduct or habitual neglect in the performance of his duties, conviction for any felony involving fraud, dishonesty or moral turpitude, a material breach of the agreement which remains uncured for 10 days after written notice of such breach by the Company, the material violation of the Company’s policies, or the material dishonesty, moral turpitude, fraud or misrepresentation with respect to Mr. Gorton’s duties under the agreement.  In the event Mr. Gorton resigns from the Company for any reason, or upon Mr. Gorton’s death, the Company is required to pay Mr. Gorton, all salary due as of the date of such termination, plus one year of severance pay (at his then applicable salary) and all unvested options held by Mr. Gorton, if any, vest immediately.  In the event of the termination of Mr. Gorton’s employment agreement for cause or disability, the Company is only required to pay him any salary and other benefits earned as of the date of termination.

 

Effective January 1, 2011, the Company entered into an Employment Agreement with R. Michael Martin to serve as the Company’s Executive Vice President Business Development.  The agreement remains in effect until the Board of Directors terminates Mr. Martin’s employment with the Company or Mr. Martin resigns with 30 days’ notice.  Pursuant to the agreement, the Company agreed to pay Mr. Martin $18,000 per month ($216,000 per year, as adjusted from time-to-time) during the term of the agreement. Additionally pursuant to the agreement, the Company agreed to reimburse up to $170 of monthly cell phone expenses and up to $1,000 in health insurance premiums.  Mr. Martin is provided four weeks of vacation per year pursuant to the agreement.  The Company can terminate the agreement at any time with or without cause, provided that if the Company terminates the agreement without cause, it is required to pay Mr. Martin, all salary due as of the date of such termination, plus six months of severance pay (at his then applicable salary) and all unvested options held by Mr. Martin, if any, vest immediately. Termination for cause under the agreement includes Mr. Martin’s willful misconduct or habitual neglect in the performance of his duties, conviction for any felony involving fraud, dishonesty or moral turpitude, a material breach of the agreement which remains uncured for 10 days after written notice of such breach by the Company, the material violation of the Company’s policies, or the material dishonesty, moral turpitude, fraud or misrepresentation with respect to Mr. Martin’s duties under the agreement.  In the event Mr. Martin resigns from the Company for any reason, or upon Mr. Martin’s death, the Company is required to pay Mr. Martin, all salary due as of the date of such termination, plus one year of severance pay (at his then applicable salary) and all unvested options held by Mr. Martin, if any, vest immediately.  In the event of the termination of Mr. Martin’s employment agreement for cause or disability, the Company is only required to pay him any salary and other benefits earned as of the date of termination.

 

 

Professional Services Agreement

 

In January 2014, we entered into a Professional Services Agreement with DNP Financial, LLC (“DNP”), pursuant to which DNP made its principal, David N. Pilotte, available to the Company as the Company’s Chief Financial Officer. Specifically, pursuant to the Professional Services Agreement, we agreed to pay DNP $275 per hour for Mr. Pilotte’s time, plus reimburse it for expenses incurred by Mr. Pilotte. The Professional Services Agreement may be terminated by either party upon sixty (60) days written notice to the other party or immediately by the Company upon written notice to DNP evidencing default of its obligations under the agreement.

 

Compensation Discussion and Analysis

 

We design our executive compensation program with the goal of achieving the following objectives:

 

●

To provide executives with overall levels of compensation that we believe are competitive with the high growth sector of the energy industry, as well as with the broader spectrum of companies from which we plan to draw our executives

●

To attract the highest caliber of talent

●

To provide executive pay packages with appropriate short and long-term incentives, including annual bonus and equity compensation tied to individual and company performance

●

To reward performance that creates stockholder value for our Company

 

We expect that our executive officer compensation plans will include some combination of the following elements of compensation that are generally recognized as important in attracting and retaining qualified individuals:

 

●

Base salaries

●

Annual cash incentives

●

Long-term incentives

●

Employee benefits programs

●

Stock Incentive Plan compensation (e.g., shares of common stock or options).

 

 

 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table presents certain information regarding the beneficial ownership of shares of common stock as of the date of this Prospectus by (i) each person who owns beneficially more than five percent (5%) of the outstanding shares of common stock based on 5,604,181 shares outstanding as of the date of this Prospectus, (ii) each of our directors, (iii) each named executive officer and (iv) all directors and officers as a group. Except as otherwise indicated, all shares are owned directly.

 

Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and includes voting and/or investing power with respect to securities. We believe that, except as otherwise noted and subject to applicable community property laws, each person named in the following table has sole investment and voting power with respect to the shares of common stock shown as beneficially owned by such person.  Additionally, shares of common stock subject to options, warrants or other convertible securities that are currently exercisable or convertible, or exercisable or convertible within 60 days of the date of this Prospectus, are deemed to be outstanding and to be beneficially owned by the person or group holding such options, warrants or other convertible securities for the purpose of computing the percentage ownership of such person or group, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person or group.

 

The address for each of our directors and named executive officers can be found on the cover hereof.

 

Name and Address		Number of Shares of Common Stock Beneficially Owned								Percentage of Common Stock Owned
Executive Officers and Directors
Michael Gorton			464,840				(1	)			8.3	%
David N. Pilotte			117,500				(2	)			2.1	%
Kenneth G. Allen			397,833				(3	)			7.1	%
R. Michael Martin			221,764				(4	)			4.0	%
Dan Bedell			124,367				(5	)			2.2	%
Margaret Keliher			62,820				(6	)			1.1	%
Ronald B. Seidel			79,790				(7	)			1.4	%
Jeffrey M. Heller			153,418				(8	)			2.7	%
Brenda Jackson			111,001				(9	)			2.0	%
Guillermo Marmol			87,917				(10	)			1.6	%
Garrett Boone			59,084				(11	)			1.0	%
Scott Olson			168,917				(13	)			3.0	%
All of the officers and Directors as a group (12 persons)			2,038,862								34.3	%
5% Stockholders
Steuben Investment Company, II L.P. (10)			1,234,326				(12	)			22.0	%
1900 North Akard St.
Dallas, Texas 75201

 

 

(1) Includes 39,048 shares held by Mr. Gorton’s wife. Does not include 21,667 shares of common stock issuable upon conversion of a convertible promissory note (which has a conversion price of $6.00 per share) which is not convertible until its maturity date (as modified), September 30, 2015.

 

(2) Includes 17,500 shares held by Mr. Pilotte's wife, and 100,000 options to purchase shares of the Company’s common stock at an exercise price of $4.00 per share held by Mr. Pilotte.

 

 

(3) Includes 4,433 shares held by Mr. Allen’s wife, and 25,000 options to purchase shares of the Company’s common stock at an exercise price of $4.00 per share held by Mr. Allen.

 

(4) Includes 4,433 shares held by Mr. Martin’s wife, and 7,641 options to purchase shares of the Company’s common stock at an exercise price of $4.00 per share held by Mr. Martin, and does not include options to purchase 17,361 shares of the Company’s common stock at an exercise price of $4.00 per share, which have not vested, and which vest over 36 months at the rate of 695 options per month.

 

(5) Includes 1,109 shares held by Mr. Bedell’s wife, and 60,000 options to purchase shares of the Company’s common stock at an exercise price of $4.00 per share held by Mr. Bedell.

 

(6) Includes options to purchase 18,000 shares of the Company’s common stock at an exercise price of $4.00 per share, options to purchase 20,500 shares at a price of $6.00, and does not include options to purchase 3,750 shares of the Company’s common stock at an exercise price of $6.00 per share which have not vested, and which vest over 24 months at the rate of 750 options per month

 

(7) Includes options to purchase 18,000 shares of the Company’s common stock at an exercise price of $4.00 per share, options to purchase 20,500 shares at a price of $6.00, and does not include options to purchase 3,750 shares of the Company’s Common Stock at an exercise price of $6.00 per share which have not vested, and which vest over 24 months at the rate of 750 options per month.

 

(8) Includes options to purchase 18,000 shares of the Company’s common stock at an exercise price of $4.00 per share. Also includes fully vested options to purchase 6,250 shares at a price of $6.00. Does not include 62,500 shares of common stock issuable upon conversion of a $250,000 convertible promissory note (which has a conversion rate of $4.00 per share), which is not convertible until its maturity date (as modified) of September 30, 2015.

 

(9) Includes options to purchase 17,250 shares of the Company’s common stock at an exercise price of $4.00 per share and does not include options to purchase 750 shares of the Company’s common stock at an exercise price of $4.00 per share, which have not vested, and which vest at the rate of 750 options per month. Also includes fully vested options to purchase 6,250 shares at a price of $6.00.

 

(10) Includes 25,000 shares of common stock held in the name of the Guillermo G. Marmol Retained Annuity Trust, 25,000 shares of common stock held in the name of the Guillermo G. Marmol, 15,000 options to purchase shares of the Company’s common stock at an exercise price of $4.00 per share, and does not include options to purchase 3,000 shares of the Company’s common stock at an exercise price of $4.00 per share, which have not vested, and which vest at the rate of 750 options per month. Also includes fully vested options to purchase 6,250 shares at a price of $6.00. Does not include 62,500 shares of common stock issuable upon conversion of a $250,000 convertible promissory note (which has a conversion rate of $4.00 per share), which is not convertible until its maturity date (as modified) of September 30, 2015.

 

(11) Includes options to purchase 8,250 shares of the Company’s common stock at an exercise price of $4.00 per share and does not include options to purchase 9,750 shares of the Company’s common stock at an exercise price of $4.00 per share, which have not vested, and which vest at the rate of 750 options per month.

 

(12) Steuben Investment Company II, L.P. has two general partners, RLH Management, Inc. (“RLH Management”) and Steuben Co-GP, Inc. (“Steuben Co-GP”), each of which has the power to vote and dispose of the Company’s common stock held by Steuben. RLH Management is 100% owned and controlled by Ray L. Hunt. Steuben Co-GP is owned and controlled by Loyal Trust No. 1, whose sole trustee is R. Gerald Turner and whose sole current lifetime beneficiary is Ray L. Hunt. While Hunter L. Hunt (i) is a contingent remainder beneficiary of Loyal Trust No. 1 and (ii) is the beneficiary of another trust which holds a minority limited partnership interest in Steuben and whose sole trustee is Ray L. Hunt, Hunter L. Hunt has no power which would allow him to control the vote or disposition of any Company common stock held by Steuben.  Based on the foregoing, Hunter L. Hunt (who resigned as a director of the Company on October 27, 2013) is not deemed to be the beneficial owner of any of the shares of common stock held by Steuben.

 

 

(13) Includes 166,668 shares held by TCH Principal Solar, LP of which Mr. Olson is an affiliate. It includes options to purchase 2,250 shares of the Company’s common stock at a price of $6.00 per share, and does not include options to purchase 15,750 shares of the Company’s Common Stock at an exercise price of $6.00 per share which have not vested, and which vest over 24 months at the rate of 750 options per month.

    

INDEMNIFICATION OF DIRECTORS AND OFFICERS

 

Section 102(b)(7) of the Delaware General Corporation Law (“DGCL”) provides that a corporation may, in its original certificate of incorporation or an amendment thereto, eliminate or limit the personal liability of a director for violations of the director’s fiduciary duty, except (1) for any breach of the director’s duty of loyalty to the corporation or its stockholders, (2) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (3) pursuant to Section 174 of the DGCL, which provides for liability of directors for unlawful payments of dividends or unlawful stock purchases or redemptions or (4) for any transaction from which a director derived an improper personal benefit. Our certificate of incorporation provides for such limitation of liability.

 

Section 145 of the DGCL provides that a corporation may indemnify any person, including an officer or director, who is, or is threatened to be made, party to any threatened, pending or completed legal action, suit or proceeding, whether civil, criminal, administrative or investigative, other than an action by or in the right of such corporation, by reason of the fact that such person was an officer, director, employee or agent of such corporation or is or was serving at the request of such corporation as an officer, director, employee or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, provided such officer, director, employee or agent acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the corporation’s best interest and, for criminal proceedings, had no reasonable cause to believe that his conduct was unlawful. A Delaware corporation may indemnify any officer or director in an action by or in the right of the corporation under the same conditions, except that no indemnification is permitted without judicial approval if the officer or director is adjudged to be liable to the corporation. Where an officer or director is successful on the merits or otherwise in the defense of any action referred to above, the corporation must indemnify him against the expenses that such officer or director actually and reasonably incurred. Our certificate of incorporation provides for the indemnification of directors to the fullest extent permissible under Delaware law.

 

Our Bylaws provide for the indemnification of officers, directors and other agents acting on our behalf if this person is not adjudged guilty of willful nonfeasance, misfeasance or malfeasance in the performance of his duties.

 

Additionally, in the future, we may purchase and maintain insurance on behalf of us and any person who is or was a director or officer against any loss arising from any claim asserted against him or her and incurred by him or her in that capacity, subject to certain exclusions and limits of the amount of coverage we ultimately obtain.  Neither our Bylaws nor our certificate of incorporation include any specific indemnification provisions for our officers or directors against liability under the Securities Act. Additionally, insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable.

 

  

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Plan of Operations

 

The Company has two needs for capital: "administrative" capital to support the administrative operations of the business and "project" capital. The Company needs, for its administrative needs, an estimated $2,205,000 over the next 12 months from the date hereof, and it needs an estimated $5,000,000 during the next 24 months from the date hereof. As of the most recent audited Balance Sheet presented in the Prospectus (December 31, 2014), the Company needed an estimated $2,800,000 during the following 12 months for administrative purposes in order to maintain its operations and further its business plan, but it has since obtained approximately $1,179,001 through the private placement of it common equity as described under "Recent Sales of Unregistered Securities - 2013-2015 Private Placement Offering" herein.

 

The Company's plan to maintain its operations and further its business plan for at least the 12 months beyond the latest audited Balance Sheet date (December 31, 2014) is to continue its efforts to obtain additional financing through the sale of its debt and equity securities based largely upon the strength and experience of its key executives, its Board of Directors, and the Company's business plan, which the Company believes is attractive to potential investors. For more than three years, the Company has repeatedly demonstrated its ability to obtain additional financing on that basis and, though there can be no assurance of such, the Company's management is confident in its ability to secure additional funding to support its operations for at least the next 12 months from the latest Balance Sheet date. Additionally, the Company would consider the sale of one or more of its existing operating properties to obtain additional funding if necessary to support its longer-term goals.

 

For its need of project capital associated with pending acquisitions, the Company is in discussions with multiple parties to provide the acquisition, construction, and permanent financing for the pending solar project acquisition. Failure to raise the necessary project capital to build the project would result in the project being abandoned and a loss of payments made to such date.

 

There are no immediate demands, commitments, or uncertainties beyond the need for additional financing, and no known trends adversely affecting the Company's liquidity that would compel the Company to present its financial statements on a basis other than as a going concern.

 

Because we do not develop new products, no new cash will be required for product development. As previously described, the Company has a four-pronged strategy which it plans to undertake. Accomplishing this four-pronged approach will require significant capital, both administrative and acquisition oriented.  From time to time, the Company enters into discussions with various parties regarding non-binding letters of intent; however, each non-binding letter of intent remains subject to significant uncertainties including, among other things, completion of due diligence and arranging both debt and equity financing with third-parties, and we have not entered into any definitive agreements in connection with any such letters of intent, and we can provide no assurances that the transactions contemplated thereby will be completed, nor are any such transactions currently ‘probable’.

 

We intend to find new acquisition opportunities in several important ways including:

 

●

Leveraging our existing partnerships and relationships and those of our Board members and advisors, many of whom have spent decades in management roles within the traditional utility or energy industries, to make introductions to solar project developers.

●

Continuing to author technical white papers, hold informational seminars, post on solar industry blogs, and comment on other industry websites, all with the intention of increasing our recognition within the industry and driving solar developers and solar projects to us.

●

Continuing an active internal business development function of scanning publications, news releases, and other materials to become aware of and pro-actively solicit new opportunities.

●

Continuing to participate in trade shows, seminars, and presentations sponsored by others in the industry.

 

 

We intend to finance acquisitions on a project-by-project basis separate and apart from financing for the administrative needs of the Company. Toward this end, we have engaged Carlyle Capital Markets, Inc. (as described above under “Description of Business” – “Consulting Agreement”), to lead our efforts to secure project specific financing in the form of tax equity, traditional equity, and debt financing. We might also undertake one or more public or private offerings of our equity securities to fund a portion of the projects.

 

Making an acquisition is comprised of at least six stages: identification, evaluation, negotiation, due diligence, financing, and finally closing. Given the several and varied nature of our efforts to find acquisition opportunities, the uncertainty of when suitable opportunities will be identified, the uncertainties of the scale of those opportunities, the uncertainty of the time it takes to evaluate and close those opportunities, and the uncertainties of how long it takes to obtain the project specific financing for those opportunities, if such funding can be obtained at all, a schedule and quantification of those expenses to process an acquisition through the six stages with any degree of certainty is not possible, and acquisition related expenses comprise a significant portion of our current monthly expenses.

 

Because we have minimal staff, we rely heavily on hourly-based consultants and advisors who are engaged for specific projects as our needs arise. As such, our expenses vary widely from quarter-to-quarter, both in amount and by type. Furthermore, we anticipate acquisition activity, and therefore acquisition related expenses, will vary widely with both the quality and number of potential acquisition candidates being evaluated in any particular quarter. These facts make it impossible to estimate monthly expenses with any degree of certainty. Notwithstanding the foregoing, we anticipate the need for $5,000,000 of additional financing to use for administrative purposes (not acquisitions) and would expect to use those funds generally within the following categories over the next 24 months:

 

Salaries, wages, consultants, and advisors		$	2,900,000
Public company expenses*			800,000
Acquisition related expenses			450,000
Marketing and promotion			250,000
Insurance expenses			150,000
Other			450,000
Total		$	5,000,000

 

* Public company costs include legal, accounting, investor relations, public relations, state filing fees, exchange listing expenses (if any), and certain SEC compliance expenses including EDGAR and XBRL filing fees.

 

To date, we have funded our operations primarily through private placements of common stock and convertible debt securities.  Since the date of the reverse merger with Principal Solar Texas, we have sold 2,085,004 shares of our common stock for aggregate proceeds of $8,453,041. These sales of our common stock reflect issuance prices ranging from $2.20 to $6.76 per share (weighted average of $4.05).

 

Our independent registered public accounting firm issued a qualified "going concern" opinion in connection their audit of our financial statements as of and for the year ended December 31, 2014. In the event that we are unable to raise the funds required to support our operations, we may seek to sell certain of our assets or reduce or scale back our operations and business plan.

 

Moving forward, we plan to seek out debt and/or equity financing to pay costs and expenses associated with our filing requirements with the SEC and to affect our plan of operations as described above, however, we do not currently have any specific plans to raise such additional financing at this time.  The sale of additional securities, if undertaken by the Company and if accomplished, may result in dilution to our stockholders. We cannot assure you, however, that future financing will be available in amounts or on terms acceptable to us, or at all.

 

 

Significant Accounting Policies

 

Recent Accounting Pronouncements

  

In February 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-02 Consolidation (Topic 810) Amendments to the Consolidation Analysis, which affects the following areas of the consolidation analysis:  limited partnerships and similar entities, evaluation of fees paid to a decision maker or service provider as a variable interest and in determination of the primary beneficiary, effect of related parties on the primary beneficiary determination and for certain investment funds. ASU No. 2015-02 is effective for fiscal years beginning after December 15, 2015, and for interim periods beginning after December 31, 2017. We are evaluating the impact of this standard on our consolidated financial position, results of operations and cash flows.

  

In April 2015, FASB issued ASU No. 2015-03, "Interest - Imputation of Interest (Subtopic 835-30)" entitled "Simplifying the Presentation of Debt Issuance Costs". Effective for financial statements issued for fiscal years beginning after December 15, 2015, the statement provides that debt issuance costs are reflected as a discount to the debt on the Balance Sheet and amortized as additional interest expense over the life of the debt. While we have incurred such debt issuance costs in the past, such amounts have not been material, and we do not expect the adoption of this standard to have a material impact on our consolidated financial position, results of operations and cash flows.

  

Principles of Consolidation

  

The Company consolidates the financial position, results of operations, and cash flows of all majority-owned subsidiaries. The consolidated financial statements include the accounts of the Company (including the dba Principal Solar Institute) and its direct subsidiaries SunGen Mill 77, LLC; SunGen Step Guys, LLC; and Powerhouse One, LLC. Significant intercompany accounts and transactions have been eliminated in consolidation.

  

Fair Value

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date.  We believe the carrying values of our current assets and current liabilities approximate their fair values, and the carrying value of our notes payable approximate their estimated fair value for debts with similar terms, interest rates, and remaining maturities currently available to companies with similar credit ratings.

 

All related party transactions are evaluated by our officers and/or Board of Directors who take into account various factors, including their fiduciary duty to the Company; the relationships of the related parties to the Company; the material facts underlying each transaction; the anticipated benefits to the Company and related costs associated with such benefits; and the terms the Company could receive from an unrelated third party. Despite this review, related party transactions may not be recorded at fair value.

 

We do not engage in hedging activities, but do have a derivative instrument treated as a liability whose value is measured on a recurring basis (see "Fair Value Instruments").

 

Fair Value Instruments

 

On March 2, 2015, the Company entered into a convertible loan agreement with Alpha Capital Anstalt (Alpha"). In connection with the loan, the Company granted Alpha complex warrants with certain "down round" protection. As such, they are treated as a derivative liability and were valued using a binomial lattice-based option valuation model using holding period assumptions developed from the Company's business plan and management assumptions, and expected volatility from comparable companies including OTC Pink® and small-cap companies. Increases or decreases in the Company's share price, the volatility of the share price, changes in interest rates in general, and the passage of time will all impact the value of these warrants. The Company re-values these warrants at the end of each reporting period and any changes are reflected as gains or losses in current period results.

 

 

Use of Estimates

 

The preparation of our financial statements in accordance with GAAP requires us to, on an ongoing basis, make significant estimates and judgments that affect the reported values of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities.  We base our estimates on historical experience and on various other assumptions we believe are reasonable under the circumstances, the results of which form the basis for our conclusions.  Actual results may differ from these estimates under different assumptions or conditions.  Such differences could have a material impact on our future financial position, results of operations, and cash flows.

 

Cash and Equivalents

 

We consider cash, deposits, and short-term investments with original maturities of three months or less as cash and equivalents.  Our deposits are maintained primarily in two financial institutions and, at times, may exceed amounts covered by U.S. Federal Deposit Insurance Corporation insurance.

 

Restricted Cash

 

As part of the June 2013 financing with Bridge Bank, National Association (see "Acquisition Note Payable" herein), the Company agreed to maintain in a restricted cash account all proceeds, less debt service and approved expenses, generated by our Powerhouse One subsidiary. Such account provides a minimum of $85,650 replacement reserve ("module reserve") on solar panels found to be defective and potentially not covered under the 25-year manufacturer's warranty. Funds in excess of the module reserve may be accessed by the Company whenever the debt service coverage ratio is greater than or equal to 1.1:1.0.

  

Accounts Receivable

 

Accounts receivable are stated at amounts management expects to collect from outstanding balances. Management provides for probable uncollectible amounts through a charge to earnings and a credit to a valuation allowance based on its assessment of individual accounts. No allowance has been recorded in the accompanying financial statements.

  

Solar Arrays

  

Solar arrays are stated at historical cost, net of accumulated depreciation. Depreciation is computed using the straight-line method over the remaining estimated useful lives of the assets. The estimated useful lives of solar arrays are 25 years from the date first placed in service. During the construction period, all costs and expenses related to the development and construction of a project, excluding administrative expenses, are recorded as construction in process.

  

In each case where a solar array is installed on property subject to a real estate lease, the Company is obligated to remove such installation at the end of the lease terms. As the expected termination dates including renewal periods are decades off (2041-2084); there is little experience uninstalling solar arrays anywhere in the world; costs are expected to be minimal; and the scrap value of the materials is expected to exceed the cost of removal, such removal costs have not been separately accounted for.

 

 

Long-Lived Assets

 

The recoverability of the carrying value of long-lived assets is assessed when an indicator of impairment has been identified.

 

 

For purposes of recognition and measurement of an impairment loss, a long-lived asset or group of assets is combined with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities.

 

For long-lived assets, when impairment indicators are present, the Company compares undiscounted future cash flows, including the eventual disposition of the asset group at market value, to the asset group’s carrying value to determine if the asset group is recoverable. If undiscounted cash flows are less than carrying value, the excess of carrying value over fair value is expensed in the period in which it is estimated to have occurred.

 

Power Purchase Agreement

 

The Company evaluated the PPA with reference to Accounting Standards Codification ("ASC") 805-20-25-10 entitled "Identifiable Intangible Assets" and determined that, while it is not separable from other assets, it does meet the contractual-legal criteria for separate recognition. Further evaluation with reference to ASC 840-10-15-6 entitled "Arrangements that qualify as Leases" concluded the PPA is not a lease, and reference to ASC 805-20-25-10 entitled "Identifiable Intangible Assets" concluded the PPA has no separately recordable value.

 

Revenue Recognition

 

Power generation revenue is recognized as delivered to the purchaser based upon electrical meters affixed to the solar array and measuring kilowatt-hours produced. Our current power generation operations do not generate renewable energy credits, performance-based incentives, or similar credits to the benefit of the Company.

 

Income Taxes

 

Income taxes are recorded under the asset and liability method under which deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities using the enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

 

We account for uncertain income tax positions in accordance with FASB ASC 740 entitled "Income Taxes". Interest costs and penalties related to income taxes are classified as interest expense and general and administrative costs, respectively, in our consolidated financial statements. Income tax returns are subject to a three-year statute of limitations during which they are subject to audit and adjustment. We file income tax returns in the United States federal jurisdiction and certain states.

 

Equity Transaction Fair Values

 

The estimated fair value of our Common Stock issued in share-based payments is measured by the more relevant of (1) the prices received in private placement sales of our stock or, (2) the Company's publically-quoted market price.  We estimate the fair value of simple warrants and stock options when issued or, in the case of issuances to non-employees, when vested, using the Black-Scholes option-pricing ("Black-Scholes") model that requires the input of subjective assumptions.  When valuing more complex warrants, options, or other derivative equity instruments, we use a binomial lattice-based option pricing model or Monte Carlo option pricing model, whichever management deems more appropriate in the circumstances. Recognition in stockholders’ equity and expense of the fair value of stock options awarded to employees is on the straight-line basis over the requisite service period.  Subsequent changes in fair value are not recognized.

 

Net Income (Loss) per Share

 

Basic net income or loss per share is computed by dividing the net income or loss attributable to common stockholders for the period by the weighted average number of shares of Common Stock outstanding for the period. Diluted income per share reflects the potential dilution of other potential issuances of Common Stock including shares to be issued upon exercise of options and warrants and upon conversion of convertible debt and preferred stock. Potentially dilutive shares are not included in the event of a loss as the effect of doing so would be anti-dilutive.

 

 

Comparison of Operating Results

 

Three Months Ended March 2015 and 2014

(all amounts rounded)

 

Power generation revenue was $184 thousand in 2015 compared to $217 thousand in 2014, down simply due to climatic factors and weather patterns in the Tennessee regions where our largest facility, Powerhouse One, operates. Direct operating costs, primarily depreciation and other fixed costs, were little changed.

 

The increase in general and administrative expenses of approximately $484 thousand was comprised of increased equity compensation (non-cash) expense of $370 thousand resulting from option grants to executives, members of the Board of Directors, contractors, and advisors; increased consulting and professional fees resulting from the addition of a financial analyst supporting fundraising activities ($29 thousand) and increased general legal fees ($14 thousand); increased public company costs including audit ($21 thousand), legal ($14 thousand), investor relations expenses ($47 thousand), each stemming from an overall increase in activity, and filings fees stemming from the many SEC filings in 2015 ($17 thousand) and other expense increases and decreases netting to $10 thousand. These increases were partially offset by a decrease in public relations costs of $38 thousand as our activities shifted more from public relations to investor relations.

 

Interest expense increased to $333 thousand in 2015 from $110 thousand in 2014, an increase of $223 thousand. The increase was comprised of $37 thousand increase in expense for the addition of convertible notes and debentures payable, $201 thousand amortization of the discount on convertible debenture resulting from the valuation of the related warrants issued in connection with the debenture, offset by a decrease stemming from the cessation of interest accrual on legacy liabilities ($12 thousand) and a reduced amount outstanding on the acquisition note payable ($3 thousand). The remaining discount on the convertible debenture at March 31, 2015, of $1,048,611 will be amortized as interest expense in the second and third quarters of 2015 as the loan matures in September 2015.

   

Year Ended December 31, 2014 and 2013

(all amounts rounded)

 

Power generation revenue was $975 thousand in 2014 compared to $487 thousand in 2013, and cost of revenues were $553 thousand (57% of revenue) and $314 thousand (64% of revenue), respectively. The increased revenues and increased cost of revenues in 2014 compared to 2013 were driven almost entirely by the acquisition of Powerhouse One in June 2013, and the fact that 2014 included a full year of its operations.

 

The increase in general and administrative expenses of approximately $1.0 million was comprised of increased equity compensation expense of $839 thousand resulting from option grants to executives, members of the Board of Directors, contractors, and advisors; increased consulting fees of $288 thousand resulting from the an upgrade at the CFO's role and expanded workload pursuant to an hourly contract; increased accounting fees of $62 thousand resulting from the outsourcing of accounting to meet a higher workload; increased accounting and legal fees of $102 thousand resulting from multiple amendments and a prolonged review period of a registration statement; increased investor relations/public relations expense of $41 thousand resulting from the initiation of investor relations efforts; increased due diligence expenses of $70 thousand resulting in the pending acquisition of PS IV; increased franchise taxes of $33 thousand resulting from reincorporating in Delaware; offset by a reduced acquisition costs of $266 thousand resulting primarily from the 2013 acquisition of Powerhouse One; reduced amortization expenses of $110 thousand resulting from the website becoming fully depreciated in 2013; and other increases and decreases netting to approximately $43 thousand increase.

 

 

Interest expense increased to $504 thousand in 2014 from $308 thousand in 2013, an increase of $196 thousand (64%). The increase was comprised of $151 thousand increase in expense for the acquisition note payable incurred in connection the 2013 acquisition of Powerhouse One outstanding for a full year versus 6.5 months in 2013; and $53 thousand resulting form the June and December 2014 issuances of convertible notes payable to related parties including members of the Board of Directors; offset by reductions in other interest bearing items totaling $8 thousand.

 

In 2013 we recorded a $102 thousand expense for the inducement for conversion of notes payable relating to the value in the decrease of the conversion price of certain outstanding convertible notes from $6.80 per share to $4.00 per share in May 2013, and an impairment charge of $114 thousand resulting from the decision to uninstall the Mill 77 project.

 

The Company had a net loss attributable to common stockholders of $3.4 million in 2014, compared to a loss of $2.4 million in 2013, an increase of $1.0 million or 42% from the prior period, due to the changes described above.

 

Liquidity and Capital Resources

 

Sources of Liquidity and Trends In Liquidity

 

Other than funds acquired recently through the private placements of debt and equity securities and our repeatedly demonstrated ability to raise capital, we are not aware of any trends that are expected to result in an increase in our liquidity. Cash flows from existing revenue sources do not cover the costs of administering our business and our monthly net cash flow reflects a deficit of between $150,000 and $200,000 each month. We also expect the need for additional funds to increase as we seek additional acquisitions and meet our increasing reporting obligations (which will increase our quarterly operating expenses in connection with costs relating to the preparation of and filing of periodic reports, financial statements and other disclosures and filings with the Securities and Exchange Commission, which we estimate in the amount of $100,000 per quarter), and provide for the ongoing payments for our pending acquisitions until permanent financing is arranged, an additional $900,000 to $1,000,000 per month.

 

As is typical in early-stage companies, our liquidity and capital resources are limited. As such, we are highly dependent upon our ability to raise money in one or more private placements of equity securities in order to continue our operations and pursue our business plan. If we are unable to acquire additional funding to support our ongoing funding requirements, we may be required to curtail or cease operations.

 

To date, we have funded our operations primarily through private placements of common stock, preferred stock, and convertible debt securities.  Since the date of the reverse merger with Principal Solar Texas, we have sold 2,085,004 shares of our common stock for aggregate proceeds of $8,453,041. The sales of our common stock reflect issuance prices ranging from $2.20 to $6.76 per share (weighted average of $4.05). We have also sold 250,000 shares of our $.01 par value Series A Preferred at a price of $4.00 per share resulting in proceeds to the Company of $1,000,000, and we have a contract to sell, under certain conditions described herein under "Series A Preferred", an additional 250,000 shares at a price of $4.00 per share yielding additional expected proceeds of $1,000,000. In addition, we have sold convertible debt yielding gross proceeds of $1,930,000. Although we have successfully financed our operations through the issuance of common stock and convertible debt to date, we cannot be assured that we will be able to continue to be successful in financing our operations in the future.

 

Like the most recent completed acquisition (Powerhouse One), future acquisitions are expected to be separately financed and self-supporting from a cash flow perspective. As such, proceeds from the recent private placements of our equity securities are used primarily to support the Company's administrative needs and due diligence efforts in furtherance of its business plan.

 

 

Within the second quarter of 2015, convertible notes and debentures totaling $1,930,000 will come due. Unless converted, in whole or in part, into up to 467,500 shares of our Common Stock, the Company will rely upon proceeds from its current public offering to settle those debts. No assurance is given that such planned public offering will be successful, and failure to realize sufficient proceeds from the offering to settle the debts and otherwise pursue the Company's business strategy could result in the cessation of operations.

 

Long-term Debt

 

Effective June 17, 2013, the Company closed an acquisition agreement with Vis Solis, Inc., and AstroSol, Inc., co-sellers of Powerhouse One, LLC, whereby 89% of the outstanding membership interest of Powerhouse was exchanged for $6,200,000 in cash.  Powerhouse owns and operates a ground mounted solar electric generation facility consisting of four projects: Lincoln Farm I, II, III and IV (each a separate wholly-owned Tennessee limited liability company), located in Fayetteville, Tennessee.  The project was designed as a 3 MW facility providing approximately 4.5 million Kilowatt hours of electricity per year.

 

In connection with the acquisition, Powerhouse, and certain of its subsidiaries, entered into a Loan and Security Agreement with Bridge Bank, NA (“Bridge Bank” and the “Loan Agreement”).  Pursuant to the Loan Agreement, Powerhouse borrowed $5,050,000 from Bridge Bank, which bears interest at 7.5% per annum, with monthly interest payable in arrears, and certain amortization payments due quarterly in an amount of between $55,514 to $77,574 (increasing during the term of the loan).  The amount borrowed under the Loan Agreement was used to pay the purchase price of the Powerhouse acquisition. The amount borrowed under the Loan Agreement is due on the fourth anniversary of the loan date (June 17, 2017), can be prepaid at any time with 30 days prior written notice, provided that an additional 7% of the principal amount of the loan is due if the loan is repaid within the first year of the loan, 6% is due if repaid within the second year of the loan, 5% is due if the loan is repaid within the third year of the loan and no additional amount is due if repaid three years from the date of the loan.  The Loan Agreement required a commitment fee of 1% of the loan amount, an underwriting fee of 1.75% of the loan amount and a yearly annual portfolio management fee of 0.16% of the amount outstanding under the loan.  Pursuant to the Loan Agreement and a separate Pledge and Security Agreement, all of the membership interests of Powerhouse and all of the assets of Powerhouse were pledged as security to secure the repayment of the loan.  The Loan Agreement requires certain affirmative and negative covenants, including requiring Powerhouse to maintain a debt coverage ratio of not less than 1.10:1, measured quarterly following the first anniversary of the debt. The debt also restricts the payment of dividends, and it is secured by all the assets of Powerhouse, guaranteed by Principal Solar, Inc., and is further secured by a pledge by Principal Solar, Inc. of its membership interest in Powerhouse.

 

Effective June 17, 2013, we granted a warrant to purchase 37,763 shares of our common stock to Bridge Bank in connection with the acquisition of Powerhouse.  The warrant has an exercise price of $4.00 per share, cashless exercise rights, redemption rights providing the Company the right to redeem the warrant for $604,200, anti-dilution rights associated with offerings of equity securities, a term expiring on the first to occur, of the 10 year anniversary of the grant, the closing of the Company’s initial public offering (which is being affected pursuant to the Registration Statement of which this Prospectus is a part), or the liquidation of the Company (each a “Termination Event”), and the warrant is automatically exercised on a cashless basis upon a Termination Event.  The Company also provided the holder registration rights in connection with the grant of the warrant.

 

Short-term Debt

 

Convertible Debenture

 

Effective March 2, 2015, we entered into a convertible loan agreement with Alpha Capital Anstalt ("Alpha") to borrow $1,250,000 (the "Loan"). The Loan is convertible into shares of Common Stock at a rate of $4.00 per share, bears interest at a rate of 8.0% per annum, all principal and interest is due on September 2, 2015, and the loan is secured by the assets of the Company and its subsidiaries (excluding Powerhouse One and all interest in its operations, its assets, and proceeds or distributions therefrom). The principal and accrued interest amounts on the Loan are convertible at any time into shares of Common Stock at a rate of $4.00 per share. In connection with the Loan, the Company also granted Alpha 234,375 warrants (the “Warrants”) exercisable at $6.00 per share, certain piggy-back registration rights, cashless exercise privileges and anti-dilution protection on both the Common Stock into which the Loan may convert and for which the Warrants may be exercised under the occurrence of certain events.

 

 

Series A Preferred

 

On May 6, 2015, the Company contracted to issue, in two separate tranches, up to 500,000 shares of its Series A Preferred to an unrelated investor at a purchase price of $4.00 per share, that will result in potential proceeds to the Company of up to $2,000,000. The Series A Preferred shares have a dividend rate of 12% per annum and, along with accrued dividends, are convertible into shares of our Common Stock at a price of $4.00 per share at any time on or before the third day following the receipt of proceeds from the Company's current public offering. If the shares are not converted by the holder during that time, the Company shall redeem the shares at face value plus accrued dividends from the proceeds of the public offering.

 

The Series A Preferred contains a $4.00 per share plus unpaid dividends liquidation preference in the event of any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, or any sale, merger, consolidation, reorganization or other transaction which results in a change of control of the Company. The Series A Preferred also have discretionary conversion features upon the receipt of funds by the Company from an initial public offering and mandatory redemption requirements following closing of this offering or in an event of default as defined in the certificate of designation for the Series A Preferred. The Company may not, without the approval of the holders of the Preferred, alter, amend or repeal the Company's certificate of incorporation or bylaws, issue securities that are senior or pari passu to the Series A, incur or create indebtedness, guaranty indebtedness, initiate bankruptcy proceedings, redeem stock or pay dividends on stock, repurchase stock or effect a stock split or restructuring of the Company's common stock. These restrictions could materially impact the ability of the Company to operate, including its ability to raise capital and incur indebtedness, which is critical for the ability of the Company to operate. In the event the Company is not permitted to incur debt or raise capital, it could be forced out of operation. In addition, the issuance of the additional shares of Series A Preferred or common stock in lieu of dividends would be highly dilutive to our common stockholders, including investors purchasing securities in this offering.

 

The first tranche of 250,000 shares and $1,000,000 was funded on May 6, 2015. The second tranche of 250,000 and $1,000,000 will be funded when a) the Registration Statement, as may be amended, is declared effective by the Securities and Exchange Commission, and b) the Company presents to the holder financing commitments to construct and operate one of our two announced solar projects, PS IV.

 

In connection with the issuance, the Company granted the holder warrants to purchase up to 375,000 shares of its Common Stock, also in two tranches of 187,500 shares each, at a purchase price of $6.00 per share.

 

Use of proceeds from the issuance is limited to repayment of a certain convertible note outstanding in the amount of $50,000, plus interest, development of PS IV and PS V, and general corporate purposes. As a part of the transaction, the Company delivered subordination agreements regarding convertible notes held by related parties, and the incurrence of additional debt or issuance of additional equity instruments pari pasu or superior to the Series A Preferred, the payment of dividends, or the repurchase of shares of our Common Stock is prohibited.

 

If the Company's current public offering is not completed on or before July 1, 2015, the Company agreed to aggressively seek strategic alternatives including, without limitation, marketing the Company to a private equity group, seeking out a strategic purchaser, seeking a merger of equals, or selling its interest in one or more of the solar projects.

 

Funding of the initial tranche occurred pursuant to a binding term sheet, and the parties worked thereafter to document and close the transaction on May 15, 2015.

  

Convertible Notes

 

Related Party Notes

 

In June 2014, the Company issued convertible notes of $250,000 each to two of its Board members, Messrs. Heller and Marmol, to fund deposits on potential future acquisitions. Such potential acquisitions remain subject to significant uncertainties including due diligence, obtaining construction and permanent financing, and negotiating PPAs, developer agreements, and interconnection agreements. The notes bear interest at a rate of 18% per year and matured on December 5, 2014, and all principal and interest was due at maturity. Principal and interest is payable in cash or shares of Common Stock, at the option of the holder, at a conversion price of $4.00 per share. The notes were secured pursuant to a security agreement by the Company's interest in the otherwise unencumbered net cash flow, if any, from the operations of its Powerhouse One subsidiary. The Company may prepay the notes at any time, but the holders of the notes were guaranteed to receive a minimum of six months interest on the notes.

 

On February 27, 2015 (made effective on the original maturity date), the notes were modified to extend the maturity date to September 30, 2015, to reduce the interest rate from 18% to 12% per annum, and to eliminate all collateral securing the notes. All other aspects of the notes remained unchanged.

 

 

On December 1, 2014, Michael Gorton, the Company's Chief Executive Officer, loaned to the Company pursuant to a convertible promissory note the amount of $130,000. The note initially would have matured on June 30, 2015, bears interest at a rate of 12% per annum, is convertible into shares of our Common Stock at a price of $6.00 per share, and was secured by a claim on proceeds, if any, of a solar project being acquired (PS IV). The notes can be prepaid at any time prior to maturity without penalty. On February 27, 2015, the note was modified to extend the maturity date to September 30, 2015, and eliminate all collateral securing the note. All other aspects of the note remained unchanged.

 

In connection with the May 6, 2015, issuance of Series A Preferred shares, Messrs. Heller, Marmol, and Gorton further modified their convertible notes subordinating them to the Series A Preferred.

 

Non-Related Party Note

 

In January 2015, the Company issued a convertible note to an unrelated party in the amount of $50,000. The note bears interest at a rate of 12% per year and matures on July 31, 2015, and all principal and interest is due at maturity. Principal and interest is payable in cash or shares of Common Stock, at the option of the holder, at a conversion price of $6.00 per share. The notes are secured pursuant to a security agreement by our interest in proceeds, if any, stemming from our interest in PS IV. The Company may prepay the notes at any time without penalty, and expects to do so using proceeds from its recent issuance of Series A Preferred stock.

 

Acquisition of Principal Sunrise IV (fka "IS 46")(pending)

 

In November 2014, the Company entered into a Membership Interest Purchase Agreement ("MIPA") with Innovative Solar Systems, LLC, a solar developer operating primarily in North Carolina, to acquire Innovative Solar 46, LLC ("PS IV"), the owner of a 78.5mw AC solar project to be built in Cumberland County, North Carolina. PS IV holds a single and intangible asset, a 15-year PPA with Duke Energy Progress, Inc. PS IV does not have, nor has it ever had, any other assets, any liabilities, any employees, any revenues, or any operations of any kind. As such, PS IV is not a "business" as defined in the accounting literature, and it has no historical financial statements. PSI agreed to pay Innovative Solar Systems, LLC $6,280,000 for 100% of the membership interest of PS IV in a series of payments of approximately $300,000 per month between execution of the MIPA and the financial close (the point at which all project financing is arranged), and a balloon payment at financial close sufficient to having cumulatively paid 70% of the $6,280,000 price. The remaining 30% of the purchase price will be paid in installments of $150,000 per month through the project's commercial operation date. At March 31, 2015, A total of $2,070,000 had been paid, and failure by the Company to make any of the future scheduled payments may result in the loss of all payments made through such date. The Company is working with engineering and construction firms on final designs, and the total cost of the project based upon the preliminary work is expected to be approximately $164 million, including an estimated $5 million from a public offering in progress. The Company is in discussion with multiple parties to provide the acquisition, construction, and permanent financing for the project, however, no assurance can be given that adequate financing on terms acceptable, or even available, to the Company will be obtained. Closing of the acquisition is expected to occur no later than June 22, 2015 (as extended), and construction is expected to be completed in late 2015.

 

Acquisition of Principal Sunrise V (fka "IS 42")(pending)

 

On March 2, 2015, the Company entered into a MIPA with Innovative Solar Systems, LLC, a solar developer operating primarily in North Carolina, to acquire Innovative Solar 42, LLC ("PS V"), the owner of a 72.9mw AC solar project to be built in Fayetteville, North Carolina. PS V holds a single and intangible asset, a 10-year power purchase agreement ("PPA") with Duke Energy Progress, Inc. PS V does not have, nor has it ever had, any other assets, any liabilities, any employees, any revenues, or any operations of any kind. As such, PS V is not a "business" as defined in the accounting literature, and it has no historical financial statements. PSI agreed to pay Innovative Solar Systems, LLC $5,832,000 for 100% of the membership interest of PS V in a series of payments of approximately $300,000 per month between execution of the MIPA and the financial close (the point at which all project financing is arranged), and a balloon payment at financial close sufficient to having cumulatively paid 70% of the $5,832,000 purchase price. The remaining 30% of the purchase price will be paid in installments of $150,000 per month through the project's commercial operation date. At March 31, 2015, a total of $870,000 had been paid, and failure by the Company to make any of the future scheduled payments may result in the loss of all payments made through such date. The Company is working with engineering and construction firms on final designs, and the total cost of the project based upon the preliminary work is expected to be approximately $153 million. The Company is in discussion with multiple parties to provide the acquisition, construction, and permanent financing for the project, however, no assurance can be given that adequate financing on terms acceptable, or even available, to the Company will be obtained. Closing of the acquisition is expected to occur no later than August 30, 2015, and construction is expected to be completed in early 2016.

 

Principal Sunrise VII (pending)

 

On June 9, 2015, the Company entered into a binding term sheet with Innovative Solar Systems, LLC, a solar developer operating primarily in North Carolina, to acquire Innovative Solar 37, LLC ("Principal Solar VII" or "PS VII"), the owner of a 78.7 MW AC solar project to be built in Anson County, North Carolina. PS VII holds a 10-year flat rate power purchase agreement with Duke. PSI will acquire 100% of the membership interest of PS VII in a series of payments of approximately $300,000 per month between execution of the MIPA to be negotiated between the parties on or before June 30, 2015, and the financial close (the point at which all project financing is arranged). Payments will also include a balloon payment at financial close sufficient to having cumulatively paid 78% of the $5.5 million purchase price. The remaining 22% of the purchase price will be paid in installments of $150,000 per month through the project's commercial operation date. The total cost of the project, based upon the preliminary work, is expected to be approximately $140 million for which the Company has not yet begun to source financing.

  

 

Possible Violations of the Securities Act of 1933

 

The Company may have contingent liability arising out of possible violations of the Securities Act in connection with the presentation which we furnished as Exhibit 99.1 to our Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 5, 2014. Specifically, the furnishing of the presentation publicly may have constituted an “offer to sell” as described in Section 5(c) of the Securities Act. Any liability would depend upon the number of shares purchased by investors who reviewed such presentation that may have constituted a violation of Section 5 of the Securities Act. If a claim were brought by any such ‘recipients’ of such presentation and a court were to conclude that the public disclosure of such presentation constituted a violation of Section 5 of the Securities Act, we could be required to repurchase the shares sold to the investors who reviewed such presentation at the original purchase price, plus statutory interest from the date of purchase, for claims brought during a period of one year from the date of their purchase of common stock. We could also incur considerable expense in contesting any such claims. As of the date of this prospectus, no legal proceedings or claims have been made or threatened by any investors in the Company’s offering. Such payments and expenses, if required, could significantly reduce the amount of working capital we have available for our operations and business plan, delay or prevent us from completing our plan of operations, or force us to raise additional funding, which funding may not be available on favorable terms, if at all. See also the “Risk Factor” entitled “We may have contingent liability arising out of possible violations of the Securities Act of 1933, as amended, in connection with the presentation which we furnished as Exhibit 99.1 to our Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 5, 2014, herein.

 

Off-Balance Sheet Arrangements

 

Principal Sunrise IV (fka "IS 46") (pending)

 

In November 2014, the Company entered into a Membership Interest Purchase Agreement ("MIPA") with Innovative Solar Systems, LLC, a solar developer operating primarily in North Carolina, to acquire Innovative Solar 46, LLC ("PS IV"), the owner of a 78.5mw AC solar project to be built in Cumberland County, North Carolina. PS IV holds a single and intangible asset, a 15-year PPA with Duke Energy Progress, Inc. PS IV does not have, nor has it ever had, any other assets, any liabilities, any employees, any revenues, or any operations of any kind. As such, PS IV is not a "business" as defined in the accounting literature, and it has no historical financial statements. PSI agreed to pay Innovative Solar Systems, LLC $6,280,000 for 100% of the membership interest of PS IV in a series of payments of approximately $300,000 per month between execution of the MIPA and the financial close (the point at which all project financing is arranged), and a balloon payment at financial close sufficient to having cumulatively paid 70% of the $6,280,000 price. The remaining 30% of the purchase price will be paid in installments of $150,000 per month through the project's commercial operation date. At March 31, 2015, A total of $2,070,000 had been paid, and failure by the Company to make any of the future scheduled payments may result in the loss of all payments made through such date. The Company is working with engineering and construction firms on final designs, and the total cost of the project based upon the preliminary work is expected to be approximately $164 million, including an estimated $5 million from a public offering in progress. The Company is in discussion with multiple parties to provide the acquisition, construction, and permanent financing for the project, however, no assurance can be given that adequate financing on terms acceptable, or even available, to the Company will be obtained. Closing of the acquisition is expected to occur no later than June 22, 2015 (as extended), and construction is expected to be completed in late 2015.

 

 

  

Principal Sunrise V (fka "IS 42") (pending)

 

On March 2, 2015, the Company entered into a MIPA with Innovative Solar Systems, LLC, a solar developer operating primarily in North Carolina, to acquire Innovative Solar 42, LLC ("PS V"), the owner of a 72.9mw AC solar project to be built in Fayetteville, North Carolina. PS V holds a single and intangible asset, a 10-year power purchase agreement ("PPA") with Duke Energy Progress, Inc. PS V does not have, nor has it ever had, any other assets, any liabilities, any employees, any revenues, or any operations of any kind. As such, PS V is not a "business" as defined in the accounting literature, and it has no historical financial statements. PSI agreed to pay Innovative Solar Systems, LLC $5,832,000 for 100% of the membership interest of PS V in a series of payments of approximately $300,000 per month between execution of the MIPA and the financial close (the point at which all project financing is arranged), and a balloon payment at financial close sufficient to having cumulatively paid 70% of the $5,832,000 purchase price. The remaining 30% of the purchase price will be paid in installments of $150,000 per month through the project's commercial operation date. At March 31, 2015, a total of $870,000 had been paid, and failure by the Company to make any of the future scheduled payments may result in the loss of all payments made through such date. The Company is working with engineering and construction firms on final designs, and the total cost of the project based upon the preliminary work is expected to be approximately $153 million. The Company is in discussion with multiple parties to provide the acquisition, construction, and permanent financing for the project, however, no assurance can be given that adequate financing on terms acceptable, or even available, to the Company will be obtained. Closing of the acquisition is expected to occur no later than August 30, 2015, and construction is expected to be completed in early 2016.

 

Need for Future Financing

 

In addition to approximately $500 million in project financing to build and operate the pending acquisitions described above, we need to raise approximately $5 million of funding to satisfy our administrative cash requirements for the next 24 months. Because we do not develop new products, no new cash will be required for product development. Accomplishing our four-pronged strategy will require significant capital, potentially in excess of $1.5 billion. From time-to-time, the Company enters into discussions with various parties regarding non-binding letters of intent; however, each non-binding letter of intent remains subject to significant uncertainties including, among other things, completion of due diligence and arranging both debt and equity financing with third-parties and we can provide no assurances that the transactions contemplated thereby will be completed. We hope to acquire these assets with a combination of debt from lending institutions and equity from investors. The future financing, however, may result in dilution to stockholders and may not be available in amounts or on terms acceptable to us, or at all.

 

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

In March 2011, the Company paid approximately $89,007 to Pegasus Funds LLC (“Pegasus”) and issued two shares of Series A Super Voting Preferred Stock (the “Series A Super”) for finding a public shell company and for structuring the Principal Solar Exchange Agreement and as compensation for monies paid by Pegasus in connection with the renewal of the Company’s charter.  The designation of the Series A Super was never filed with the Secretary of State of New York (see also the risk factor above entitled “We believe that certain prior corporate actions undertaken by us pursuant to the purported authority and approval of our preferred stock holders, including our March 2011 reverse stock split, were completed without effective stockholder approval and in violation of state statutes”).  The Series A Super had the terms and conditions described above under “Description of Business” – “Organizational History” – “Exchange Agreement”.

 

In connection with the March 7, 2011, Exchange Agreement (described in greater detail above under “Description of Business” – “Organizational History” – “Exchange Agreement”), we issued 2,648,847 shares of our common stock to the stockholders of Principal Solar Texas in exchange for 100% of the outstanding shares of Principal Solar Texas (which was later merged with and into us in April 2011) and 534,654 shares of the Company’s common stock in connection with the Preferred Stock Exchange to Pegasus Funds LLC and its assigns (“Pegasus”).  Included in the shareholders of Principal Solar Texas who exchanged their shares for shares of the Company were our Chief Executive Officer and Chairman, Michael Gorton (531,317 shares, 50,000 of which were subsequently transferred in a private transaction), Kenneth G. Allen, our Chief Operations Officer (367,091 shares), R. Michael Martin, our Executive Vice President of Business Development (208,546 shares), Jorge Aizcorbe, our consultant on Business Development (155,000 shares), Ronald B. Seidel, our director (33,470 shares), Carl Hefton, who at the time was a director of the Company (29,682 shares), Richard Borry, our current consultant (62,500 shares); Dan Bedell (62,500 shares) our Executive Vice President of Strategic and Corporate Development; Richard Kang, our former Chief Financial Officer (143,587 shares); Aaron Cother, our former Chief Financial Officer (25,000 shares); Shelly Gorton, the wife of our Chief Executive Officer, Michael Gorton (18,962 shares); and Margaret Keliher, our director (14,000 shares).

 

The 534,654 shares of common stock issued to Pegasus were issued in exchange for the two shares of Series A Super held by Pegasus. We relied on an exemption from registration afforded by Section 3(a)(9) of the Securities Act for the conversions, as the securities were exchanged by the Company with its existing security holder exclusively in transactions where no commission or other remuneration was paid or given directly or indirectly for soliciting such exchange.

 

In November and December 2011, we sold an aggregate of 254,603 shares of restricted common stock to 19 individuals and entities in private transactions for $5.64 per share.  Persons purchasing shares in the offering included Steuben, a greater than 5% stockholder of the Company (177,305 shares), the wife of Mr. Gorton, our Chief Executive Officer and Chairman (17,731 shares), Margaret Keliher, our director (5,319 shares), Ronald B. Seidel, our director (4,433 shares), the wife of Mr. Allen, our Chief Operations Officer (4,433 shares), the wife of Mr. Martin, our Executive Vice President of Business Development (4,433 shares), the wife of Mr. Bedell, our Executive Vice President of Strategic and Corporate Development (1,108 shares), the wife of Mr. Kang, our former CFO (4,433 shares), and a trust owned by Rick Borry, our current consultant (2,000 shares).

 

In February 2012, we sold an aggregate of 8,156 shares of our restricted common stock to 10 individuals for $5.64 per share in a private offering.  Persons purchasing shares included R. Michael Martin, our Executive Vice President of Business Development (621 shares), Ronald B. Seidel, our director (887 shares), Hunter L. Hunt, our former director (1,773 shares), John R. Harris, our former director (887 shares), and Everett Gorton, the father of our Chief Executive Officer, Michael Gorton (355 shares).

 

In June 2012, we sold 147,929 shares of our restricted common stock to Steuben Investment Company II, L.P., a greater than 5% stockholder for an aggregate of $1,000,000 or $6,76 per share in a private transaction. The Company claims an exemption from registration afforded by Section 4(2) of and Rule 506 of the Securities Act since the foregoing issuance/grant did not involve a public offering, the recipient took the securities for investment and not resale, the Company took appropriate measures to restrict transfer, and the recipient was an “accredited investor”. No underwriters or agents were involved in the foregoing issuances and the Company paid no underwriting discounts or commissions.

 

 

During November 2012, the Company sold unsecured convertible notes in the aggregate amount $17,000 to Jorge Aizcorbe, our consultant on Business Development ($5,000), Aaron Cother, who was then serving as CFO of the Company ($2,000), and Matthew Thompson, our employee ($10,000).  The convertible notes accrued interest at 12% per annum, were due in November 2013 and were convertible into shares of the Company’s common stock at maturity in the option of the holder at a conversion price of $6.80 per share.

 

During March 2013 the Company sold unsecured convertible notes in the aggregate amount of $21,000 to Michael Gorton, our Chief Executive Officer ($5,000), Kenneth G. Allen, our Chief Operations Officer ($5,000), R. Michael Martin, our Executive Vice President of Business Development ($2,000), and the wife of Mr. Gorton ($9,000). The convertible notes (as amended) accrued interest at 18% per annum, were due in March 2014 and were convertible into shares of the Company’s common stock at maturity in the option of the holder at a conversion price of $6.80 per share.  As described below in May 2013, the conversion price of the notes was reduced to $4.00 per share and all of the notes and accrued interest of $966 were converted into shares of the Company’s restricted common stock.

 

In May 2013, the conversion price of all of the unsecured convertible notes sold by the Company in November 2012, January 2013 and March 2013 was reduced to $4.00 per share and all of the notes totaling $138,000 and accrued interest thereon of $7,990 were converted into 36,498 restricted shares of the Company’s common stock.  Shares of our restricted common stock were issued to the following related parties in connection with the conversions: Michael Gorton, our Chief Executive Officer (1,308 shares), Kenneth G. Allen, our Chief Operations Officer (1,308 shares), R. Michael Martin, our Executive Vice President of Business Development (523 shares), the wife of Mr. Gorton (2,354 shares), Jorge Aizcorbe, our consultant on Business Development (1325), Aaron Cother, who was then serving as CFO (2,120 shares) and Matthew Thompson, our employee (2,651 shares).  Additionally, in January 2013, a note held by the private investor was converted into common stock as well.

 

From May through September 2013, we sold an aggregate of 225,000 shares of our restricted common stock to three individuals for $4.00 per share or $900,000 in aggregate. Purchasers in the offering included Brenda Jackson, our director (50,000 shares), and Jeffrey M. Heller, our director (50,000 shares).

 

In May and September 2013, the Company granted options to purchase up to 132,000 shares of the Company’s common stock to members of the Company’s Board of Directors and advisors to the Company.  The options have an exercise price ranging from of $4.00 to $6.80 per share, various vesting schedules not exceeding two years from the date of grant and a term of ten years (subject, where applicable, to the continued service of the optionholder with the Company).  Included in the grants were Hunter L. Hunt, our former director; Margaret Keliher, our director; Ronald B. Seidel, our director; and John R. Harris, our former director with each receiving options to purchase 18,000 shares including options to purchase 12,000 shares vesting immediately and the remaining 6,000 vesting over the following eight months; and Jeffrey M. Heller, our director and Brenda Jackson, our director, with each receiving options to purchase 18,000 shares vesting over the following 24 months. Each of the director's options has an exercise price of $4.00 per share.

 

Effective June 14, 2013, the Company entered into a Subscription Agreement with Steuben Investment Company II, L.P.  Pursuant to the subscription agreement, Steuben purchased 727,273 shares of the Company’s common stock for an aggregate of $1,600,000 or $2.20 per share.   As additional consideration in connection with the subscription, the Company granted Steuben warrants to purchase 545,455 shares of the Company’s common stock with an exercise price of $4.00 per share and a term of 10 years.  The Company also provided Steuben registration rights. Pursuant to the Registration Rights Agreement, the Company was obligated to file a registration statement and to take all necessary actions to maintain the availability for Steuben to sell its securities pursuant to Rule 144 for a period ending two years from the date the registration statement became effective, February 3, 2015. If the company fails to take all necessary actions to maintain the availability to Steuben of Rule 144 for a period ending February 3, 2017, the Company may be obligated to pay to Steuben a penalty of $216,000, thus negatively impacting its cash and its results of operations.

 

 

In November 2014, all 545,455 warrants held by Steuben and described above were exercised by the holder in a cashless transaction as provided for in the warrant agreement. Based upon a share valuation of $6.00 per share determined by the Company's Board of Directors based upon concurrent issuances, the exercise of warrants to acquire 545,455 shares of Common Stock on a cashless basis resulted in a net issuance to Steuben of 181,818 shares of Common Stock. The final settlement of the liability upon exercise resulted in a gain of $32,239 recognized in 2014.

 

Effective June 17, 2013, we granted a warrant to purchase 37,763 shares of our common stock to Bridge Bank, National Association in connection with the acquisition of Powerhouse (as described in greater detail above under “Description of Business” – “Material Acquisitions” – “Powerhouse One”).  The warrant has an exercise price of $4.00 per share, cashless exercise rights, redemption rights providing the Company the right to redeem the warrant for $604,200, anti-dilution rights associated with offerings of equity securities, a term expiring on the first to occur, of the 10 year anniversary of the grant, the closing of the Company’s initial public offering (which is being affected pursuant to the Registration Statement of which this Prospectus is a part), or the liquidation of the Company (each a “Termination Event”), and the warrant is automatically exercised on a cashless basis upon a Termination Event.  The Company also provided the holder registration rights in connection with the grant of the warrant.

 

2013-2015 Private Placement Offering -- From May 2013 through October 2014, we sold an aggregate of 1,357,795 shares of our restricted common stock to 15 "accredited investors" (individuals and trusts) at price of $4.00 per share resulting in total proceeds to the Company of $4,072,090 in aggregate. Purchasers in the offering included Guillermo Marmol, our director (50,000 shares); Jeffrey M. Heller, our director (100,000 shares); Brenda Jackson, our director (75,000 shares); Garrett Boone, our director (50,000 shares); and the wife of our CFO, David Pilotte (5,000 shares).

 

Beginning in November 2014, we sold an aggregate of 149,835 shares of our restricted common stock to seven of our Board members, two current investors, our former CFO, a close relative of our CEO, and two business partners of an existing investor. Each sale was at a price of $6.00 per share resulting in total proceeds to the Company of $899,000 in aggregate. Board members participating in the offering included Guillermo Marmol (16,667 shares); Jeffrey M. Heller (29,167 shares); Brenda Jackson (12,500 shares); Garrett Boone (834 shares); Ron Seidel (2,500 shares); Margaret Keliher (5,000 shares); and Michael Gorton (6,667 shares).

 

Certain members of the management team have deferred payment of their compensation for the benefit of the Company.  No formal terms of payment have been established.  The amounts payable as of March 31, 2015, December 31, 2013, and December 31, 2012 were $1,076,448, $559,998, and $305,322, respectively.

 

In June 2014, the Company issued convertible notes of $250,000 each to two of its Board members, Messrs. Heller and Marmol, to fund deposits on potential future acquisitions. Such potential acquisitions remain subject to significant uncertainties including due diligence, obtaining construction and permanent financing, and negotiating PPAs, developer agreements, and interconnection agreements. The notes bore interest at a rate of 18% per year and matured on December 5, 2014, and all principal and interest was due at maturity. Principal and interest is payable in cash or shares of Common Stock, at the option of the holder, at a conversion price of $4.00 per share. The notes were secured pursuant to a security agreement by the Company's interest in the otherwise unencumbered net cash flow, if any, from the operations of its Powerhouse One subsidiary. The Company may prepay the notes at any time, but the holders of the notes were guaranteed to receive a minimum of six months interest on the notes.

 

On February 27, 2015 (made effective on the original maturity date), the notes were modified to extend the maturity date to September 30, 2015, to reduce the interest rate from 18% to 12% per annum, and to eliminate all collateral securing the notes. All other aspects of the notes remained unchanged.

 

 

On December 1, 2014, Michael Gorton, the Company's Chief Executive Officer, loaned to the Company pursuant to a convertible promissory note the amount of $130,000. The note initially matured on June 30, 2015, bore interest at a rate of 12% per annum, is convertible into shares of our Common Stock at a price of $6.00 per share, and was secured by a claim on proceeds, if any, of a solar project being acquired (PS IV). The notes can be prepaid at any time prior to maturity without penalty. On February 27, 2015, the note was modified to extend the maturity date to September 30, 2015, and eliminate all collateral securing the note. All other aspects of the note remained unchanged.

 

In June 2014, the Company re-priced 24,000 options granted to independent advisors between February 2012 and September 2012. The options, originally issued having exercise prices ranging from $5.64 to $6.84 per share, were re-priced to $4.00 per share. Because of the small change in inputs to the Black-Scholes model since they were initially issued (especially volatility), there was no expense recorded in connection with this action.

 

Pursuant to its 2014 Equity Incentive Plan, during the period June through October 2014, the Company granted to its key executives, independent contractors, new Board members, and one key advisor (our former CFO), options to acquire 307,257 shares of its Common Stock. The options have an exercise price of $4.00 per share and have expiration dates of 5 years for the advisor and 10 years for key executives, independent contractors, and Board members. Vesting ranges from (i) immediately upon grant for non-employee executives and independent contractors with extended expiration privileges based upon their continued services to the Company, (ii) 24 months for Board members starting when they joined the Board, and (iii) 36 months for employees. All options were valued using the Black-Scholes options pricing model and resulted in an expense of $1,044,130 recognized during 2014.

 

Our Board of Directors member, Scott Olson, negotiated the May 6, 2015, placement of our Series A Preferred stock yielding a potential $2,000,000 in proceeds to the Company. Though no agreement exists today, the Company's Board may, at some point in the future, determine an appropriate discretionary compensation for his service, and such compensation could be material.

 

Review, Approval and Ratification of Related Party Transactions

 

Given our small size and limited financial resources, we have not adopted formal policies and procedures for the review, approval or ratification of transactions, such as those described above, with our executive officers, directors and significant stockholders.  However, all of the transactions described above were approved and ratified by our officers and/or directors.  In connection with the approval of the transactions described above, our officers and/or directors took into account various factors, including their fiduciary duty to the Company; the relationships of the related parties described above to the Company; the material facts underlying each transaction; the anticipated benefits to the Company and related costs associated with such benefits; whether comparable products or services were available; and the terms the Company could receive from an unrelated third party.

 

We intend to establish formal policies and procedures in the future, once we have sufficient resources and have appointed additional directors, so that such transactions will be subject to the review, approval or ratification of our Board of Directors, or an appropriate committee thereof.   On a moving forward basis, our officers and directors will continue to approve any related party transaction based on the criteria set forth above.

 

CHANGES IN AND DISAGREEMENTS WITH

ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

  

DESCRIPTION OF CAPITAL STOCK

 

Common Stock

 

Our Certificate of Incorporation, as amended, authorizes the Company to issue up to 300,000,000 shares of common stock, $0.01 par value per share. As of the date hereof, there are 5,604,181 shares of our common stock issued and outstanding, which are held by approximately 220 stockholders of record. All outstanding shares of common stock are of the same class and have equal rights and attributes. Holders of our common stock are entitled to one vote per share on matters to be voted on by stockholders and also are entitled to receive such dividends, if any, as may be declared from time to time by our Board of Directors in its discretion out of funds legally available therefore. Subject to the rights of the holders of any preferred stock then outstanding, holders of our common stock have exclusive voting rights for the election of our directors and all other matters requiring stockholder action, except with respect to amendments to our Certificate of Incorporation that alter or change the powers, preferences, rights or other terms of any outstanding preferred stock if the holders of such affected series of preferred stock are entitled to vote on such an amendment. Upon our liquidation or dissolution, the holders of our common stock are entitled to receive pro rata all assets remaining available for distribution to stockholders after payment of all liabilities and provision for the liquidation of any shares of preferred stock at the time outstanding. Our common stock has no cumulative or preemptive rights or other subscription rights. The payment of dividends on our common stock is subject to the prior payment of dividends on any outstanding preferred stock.

 

Preferred Stock

 

Our Certificate of Incorporation, as amended, authorizes the Board of Directors to issue, without stockholder approval, up to 100,000,000 shares of preferred stock, $0.01 par value per share, which preferred stock may be issued from time to time in one or more series. As of the date hereof, 2,000,000 shares of preferred stock have been designated "Series A Preferred" and 250,000 of those shares are issued and outstanding and we have contracted to issue an additional 250,000 of those shares, subject to meeting certain conditions. Our Board of Directors is authorized to fix the voting rights, if any, designations, powers, preferences, the relative participating, optional or other special rights and any qualifications, limitations and restrictions thereof, applicable to the shares of each series of our preferred stock. Our Board of Directors may be able to, without stockholder approval, issue preferred stock with voting and other rights that could adversely affect the voting power and other rights of the holders of our common stock, and could have anti-takeover effects. Although we do not currently intend to issue any shares of preferred stock, we cannot assure any person or other entity that we will not do so in the future. The ability of our Board of Directors to issue preferred stock without stockholder approval could have the effect of delaying, deferring, or preventing a change of control of us or the removal of existing management. See a full description of the Series A Preferred herein under "Liquidity and Capital Resources - Series A Preferred".

    

Equity Compensation Plan Information

 

In January 2012, the Board approved an option pool of 716,090 shares (20% of the then outstanding common stock) to be awarded to officers, Directors, contractors and advisors, each contributing to the further development of the business. This pool of shares was not documented in writing.  

 

2014 Equity Incentive Plan

 

In June 2014, the Company's Board of Directors approved the 2014 Equity Incentive Plan ("Plan") providing for the future issuance of options, restricted stock, performance units, share appreciation rights, and similar equity incentive-type awards for officers, Board members, employees, and advisors to the Company. All options previously issued outside of a written plan were adopted by the 2014 Equity Incentive Plan and shall be governed thereafter by the Plan. The newly formed Plan also adopted the previously approved Pool of shares.

 

 

In January 2015, the Board of Directors reserved an additional 250,000 shares of Common Stock pursuant to the Plan and 765,590 of the total 966,090 reserved have been issued to date.

 

The following table provides information as of December 31, 2014, regarding the Pool under which equity securities are authorized for issuance:

 

Plan Category		Number of securities to be issued upon exercise of outstanding options, warrants and rights				Weighted-average exercise price of outstanding options, warrants and rights				Number of securities available for future issuance under equity compensation plans (excluding those in first column)
Equity compensation plans approved by the security holders			-				-				-
Equity compensation plans not approved by the security holders			716,091			$	4.62				-
Total			716,091			$	4.62				-

  

Anti-Takeover Provisions of Our Charter and Bylaws

 

The following discussion summarizes the reasons for, and the operation and effects of, certain provisions of our Certificate of Incorporation and Bylaws which management has identified as potentially having an anti-takeover effect.

 

The anti-takeover provisions in Delaware law, the Certificate of Incorporation and Bylaws are designed to minimize our susceptibility to sudden acquisitions of control which have not been negotiated with and approved by our Board of Directors.  These provisions may tend to make it more difficult to remove the incumbent members of the Board of Directors and may have the effect of preventing an acquisition or tender offer which might be viewed by stockholders to be in their best interests.

 

Tender offers or other non-open market acquisitions of stock are usually made at prices above the prevailing market price of a company’s stock.  In addition, acquisitions of stock by persons attempting to acquire control through market purchases may cause the market price of the stock to reach levels which are higher than would otherwise be the case.  Anti-takeover provisions may discourage such purchases, particularly those of less than all of the company’s stock, and may thereby deprive stockholders of an opportunity to sell their stock at a temporarily higher price.  These provisions may therefore decrease the likelihood that a tender offer will be made, and, if made, will be successful.  As a result, the provisions may adversely affect those stockholders who would desire to participate in a tender offer.  These provisions may also serve to insulate incumbent management from change and to discourage not only sudden or hostile takeover attempts, but any attempts to acquire control which are not approved by the Board of Directors, whether or not stockholders deem such transactions to be in their best interests.

 

Authorized Shares of Capital Stock.  Our Certificate of Incorporation authorizes the issuance of up to 300,000,000 shares of common stock.  Our Certificate of Incorporation also authorizes the issuance of up to 100,000,000 shares of preferred stock.  This preferred stock, together with authorized but unissued shares of common stock, could represent additional capital stock required to be purchased by an acquirer.  Issuance of such additional shares may dilute the voting interest of our stockholders.  If our directors determine it is in our best interest to issue an additional class of voting preferred stock to a person opposed to a proposed acquisition, such person might be able to prevent the acquisition single-handedly.

 

 

Stockholder Meetings.  Delaware law provides that the stockholder meetings may be called by a corporation’s Board of Directors or by such person or persons as may be authorized by a corporation’s Certificate of Incorporation or Bylaws.  Our Bylaws provide that stockholder meetings, whether annual or special, may be called by our Board of Directors, the President or by stockholders holding in aggregate 10% or more of our outstanding voting shares, unless otherwise required by law.  Although we believe that this provision will discourage stockholder attempts to disrupt the business of the Company between annual meetings, its effect may be to deter hostile takeovers by making it more difficult for a person or entity to obtain immediate control of the Company by preventing the call of a special meeting of stockholders.  

 

Restriction of Maximum Number of Directors and Filling Vacancies on the Board of Directors.  Delaware law requires that the Board of Directors of a corporation consist of one or more members and that the number of directors shall be established by the corporation’s Certificate of Incorporation or Bylaws.  Our Certificate of Incorporation and Bylaws provide that the number of directors shall be fixed from time to time by the Board of Directors.  The power to determine the number of directors and the power to fill vacancies, whether occurring by reason of an increase in the number of directors or by resignation, is vested in our Board of Directors.  The overall effect of such provisions may be to prevent a person or entity from quickly acquiring control of the Company through an increase in the number of our directors and election of nominees to fill the newly created vacancies and thus allow existing management to continue in office.

 

Lack of Cumulative Voting. Under Delaware law, there is no cumulative voting by stockholders for the election of our directors.  The absence of cumulative voting rights effectively means that the holders of a majority of the stock voted at a stockholder meeting may, if they so choose, elect all of the directors to be elected at that meeting, thus precluding a small group of stockholders from controlling the election of one or more representatives to our Board of directors.

 

Amendment of Bylaws. Our Certificate of Incorporation provides that the power to adopt, amend or repeal the Company’s Bylaws resides in the Board of directors, but that the stockholders may make additional Bylaws and may alter or repeal any Bylaw(s), whether adopted by them or otherwise, by an affirmative vote of the holders of a majority of the outstanding shares of stock entitled to vote on such proposal at a duly held meeting of the stockholders or, without a meeting, by written consent, signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voting.

 

Section 203 of the Delaware General Corporation Law. We are subject to Section 203 of the Delaware General Corporation Law. Subject to certain exceptions, Section 203 prevents a publicly-held Delaware corporation from engaging in a “business combination” with any “interested stockholder” for three years following the date that the person became an interested stockholder, unless the interested stockholder attained such status with the approval of our board of directors or unless the business combination is approved in a prescribed manner. A “business combination” includes, among other things, a merger or consolidation involving us and the “interested stockholder” and the sale of more than 10% of our assets. In general, an “interested stockholder” is any entity or person beneficially owning 15% or more of our outstanding voting stock and any entity or person affiliated with or controlling or controlled by such entity or person.

 

  

SHARES AVAILABLE FOR FUTURE SALE

 

Future sales of substantial amounts of our common stock could adversely affect market prices prevailing from time to time, and could impair our ability to raise capital through the sale of equity securities.

 

Upon the date of this Prospectus, there are 5,604,181 shares of common stock issued and outstanding. Upon the completion of this offering, an additional 1,500,000 shares of common stock will be eligible for immediate resale in the public market. Approximately 4,760,409 shares of our currently issued and outstanding common stock which were not registered pursuant to a Registration Statement dated February 3, 2015, will constitute “restricted securities” as that term is defined by Rule 144 of the Securities Act of 1933, as amended (the “Securities Act”) and bear appropriate legends, restricting transferability. The Company may also raise capital in the future by issuing additional restricted shares to investors.  In addition to the shares being registered herein and the “restricted securities” which are currently outstanding, an aggregate of 843,772 shares of the Company are non-“restricted securities” currently eligible to be freely traded on the OTC Pink^® market.

 

Restricted securities may not be sold except pursuant to an effective registration statement filed by us or an applicable exemption from registration, including an exemption under Rule 144 promulgated under the Act.

 

Pursuant to Rule 144 of the Securities Act (“Rule 144”), a “shell company” is defined as a company that has no or nominal operations; and, either no or nominal assets; assets consisting solely of cash and cash equivalents; or assets consisting of any amount of cash and cash equivalents and nominal other assets.  As such, because, while we do not believe that we are a “shell company” we were previously a “shell company” pursuant to Rule 144, and sales of our securities pursuant to Rule 144 are not able to be made until 1) we have ceased to be a “shell company” (which we believe occurred in June 2013 in connection with the Powerhouse acquisition); 2) we are subject to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, and have filed all of our required periodic reports for the previous one year period prior to any sale; and a period of at least twelve months has elapsed from the date “Form 10 type information” has been filed with the Commission reflecting the Company’s status as a non-“shell company.”  As such, none of our securities will be eligible to be sold pursuant to Rule 144 until at least February 3, 2016, and any “restricted shares” which are not registered herein will have no liquidity and will in fact be ineligible to be resold until and unless such securities are registered with the Commission and/or until a year after our Registration Statement has been declared effective and the other requirements of Rule 144 have been complied with, as described above.

 

Assuming we are not deemed to be a “shell company” in the future and we otherwise meet the requirements of Rule 144, including our status as a “reporting company”, a person (or persons whose shares are aggregated) who owns “restricted securities” that were purchased from us (or any affiliate) at least one year previously (six months after a period of at least six months has elapsed after the date of the Registration Statement), would be entitled to sell such securities without restrictions other than the availability of current public information about us and the requirement that we continue to timely file our periodic filings for one year from the date they acquired such securities. A person who may be deemed our affiliate, who owns “restricted securities” that were purchased from us (or any affiliate) at least one year previously (six months after a period of at least six months has elapsed after the date of our Registration Statement), would be entitled to sell within any three-month period a number of shares that does not exceed 1% of the then outstanding shares of the Company’s common stock. Sales by affiliates are also subject to certain manner of sale provisions, notice requirements and the availability of current public information about us. If the Company has complied with the requirements above, and continues to be a “reporting company” and timely files its filings, a person who is not deemed to have been our affiliate at any time during the 90 days preceding a sale, and who owns “restricted securities” that were purchased from us (or any affiliate) at least one year previously, would be entitled to sell such shares under Rule 144 without restrictions.

 

In the event we become a “shell company” or non-“reporting company” in the future, under Rule 144, due to the fact that we are deemed to be a former “shell company”, no sales of our “restricted securities” are eligible to be made pursuant to Rule 144 until we comply with the requirements of Rule 144, as described above, including, in the event we do not become a “shell company”, becoming current in our filings with the Commission and in the event we do become a “shell company”, complying with Rule 144 above, as such relates to “shell companies.”

 

  

UNDERWRITING

 

The underwriters named below have agreed to buy, subject to the terms of the underwriting agreement, the number of shares of common stock listed opposite their names below. The underwriters are committed to purchase and pay for all of the securities if any are purchased.

 

Underwriters		Number of Shares
Northland Securities, Inc.
Total

 

The underwriters have advised us that they propose to offer the shares of Common Stock to the public at the price set forth on the cover page of this prospectus supplement. The underwriters propose to offer the shares of Common Stock to certain dealers at the same price less a concession not in excess of $      per share. The underwriters may allow, and the dealers may reallow, a concession of not more than a $       per share on sales to certain other brokers and dealers. After this offering, these amounts may be changed by the underwriters.

 

We have granted to the underwriters an option to purchase up to an additional         shares of Common Stock from us at the same price to the public, and with the same underwriting discount, as set forth in the table below. The underwriters may exercise this option any time during the 45-day period after the date of this prospectus, but only to cover over-allotments, if any. To the extent the underwriters exercise the option, the underwriters will become obligated, subject to certain conditions, to purchase the securities for which they exercise the option. The underwriters expect to deliver the securities to purchasers on or about           , 2015.

 

The underwriting discount is equal to the public offering price per share of Common Stock, less the amount paid by the underwriters to us per share. The following table shows the per share and total underwriting discount to be paid to the underwriters in this offering, assuming both no exercise and full exercise of the over-allotment option.

 

		Per Share		Total with No Exercise	Total With Exercise
Paid by us		$		$		$

  

We estimate expenses payable by us in connection with this offering, other than the underwriting discounts referred to above, will be approximately $750,000. This estimate includes $500,000 of fees and expenses of the underwriter.

 

In the event the Company determines to undertake any public or private offering of securities, or any merger, acquisition or sale transaction, whether on its own behalf or on behalf of its securityholders, at any time within 28 months of the closing of this offering, the Company will offer Northland the right to serve as exclusive placement agent (in the case of a private offering) lead-managing underwriter (in the case of a public offering), or as exclusive financial advisor (in the case of a merger, acquisition or sale transaction). If Northland agrees to act in such capacity, the Company and Northland will enter into an appropriate form of separate agreement containing customary terms and conditions to be mutually agreed upon. This right to serve is neither an expressed nor an implied commitment by Northland to act in any capacity in any such transaction or to purchase any securities in connection therewith, which commitment will only be set forth in a separate agreement. Notwithstanding the foregoing, in no event shall the right to serve have a duration of more than three years from the date of effectiveness or commencement of sales of the offering.

 

Except as disclosed in this prospectus, the underwriters have not received, and will not receive, from us any other item of compensation or expense in connection with this offering considered by the Financial Industry Regulatory Authority to be underwriting compensation under its rule of fair price. The underwriting discount was determined through an arms’ length negotiation between us and the underwriters.

 

 

We have agreed to indemnify the underwriters against certain liabilities, including civil liabilities under the Securities Act, or to contribute to payments that the underwriters may be required to make in respect of those liabilities.

 

We, and each of our directors and executive officers, have agreed to certain restrictions on the ability to sell shares of our Common Stock for a period of 180 days after the date of this prospectus. The agreements provide exceptions for sales to the underwriters pursuant to the underwriting agreement and certain other situations (including a private placement of debt and or equity securities in an amount not to exceed an amount that would provide the Company with gross proceeds of $3,000,000). The restrictions in these agreements may be waived by the underwriters in their sole discretion. The lock-up periods discussed above are subject to extension such that, in the event that either (i) during the last 17 days of the “lock-up” period, we issue an earnings or financial results release or material news or a material event relating to us occurs, or (ii) prior to the expiration of the “lock-up” period, we announce that we will release earnings or financial results during the 16-day period beginning on the last day of the “lock-up” period, then in either case the expiration of the “lock-up” period will be extended until the expiration of the 18-day period beginning on the issuance of the earnings or financial results release or the occurrence of the material news or material event, as applicable, unless the underwriters waive, in writing, such an extension. The restrictions described above do not apply to certain transactions by our officers and directors pursuant to any trading plan established pursuant to Rule 10b-5 of the Exchange Act.

 

To facilitate this offering, the underwriters may engage in transactions that stabilize, maintain, or otherwise affect the price of shares of our Common Stock during and after this offering. Specifically, the underwriters may over-allot or otherwise create a short position in our Common Stock for its own accounts by selling more shares of Common Stock than we have sold to them. The underwriters may close out any short position by either exercising its option to purchase additional shares or purchasing shares in the open market. In addition, the underwriters may stabilize or maintain the price of our Common Stock by bidding for or purchasing shares in the open market and may impose penalty bids. If penalty bids are imposed, selling concessions allowed to syndicate members or other broker-dealers participating in the offering are reclaimed if shares previously distributed in the offering are repurchased, whether in connection with stabilization transactions or otherwise. The effect of these transactions may be to stabilize or maintain the market price of our Common Stock at a level above that which might otherwise prevail in the open market. The imposition of a penalty bid may also affect the price of our Common Stock to the extent that it discourages resales of shares. The magnitude or effect of any stabilization or other transactions is uncertain. These transactions may be effected on the NASDAQ or otherwise and, if commenced, may be discontinued at any time.

 

In connection with this offering, the underwriters and selling group members may also engage in passive market making transactions in our Common Stock. Passive market making consists of displaying bids on the Nasdaq Capital Market limited by the prices of independent market makers and effecting purchases limited by those prices in response to order flow. Rule 103 of Regulation M promulgated by the SEC limits the amount of net purchases that each passive market maker may make and the displayed size of each bid. Passive market making may stabilize the market price of our Common Stock at a level above that which might otherwise prevail in the open market and, if commenced, may be discontinued at any time.

 

The underwriters may facilitate the marketing of this offering online directly or through one of the underwriters’ affiliates. In those cases, prospective investors may view offering terms and a prospectus online and place orders online or through their financial advisors. Such websites and the information contained on such websites, or connected to such sites, are not incorporated into and are not a part of this prospectus supplement.

 

Northland Capital Markets is the trade name for certain capital markets and investment banking services of Northland Securities, Inc., member FINRA/SIPC.

 

 

European Economic Area. In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a “Relevant Member State”) an offer to the public of any shares of our common stock may not be made in that Relevant Member State, except that an offer to the public in that Relevant Member State of any shares of our common stock may be made at any time under the following exemptions under the Prospectus Directive, if they have been implemented in that Relevant Member State:

 

●     to any legal entity which is a qualified investor as defined in the Prospectus Directive

●     to fewer than 100 or, if the Relevant Member State has implemented the relevant provision of the 2010 PD Amending Directive, 150, natural or legal persons (other than qualified investors as defined in the Prospectus Directive), as permitted under the Prospectus Directive, subject to obtaining the prior consent of the representatives for any such offer

●     in any other circumstances falling within Article 3(2) of the Prospectus Directive, provided that no such offer of shares of our common stock shall result in a requirement for the publication by us or any underwriter of a prospectus pursuant to Article 3 of the Prospectus Directive

 

For the purposes of this provision, the expression an “offer to the public” in relation to any shares of our common stock in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and any shares of our common stock to be offered so as to enable an investor to decide to purchase any shares of our common stock, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State, the expression “Prospectus Directive” means Directive 2003/71/EC (and amendments thereto, including the 2010 PD Amending Directive, to the extent implemented in the Relevant Member State), and includes any relevant implementing measure in the Relevant Member State, and the expression “2010 PD Amending Directive” means Directive 2010/73/EU. 

 

Norway. This offering document has not been approved or disapproved by, or registered with, the Norwegian Financial Supervisory Authority (Finanstilsynet) nor the Norwegian Registry of Business Enterprises, and the shares are marketed and sold in Norway on a private placement basis and under other applicable exceptions from the offering prospectus requirements as provided for pursuant to the Norwegian Securities Trading Act and the Norwegian Securities Trading Regulation. 

 

Switzerland. The common shares may not be publicly offered in Switzerland and will not be listed on the SIX Swiss Exchange (the “SIX”) or on any other stock exchange or regulated trading facility in Switzerland. This document has been prepared without regard to the disclosure standards for issuance prospectuses under art. 652a or art. 1156 of the Swiss Code of Obligations or the disclosure standards for listing prospectuses under art. 27 ff. of the SIX Listing Rules or the listing rules of any other stock exchange or regulated trading facility in Switzerland. Neither this document nor any other offering or marketing material relating to the common shares or the offering may be publicly distributed or otherwise made publicly available in Switzerland.

 

Neither this document nor any other offering or marketing material relating to the offering, or the common shares have been or will be filed with or approved by any Swiss regulatory authority. In particular, this document will not be filed with, and the offer of common shares will not be supervised by, the Swiss Financial Market Supervisory Authority FINMA, and the offer of common shares has not been and will not be authorized under the Swiss Federal Act on Collective Investment Schemes (“CISA”). Accordingly, no public distribution, offering or advertising, as defined in CISA, its implementing ordinances and notices, and no distribution to any non-qualified investor, as defined in CISA, its implementing ordinances and notices, shall be undertaken in or from Switzerland, and the investor protection afforded to acquirers of interests in collective investment schemes under CISA does not extend to acquirers of common shares. 

 

United Kingdom. This document is not an approved prospectus for the purposes of section 85 of the UK Financial Services and Markets Act 2000, as amended, or FSMA, and a copy of it has not been, and will not be, delivered to or approved by the UK Financial Conduct Authority or approved by any other authority which could be a competent authority for the purposes of the Prospectus Directive. 

 

 

This prospectus supplement is only being distributed to, and is only directed at, persons in the United Kingdom that are “qualified investors” within the meaning of Article 2(1)(e) of the Prospectus Directive that are also (i) investment professionals falling within Article 19(5) of the UK Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended, (the “Order”), and/or (ii) high net worth companies, unincorporated associations or partnerships and the trustees of high value trusts falling within Article 49(2)(a) to (d) of the Order and other persons to whom it may lawfully be communicated (each such person being referred to as a “relevant person”).

 

Any person in the United Kingdom that is not a relevant person should not act or rely on these documents or any of their contents. Any investment, investment activity or controlled activity to which this document relates is available in the United Kingdom only to relevant persons and will be engaged in only with such persons.

 

Accordingly, this document is exempt from the general restriction on the communication of invitations or inducements to enter into investment activity contained in Section 21 of the FSMA and has not been approved by an authorized person, as would otherwise be required.

 

Any purchaser of ordinary shares resident in the United Kingdom you will be deemed to have represented to the Company and the underwriters, and acknowledge that each of the Company and the underwriters are relying on such representation, that it, or the ultimate purchaser for which it is acting as agent, is a relevant person. 

 

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

Market for Common Stock

 

Our common stock is currently quoted on the OTC Pink^® market maintained by OTC Markets Group, Inc. under the symbol “PSWW”; however, our securities are currently highly illiquid, and subject to large swings in trading price, and are only traded on a sporadic and limited basis. In connection with this offering, our Common Stock has been approved for listing on NASDAQ.

 

The following table sets forth, for the periods indicated, the high and low sales prices per share of our common stock. The quotations reflect inter-dealer prices without retail markups, markdowns, or commissions and may not represent actual transactions. For current price information, stockholders or other interested individuals are urged to consult publicly available sources.  During the periods presented below trading in our common stock was highly illiquid and sporadic. Effective with FINRA on May 25, 2011, the Company completed a 1:40 reverse stock split of its outstanding common stock.  Unless otherwise stated or the context would require otherwise, all share amounts disclosed throughout this Prospectus retroactively take into account the Reverse Split.

 

On May 5, 2015, the Company's Board of Directors and stockholders representing a majority of the shares outstanding on that date voted to effect a 1:4 reverse stock split (the "May 2015 Reverse"). Unless otherwise stated or the context would require otherwise, all share amounts disclosed throughout this Prospectus retroactively take into account the May 2015 Reverse, and all resulting fractional share amounts have been rounded to the nearest whole share.

  

QUARTER ENDED		HIGH				LOW
June 30, 2015 (through June 12)		$	35.60			$	12.00
March 31, 2015		$	32.00			$	2.80
December 31, 2014		$	7.16			$	2.20
September 30, 2014		$	6.40			$	5.20
June 30, 2014		$	7.20			$	4.60
March 31, 2014		$	8.04			$	4.04
December 31, 2013		$	6.00			$	2.04
September 30, 2013		$	7.00			$	1.60
June 30, 2013		$	4.00			$	3.96
March 31, 2013		$	7.96			$	3.96

 

 

Holders

 

As of June 12, 2015, there were approximately 220 record holders of our Common Stock, and the last price at which a trade occurred on that date was $14.00 per share.

 

Dividends

 

We have never declared or paid any cash dividends on our common stock, and we do not anticipate paying any dividends in the foreseeable future.  We intend to devote any earnings to fund the operations and the development of our business.

 

 

ADDITIONAL INFORMATION

 

We have filed with the SEC a Registration Statement on Form S-1 under the Securities Act with respect to the shares of common stock offered by this Prospectus. This Prospectus does not contain all of the information included in the Registration Statement. For further information pertaining to us and our common stock, you should refer to the Registration Statement and to its exhibits.

 

We file annual, quarterly, and current reports and other information with the SEC. You may read and copy any reports, statements, or other information we file at the SEC's public reference room at 100 F. Street, N.E., Washington D.C. 20549. You can request copies of these documents, upon payment of a duplicating fee by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference rooms. Our SEC filings are also available to the public on the SEC's Internet site at httpwww.sec.gov.

  

LEGAL MATTERS

 

The validity of the shares of common stock offered by this prospectus and certain other legal matters as to Delaware law will be passed upon for us by Andrews Kurth LLP. Settle & Pou, PC, Dallas, Texas, acted as co-counsel to the Company. Faegre Baker Daniels LLP, Minneapolis, Minnesota, has acted as counsel to the underwriters for this offering.

  

EXPERTS

 

The financial statements of the Company as of December 31, 2014 and 2013, included in this Prospectus, have been audited by Whitley Penn LLP, our independent registered public accounting firm, as stated in their report appearing herein and have been included in reliance upon the report of such firm, given upon their authority as experts in accounting and auditing.

 

No expert or counsel named in this Prospectus as having prepared or certified any part of this Prospectus or having given an opinion upon the validity of the securities being registered or upon other legal matters in connection with the registration or offering of the common stock was employed on a contingency basis, or had, or is to receive, any interest, directly or indirectly, in our Company or any of our parents or subsidiaries.  Nor was any such person connected with us or any of our parents or subsidiaries, if any, as a promoter, managing or principal underwriter, voting trustee, director, officer, or employee.

 

  

PRINCIPAL SOLAR, INC.

 

CONSOLIDATED FINANCIAL STATEMENTS

 

As Of And For The Three Months Ended

March 31, 2015 and 2014

 

Table of Contents

  

	Page
Unaudited Consolidated Balance Sheets	F-2
Unaudited Consolidated Statements of Operations	F-3
Unaudited Consolidated Statement of Stockholders’ Equity	F-4
Unaudited Consolidated Statements of Cash Flows	F-5
Notes to Unaudited Consolidated Financial Statements	F-6

 

 

PRINCIPAL SOLAR, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

		March 31,				December 31,
		2015				2014
ASSETS
Current Assets
Cash and equivalents		$	565,675			$	104,328
Accounts receivable			122,788				105,143
Deposits			-				250,000
Prepaid assets			36,956				49,831
Total current assets			725,419				509,302
Other Assets
Solar arrays at cost, net			6,488,210				6,563,704
Construction in progress			3,759,487				912,445
Restricted cash			74,643				103,094
Total other assets			10,322,340				7,579,243
Total assets		$	11,047,759			$	8,088,545
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Liabilities arising from reverse merger		$	1,003,839			$	1,003,839
Compensation payable			1,192,948				1,076,448
Accounts payable			738,740				293,239
Current portion of acquisition note payable, net of discount			249,816				249,816
Interest payable			114,590				81,748
Note payable for insurance premiums			16,982				33,250
Convertible notes payable, related parties			630,000				630,000
Convertible debenture, net of discount			201,389				-
Convertible note			50,000				-
Accrued expenses and other liabilities			55,448				15,881
Derivative liability on warrants			1,269,215				-
Total current liabilities			5,522,967				3,384,221
Other Liabilities
Acquisition note payable, net of discount			4,345,799				4,403,163
Total liabilities			9,868,766				7,787,384
Commitments and contingencies
Stockholders' Equity
Preferred stock: $0.01 par value, 100,000,000 shares authorized; none issued			-				-
Common stock: $0.01 par value, 300,000,000 shares authorized, 5,604,181 and 5,311,817 shares issued and outstanding at March 31, 2015 and December 31, 2014, respectively			56,042				53,118
Additional paid-in capital			11,989,559				9,897,412
Accumulated deficit			(11,705,802	)			(10,482,079	)
Equity (Deficit) attributable to common stockholders			339,799				(531,550	)
Noncontrolling interest in subsidiary			839,194				832,711
Total stockholders' equity			1,178,993				301,161
Total liabilities and stockholders' equity		$	11,047,759			$	8,088,545

 

The accompanying notes are an integral part of these consolidated financial statements.

 

  

PRINCIPAL SOLAR, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		Three Months Ended
		March 31,
		2015				2014
Revenues
Power generation		$	184,075			$	217,290
Total revenues			184,075				217,290
Cost of revenues
Depreciation			75,495				83,115
Direct operating costs			52,227				51,988
Total cost of revenues			127,722				135,103
Gross profit			56,353				82,187
General and administrative expenses			919,671				435,990
Operating loss			(863,318	)			(353,803	)
Other expense
Interest expense			333,474				110,262
Loss on derivative liability warrants			19,215				5,851
Total other expense			352,689				116,113
Loss before provision for income taxes			(1,216,007	)			(469,916	)
Provision for state income taxes			1,233				-
Net loss			(1,217,240	)			(469,916	)
Less: Income attributable to noncontrolling interest in subsidiary			6,483				10,671
Net loss attributable to common stockholders		$	(1,223,723	)		$	(480,587	)
Net loss per share - basic and diluted		$	(0.23	)		$	(0.10	)
Weighted average shares outstanding - basic and diluted			5,435,120				4,791,175

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

PRINCIPAL SOLAR, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(Unaudited)

 

										Additional								Principal				Non-
		Common Stock								Paid-in				Accumulated				Solar, Inc.				Controlling
		Shares				Amount				Capital				Deficit				Total				Interest				Total
December 31, 2014			5,311,817			$	53,118			$	9,897,412			$	(10,482,079	)		$	(531,550	)		$	832,711			$	301,161
Common stock issued for cash			279,835				2,798				1,676,203				-				1,679,001				-				1,679,001
Stock-based employee compensation expense			-				-				341,071				-				341,071				-				341,071
Stock-based advisor compensation expense			12,500				125				74,875				-				75,000				-				75,000
Franctional shares issued in reverse stock split			29				-				(1	)			-				-				-				-
Net income (loss)			-				-				-				(1,223,723	)			(1,223,723	)			6,483				(1,217,240	)
March 31, 2015			5,604,181			$	56,042			$	11,989,559			$	(11,705,802	)		$	339,799			$	839,194			$	1,178,993

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

  

PRINCIPAL SOLAR, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Three Months Ended March 31,
		2015				2014
OPERATING ACTIVITIES
Net loss		$	(1,217,240	)		$	(470,216	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation			75,494				83,115
Stock-based employee compensation expense			341,071				17,737
Stock-based advisor compensation expense			75,000				-
Loss on derivative liability on warrants			19,215				5,851
Amortization of discount on acquisition note payable			206,480				5,091
Change in operating assets and liabilities:
Accounts receivable			(17,645	)			(43,588	)
Deposits			-				(25,000	)
Prepaid assets			12,875				3,750
Liabilities arising from reverse merger			-				12,468
Compensation payable			116,500				126,439
Accounts payable			50,551				24,720
Interest payable			32,842				(69	)
Accrued expenses and other liabilities			39,567				18,343
Net cash used in operating activities			(265,290	)			(241,359	)
INVESTING ACTIVITIES
Construction in progress			(2,202,092	)			-
			(2,202,092	)			-
FINANCING ACTIVITIES
Proceeds from acquisition debenture payable			1,250,000				-
Payments on acquisition note payable			(62,455	)			(55,514	)
Proceeds from sale of common stock			1,679,001				275,000
Proceeds from convertible note payable			50,000				-
Payments on note payable for insurance premiums			(16,268	)			(3,352	)
Change in restricted cash			28,451				23,487
Net cash provided by financing activities			2,928,729				239,621
Increase (decrease) in cash and equivalents			461,347				(1,738	)
Cash and equivalents, beginning of period			104,328				122,533
Cash and equivalents, end of period		$	565,675			$	120,795
Supplemental Disclosures
Interest paid		$	94,152			$	92,773
Income taxes paid		$	-			$	26
Non-Cash Transactions:
Discount on convertible debenture recorded as a derivative liability		$	1,250,000			$	-
Deposit applied to construction in progress			250,000				-
Construction in progress in accounts payable			394,950				-

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

PRINCIPAL SOLAR, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 - OVERVIEW

 

Basis of Presentation

 

The unaudited consolidated financial statements and related notes of have been prepared pursuant to Article 8-03 of the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments and information (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included.

 

The year-end balance sheet was derived from the Company’s audited financial statements. The accompanying unaudited consolidated financial statements and related notes should be read in conjunction with the Company’s audited financial statements included in its 2014 Annual Report on Form 10-K. The results of operations for the periods reflected herein are not necessarily indicative of the results to be expected for the full year.

 

Going Concern

 

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As of March 31, 2015, the Company has an accumulated deficit of approximately $11.7 million, and the Company has had cumulative negative cash flows from operations since inception. Its ability to continue as a going concern is dependent upon the ability of the Company to obtain the necessary financing, likely through the continued sale of its equity and equity-linked securities, to meet its obligations and pay its liabilities arising from normal business operations when they come due. The outcome of these matters cannot be predicted with any certainty at this time and raise substantial doubt that the Company will be able to continue as a going concern. These consolidated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should the Company be unable to continue as a going concern.

 

Concentration

 

Historically, approximately 96% of our consolidated power generation revenue arose from our Powerhouse One solar installation under an index-priced power purchase agreement ("PPA") having a fixed premium of $0.12 per kilowatt-hour over the GSA-1 scheduled rate (currently approximately $0.10 per kWh) through 2021, and a market rate based upon the then current GSA-1 scheduled rate for the remaining 10 years of the initial 20 year term ending in 2031. The buyer and counterparty of the PPA is Fayetteville Public Utility of Lincoln County Tennessee. A similar percentage of the accounts receivable also stems from this single relationship.

 

Reverse Stock Split

 

On May 5, 2015, the Company's Board of Directors and stockholders representing a majority of the shares outstanding on that date voted to effect a 1:4 reverse stock split (the "May 2015 Reverse"). Unless otherwise stated or the context would require otherwise, all share amounts disclosed throughout these financial statements retroactively takes into account the May 2015 Reverse, and all resulting fractional share amounts have been rounded to the nearest whole share. On May 6, 2015, the Company amended its Certificate of Incorporation with the State of Delaware reflecting the May 2015 Reverse.

 

 

  

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Recent Accounting Pronouncements

  

In February 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-02 Consolidation (Topic 810) Amendments to the Consolidation Analysis, which affects the following areas of the consolidation analysis:  limited partnerships and similar entities, evaluation of fees paid to a decision maker or service provider as a variable interest and in determination of the primary beneficiary, effect of related parties on the primary beneficiary determination and for certain investment funds. ASU No. 2015-02 is effective for fiscal years beginning after December 15, 2015, and for interim periods beginning after December 31, 2017. We are evaluating the impact of this standard on our consolidated financial position, results of operations and cash flows.

  

In April 2015, FASB issued ASU No. 2015-03, "Interest - Imputation of Interest (Subtopic 835-30)" entitled "Simplifying the Presentation of Debt Issuance Costs". Effective for financial statements issued for fiscal years beginning after December 15, 2015, the statement provides that debt issuance costs are reflected as a discount to the debt on the Balance Sheet and amortized as additional interest expense over the life of the debt. While we have incurred such debt issuance costs in the past, such amounts have not been material, and we do not expect the adoption of this standard to have a material impact on our consolidated financial position, results of operations and cash flows.

  

Principles of Consolidation

  

The Company consolidates the financial position, results of operations, and cash flows of all majority-owned subsidiaries. The consolidated financial statements include the accounts of the Company (including the dba Principal Solar Institute) and its subsidiaries SunGen Mill 77, LLC; SunGen Step Guys, LLC; and Powerhouse One, LLC. Significant intercompany accounts and transactions have been eliminated in consolidation.

  

Fair Value

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date.  We believe the carrying values of our current assets and current liabilities approximate their fair values, and the carrying value of our notes payable approximate their estimated fair value for debts with similar terms, interest rates, and remaining maturities currently available to companies with similar credit ratings.

 

All related party transactions are evaluated by our officers and/or Board of Directors who take into account various factors, including their fiduciary duty to the Company; the relationships of the related parties to the Company; the material facts underlying each transaction; the anticipated benefits to the Company and related costs associated with such benefits; and the terms the Company could receive from an unrelated third party. Despite this review, related party transactions may not be recorded at fair value.

 

We do not engage in hedging activities, but do have a derivative instrument treated as a liability whose value is measured on a recurring basis (see "Fair Value Instruments" and "Derivative Liability on Warrants" included herein).

 

Fair Value Instruments

 

On March 2, 2015, the Company entered into a convertible loan agreement with Alpha Capital Anstalt (Alpha") (See NOTE 6 - NOTES PAYABLE, Convertible Debentures). In connection with the loan, the Company granted Alpha complex warrants with certain "down round" protection. As such, they are treated as a derivative liability and were valued using a binomial lattice-based option valuation model using holding period assumptions developed from the Company's business plan and management assumptions, and expected volatility from comparable companies including OTC Pink® and small-cap companies. Increases or decreases in the Company's share price, the volatility of the share price, changes in interest rates in general, and the passage of time will all impact the value of these warrants. The Company re-values these warrants at the end of each reporting period and any changes are reflected as gains or losses in current period results.

 

(See NOTE 8 - DERIVATIVE LIABILITY ON WARRANTS).

 

 

 

Use of Estimates

 

The preparation of our financial statements in accordance with GAAP requires us to, on an ongoing basis, make significant estimates and judgments that affect the reported values of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities.  We base our estimates on historical experience and on various other assumptions we believe are reasonable under the circumstances, the results of which form the basis for our conclusions.  Actual results may differ from these estimates under different assumptions or conditions.  Such differences could have a material impact on our future financial position, results of operations, and cash flows.

 

Cash and Equivalents

 

We consider cash, deposits, and short-term investments with original maturities of three months or less as cash and equivalents.  Our deposits are maintained primarily in two financial institutions and, at times, may exceed amounts covered by U.S. Federal Deposit Insurance Corporation insurance.

 

Restricted Cash

 

As part of the June 2013 financing with Bridge Bank, National Association (see "Acquisition Note Payable" herein), the Company agreed to maintain in a restricted cash account all proceeds, less debt service and approved expenses, generated by our Powerhouse One subsidiary. Such account provides a minimum of $85,650 replacement reserve ("module reserve") on solar panels found to be defective and potentially not covered under the 25-year manufacturer's warranty. Funds in excess of the module reserve may be accessed by the Company whenever the debt service coverage ratio is greater than or equal to 1.1:1.0.

  

Accounts Receivable

 

Accounts receivable are stated at amounts management expects to collect from outstanding balances. Management provides for probable uncollectible amounts through a charge to earnings and a credit to a valuation allowance based on its assessment of individual accounts. No allowance has been recorded in the accompanying financial statements.

  

Solar Arrays

  

Solar arrays are stated at historical cost, net of accumulated depreciation. Depreciation is computed using the straight-line method over the remaining estimated useful lives of the assets. The estimated useful lives of solar arrays are 25 years from the date first placed in service. Accumulated depreciation was $572,389 and $496,894 at March 31, 2015 and December 31, 2014, respectively. During the construction period, all costs and expenses related to the development and construction of a project, excluding administrative expenses, are recorded as construction in process.

  

In each case where a solar array is installed on property subject to a real estate lease, the Company is obligated to remove such installation at the end of the lease terms. As the expected termination dates including renewal periods are decades off (2041-2084); there is little experience uninstalling solar arrays anywhere in the world; costs are expected to be minimal; and the scrap value of the materials is expected to exceed the cost of removal, such removal costs have not been separately accounted for.

  

 

 

Long-Lived Assets

 

The recoverability of the carrying value of long-lived assets is assessed when an indicator of impairment has been identified.

 

For purposes of recognition and measurement of an impairment loss, a long-lived asset or group of assets is combined with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities.

 

For long-lived assets, when impairment indicators are present, the Company compares undiscounted future cash flows, including the eventual disposition of the asset group at market value, to the asset group’s carrying value to determine if the asset group is recoverable. If undiscounted cash flows are less than carrying value, the excess of carrying value over fair value is expensed in the period in which it is estimated to have occurred.

 

Power Purchase Agreement

 

The Company evaluated the PPA with reference to Accounting Standards Codification ("ASC") 805-20-25-10 entitled "Identifiable Intangible Assets" and determined that, while it is not separable from other assets, it does meet the contractual-legal criteria for separate recognition. Further evaluation with reference to ASC 840-10-15-6 entitled "Arrangements that qualify as Leases" concluded the PPA is not a lease, and reference to ASC 805-20-25-10 entitled "Identifiable Intangible Assets" concluded the PPA has no separately recordable value.

 

Revenue Recognition

 

Power generation revenue is recognized as delivered to the purchaser based upon electrical meters affixed to the solar array and measuring kilowatt-hours produced. Our current power generation operations do not generate renewable energy credits, performance-based incentives, or similar credits to the benefit of the Company.

 

Income Taxes

 

Income taxes are recorded under the asset and liability method under which deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities using the enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

 

We account for uncertain income tax positions in accordance with FASB ASC 740 entitled "Income Taxes". Interest costs and penalties related to income taxes are classified as interest expense and general and administrative costs, respectively, in our consolidated financial statements. Income tax returns are subject to a three-year statute of limitations during which they are subject to audit and adjustment. We file income tax returns in the United States federal jurisdiction and certain states.

 

Equity Transaction Fair Values

 

The estimated fair value of our Common Stock issued in share-based payments is measured by the more relevant of (1) the prices received in private placement sales of our stock or, (2) the Company's publically-quoted market price.  We estimate the fair value of simple warrants and stock options when issued or, in the case of issuances to non-employees, when vested, using the Black-Scholes option-pricing ("Black-Scholes") model that requires the input of subjective assumptions.  When valuing more complex warrants, options, or other derivative equity instruments, we use a binomial lattice-based option pricing model or Monte Carlo option pricing model, whichever management deems more appropriate in the circumstances. Recognition in stockholders’ equity and expense of the fair value of stock options awarded to employees is on the straight-line basis over the requisite service period.  Subsequent changes in fair value are not recognized.

 

 

 

Net Income (Loss) per Share

 

Basic net income or loss per share is computed by dividing the net income or loss attributable to common stockholders for the period by the weighted average number of shares of Common Stock outstanding for the period. Diluted income per share reflects the potential dilution of other potential issuances of Common Stock including shares to be issued upon exercise of options and warrants and upon conversion of convertible debt and preferred stock. Potentially dilutive shares are not included in the event of a loss as the effect of doing so would be anti-dilutive. As of March 31, 2015, options to purchase 765,590 shares, warrants to purchase 276,513 shares of our Common Stock, and 467,501 shares issuable upon the conversion of convertible notes payable have been excluded from the calculation of diluted loss per share, as their effect would have been anti-dilutive. As of March 31, 2014, options to purchase 402,833 shares and warrants to purchase 587,592 shares of our Common Stock have been excluded from the calculation of diluted loss per share as their effect would have been anti-dilutive.

  

NOTE 3 - LIABILITIES ARISING FROM REVERSE MERGER

 

Liabilities arising from the reverse merger represent long term real estate leases which had been abandoned, general unsecured liabilities, commercial liens, and tax liens filed with various states all associated with the Company’s pre-reverse merger operations, which were unknowingly assumed in the March 2011 reverse merger transaction. The statute of limitations for most of such liabilities is five years and for most liens is ten years, subject to renewal at the lien holders’ option, depending upon the jurisdiction.  Although the liens accrue interest at between 8% and 12% per year, the Company has ceased accruing interest as it believes the liability recorded to date is adequate to cover the ultimate claims that may, one day, be presented. Liabilities not associated with a lien have been accrued based upon management’s estimation of the amount to be paid.  Liabilities associated with a lien have been accrued at face value.  Management believes all such liabilities have been indemnified by Pegasus Funds, LLC (and/or its affiliates or related parties) to which (including its assigns) the Company issued 534,654 shares of its common stock as part of the reverse merger transaction.  However, as the Company is obligor, the Company has recorded the liability.  To date, only one lien holder has approached the Company concerning payment.  Such lien holder is pursuing the former management of the Company first through litigation.  To the extent such lien holder recovers the liability from the former management, the lien against the Company will be reduced.

 

In March 2015, the Company entered into a settlement agreement with Pegasus Funds LLC ("Pegasus") regarding its indemnification of the Company in regards to the Legacy Liabilities. In the settlement agreement, the Company agreed to accept the return of 214,154 shares of the original 534,654 shares of its Common Stock issued to Pegasus and its principals and affiliates in acquiring the shell company, Kupper Parker Communications, Inc., which later became Principal Solar, Inc. As the shares of Common Stock were initially issued in a common stock for preferred stock share exchange with Pegasus, the shares returned by Pegasus will be cancelled without further accounting recognition. Cancellation of the shares will be recognized for accounting purposes once they are received from Pegasus.

 

In the settlement with Pegasus, the Company preserved its rights to pursue the individual(s) serving as officers of Kupper Parker Communications, Inc. prior to the exchange of shares, who had agreed in the Exchange Agreement to "satisfy and assume liability for the payment of any additional liabilities not identified" in the agreement. In April 2015 the Company filed a lawsuit against the remaining individual serving as an officer of Kupper Parker Communications, Inc. prior to the exchange of shares seeking an amount of $991,371 plus accruing interest and legal fees. Any recovery from the lawsuit is uncertain at this time, and such recovery would in no way diminish our potential obligation to third parties.

  

NOTE 4 - COMPENSATION PAYABLE

 

Certain members of the management team have deferred payment of their compensation for the benefit of the Company.  No interest is accrued on such deferral and no formal terms of payment have been established.

  

 

 

NOTE 5 - ACQUISITIONS

 

Principal Sunrise IV (fka "IS 46") (pending)

 

In November 2014, the Company entered into a Membership Interest Purchase Agreement ("MIPA") with Innovative Solar Systems, LLC, a solar developer operating primarily in North Carolina, to acquire Innovative Solar 46, LLC ("PS IV"), the owner of a 78.5mw AC solar project to be built in Cumberland County, North Carolina. PS IV holds a single and intangible asset, a 15-year PPA with Duke Energy Progress, Inc. PS IV does not have, nor has it ever had, any other assets, any liabilities, any employees, any revenues, or any operations of any kind. As such, PS IV is not a "business" as defined in the accounting literature, and it has no historical financial statements. PSI agreed to pay Innovative Solar Systems, LLC $6,280,000 for 100% of the membership interest of PS IV in a series of payments of approximately $300,000 per month between execution of the MIPA and the financial close (the point at which all project financing is arranged), and a balloon payment at financial close sufficient to having cumulatively paid 70% of the $6,280,000 price. The remaining 30% of the purchase price will be paid in installments of $150,000 per month through the project's commercial operation date. At March 31, 2015, A total of $2,070,000 has been paid to date, and failure by the Company to make any of the future scheduled payments may result in the loss of all payments made through such date. The Company is working with engineering and construction firms on final designs, and the total cost of the project based upon the preliminary work is expected to be approximately $164 million, including an estimated $10 million from a public offering in progress. The Company is in discussion with multiple parties to provide the acquisition, construction, and permanent financing for the project, however, no assurance can be given that adequate financing on terms acceptable, or even available, to the Company will be obtained. Closing of the acquisition is expected to occur no later than June 3, 2015, and construction is expected to be completed in late 2015.

  

Principal Sunrise V (fka "IS 42") (pending)

 

On March 2, 2015, the Company entered into a MIPA with Innovative Solar Systems, LLC, a solar developer operating primarily in North Carolina, to acquire Innovative Solar 42, LLC ("PS V"), the owner of a 72.9mw AC solar project to be built in Fayetteville, North Carolina. PS V holds a single and intangible asset, a 10-year power purchase agreement ("PPA") with Duke Energy Progress, Inc. PS V does not have, nor has it ever had, any other assets, any liabilities, any employees, any revenues, or any operations of any kind. As such, PS V is not a "business" as defined in the accounting literature, and it has no historical financial statements. PSI agreed to pay Innovative Solar Systems, LLC $5,832,000 for 100% of the membership interest of PS V in a series of payments of approximately $300,000 per month between execution of the MIPA and the financial close (the point at which all project financing is arranged), and a balloon payment at financial close sufficient to having cumulatively paid 70% of the $5,832,000 purchase price. The remaining 30% of the purchase price will be paid in installments of $150,000 per month through the project's commercial operation date. At March 31, 2015, a total of $870,000 has been paid to date, and failure by the Company to make any of the future scheduled payments may result in the loss of all payments made through such date. The Company is working with engineering and construction firms on final designs, and the total cost of the project based upon the preliminary work is expected to be approximately $153 million including an estimated $5 million from a public offering in progress. The Company is in discussion with multiple parties to provide the acquisition, construction, and permanent financing for the project, however, no assurance can be given that adequate financing on terms acceptable, or even available, to the Company will be obtained. Closing of the acquisition is expected to occur no later than August 30, 2015, and construction is expected to be completed in early 2016.

  

NOTE 6 - NOTES PAYABLE

 

Acquisition Note Payable

 

On June 17, 2013, Powerhouse One, LLC secured financing of $5,050,000 from Bridge Bank, National Association to acquire the membership interest (and the underlying solar arrays) of co-sellers, Vis Solis, Inc., a Tennessee limited liability company, and AstroSol, Inc., a Tennessee corporation. The note matures on June 17, 2017, and bears a fixed interest rate of 7.5% annually. Interest is paid monthly and principal is paid quarterly beginning in September 2013 based on an 11-year amortization schedule. Covenants include the maintenance of a restricted cash account, routine reporting, and a minimum debt service coverage ratio calculated separately for Powerhouse One of not less than 1.10:1, measured quarterly following the first anniversary of the debt. The debt also restricts the payment of dividends, and it is secured by all the assets of Powerhouse and further guaranteed by Principal Solar, Inc.

 

 

 

In conjunction with the acquisition note payable, warrants to purchase 37,763 shares of Common Stock were issued to Bridge Bank with an exercise price of $4.00 and a contractual life of 10 years. The value of the warrants issued in connection with this debt, as determined using the Black-Scholes model, was $81,449 and is recorded as a discount to the debt. The discount is being amortized as interest expense over the life of the note.

 

The Bridge Bank warrants have cashless exercise rights, redemption rights providing the Company the right to redeem the warrants for $604,200, anti-dilution rights associated with offerings of equity securities, a term expiring on the first to occur of (i) the 10 year anniversary of the grant, (ii) the closing of the Company’s initial public offering (which is being affected pursuant to Registration Statement on Form S-1), or (iii) the liquidation of the Company (each a “Termination Event”). In each case, unless exercised earlier, the warrants are automatically exercised on a cashless basis upon a Termination Event.  The Company also provided the holder registration rights in connection with the grant of the warrants.

 

Convertible Debenture

 

On March 2, 2015, the Company entered into a convertible loan agreement with Alpha Capital Anstalt ("Alpha") to borrow $1,250,000 (the "Loan"). The Loan is convertible into shares of Common Stock at a rate of $4.00 per share, bears interest at a rate of 8.0% per annum, all principal and interest is due on September 2, 2015, and the loan is secured by the assets of the Company and its subsidiaries (excluding Powerhouse One and all interest in its operations, its assets, and proceeds or distributions therefrom). The loan also contains certain "down round" protection that, due to the loan's short maturity, the prohibition in the debenture of issuing further debt, and managements assessment of the probability of issuing future convertible debt below $4.00 as remote, no separate value has been assigned to this aspect of the debt. The principal and accrued interest amounts on the Loan are convertible at any time into shares of Common Stock at a rate of $4.00 per share. In connection with the Loan, the Company granted Alpha 234,375 warrants (See NOTE 8 - DERIVATIVE LIABILITY ON WARRANTS).

 

Convertible Notes Payable, Related Parties

 

In June 2014, the Company issued convertible notes of $250,000 each to two of its Board members, Messrs. Heller and Marmol, to fund deposits on potential future acquisitions. Such potential acquisitions remain subject to significant uncertainties including due diligence, obtaining construction and permanent financing, and negotiating PPAs, developer agreements, and interconnection agreements. The notes bear interest at a rate of 18% per year and matured on December 5, 2014, and all principal and interest was due at maturity. Principal and interest is payable in cash or shares of Common Stock, at the option of the holder, at a conversion price of $4.00 per share. The notes were secured pursuant to a security agreement by the Company's interest in the otherwise unencumbered net cash flow, if any, from the operations of its Powerhouse One subsidiary. The Company may prepay the notes at any time, but the holders of the notes were guaranteed to receive a minimum of six months interest on the notes.

 

On February 27, 2015 (made effective on the original maturity date), the notes were modified to extend the maturity date to September 30, 2015, to reduce the interest rate from 18% to 12% per annum, and to eliminate all collateral securing the notes. All other aspects of the notes remained unchanged.

 

On December 1, 2014, Michael Gorton, the Company's Chief Executive Officer, loaned to the Company pursuant to a convertible promissory note the amount of $130,000. The note initially would have matured on June 30, 2015, bears interest at a rate of 12% per annum, is convertible into shares of our Common Stock at a price of $6.00 per share, and was secured by a claim on proceeds, if any, of a solar project being acquired (PS IV). The notes can be prepaid at any time prior to maturity without penalty. On February 27, 2015, the note was modified to extend the maturity date to September 30, 2015, and eliminate all collateral securing the note. All other aspects of the note remained unchanged.

 

In January 2015, the Company issued a convertible note to an unrelated party in the amount of $50,000. The note bears interest at a rate of 12% per year and matures on July 31, 2015, and all principal and interest is due at maturity. Principal and interest is payable in cash or shares of Common Stock, at the option of the holder, at a conversion price of $6.00 per share. The notes are secured pursuant to a security agreement by our interest in proceeds, if any, stemming from our interest in PS IV. The Company may prepay the notes at any time without penalty.

 

 

  

NOTE 7 - LEASES

 

The Company's solar arrays sit on properties subject to long-term real estate leases (or similar agreements in the case of rooftop installations) with initial terms equal to the PPA and having one or more renewal options. Rental payments under the leases vary in type between fixed price, percentage of revenue, or, in the case of rooftop installations, no separate charge. The Company's current solar array installations are as follows:

 

Installation	Location	kW	Date	Term	Rent
Powerhouse One	Fayetteville, TN	3,000	Aug 2011	20 yr. + 2 5-yr renewals	4% of revenue
SunGen StepGuys	Alfred, ME	110	Sep 2009	25 yr. + 2 25-yr renewals	None

 

The Company recognized expenses of $6,645 and $4,258 in rent under the Powerhouse One lease in the three months ended March 31, 2015 and 2014, respectively.

 

In each case, the Company is obligated to remove such installations at the end of the lease terms. As the expected termination dates are decades off; there is little experience de-installing solar arrays anywhere in the world; and, costs are expected to be minimal; such removal costs have not been separately accounted for.

 

The Company maintains its headquarters in Dallas, Texas pursuant to a month-to-month lease at a cost of $500 per month.

  

NOTE 8 - DERIVATIVE LIABILITY ON WARRANTS

 

On March 2, 2015, the Company issued warrants to purchase 234,375 shares of Common Stock with a 66-month contractual term to Alpha Capital Anstalt in connection with the issuance of convertible debentures (See NOTE 6 "CONVERTIBLE DEBENTURE"). The warrants were immediately exercisable into the Company’s Common Stock with an exercise price of $6.00 per share. However, as the warrants have “down round” protection, they are treated as a derivative liability and were valued using a binomial lattice-based option valuation model using holding period assumptions developed from the Company's business plan and management assumptions, and expected volatility from comparable companies including OTC Pink^® and small-cap companies. Increases or decreases in the Company's share price, the volatility of the share price, changes in interest rates in general, and the passage of time will all impact the value of these warrants. The Company re-values these warrants at the end of each reporting period and any changes are reflected as gains or losses in current period results.

 

Input assumptions on the issuance date were as follows:

 

Estimated fair value	$6.77
Expected life (years)	5.51
Risk free interest rate	1.65%
Volatility	146.11%

 

The fair value of the warrant derivative liability outstanding as of March 31, 2015, was determined using "Level 2 Observable Inputs" as defined in ASC 820, entitled "Fair Value Measurement".

 

 

 

The following table sets forth a summary of changes in fair value of the warrants in 2015:

 

Beginning balance December 31, 2014		$	-
Derivative warrants issued			1,586,884
Change in fair value included in net loss			(317,669	)
Balance at March 31, 2015		$	1,269,215

 

In this issuance of convertible debentures and warrants, done at arm's length between unrelated parties, the value of the warrants alone exceeded the proceeds received. The Company's need for ongoing financing made the transaction attractive, despite the economics. The application of FASB Topic 820 entitled "Fair Value Measurement", resulted in a loss on the date of issuance of $336,884, offset by a subsequent gain of $317,669 stemming from the subsequent movement in the price of our Common Stock, together resulting in a net loss on derivative liability warrants of $19,215 or the period ended March 31, 2015.

  

NOTE 9 – CAPITAL STOCK

 

Preferred Stock

 

The Company has authorized 100,000,000 shares of $.01 par value Class A preferred stock but had none outstanding during the periods covered in the accompanying financial statements.

 

Common Stock

 

The Company has authorized 300,000,000 shares of $.01 par value Common Stock, and it trades on the OTC Pink^® under the symbol “PSWW.”  Holders of our Common Stock are entitled to one vote per share and receive dividends or other distributions when, and if, declared by our Board of Directors.  In addition to shares outstanding, we have reserved 966,090 shares for issuance upon exercise of equity incentive awards with options to purchase 765,590 shares of Common Stock granted to date.

 

Stueben Investment

 

Effective June 14, 2013, the Company entered into a Subscription Agreement with Steuben Investment Company II, L.P. (“Steuben”).  Pursuant to the subscription agreement, Steuben purchased 727,273 shares of the Company’s common stock for an aggregate of $1,600,000 or $2.20 per share. As additional consideration in connection with the subscription, the Company granted Steuben warrants to purchase 545,455 shares of the Company’s common stock with an exercise price of $4.00 per share and a term of 10 years.  The Company also provided Steuben registration rights whereby the Company was required to file a registration statement and take all necessary actions to maintain the availability of Rule 144 for a period of two years following its effective date. The registration statement became effective on February 3, 2015.

 

In the event we fail to take all necessary actions to enable Steuben to sell shares pursuant to Rule 144, we may have to pay to Steuben penalties totaling $216,000 which could have a material adverse effect on our available cash, limit our ability to raise capital, and negatively impact our results of operations. The Company has not accrued a liability for this potential penalty, as it believes the payment of any such penalty is not probable.

 

Stock Options

 

The Company maintains the 2014 Equity Incentive Plan (the "Plan"), pursuant to which 716,090 shares of Common Stock were had previously been reserved for issuance. In January 2015, the Board of Directors reserved an additional 250,000 shares of Common Stock pursuant to the Plan and 765,590 of the total 966,090 reserved have been issued to date.

 

 

 

2015 Grants

 

In February 2015, the Company granted 6,250 options to acquire shares of Common Stock having an exercise price of $6.00 per share, a 10-year term, and immediate vesting to each of five directors as a discretionary bonus. The options were valued using the Black-Scholes model and the resulting equity-based compensation expense included in general and administrative expenses for 2015 was $187,500. The Company also granted in February 2015 options to acquire 6,000 shares of Common Stock to each of two advisors. The options have an exercise price of $6.00 per share, immediate vesting, and expiration dates extending to 5-years based upon their continued service of two years from the grant date. The options were valued using the Black-Scholes model and the resulting equity-based compensation expense included in general and administrative expenses for 2015 was $72,000. Finally, the Company granted to a consultant in February 2015 options to acquire 6,250 shares of Common Stock. The options have an exercise price of $6.00 per share, immediate vesting, and expiration dates extending to 10-years based upon continued service of three years from the date of grant. The options were valued using the Black-Scholes model and the resulting equity-based compensation expense included in general and administrative expenses for 2015 was $37,500.

 

As the Company does not have a significant history of post vesting exercises to estimate an expected life of the option, the simplified method was used wherein the expected life becomes the mid-point of the options vesting date and their contractual life. The valuation of all of the option issuances above were based upon the following parameters:

 

Estimated fair value	$6.00
Expected life (years)	2.5 to 5
Risk free interest rate	0.52 to 1.28%
Volatility	207.45%

 

Warrants

 

The Company had 276,513 warrants outstanding at March 31, 2015, including 37,763 issued to Bridge Bank, National Association (Note 6), 234,375 issued to Alpha Capital Anstalt (Note 8), and 4,375 issued to various advisors in earlier years. The weighted average exercise price of outstanding warrants is $5.68 per share

  

NOTE 10 - NONCONTROLLING INTEREST

 

The original owners of Powerhouse One continue to own approximately 11% of the membership interest of the limited liability company. The noncontrolling interests of equity investors in Powerhouse One is reported on the consolidated balance sheet and statement of operations as "Noncontrolling interest in subsidiary" ("noncontrolling interest") and reflects their respective interests in the equity and the income or loss of the limited liability company.

 

The following table sets forth the activity in the noncontrolling interest equity account during 2015:

 

Balance December 31, 2014		$	832,711
Earnings allocated to noncontrolling interest			6,483
Balance March 31, 2015		$	839,194

  

NOTE 11 – RELATED PARTY TRANSACTIONS

 

Other than the Board member options described herein in a note entitled "Stock Options,” the issuance of convertible notes described herein in the note entitled "Convertible Notes Payable, Related Parties", no other related party transactions occurred during the three months ended March 31, 2015 and 2014.

 

 

  

NOTE 12 - TAXES

 

Our estimated $8,258,355 federal income tax net operating loss carryover expires over the period from 2030 through 2034. Our federal and state income tax returns are no longer subject to examination for years before 2011. We have taken no tax positions that, more likely than not, may not be realized.

 

The Company has established a valuation allowance to fully reserve the net deferred tax assets in the accompanying financial statements, due to the uncertainty of the timing and amounts of future taxable income.

  

NOTE 13 - COMMITMENTS AND CONTINGENCIES

 

The Company may be subject to rescission rights from certain investors who purchased shares of our common stock based on their review of the presentation which we furnished as Exhibit 99.1 to our Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 5, 2014, which may have constituted a communication of an “offer to sell” as described in Section 5(c) of the Securities Act of 1933, as amended (the “Securities Act”) in violation of Section 5 of the Securities Act. If a claim were brought by any recipients of such presentation and a court were to conclude that such presentation constituted a violation of Section 5 of the Securities Act, we could be required to repurchase the shares sold to the investors who reviewed such presentation at the original purchase price, plus statutory interest from the date of purchase, for claims brought during a period of one year from the date of their purchase of common stock. We could also incur considerable expense in contesting any such claims. The prospectus included in the Form S-1/A and dated October 20, 2014, included an additional risk factor stating:

 

"You should not rely on any information set forth in the presentation attached as Exhibit 99.1 to our Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 5, 2014 in making an investment decision."

 

As of the date of these statements, no legal proceedings or claims have been made or threatened by any investors in the Company and the Company considers the likelihood that the investors will file suit to be remote. Therefore, in accordance with ASC 450-20 entitled “Loss Contingencies”, the Company has not recorded a liability for the potential rescission.

  

NOTE 14 - SUBSEQUENT EVENT

 

On May 6, 2015, the Company contracted to issue, in two separate tranches, 500,000 shares of its $.01 par value Series A Preferred stock ("Series A Preferred") to an unrelated investor at a purchase price of $4.00 per share, that will result in proceeds to the Company of $2,000,000. The preferred shares have a dividend rate of 12% per annum and, along with accrued dividends, are convertible into shares of our Common Stock at a price of $4.00 per share at any time on or before the third day following the receipt of proceeds from the Company's current public offering. If the shares are not converted by the holder during that time, the Company shall redeem the shares at face value plus accrued dividends from the proceeds of the public offering.

 

The first tranche of $1,000,000 was funded on May 6, 2015. The second tranche of $1,000,000 will be funded when a) the Registration Statement, as may be amended, is declared effective by the Securities and Exchange Commission, and b) the Company presents to the holder financing commitments to construct and operate one of our two announced solar projects, PS IV.

 

In connection with the issuance, the Company granted the holder warrants to purchase 375,000 shares of its Common Stock, also in two tranches, at a purchase price of $6.00 per share.

 

Use of proceeds from the issuance is limited to repayment of a certain convertible note outstanding in the amount of $50,000, development of PS IV and PS V, and general corporate purposes. The Company agreed to deliver subordination agreements regarding convertible notes held by related parties, and the incurrence of additional debt or issuance of additional equity instruments superior to the Series A Preferred, the payment of dividends, or the repurchase of our Common shares is prohibited.

 

If the Company's current public offering is not completed on or before July 1, 2015, the Company agreed to aggressively seek strategic alternatives including, without limitation, marketing the Company to a private equity group, seeking out a strategic purchaser, seeking a merger of equals, or selling its interest in one or more of the solar projects.

 

Funding of the initial tranche occurred pursuant to a binding term sheet, and the parties have agreed to work together in good faith to negotiate and execute definitive transaction documents on or before May 15, 2015.

 

 

PRINCIPAL SOLAR, INC.

 

CONSOLIDATED FINANCIAL STATEMENTS

 

For The Years Ended December 31, 2014 and 2013

 

Table of Contents

  

	Page
Report of Independent Registered Public Accounting Firm	F-18
Consolidated Balance Sheets	F-19
Consolidated Statements of Operations	F-20
Consolidated Statement of Stockholders’ Equity (Deficit)	F-21
Consolidated Statements of Cash Flows	F-22
Notes to Consolidated Financial Statements	F-23

 

Note regarding Basis of Presentation

 

Reverse Stock Split

 

On May 5, 2015, the Company's Board of Directors and stockholders representing a majority of the shares outstanding on that date voted to effect a 1:4 reverse stock split (the "May 2015 Reverse"). Unless otherwise stated or the context would require otherwise, all share amounts disclosed throughout these financial statements retroactively takes into account the May 2015 Reverse, and all resulting fractional share amounts have been rounded to the nearest whole share. On May 6, 2015, the Company amended its Certificate of Incorporation with the State of Delaware reflecting the May 2015 Reverse.

 

 

  

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

  

To the Board of Directors and Stockholders

Principal Solar, Inc.

  

We have audited the accompanying consolidated balance sheets of Principal Solar, Inc. and subsidiaries (the “Company”), as of December 31, 2014 and 2013, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for the years then ended. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit 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, 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 the Company as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the years then ended in conformity with accounting principles generally accepted in the United States of America.

  

The accompanying financial statements have been prepared assuming that the entity will continue as a going concern. The Company has negative cash flows from operating activities, negative working capital, and an accumulated deficit of $10.5 million as of December 31, 2014. Management’s plans in regard to these matters are described in Note 1. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. These consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

  

 

/s/Whitley Penn LLP

 

Dallas, Texas

March 12, 2015

 

  

PRINCIPAL SOLAR, INC.

CONSOLIDATED BALANCE SHEETS

 

				December 31,
				2014				2013
ASSETS
Current Assets
	Cash and equivalents			$	104,328			$	122,533
	Accounts receivable				105,143				105,989
	Deposits				250,000				10,000
	Prepaid expenses				49,831				23,867
	Option to acquire noncontrolling interest in subsidiary				-				46,010
		Total current assets			509,302				308,399
Other Assets
	Solar arrays at cost, net				6,563,704				6,984,936
	Construction in process				912,445				-
	Restricted cash				103,094				140,644
		Total other assets			7,579,243				7,125,580
		Total assets		$	8,088,545			$	7,433,979
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
	Liabilities arising from reverse merger			$	1,003,839			$	953,967
	Compensation payable				1,076,448				559,998
	Accounts payable				293,239				59,968
	Current portion of acquisition note payable, net of discount				249,816				215,574
	Interest payable				81,748				26,753
	Note payable for insurance premiums				33,250				9,040
	Convertible notes payable, related parties				630,000				-
	Accrued expenses and other liabilities				15,881				3,378
		Total current liabilities			3,384,221				1,828,678
Other Liabilities
	Acquisition note payable, net of discount				4,403,163				4,652,979
	Derivative liability on warrants				-				1,123,149
		Total other liabilities			4,403,163				5,776,128
		Total liabilities			7,787,384				7,604,806
Commitments and contingencies
Stockholders' Equity (Deficit)
	Preferred stock: $0.01 par value, 100,000,000 shares authorized; none issued				-				-
	Common stock: $0.01 par value, 300,000,000 shares authorized, 5,311,838 and 4,754,309 shares issued and outstanding at December 31, 2014 and December 31, 2013, respectively				53,119				47,544
	Additional paid-in capital				9,897,411				6,097,014
	Accumulated deficit				(10,482,079	)			(7,102,188	)
	Deficit attributable to common stockholders				(531,550	)			(957,630	)
	Noncontrolling interest in subsidiary				832,711				786,803
		Total stockholders' equity (deficit)			301,161				(170,827	)
		Total liabilities and stockholders' equity (deficit)		$	8,088,545			$	7,433,979

 

The accompanying notes are an integral part of these consolidated financial statements.

  

  

PRINCIPAL SOLAR, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

				Year Ended
				December 31,
				2014				2013
Revenues
	Power generation			$	974,882			$	487,408
	Other				-				3,234
		Total revenues			974,882				490,642
Cost of revenues
	Depreciation				307,570				177,947
	Direct operating costs				245,439				136,406
		Total cost of revenues			553,009				314,353
Gross profit					421,873				176,289
General and administrative expenses					3,168,623				2,162,214
Impairment of assets					113,661				-
					3,282,284				2,162,214
Operating loss					(2,860,411	)			(1,985,925	)
Other expense
	Interest expense				504,883				308,211
	Inducement for conversion of notes payable				-				102,193
	Gain on derivative liability on warrants				(32,239	)			(47,310	)
		Total other expense			472,644				363,094
Loss before provision for income taxes					(3,333,055	)			(2,349,019	)
Provision for state income taxes					928				1,227
Net loss					(3,333,983	)			(2,350,246	)
	Less: Income attributable to noncontrolling interest in subsidiary				45,908				19,976
Net loss attributable to common stockholders				$	(3,379,891	)		$	(2,370,222	)
Net loss per share - basic and diluted				$	(0.68	)		$	(0.55	)
Weighted average shares outstanding - basic and diluted					4,971,062				4,272,281

 

The accompanying notes are an integral part of these consolidated financial statements.

 

  

PRINCIPAL SOLAR, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)

 

										Additional								Principal				Non-
		Common Stock								Paid-in				Accumulated				Solar, Inc.				Controlling
		Shares				Amount				Capital				Deficit				Total				Interest				Total
December 31, 2012			3,736,534			$	37,366			$	4,032,030			$	(4,731,966	)		$	(662,570	)		$	-			$	(662,570	)
Common stock issued for cash in May			125,000				1,250				498,750				-				500,000				-				500,000
Common stock issued upon conversion of convertible debt, accrued interest, and conversion price adjustment			36,498				365				247,817				-				248,182				-				248,182
Common stock issued for rights to acquire noncontrolling interest in subsidiary			11,503				115				45,895				-				46,010				-				46,010
Common stock issued with warrants for cash in June			727,273				7,273				422,268				-				429,541				-				429,541
											-
Common stock issued for cash in September			100,000				1,000				399,000				-				400,000				-				400,000
Stock-based advisor compensation expense			-				-				108,731				-				108,731				-				108,731
Stock-based employee compensation expense			-				-				191,249				-				191,249				-				191,249
Acquisition note payable - warrants			-				-				81,449				-				81,449				-				81,449
Noncontrolling interest in subsidiary			-				-				-				-				-				766,827				766,827
Common stock issued for cash in November			17,500				175				69,825				-				70,000				-				70,000
Net income (loss)			-				-				-				(2,370,222	)			(2,370,222	)			19,976				(2,350,246	)
December 31, 2013			4,754,309				47,544				6,097,014				(7,102,188	)			(957,630	)			786,803				(170,827	)
Common stock issued for cash			375,686				3,757				1,572,318				-				1,576,075				-				1,576,075
															-				-								-
Warrant Exercise			181,818				1,818				1,089,092				-				1,090,910				-				1,090,910
Option Exercise			25				-				25				-				25				-				25
Stock-based employee compensation expense			-				-				130,060				-				130,060				-				130,060
Stock-based advisor compensation expense			-				-				1,008,902				-				1,008,902				-				1,008,902
Net income (loss)			-				-				-				(3,379,891	)			(3,379,891	)			45,908				(3,333,983	)
																			-								-
December 31, 2014			5,311,838			$	53,120			$	9,897,411			$	(10,482,079	)		$	(531,550	)		$	832,711			$	301,161

 

The accompanying notes are an integral part of these consolidated financial statements.

 

  

PRINCIPAL SOLAR, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

					Year Ended
					December 31,
					2014				2013
OPERATING ACTIVITIES
	Net loss				$	(3,333,983	)		$	(2,350,246	)
		Adjustments to reconcile net loss to net cash used in operating activities:
			Depreciation and amortization			307,570				287,947
			Stock-based employee compensation expense			130,060				191,249
			Stock-based advisor compensation expense			1,008,902				108,731
			Inducement cost for conversion of notes payable			-				102,193
			Impairment of assets			113,661				-
			Interest expense, paid in stock			-				7,990
			Gain (Loss) on derivative liability on warrants			(32,239	)			(47,310	)
			Amortization of discount on acquisition note payable			20,363				11,030
			Write-off of option to acquire noncontrolling interest in subsidiary			46,010				-
		Change in operating assets and liabilities:
			Accounts receivable			846				92,879
			Deposits			(240,000	)			47,000
			Prepaid assets			(1,214	)			(12,617	)
			Liabilities arising from reverse merger			49,872				47,826
			Compensation payable			516,450				254,676
			Accounts payable			233,271				(67,092	)
			Interest payable			54,995				26,580
			Accrued expenses and other liabilities			12,504				376
		Net cash used in operating activities				(1,112,931	)			(1,298,788	)
INVESTING ACTIVITIES
	Powerhouse One acquisition, net of cash acquired					-				(6,077,214	)
	Construction in process					(912,445	)			-
		Net cash used in investing activities				(912,445	)			(6,077,214	)
FINANCING ACTIVITIES
	Proceeds from acquisition note payable					-				5,050,000
	Payments on acquisition note payable					(235,936	)			(111,028	)
	Proceeds from sale of common stock and option exercise					1,576,099				2,569,999
	Proceeds from convertible note payable					-				100,000
	Proceeds from convertible notes payable, related parties					630,000				21,000
	Payments on note payable for insurance premiums					(540	)			(2,210	)
	Change in restricted cash					37,550				(140,644	)
		Net cash provided by financing activities				2,007,172				7,487,117
Increase (decrease) in cash and equivalents						(18,205	)			111,115
Cash and equivalents, beginning of period						122,533				11,418
Cash and equivalents, end of period					$	104,328			$	122,533
Supplemental Disclosures
	Interest paid				$	379,654			$	378,732
	Income taxes paid				$	-			$	26
	Non-Cash Transactions:
		Discount on acquisition note payable			$	-				81,449
		Option to acquire noncontrolling interest in subsidiary				-				46,010
		Derivative liability on investor warrants				1,090,910				1,170,459
		Redemption of convertible notes payable and accrued interest for stock				-				145,990
		Note payable for insurance premiums				24,750				11,250

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

PRINCIPAL SOLAR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  

NOTE 1 - OVERVIEW

 

The Company

 

Principal Solar, Inc. (“PSI”, the “Company”, “our”, “us”, or “we”) was incorporated on July 8, 2010, under the laws of the State of Texas and became a New York corporation upon consummation of a reverse merger. On March 7, 2011, the Company was acquired by Kupper Parker Communications, Inc. (“KPCG”), then a public shell company, in a reverse merger transaction whereby KPCG merged with and into PSI, with KPCG remaining as the surviving corporation and PSI becoming a wholly owned subsidiary of KPCG. In connection with the merger, the Company changed its corporate name from “Kupper Parker Communications, Inc.” to “Principal Solar, Inc.” In accordance with the terms of this transaction, the shareholders of PSI exchanged all of their shares of PSI's $.01 par value common stock ("Common Stock") for shares of KPCG common stock that, immediately following the transaction, represented approximately 82 percent of the issued and outstanding Common Stock of the Company.

 

In October 2012, the Company was re-domiciled in Delaware. The Company is authorized to issue 300,000,000 shares of Common Stock and 100,000,000 shares of preferred stock with a par value of $0.01 per share ("Preferred Stock").

 

PSI is traded on the OTCPink^® market under the symbol "PSWW".

 

PSI is a renewable energy company with the goal of becoming a leading utility-scale solar power generating company. Power generated by the Company can be sold to the "power grid" through traditional utility companies under long-term fixed or escalating price power purchase agreements ("PPA"). In this instance, the buyer agrees to take all power produced by the Company for the period of the PPA, generally 10-20 years. Alternatively, the power can be sold to one or more industrial users ("merchants") either under a PPA or at market rates. More than 96% of power generation revenues in 2014 were generated under an index-priced PPA having a fixed premium of $0.12 per kilowatt-hour (“kWh”) over the GSA-1 scheduled rate (currently approximately $0.10 per kWh) through 2021, and a market rate based upon the then current GSA-1 scheduled rate for the remaining 10 years of the initial 20 year term ending in 2031. The remainder (3%) was generated under a single-merchant Energy Management Services Agreement at a 10% discount to the prevailing market prices in the area. Though the level of power generation is highly predictable over time, shorter-term variations do occur.

 

As with any long-term contract, the ability of the counterparty to perform its obligations under a PPA is of significant importance. The Company evaluates the strength, stability, and longevity of the counterparty relative to the obligation under the PPA before entering into such an agreement, and periodically reevaluates its initial assessment.

 

PSI intends to establish itself as a leading solar power company using a 4-pronged approach:

 

1.

Acquire existing small and medium sized solar power generating companies in a roll-up strategy using a combination of cash and shares of its Common Stock. The goal of acquiring multiple generating companies is to build the world's first distributed solar generating utility.

 

2.

Establish thought leadership by networking well-respected thinkers who will author technical white papers and host interactive webinars at www.principalsolarinstitute.org.

 

3.

Implement, opportunistically, new commercial solar projects utilizing our new partnerships and relationships.

 

4.

Build an entity capable of winning bids for gigawatt-scale projects around the world based on solid economics. This is the longer-term phase 2 of the Company's plan.

 

 

 

Basis of Presentation

 

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. ("GAAP") and the rules of the Securities and Exchange Commission. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the periods presented have been reflected herein.

 

Going Concern

 

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As of December 31, 2014, the Company has an accumulated deficit of approximately $10.5 million, and the Company has had negative cash flows from operations since inception. Its ability to continue as a going concern is dependent upon the ability of the Company to obtain the necessary financing, likely through the continued sale of its equity and equity-linked securities, to meet its obligations and pay its liabilities arising from normal business operations when they come due. The outcome of these matters cannot be predicted with any certainty at this time and raise substantial doubt that the Company will be able to continue as a going concern. These consolidated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should the Company be unable to continue as a going concern.

 

Concentration

 

In 2014 and 2013, more than 96% of our consolidated power generation revenue arose from our Powerhouse One solar installation under an index-priced PPA having a fixed premium of $0.12 per kilowatt-hour over the GSA-1 scheduled rate (currently approximately $0.10 per kWh) through 2021, and a market rate based upon the then current GSA-1 scheduled rate for the remaining 10 years of the initial 20 year term ending in 2031. The buyer and counterparty of the PPA is Fayetteville Public Utility of Lincoln County Tennessee. A similar percentage of the accounts receivable also stems from this single relationship.

  

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers (Topic 606)," which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. This guidance is effective for the annual period beginning after December 15, 2016, and interim and annual periods thereafter. Early adoption is not permitted. We expect the new guidance will have no impact on the Company's current revenue recognition policy.

 

In August 2014, the FASB issued ASU No. 2014-15, "Presentation of Financial Statements-Going Concern." ASU 2014-15 is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. This guidance is effective for annual periods ending after December 15, 2016, and interim and annual periods thereafter. We do not expect the adoption of this standard to have a material impact on our consolidated financial position, results of operations and cash flow.

 

In February 2015, the FASB issued ASU No. 2015-02, "Consolidations (Topic 810) - Amendments to the Consolidation Analysis". ASU 2015-2 makes amendments to the current consolidation guidance, including introducing a separate consolidation analysis specific to limited partnerships and other similar entities.  Under this analysis, limited partnerships and other similar entities will be considered a variable-interest entity ("VIE") unless the limited partners hold substantive kick-out rights or participating rights. The standard is effective for annual periods beginning after December 15, 2015. We are currently evaluating the standard and the impact, if any, on our business model and intended acquisitions.

 

 

 

Principles of Consolidation

 

The Company consolidates the financial position, results of operations, and cash flows of all majority-owned subsidiaries. The consolidated financial statements include the accounts of the Company (including the dba Principal Solar Institute) and its subsidiaries SunGen Mill 77, LLC; SunGen Step Guys, LLC; and Powerhouse One, LLC. Significant intercompany accounts and transactions have been eliminated in consolidation.

 

Fair Value

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date.  We believe the carrying values of our current assets and current liabilities approximate their fair values, and the carrying value of our notes payable approximate their estimated fair value for debts with similar terms, interest rates, and remaining maturities currently available to companies with similar credit ratings.

 

All related party transactions are evaluated by our officers and/or Board of Directors who take into account various factors, including their fiduciary duty to the Company; the relationships of the related parties to the Company; the material facts underlying each transaction; the anticipated benefits to the Company and related costs associated with such benefits; and the terms the Company could receive from an unrelated third party. Despite this review, related party transactions may not be recorded at fair value.

 

We do not engage in hedging activities, but we did have a derivative instrument treated as a liability whose value was measured on a recurring basis (see "Fair Value Instruments" and "Derivative Liability on Warrants" included herein).

 

Fair Value Instruments

 

In June 2013, in connection with a sale of its par value $.01 common stock ("Common Stock"), the Company issued complex non-traded warrants with the potential for downward adjustments of the exercise price. The Company estimated the value of these warrants upon issuance using a binomial lattice-based option valuation model. The Company re-valued these warrants at the end of each reporting period since issuance and any changes were reflected as gains or losses in current period results. In November 2014, the warrants were exercised and a resulting gain of $32,239 was recognized.

 

Use of Estimates

 

The preparation of our financial statements in accordance with GAAP requires us to, on an ongoing basis, make significant estimates and judgments that affect the reported values of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities.  We base our estimates on historical experience and on various other assumptions we believe are reasonable under the circumstances, the results of which form the basis for our conclusions.  Actual results may differ from these estimates under different assumptions or conditions.  Such differences could have a material impact on our future financial position, results of operations, and cash flows.

 

Cash and Equivalents

 

We consider cash, deposits, and short-term investments with original maturities of three months or less as cash and equivalents.  Our deposits are maintained primarily in two financial institutions and, at times, may exceed amounts covered by U.S. Federal Deposit Insurance Corporation insurance.

 

Restricted Cash

 

As part of the June 2013 financing with Bridge Bank, National Association (see "Acquisition Note Payable" herein), the Company agreed to maintain in a restricted cash account all proceeds, less debt service and approved expenses, generated by our Powerhouse One subsidiary. Such account provides a minimum of $93,150 replacement reserve ("module reserve") on solar panels found to be defective and potentially not covered under the 25-year manufacturer's warranty. Funds in excess of the modular reserve may be accessed by the Company whenever the debt service coverage ratio is greater than or equal to 1.1:1.0.

 

 

  

Accounts Receivable

 

Accounts receivable are stated at amounts management expects to collect from outstanding balances. Management provides for probable uncollectible amounts through a charge to earnings and a credit to a valuation allowance based on its assessment of individual accounts. No allowance has been recorded in the accompanying financial statements.

  

Solar Arrays

 

Solar arrays are stated at historical cost, net of accumulated depreciation. Depreciation is computed using the straight-line method over the remaining estimated useful lives of the assets. The estimated useful lives of solar arrays are 25 years from the date first placed in service. Accumulated depreciation was $496,894 and $207,851 at December 31, 2014 and 2013, respectively. During the construction period, all costs and expenses related to the development and construction of a project, excluding administrative expenses, are recorded as construction in process.

 

In each case where a solar array is installed on property subject to a real estate lease, the Company is obligated to remove such installation at the end of the lease terms. As the expected termination dates including renewal periods are decades off (2041-2084); there is little experience uninstalling solar arrays anywhere in the world; costs are expected to be minimal; and the scrap value of the materials is expected to exceed the cost of removal, such removal costs have not been separately accounted for.

  

Long-Lived Assets

 

The recoverability of the carrying value of long-lived assets is assessed when an indicator of impairment has been identified.

 

For purposes of recognition and measurement of an impairment loss, a long-lived asset or group of assets is combined with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities.

 

For long-lived assets, when impairment indicators are present, the Company compares undiscounted future cash flows, including the eventual disposition of the asset group at market value, to the asset group’s carrying value to determine if the asset group is recoverable. If undiscounted cash flows are less than carrying value, the excess of carrying value over fair value is expensed in the period in which it is estimated to have occurred. The Company recorded an impairment charge of $113,661 in 2014 as it wrote-off its investment in SunGen Mill, LLC (see "Note 7 Leases" for additional discussion). No impairment was recorded in 2013.

 

Power Purchase Agreement

 

The Company evaluated the PPA with reference to Accounting Standards Codification ("ASC") 805-20-25-10 entitled "Identifiable Intangible Assets" and determined that, while it is not separable from other assets, it does meet the contractual-legal criteria for separate recognition. Further evaluation with reference to ASC 840-10-15-6 entitled "Arrangements that qualify as Leases" concluded the PPA is not a lease, and reference to ASC 805-20-25-10 entitled "Identifiable Intangible Assets" concluded the PPA has no separately recordable value.

 

 

 

Revenue Recognition

 

Power generation revenue is recognized as delivered to the purchaser based upon electrical meters affixed to the solar array and measuring kilowatt-hours produced. Our current power generation operations do not generate renewable energy credits, performance-based incentives, or similar credits to the benefit of the Company.

 

Income Taxes

 

Income taxes are recorded under the asset and liability method under which deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities using the enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

 

We account for uncertain income tax positions in accordance with FASB ASC 740 entitled "Income Taxes". Interest costs and penalties related to income taxes are classified as interest expense and general and administrative costs, respectively, in our consolidated financial statements. Income tax returns are subject to a three-year statute of limitations during which they are subject to audit and adjustment. We file income tax returns in the United States federal jurisdiction and certain states. The tax years that remain subject to examination by major tax jurisdictions include 2010 through 2013.

 

Equity Transaction Fair Values

 

The estimated fair value of our Common Stock issued in share-based payments is measured by the more relevant of (1) the prices received in private placement sales of our stock or, (2) its publically-quoted market price.  We estimate the fair value of simple warrants and stock options when issued or, in the case of issuances to non-employees, when vested using the Black-Scholes option-pricing ("Black-Scholes") model that requires the input of subjective assumptions.  When valuing more complex warrants, options, or other derivative equity instruments, we use a binomial lattice-based option pricing model or Monte Carlo option pricing model, whichever management deems more appropriate in the circumstances. Recognition in stockholders’ equity and expense of the fair value of stock options awarded to employees is on the straight-line basis over the requisite service period.  Subsequent changes in fair value are not recognized.

 

Net Income (Loss) per Share

 

Basic net income or loss per share is computed by dividing the net income or loss for the period by the weighted average number of shares of Common Stock outstanding for the period. Diluted income per share reflects the potential dilution of derivative securities by including other potential issuances of Common Stock including shares to be issued upon exercise of options and warrants and upon conversion of convertible debt. Potentially dilutive shares are not included in the event of a loss as the effect of doing so would be anti-dilutive. As of December 31, 2014, options to purchase 716,065 shares, warrants to purchase 42,138 shares of our Common Stock, and 146,667 shares issuable upon the conversion of convertible notes payable have been excluded from the calculation of diluted loss per share, as their effect would have been anti-dilutive. As of December 31, 2013, options to purchase 402,833 shares and warrants to purchase 587,592 shares of our Common Stock have been excluded from the calculation of diluted loss per share as their effect would have been anti-dilutive.

  

NOTE 3 - LIABILITIES ARISING FROM REVERSE MERGER

 

Liabilities arising from the reverse merger represent long term real estate leases which had been abandoned, general unsecured liabilities, commercial liens, and tax liens filed with various states all associated with the Company’s pre-reverse merger operations, which were unknowingly assumed in the March 2011 reverse merger transaction. The statute of limitations for most of such liabilities is five years and for most liens is ten years, subject to renewal at the lien holders’ option, depending upon the jurisdiction.  The liens accrue interest at between 8% and 12%. Liabilities not associated with a lien have been accrued based upon management’s estimation of the amount to be paid.  Liabilities associated with a lien have been accrued at face value.  Management believes all such liabilities have been indemnified by Pegasus Funds, LLC (and/or its affiliates or related parties) to which (including its assigns) the Company issued 534,654 shares of its common stock as part of the reverse merger transaction.  However, as the Company is obligor, the Company has recorded the liability.  To date, only one lien holder has approached the Company concerning payment.  Such lien holder is pursuing the former management of the Company first through litigation.  To the extent such lien holder recovers the liability from the former management, the lien against the Company will be reduced.

 

 

  

NOTE 4 - COMPENSATION PAYABLE

 

Certain members of the management team have deferred payment of their compensation for the benefit of the Company.  No formal terms of payment have been established.

  

NOTE 5 - ACQUISITIONS

 

Powerhouse One

 

Effective June 17, 2013, PSI entered into an acquisition agreement with Vis Solis, LLC (“Vis Solis”), a Tennessee Limited Liability Company and AstroSol, Inc., a Tennessee corporation (together "Co-Sellers") of Powerhouse One, LLC (“Powerhouse”), whereby 89% of the outstanding membership interests of Powerhouse were exchanged for $6,200,000 in cash. At the time of acquisition, the four solar arrays owned by Powerhouse had a remaining estimated useful life of 23 years (being first placed in service in 2011), and power generated is sold to a utility in Lincoln County Tennessee under an index-priced PPA having a fixed premium of $0.12 per kilowatt-hour over the GSA-1 scheduled rate (currently approximately $0.10 per kWh) through 2021, and a market rate based upon the then current GSA-1 scheduled rate for the remaining 10 years of the initial 20 year term ending in 2031.

 

The acquisition was accounted for as a business combination under ASC 805 and was entered into in order to acquire the solar arrays. As part of the acquisition, 11,503 shares were issued to Co-Sellers in consideration for the right to acquire their remaining 11% noncontrolling interest for $766,827 within one year from the initial acquisition date. The value of the noncontrolling interest was pro-rated based upon the negotiated value of the equity interest acquired by the Company.

 

In June 2014, the option to acquire the remaining 11% non-controlling interest of Powerhouse One from the Co-Sellers expired. However, the parties have re-confirmed their intent to transfer the non-controlling interest to the Company over the next several months as the Company obtains sufficient financing to do so, and on the same terms contained in the option as if it were still in full force and effect. The Company does not believe there are any material risks to the Company if the acquisition is not completed. The option value was expensed upon expiration.

 

The Company incurred $277,287 in acquisition related fees as part of the transaction which are included in general and administrative expenses.

 

The operating results of Powerhouse have been included in the consolidated financial statements since the acquisition date. On a pro forma basis, had the acquisition of Powerhouse occurred on January 1, 2013, the consolidated revenues and loss of PSI for 2013 would have been:

 

(unaudited)		2013
Revenue		$	831,999
Net Loss		$	(2,460,219	)

 

 

   

Innovative Solar 46

 

In November 2014, the Company entered into a Membership Interest Purchase Agreement ("MIPA") with Innovative Solar Systems, LLC, a solar developer operating primarily in North Carolina, to acquire Innovative Solar 46, LLC ("IS 46"), the owner of a 78.5mw AC solar project to be built in Cumberland County, North Carolina. IS 46 holds a single and intangible asset, a 15-year PPA with Duke Energy Progress, Inc. IS 46 does not have, nor has it ever had, any other assets, any liabilities, any employees, any revenues, or any operations of any kind. As such, IS 46 is not a "business" as defined in the accounting literature, and it has no historical financial statements. PSI agreed to pay Innovative Solar Systems, LLC $6,280,000 for 100% of the membership interest of IS 46 in a series of payments of approximately $300,000 per month between execution of the MIPA and the financial close (the point at which all project financing is arranged), and a balloon payment at financial close sufficient to having cumulatively paid 70% of the $6,280,000 price. The remaining 30% of the purchase price will be paid in installments of $153,000 per month through the project's commercial operation date. At December 31, 2014, a total of $870,000 has been paid to date, and failure by the Company to make any of the future scheduled payments may result in the loss of all payments made through such date. The Company is working with engineering and construction firms on final designs, and the total cost of the project based upon the preliminary work is expected to be approximately $164 million, including an estimated $10 million from a public offering. The Company is in discussion with multiple parties to provide the acquisition, construction, and permanent financing for the project, however, no assurance can be given that adequate financing on terms acceptable, or even available, to the Company will be obtained. Closing of the acquisition is expected to occur no later than June 3, 2015, and construction is expected to be completed in early 2016.

  

NOTE 6 - NOTES PAYABLE

 

Acquisition Note Payable

 

On June 17, 2013, Powerhouse One, LLC secured financing of $5,050,000 from Bridge Bank, National Association to acquire the membership interest (and the underlying solar arrays) of Co-Sellers. The note matures on June 17, 2017, and bears a fixed interest rate of 7.5% annually. Interest is paid monthly and principal is paid quarterly beginning in September 2013 based on an 11-year amortization schedule. Covenants include the maintenance of a restricted cash account, routine reporting, and a minimum debt service coverage ratio calculated separately for Powerhouse One of not less than 1.10:1, measured quarterly following the first anniversary of the debt. The debt also restricts the payment of dividends, and it is secured by all the assets of Powerhouse, guaranteed by Principal Solar, Inc., and is further secured by a pledge by Principal Solar, Inc. of its membership interest in Powerhouse.

 

Principal payments over the following years are as follows:

 

2015		$	249,816
2016			280,056
2017			4,173,164
Total principal payments			4,703,036
Unrecognized discount			(50,057	)
Note payable at December 31, 2014		$	4,652,979

  

In conjunction with the acquisition note payable, warrants to purchase 37,763 shares of Common Stock were issued to Bridge Bank with an exercise price of $4.00 and a contractual life of 10 years. The value of the warrants issued in connection with this debt, as determined using the Black-Scholes model, was $81,449 and is recorded as a discount to the debt. The discount is being amortized as interest expense over the life of the note, including $20,363 and $11,030 in 2014 and 2013, respectively. The assumptions used to value the warrants were as follows:

 

Estimated fair value	$2.16
Expected life (years)	5.26
Risk free interest rate	1.27%
Volatility	211.91%

 

 

 

The Bridge Bank warrants have cashless exercise rights, redemption rights providing the Company the right to redeem the warrants for $604,200, anti-dilution rights associated with offerings of equity securities, a term expiring on the first to occur of (i) the 10 year anniversary of the grant, (ii) the closing of the Company’s initial public offering (which is being affected pursuant to Registration Statement on Form S-1), or (iii) the liquidation of the Company (each a “Termination Event”). In each case, unless exercised earlier, the warrants are automatically exercised on a cashless basis upon a Termination Event.  The Company also provided the holder registration rights in connection with the grant of the warrants.

 

Convertible Notes Payable, Related Parties

 

In June 2014, the Company issued convertible notes of $250,000 each to two of its Board members, Messrs. Heller and Marmol, to fund deposits on potential future acquisitions. Such potential acquisitions remain subject to significant uncertainties including due diligence, obtaining construction and permanent financing, and negotiating PPAs, developer agreements, and interconnection agreements. The notes bear interest at a rate of 18% per year and matured on December 5, 2014, and all principal and interest was due at maturity. Principal and interest is payable in cash or shares of Common Stock, at the option of the holder, at a conversion price of $4.00 per share. The notes were secured pursuant to a security agreement by the Company's interest in the otherwise unencumbered net cash flow, if any, from the operations of its Powerhouse One subsidiary. The Company may prepay the notes at any time, but the holders of the notes were guaranteed to receive a minimum of six months interest on the notes.

 

On February 27, 2015 (made effective on the original maturity date), the notes were modified to extend the maturity date to September 30, 2015, to reduce the interest rate from 18% to 12% per annum, and to eliminate all collateral securing the notes. All other aspects of the notes remained unchanged.

 

On December 1, 2014, Michael Gorton, the Company's Chief Executive Officer, loaned to the Company pursuant to a convertible promissory note the amount of $130,000. The note initially matured on June 30, 2015, bears interest at a rate of 12% per annum, is convertible into shares of our Common Stock at a price of $6.00 per share, and was secured by a claim on proceeds, if any, of a solar project being acquired (IS 46). The notes can be prepaid at any time prior to maturity without penalty. On February 27, 2015, the note was modified to extend the maturity date to September 30, 2015, and eliminate all collateral securing the note. All other aspects of the note remained unchanged.

  

NOTE 7 - LEASES

 

The Company's solar arrays sit on properties subject to long-term real estate leases (or similar agreements in the case of rooftop installations) with initial terms equal to the PPA and having one or more renewal options. Rental payments under the leases vary in type between fixed price, percentage of revenue, or, in the case of rooftop installations, no separate charge. The Company's current solar array installations are as follows:

 

Installation	Location	kWh	Date	Term	Rent
Powerhouse One	Fayetteville, TN	3,000	Aug 2011	20 yr. + 2 5-yr renewals	4% of revenue
SunGen Step Guys	Alfred, ME	110	Sep 2009	25 yr. + 2 25-yr renewals	None
SunGen Mill 77	Amesbury, MA	63	June 2010	25 yr. + 2 25-yr renewals	None

 

The Company recognized expenses of $38,894 and $11,086 in rent under the Powerhouse One lease in 2014 and 2013, respectively.

 

SunGen Mill 77

 

The SunGen Mill 77 ("Mill 77") facility is a rooftop project in Amesbury, MA acquired by the Company in September 2011. The project generated less than 1% of consolidated revenues in 2014. Due to record winter storms and snowstorms in Massachusetts in the December 2014 / January 2015 timeframe, their impact on the ongoing maintenance program including seemingly insurmountable roof leaks, and resulting tension with the landlord, the Company determined the Mill 77 project was no longer economically desirable and has arranged to uninstall the project. Costs to uninstall the project total approximately $18,000, and the write-off of the asset was $113,661. The actual removal of the project from the rooftop will occur when the weather permits. The agreement with the landlord to uninstall the project resolved all claims, if any, and relieved both parties of all future obligations.

 

The Company maintains its headquarters in Dallas, Texas pursuant to a month-to-month lease at a cost of $500 per month.

  

 

 

NOTE 8 - DERIVATIVE LIABILITY ON WARRANTS

 

In June 2013, the Company issued warrants to purchase 545,455 shares of Common Stock with a 10-year contractual term to Steuben Investment Company II, L.P. in connection with the issuance of Common Stock to fund the Powerhouse One acquisition. The warrants were immediately exercisable into the Company’s Common Stock with an exercise price of $4.00 per share. However, as the warrants have “down round” protection, they are treated as a derivative liability and were historically valued using a binomial lattice-based option valuation model using holding period assumptions developed from the Company's business plan and management assumptions, and expected volatility from comparable companies including OTC Pink^® and small-cap companies.

 

In November 2014, all 545,455 warrants held by Steuben Investment Company II, L.P. and described above were exercised by the holder in a cashless transaction as provided for in the warrant agreement. Based upon a share valuation of $6.00 per share determined by the Company's Board of Directors based upon concurrent issuances, the exercise of warrants to acquire 545,455 shares of Common Stock on a cashless basis resulted in a net issuance to Steuben of 181,818 shares of Common Stock. The final settlement of the liability upon exercise resulted in a gain listed in the table below.

 

The following table sets forth a summary of changes in fair value of the warrants during the period covered by the accompanying financial statements:

 

Balance at issuance June 14, 2013		$	1,170,459
Change in fair value included in net loss			(47,310	)
Balance at December 31, 2013			1,123,149
Change in fair value included in net loss			(32,239	)
Warrants exercised			(1,090,910	)
Balance at December 31, 2014		$	0

  

NOTE 9 – CAPITAL STOCK

 

Preferred Stock

 

The Company has authorized 100,000,000 shares of $.01 par value Class A preferred stock but had none outstanding during the periods covered in the accompanying financial statements.

 

Common Stock

 

The Company has authorized 300,000,000 shares of $.01 par value Common Stock, and it trades on the OTC Pink^® under the symbol “PSWW.”  Holders of our Common Stock are entitled to one vote per share and receive dividends or other distributions when, and if, declared by our Board of Directors.  In addition to shares outstanding, we have reserved 716,090 shares for issuance upon exercise of equity incentive awards with options to purchase 716,090 shares of Common Stock granted to date.

 

Throughout 2013, we issued a total of 242,500 shares at a price of $4.00 per share to investors. In addition, in May 2013, the Company issued 36,498 shares of Common Stock for conversion of convertible debt of $138,000 plus accrued interest of $7,990 including induced conversion expense of $102,193. In June 2013, the Company issued 727,273 shares of Common Stock and 545,455 warrants for $1,600,000 as part of financing the acquisition of Powerhouse One, LLC (see "Steuben Investment" herein). In June 2013, the Company issued 11,503 shares of Common Stock at $4.00 for the right to purchase the remaining noncontrolling interest of Powerhouse One, LLC. The right to acquire the noncontrolling interest of Powerhouse One, LLC expired in June 2014.

 

Throughout 2014, we issued a total of 339,000 shares at a price of $4.00 per share and 36,667 shares at a price of $6.00 per share to executives, employees, members of the Board of Directors, and unrelated investors, and we issued 181,818 shares resulting from an exercise of warrants at a price of $4.00 per share (see "Steuben Investment herein"), and 25 shares resulting from an exercise of options.

 

 

 

Stueben Investment

 

Effective June 14, 2013, the Company entered into a Subscription Agreement with Steuben Investment Company II, L.P. (“Steuben”).  Pursuant to the subscription agreement, Steuben purchased 727,273 shares of the Company’s common stock for an aggregate of $1,600,000.05 or $2.20 per share. As additional consideration in connection with the subscription, the Company granted Steuben warrants to purchase 545,455 shares of the Company’s common stock with an exercise price of $4.00 per share and a term of 10 years.  The Company also provided Steuben registration rights whereby the Company was required to file a registration statement and take all necessary actions to maintain the availability of Rule 144 for a period of two years following its effective date. The registration statement became effective on February 3, 2015.

 

In the event we fail to take all necessary actions to enable Steuben to sell shares pursuant to Rule 144, we may have to pay to Steuben penalties totaling $216,000 which could have a material adverse effect on our available cash, limit our ability to raise capital, and negatively impact our results of operations. The Company has not accrued a liability for this potential penalty, as it believes the payment of any such penalty is not probable.

  

Stock Options

 

2013 Issuances

 

In May 2013, the Company issued to advisors options to acquire 24,000 shares of its Common Stock. The options have exercise prices ranging from $5.64 to $6.80, a contractual life of 10 years, and vest over 8 months. The options were valued using the Black-Scholes model and the resulting equity-based compensation expense included in general and administrative expenses for 2013 was $108,731, based upon the following parameters:

 

Estimated fair value		$4.24	-	$5.24
Expected life (years)			10
Risk free interest rate		1.72	–	2.17%
Volatility			73.26%

 

In June 2014, the Company re-priced the advisors' 24,000 options. The options, originally issued having exercise prices ranging from $5.64 to $6.80 per share, were re-priced to $4.00 per share. Because of the small change in inputs to the Black-Scholes model since they were initially issued (especially volatility), there was no expense recorded in connection with this action.

 

 

 

In 2013, the Company issued to its independent Directors options to acquire an aggregate of 108,000 shares of its Common Stock. The options have an exercise price of $4.00 per share and vests in periods ranging from 8 to 24 months. The options were valued using the Black-Scholes model and the resulting equity-based compensation expense for 2014 and 2013 was $70,948 and $191,249, respectively based upon the following parameters:

 

Estimated fair value		$2.16	-	$3.96
Expected life (years)		5.26	-	5.50
Risk free interest rate		0.80	-	1.69%
Volatility			211.91%

 

2014 Issuances

 

Throughout 2014, the Company issued 313,257 options to executives, employees, contractors, members of the Board of Directors, and advisors having an exercise price of $4.00 and contractual lives ranging from 5 to 10 years. The options were valued using the Black-Scholes model and the resulting equity-based compensation expense for 2014 was $1,068,012 based upon the following parameters:

 

Estimated fair value		$	4.00
Expected life (years)		5.00	-	7.25
Risk free interest rate		0.44	-	2.19%
Volatility			227.71%

 

As the Company does not have a significant history of post vesting exercises to estimate an expected life of the option, the simplified method was used wherein the expected life becomes the mid-point of the options vesting date and their contractual life.

 

A summary of option activity for 2013 and 2014 is as follows:

 

		Shares				Weighted Avg. Exercise Price				Weighted Avg. Grant Date Value
Outstanding, January 1, 2013			270,833			$	5.64			$	3.52
Granted			132,000				4.36				3.08
Exercised			-				-				-
Forfeited			-				-				-
Expired			-				-				-
Outstanding, December 31, 2013			402,833				5.20				3.40
Granted			313,257				4.00				4.00
Exercised			25				4.00				4.00
Forfeited			-				-				-
Expired			-				-				-
Outstanding, December 31, 2014			716,065			$	4.64			$	3.64

 

The following is a summary of stock options outstanding at December 31, 2014:

 

	Exercise Price				Options Outstanding				Average Remaining Contractual Lives (Years)				Options Exercisable				Non-Vested Options
	$	5.64				270,833				1.8				270,833				-
	$	4.00				445,232				8.5				390,033				55,199
						716,065								660,866				55,199

 

Stock-based compensation expense included in general and administrative expenses in 2014 was $1,138,961, and $220,372 of compensation expense related to options not yet vested remains unrecognized at December 31, 2014. Such amount is expected to be recognized during the years 2015 through 2017.

 

 

 

The weighted average exercise price of those options currently outstanding is $4.64 and those currently exercisable is $4.32. Based upon the Company's stock price at December 31, 2014, of $3.00 as quoted on OTCPink^® market, the options then outstanding had no intrinsic value and those exercisable had no intrinsic value.

 

Warrants

 

At December 31, 2014, the Company had warrants to purchase 42,138 shares of Common Stock outstanding having a weighted average exercise price of $3.88 per share. The Company had warrants to purchase 587,592 shares of Common Stock outstanding at December 31, 2013. See notes herein entitled "Acquisition Notes Payable" and "Derivative Liability on Warrants" for descriptions of the significant issuances.

  

NOTE 10 - NONCONTROLLING INTEREST

 

The original owners of Powerhouse One continue to own approximately 11% of the membership interest of the limited liability company. The noncontrolling interests of equity investors in Powerhouse One is reported on the consolidated balance sheet and statement of operations as "Noncontrolling interest in subsidiary" ("noncontrolling interest") and reflects their respective interests in the equity and the income or loss of the limited liability company.

 

The following table sets forth the activity in the noncontrolling interest equity account during 2014:

  

Balance December 31, 2012		$	-
Noncontrolling interest at acquisition			766,827
Earnings allocated to noncontrolling interest			19,976
Balance December 31, 2013			786,803
Earning allocated to noncontrolling interest			45,908
Balance December 31, 2014		$	832,711

  

NOTE 11 – RELATED PARTY TRANSACTIONS

 

Other than the Board member options described herein in a note entitled "Stock Options,” and the issuance of convertible notes described herein in the note entitled "Convertible Notes Payable, Related Parties", no other related party transactions occurred during the periods covered in the accompanying financial statements.

  

NOTE 12 - TAXES

 

Our approximately $7.65 million of federal income tax net operating loss carryovers expire from 2030 through 2034. Our federal and state income tax returns are not under examination by any taxing authorities and no statute extensions have been granted; therefore, only our December 31, 2011 to 2014 tax returns are subject to examination.

 

Management has evaluated tax positions pursuant to ASC 740 and determined that no uncertain tax positions exist at this time. As a result, no amounts have been recorded related to a tax position more likely than not to be sustained. The company classifies interest and penalties related to income taxes, if any, as interest expense and general and administrative costs, respectively, in our consolidated financial statements.

 

 

  

Significant components of our income tax provisions were:

 

		2014				2013
Current provision
Federal		$	-			$	-
State			928				1,227
Total current tax provision			928				1,227
Deferred provision
Federal			-				-
State			-				-
Total deferred tax provision			-				-
Total income tax provision		$	928			$	1,227

 

The provision for income tax differs from the amount estimated by applying the statutory federal income tax rate to the net loss before taxes as follows at December 31:
Taxes at statutory rate (34%)		$	(1,133,554	)		$	(798,946	)
State taxes			(43,342	)			(231,920	)
Change in valuation allowance			1,175,084				1,059,316
Permanent differences			(11,350	)			(15,713	)
Change in state tax rate			(9,869	)			(69,976	)
Other (prior year adjustments)			23,959				58,466
Total income tax provision		$	928			$	1,227

 

Deferred tax assets (liabilities) are comprised of the following at December 31:
Accrued compensation			267,156				214,782
Other accrued expenses			157,266				55,688
Gross current deferred tax assets			424,422				270,470
Fixed assets			(325,590	)			(499,066	)
Intangible assets			24,420				50,627
Stock compensation expense			885,924				481,509
Net operating losses			2,832,332				2,362,884
Gross non-current deferred tax assets, net			3,417,086				2,395,954

 

Total deferred tax assets			3,841,508				2,666,424
Valuation allowance for deferred tax assets			(3,841,508	)			(2,666,424	)
Deferred tax assets, net of valuation allowance		$	-			$	-

 

The Company has established a valuation allowance to fully reserve the net deferred tax assets for the periods December 31, 2014 and 2013, due to the uncertainty of the timing and amounts of future taxable income.

 

 

  

NOTE 13 - COMMITMENTS AND CONTINGENCIES

 

The Company may be subject to rescission rights from certain investors who purchased shares of our common stock based on their review of the presentation which we furnished as Exhibit 99.1 to our Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 5, 2014, which may have constituted a communication of an “offer to sell” as described in Section 5(c) of the Securities Act of 1933, as amended (the “Securities Act”) in violation of Section 5 of the Securities Act. If a claim were brought by any ‘recipients’ of such presentation and a court were to conclude that such presentation constituted a violation of Section 5 of the Securities Act, we could be required to repurchase the shares sold to the investors who reviewed such presentation at the original purchase price, plus statutory interest from the date of purchase, for claims brought during a period of one year from the date of their purchase of common stock. We could also incur considerable expense in contesting any such claims. The prospectus included in the Form S-1/A and dated October 20, 2014, included an additional risk factor stating:

 

"You should not rely on any information set forth in the presentation attached as Exhibit 99.1 to our Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 5, 2014 in making an investment decision."

 

As of the date of these statements, no legal proceedings or claims have been made or threatened by any investors in the Company and the Company considers the likelihood that the investors will file suit to be remote. Therefore, in accordance with ASC 450-20 entitled “Loss Contingencies”, the Company has not recorded a liability for the potential rescission.

  

NOTE 14 - SUBSEQUENT EVENTS

 

Financing

 

On March 2, 2015, the Company entered into a convertible loan agreement with Alpha Capital Anstalt ("Alpha") to borrow $1,250,000 (the "Loan"). The Loan is convertible into shares of Common Stock at a rate of $4.00 per share, bears interest at a rate of 8.0% per annum, all principal and interest is due on September 2, 2015, and the loan is secured by the assets of the Company and its subsidiaries (excluding Powerhouse One and all interest in its operations, its assets, and proceeds or distributions therefrom). The principal and accrued interest amounts on the Loan are convertible at any time into shares of Common Stock at a rate of $4.00 per share. In connection with the Loan, the Company granted Alpha 234,375 warrants (the ‘Warrants”) exercisable at $6.00 per share, certain piggy-back registration rights, cashless exercise privileges and anti-dilution protection on both the Common Stock into which the Loan may convert and for which the Warrants may be exercised under the occurrence of certain events.

 

Acquisition (pending)

 

On March 2, 2015, the Company entered into a MIPA with Innovative Solar Systems, LLC, a solar developer operating primarily in North Carolina, to acquire Innovative Solar 42, LLC ("IS 42"), the owner of a 72.9mw AC solar project to be built in Fayetteville, North Carolina. IS 42 holds a single and intangible asset, a 10-year power purchase agreement ("PPA ") with Duke Energy Progress, Inc. IS 42 does not have, nor has it ever had, any other assets, any liabilities, any employees, any revenues, or any operations of any kind. As such, IS 42 is not a "business" as defined in the accounting literature, and it has no historical financial statements. PSI agreed to pay Innovative Solar Systems, LLC $5,832,000 for 100% of the membership interest of IS 42 in a series of payments of approximately $300,000 per month between execution of the MIPA and the financial close (the point at which all project financing is arranged), and a balloon payment at financial close sufficient to having cumulatively paid 70% of the $5,832,000 purchase price. The remaining 30% of the purchase price will be paid in installments of $153,000 per month through the project's commercial operation date. A total of $570,000 has been paid to date, and failure by the Company to make any of the future scheduled payments may result in the loss of all payments made through such date. The Company is working with engineering and construction firms on final designs, and the total cost of the project based upon the preliminary work is expected to be approximately $153 million including an estimated $5 million from this offering. The Company is in discussion with multiple parties to provide the acquisition, construction, and permanent financing for the project, however, no assurance can be given that adequate financing on terms acceptable, or even available, to the Company will be obtained. Closing of the acquisition is expected to occur no later than August 30, 2015, and construction is expected to be completed in early 2016.

 

 

 

 

 

1,500,000 Shares

 

 

PRINCIPAL SOLAR, INC.

Common Stock

_________________________________

   

PROSPECTUS

 

 

Northland Capital Markets

 

The date of this prospectus is   ________, 2015

 

 

  

PART II

 

INFORMATION NOT REQUIRED IN PROSPECTUS

 

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

 

The following table sets forth the costs and expenses, payable by the Company in connection with the distribution of securities registered on this registration statement.  All amounts are estimates except the SEC registration fee.

 

Securities and Exchange Commission registration fee		$	3,675
FINRA Fee			5,000
NASDAQ listing fee			75,000
Underwriter expenses(1)			500,000
Legal fees			50,000
Company travel			60,000
Accounting fees and expenses			30,000
Transfer agent's and registrar fees and expenses			16,000
Miscellaneous			10,325
Total		$	750,000

(1) Includes out-of-pocket, accountable, bona fide expenses actually incurred in connection with its service under the engagement agreement, and expected to be comprised largely of legal fees, due diligence costs, and travel.

 

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

 

See “Indemnification of directors and Officers” above.

 

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

 

In March 2011, the Company paid approximately $89,007 to Pegasus Funds LLC (“Pegasus”) and issued two shares of Series A Super Voting Preferred Stock (the “Series A Super”) for finding a public shell company and for structuring the Principal Solar Exchange Agreement and as compensation for monies paid by Pegasus in connection with the renewal of the Company’s charter.  The designation of the Series A Super was never filed with the Secretary of State of New York (see also the risk factor above entitled “We believe that certain prior corporate actions undertaken by us pursuant to the purported authority and approval of our preferred stock holders, including our March 2011 reverse stock split, were completed without effective stockholder approval and in violation of state statutes”).  The Series A Super had the terms and conditions described above under “Description of Business” – “Organizational History” – “Exchange Agreement”.

 

In connection with the March 7, 2011 Exchange Agreement (described in greater detail above under “Description of Business” – “Organizational History” – “Exchange Agreement”), we issued 2,648,847 shares of our Common Stock to the shareholders of Principal Solar Texas in exchange for 100% of the outstanding shares of Principal Solar Texas (which was later merged with and into us in April 2011) and 534,654 shares of the Company’s common stock in connection with the Preferred Stock Exchange to Pegasus Funds LLC and its assigns (“Pegasus”).  As of the date of this Prospectus, Pegasus is not a greater than 5% shareholder of the Company. Included in the shareholders of Principal Solar Texas who exchanged their shares for shares of the Company were our Chief Executive Officer and Chairman, Michael Gorton (531,317 shares, 50,000 of which were subsequently transferred in a private transaction), Kenneth G. Allen, our Chief Operations Officer (367,091 shares), R. Michael Martin, our Executive Vice President of Business Development (208,546 shares), Jorge Aizcorbe, our consultant on Business Development matters (155,000 shares), Ronald B. Seidel, our director (33,470 shares), Carl Hefton, who at the time was a director of the Company (29,682 shares), Richard Borry, our current IT consultant (62,500 shares) Dan Bedell (62,500 shares) our Executive Vice President of Strategic and Corporate Development; Richard Kang, our former Chief Financial Officer (143,587 shares); Aaron Cother, our former Chief Financial Officer (25,000 shares); Shelly Gorton, the wife of our Chief Executive Officer, Michael Gorton (18,962 shares); and Margaret Keliher, our director (14,000 shares).

 

The 534,654 shares of common stock issued to Pegasus were issued in exchange for the two shares of Series A Super held by Pegasus. We claim an exemption from registration afforded by Section 3(a)(9) of the Securities Act for the conversions, as the securities were exchanged by the Company with its existing security holder exclusively in transactions where no commission or other remuneration was paid or given directly or indirectly for soliciting such exchange.

 

 

 

In September 2011, we acquired 100% of the outstanding membership interests of SunGen Mill 77 LLC and SunGen StepGuys LLC (the “SunGen Entities”) in consideration for $1,000 in cash and the satisfaction of $841,154 of outstanding liabilities payable by the SunGen Entities to Talmage Solar Engineering (“Talmage”) by way of the issuance to Talmage of 110,041 shares of our restricted common stock valued at $4.82 per share or $530,111.

 

In November 2011, the Company granted options to purchase 325,000 shares of common stock to a consultant which vested over one year and have an exercise price of $5.64 per share.  The options will expire in November 2016 if not exercised prior to then.  A total of 270,833 options vested to the consultant and the remaining 54,167 options were cancelled in 2012.

 

In November and December 2011, we sold an aggregate of 254,603 shares of restricted Common Stock to 19 individuals and entities in private transactions for $5.64 per share resulting in proceeds to the Company of $1,435,950.  Persons purchasing shares in the offering included Steuben Investment Company II, L.P., a greater than 5% stockholder of the Company (177,305 shares), the wife of Mr. Gorton, our Chief Executive Officer and Chairman (17,731 shares), Margaret Keliher, our director (5,319 shares), Ronald B. Seidel, our director (4,433 shares), the wife of Mr. Allen, our Chief Operations Officer (4,433 shares), the wife of Mr. Martin, our Executive Vice President of Business Development (4,433 shares), the wife of Mr. Bedell, our Executive Vice President of Strategic and Corporate Development (1,108 shares), the wife of Mr. Kang, our former CFO (4,433 shares), and a trust owned by Rick Borry, our current IT consultant (2,000 shares).

 

In February 2012, we sold an aggregate of 8,156 shares of our restricted Common Stock to 10 individuals for $5.64 per share in a private offering resulting in proceeds to the Company of $46,000.  Persons purchasing shares included R. Michael Martin, our Executive Vice President of Business Development (621 shares), Ronald B. Seidel, our director (887 shares), Hunter L. Hunt, our former director (1,773 shares), and John R. Harris, our former director (887 shares), and Everett Gorton, the father of our Chief Executive Officer, Michael Gorton (355 shares).

 

In June 2012, we sold 147,929 shares of our restricted common stock to Steuben Investment Company II, L.P., a greater than 5% stockholder for an aggregate of $1,000,000 or $6.76 per share in a private transaction. The Company claims an exemption from registration afforded by Section 4(2) of and Rule 506 of the Securities Act since the foregoing issuance/grant did not involve a public offering, the recipient took the securities for investment and not resale, the Company took appropriate measures to restrict transfer, and the recipient was an “accredited investor”. No underwriters or agents were involved in the foregoing issuances and the Company paid no underwriting discounts or commissions.

 

During November 2012, the Company sold unsecured convertible notes in the aggregate amount of $17,000 to Jorge Aizcorbe, our consultant on Business Development matters ($5,000), Aaron Cother, who was then serving as CFO of the Company ($2,000), and Matthew Thompson, our employee ($10,000).  The convertible notes accrued interest at 12% per annum, were due in November 2013 and were convertible into shares of the Company’s common stock at maturity in the option of the holder at a conversion price of $6.80 per share.  As described below in May 2013, the conversion price of the notes was reduced to $4.00 per share and all of the notes and accrued interest of $1,024 were converted into shares of the Company’s restricted common stock.

 

In January 2013, the Company sold an unsecured convertible note in the aggregate amount of $100,000 to a private investor. The convertible note accrued interest at 12% per annum, was due in January 2014 and was convertible into shares of the Company’s common stock at maturity in the option of the holder at a conversion price of $6.80 per share.  As described below in May 2013, the conversion price of the note was reduced to $4.00 per share and the note and accrued interest of $6,000 was converted into shares of the Company’s restricted common stock.

 

During March 2013 the Company sold unsecured convertible notes in the aggregate amount of $21,000 to Michael Gorton, our Chief Executive Officer ($5,000), Kenneth G. Allen, our Chief Operations Officer ($5,000), R. Michael Martin, our Executive Vice President of Business Development ($2,000), and the wife of Mr. Gorton ($9,000). The convertible notes (as amended) accrued interest at 18% per annum, were due in March 2014 and were convertible into shares of the Company’s common stock at maturity in the option of the holder at a conversion price of $6.80 per share.  As described below in May 2013, the conversion price of the notes was reduced to $4.00 per share and all of the notes and accrued interest of $966 were converted into shares of the Company’s restricted common stock.

 

In May 2013, the conversion price of the unsecured convertible notes sold by the Company in November 2012, January 2013 and March 2013 was reduced to $4.00 per share and all of the notes totaling $138,000 and accrued interest thereon of $7,990 were converted into 36,498 restricted shares of the Company’s Common Stock.  Shares of our restricted common stock were issued to the following related parties in connection with the conversions: Michael Gorton, our Chief Executive Officer (1,308 shares), Kenneth G. Allen, our Chief Operations Officer (1,308 shares), R. Michael Martin, our Executive Vice President of Business Development (523 shares), the wife of Mr. Gorton (2,354 shares), Jorge Aizcorbe, our consultant on Business Development matters (1,325), Aaron Cother, who was then serving as CFO (530 shares) and Matthew Thompson, our employee (2,651 shares).  Additionally, in January 2013, a note held by the private investor was converted into common stock as well.

 

 

 

In May and September 2013, the Company granted options to purchase up to 132,000 shares of the Company’s common stock to members of the Company’s Board of directors and advisors to the Company.  The options have an exercise price ranging from of $4.00 to $6.80 per share, various vesting schedules not exceeding two years from the date of grant and a term of ten years (subject, where applicable, to the continued service of the optionholder with the Company).  Included in the grants were Hunter L. Hunt, our former director; Margaret Keliher, our director; Ronald B. Seidel, our director; and John R. Harris, our former director with each receiving options to purchase 18,000 shares including options to purchase 12,000 vesting immediately and the remaining 6,000 vesting over the following eight months; and Jeffrey M. Heller, our director and Brenda Jackson, our director, with each receiving options to purchase 18,000 shares vesting over the following 24 months. Each of the director's options has an exercise price of $4.00.

 

Effective June 14, 2013, the Company entered into a Subscription Agreement with Steuben Investment Company II, L.P.  Pursuant to the subscription agreement, Steuben purchased 727,273 shares of the Company’s common stock for an aggregate of $1,600,000 or $2.20 per share.  As additional consideration in connection with the subscription, the Company granted Steuben 545,455 warrants to purchase shares of the Company’s common stock with an exercise price of $4.00 per share and a term of 10 years.  The transaction is described in greater detail above under “Certain Relationships and Related Transactions”.  The Company claims an exemption from registration afforded by Section 4(2) of and Rule 506 of the Securities Act since the foregoing issuance/grant did not involve a public offering, the recipient took the securities for investment and not resale, the Company took appropriate measures to restrict transfer, and the recipient was an “accredited investor”. No underwriters or agents were involved in the foregoing issuances and the Company paid no underwriting discounts or commissions.

 

Effective June 17, 2013, we granted a warrant to purchase 37,763 shares of our common stock to Bridge Bank, National Association in connection with the acquisition of Powerhouse (as described in greater detail above under “Description of Business” – “Material Acquisitions” – “Powerhouse One”).  The warrant has an exercise price of $4.00 per share, cashless exercise rights, redemption rights providing the Company the right to redeem the warrant for $604,200, anti-dilution rights associated with offerings of equity securities, a term expiring on the first to occur, of the 10 year anniversary of the grant, the closing of the Company’s initial public offering (which is being affected pursuant to the Registration Statement of which this Prospectus is a part), or the liquidation of the Company (each a “Termination Event”), and the warrant is automatically exercised on a cashless basis upon a Termination Event.  The Company also provided the holder registration rights in connection with the grant of the warrant.

 

Effective June 17, 2013, we issued 11,503 shares of our restricted common stock valued at $4.00 per share or $46,010 to Vis Solis, Inc. and AstroSol, Inc., co-sellers in connection with the acquisition of Powerhouse (as described in greater detail above under “Description of Business” – “Material Acquisitions” – “Powerhouse One”).

 

In June 2014, the Company issued convertible notes of $250,000 each to two of its Board members, Messrs. Heller and Marmol, to fund deposits on potential future acquisitions. Such potential acquisitions remain subject to significant uncertainties including due diligence, obtaining construction and permanent financing, and negotiating PPAs, developer agreements, and interconnection agreements. The notes bore interest at a rate of 18% per year and matured on December 5, 2014, and all principal and interest was due at maturity. Principal and interest is payable in cash or shares of Common Stock, at the option of the holder, at a conversion price of $4.00 per share. The notes were secured pursuant to a security agreement by the Company's interest in the otherwise unencumbered net cash flow, if any, from the operations of its Powerhouse One subsidiary. The Company may prepay the notes at any time, but the holders of the notes were guaranteed to receive a minimum of six months interest on the notes.

 

On February 27, 2015 (made effective on the original maturity date), the notes were modified to extend the maturity date to September 30, 2015, to reduce the interest rate from 18% to 12% per annum, and to eliminate all collateral securing the notes. All other aspects of the notes remained unchanged.

 

 

 

On December 1, 2014, Michael Gorton, the Company's Chief Executive Officer, loaned to the Company pursuant to a convertible promissory note the amount of $130,000. The note initially matured on June 30, 2015, bore interest at a rate of 12% per annum, is convertible into shares of our Common Stock at a price of $6.00 per share, and was secured by a claim on proceeds, if any, of a solar project being acquired (PS IV). The notes can be prepaid at any time prior to maturity without penalty. On February 27, 2015, the note was modified to extend the maturity date to September 30, 2015, and eliminate all collateral securing the note. All other aspects of the note remained unchanged.

 

2013-2015 Private Placement Offering

 

From May 2013 through October 2014, we sold an aggregate of 1,345,295 shares of our restricted Common Stock (including 762,270 already described above) to 15 "accredited investors" (individuals and trusts) at prices ranging from $2.20 to $4.00 per share (weighted average of $3.03) resulting in total proceeds to the Company of $4,072,090 in aggregate. Purchasers in the offering included Guillermo Marmol, our director (50,000 shares); Jeffrey M. Heller, our director (100,000 shares); Brenda Jackson, our director (75,000 shares); Garrett Boone, our director (50,000 shares); and the wife of our CFO, David Pilotte (5,000 shares). All shares sold since the original S-1 Registration Statement was filed (December 23, 2013) were to officers, directors, existing stockholders, or others with which the Company had a pre-existing relationship.

 

Beginning in November 2014, we sold an aggregate of 233,169 shares of our restricted common stock to seven of our Board members, two current investors, our former CFO, a close relative of our CEO, two business partners of an existing investor, and an investment fund. Each sale was at a price of $6.00 per share resulting in total proceeds to the Company of $1,399,001 in aggregate. Board members participating in the offering included Guillermo Marmol (16,667 shares); Jeffrey M. Heller (29,167 shares); Brenda Jackson (12,500 shares); Garrett Boone (834 shares); Ron Seidel (2,500 shares); Margaret Keliher (5,000 shares); and Michael Gorton (6,667 shares).

 

Short-term Debt

 

Effective March 2, 2015, we entered into a convertible loan agreement with Alpha Capital Anstalt ("Alpha") to borrow $1,250,000 (the "Loan"). The Loan is convertible into shares of Common Stock at a rate of $4.00 per share, bears interest at a rate of 8.0% per annum, all principal and interest is due on September 2, 2015, and the loan is secured by the assets of the Company and its subsidiaries (excluding Powerhouse One and all interest in its operations, its assets, and proceeds or distributions therefrom). The principal and accrued interest amounts on the Loan are convertible at any time into shares of Common Stock at a rate of $4.00 per share. In connection with the Loan, the Company also granted Alpha 234,375 warrants (the “Warrants”) exercisable at $6.00 per share, certain piggy-back registration rights, cashless exercise privileges and anti-dilution protection on both the Common Stock into which the Loan may convert and for which the Warrants may be exercised under the occurrence of certain events.

 

Series A Preferred

 

On May 6, 2015, the Company contracted to issue, in two separate tranches, up to 500,000 shares of its Series A Preferred to an unrelated investor at a purchase price of $4.00 per share, that will result in proceeds to the company of up to $2,000,000. The preferred shares have a dividend rate of 12% per annum and, along with accrued dividends, are convertible into shares of our Common Stock at a price of $4.00 per share at any time on or before the third day following the receipt of proceeds from the Company's current public offering. If the shares are not converted by the holder during that time, the Company shall redeem the shares at face value plus accrued dividends from the proceeds of the public offering. In connection with the issuance, the Company granted the holder warrants to purchase up to 375,000 shares of its Common Stock, also in two tranches, at a purchase price of $6.00 per share. Use of proceeds from the issuance is limited to repayment of a certain convertible note outstanding in the amount of $50,000, development of PS IV and PS V, and general corporate purposes. The Company agreed to deliver subordination agreements regarding convertible notes held by related parties, and the incurrence of additional debt or issuance of additional equity instruments superior to the Series A Preferred, the payment of dividends, or the repurchase of shares of our Common Stock is prohibited.

 

Re-pricing of Options

 

In June 2014, the Company re-priced 24,000 options granted to independent advisors between February 2012 and September 2012. The options, originally issued having exercise prices ranging from $5.64 to $6.84 per share, were re-priced to $4.00 per share. Because of the small change in inputs to the Black-Scholes model since they were initially issued (especially volatility), there was no expense recorded in connection with this action.

 

 

 

Option Issuances

 

2014

 

Pursuant to its 2014 Equity Incentive Plan, during 2014, the Company granted to its key executives, independent contractors, new Board members, and two advisors (including our former CFO), options to acquire 313,257 shares of its Common Stock. The options have an exercise price of $4.00 per share and have expiration dates of 5 years for the advisors and 10 years for key executives, independent contractors, and Board members. Vesting ranges from (i) immediately upon grant for non-employee executives and independent contractors with extended expiration privileges based upon their continued services to the Company, (ii) 24 months for Board members starting when they joined the Board, and (iii) 36 months for employees. All options were valued using the Black-Scholes options pricing model and resulted in an expense of $1,068,012 in the year ended December 31, 2014; $26,334 for each three-month period thereafter through December 31, 2015; $5,778 for each month from January 2016 through August 2016; and $2,778 for each month from September 2016 through August 2017.

 

2015

 

In February 2015, the Company granted 6,250 options to acquire shares of Common Stock having an exercise price of $6.00 per share, a 10-year term, and immediate vesting to each of five directors as a discretionary bonus. The options were valued using the Black-Scholes model and the resulting equity-based compensation expense included in general and administrative expenses for 2015 was $187,500. The Company also granted in February 2015 options to acquire 6,000 shares of Common Stock to each of two advisors. The options have an exercise price of $6.00 per share, immediate vesting, and expiration dates extending to 5-years based upon their continued service of two years from the grant date. The options were valued using the Black-Scholes model and the resulting equity-based compensation expense included in general and administrative expenses for 2015 was $72,000. Finally, the Company granted to a consultant in February 2015 options to acquire 6,250 shares of Common Stock. The options have an exercise price of $6.00 per share, immediate vesting, and expiration dates extending to 10-years based upon continued service of three years from the date of grant. The options were valued using the Black-Scholes model and the resulting equity-based compensation expense included in general and administrative expenses for 2015 was $37,500.

 

Exercise of Steuben Warrants

 

In November 2014, all 545,455 warrants held by Steuben Investment Company II, L.P. and described above were exercised by the holder in a cashless transaction as provided for in the warrant agreement. Based upon a share valuation of $6.00 per share determined by the Company's Board of Directors based upon concurrent issuances, the exercise of warrants to acquire 545,455 shares of Common Stock on a cashless basis resulted in a net issuance to Steuben of 181,818 shares of Common Stock. The final settlement of the liability upon exercise resulted in a gain of $32,239 recognized in 2014.

 

Exemption from Registration

 

Except as discussed specifically above, the Company believes that the issuances and grants of the restricted securities described above were exempt from registration pursuant to (a) Section 4(2) of the Securities Act; (b) Rule 506 of the Securities Act; and/or (c) Rule 701 of the Securities Act, and the regulations promulgated thereunder.  With respect to the transactions described above, no general solicitation was made either by us or by any person acting on our behalf. The transactions were all privately negotiated, and none involved any kind of public solicitation. No underwriters or agents were involved in the foregoing issuances and grants and the Company paid no underwriting discounts or commissions. The securities sold are subject to transfer restrictions, and the certificates evidencing the securities contain an appropriate legend stating that such securities have not been registered under the Securities Act and may not be offered or sold absent registration or pursuant to an exemption therefrom. All recipients (a) were “accredited investors” (b) either received adequate information about us or had access, through employment or other relationships, to such information, to make an informed investment decision regarding the securities; and/or (c) were officers and/or directors of the Company. In regard to the Rule 701 issuances, the common stock shares and where applicable, options, were issued and granted pursuant to written compensatory plans or arrangements with our employees, directors and consultants.

  

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

(a) Exhibits

 

See “Exhibit Index” below, which follows the signature page to this Registration Statement.

 

 

ITEM 17. UNDERTAKINGS

 

(a) The undersigned registrant hereby undertakes:

 

(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:

 

(i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933;

 

(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) under the Securities Act of 1933 if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement.

 

(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;

 

(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

 

(4) That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser:

 

The information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or 497(h) under the Securities Act of 1933 shall be deemed to be part of this registration statement as of the time it was declared effective.

 

(5) That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities:

 

(b) The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:

 

(i) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424 under the Securities Act of 1933;

 

(ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;

 

(iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and

 

(iv) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.

 

 

 

(c) For determining any liability under the Securities Act of 1933, treat each post-effective amendment that contains a form of prospectus as a new registration statement for the securities offered in the registration statement, and that offering of securities at that time as the initial bona fide offering of those securities.

 

(d) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

 

(e) Each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any document immediately prior to such date of first use.

 

  

SIGNATURES

 

In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all the requirements of filing on Form S-1 and authorized this Amendment No. 5 to Registration Statement to be signed on its behalf by the undersigned in the City of Dallas, Texas, on June 15, 2015

 

PRINCIPAL SOLAR, INC.

By: /s/ Michael Gorton

Michael Gorton

Chief Executive Officer

(Principal Executive Officer)

 

By: /s/ David N. Pilotte

David N. Pilotte

Chief Financial Officer

(Principal Financial/Accounting Officer)

 

Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities indicated on June 15, 2015.

 

/s/ Michael Gorton	/s/ *
Michael Gorton	Brenda Jackson
Chief Executive Officer	Director
(Principal Executive Officer) and Chairman
/s/ David N. Pilotte	/s/ *
David N. Pilotte	Margaret Keliher
Chief Financial Officer	Director
(Principal Financial/Accounting Officer)
/s/ *	/s/ *
Ronald B. Seidel	Guillermo Marmol
Director	Director
/s/ *	/s/ *
Jeffrey M. Heller	Garrett Boone
Director	Director
/s/ *
Scott Olson
Director

 

* Executed on June 15, 2015, by Michael Gorton as attorney-in-fact pursuant to the power of attorney granted in connection with Amendment No. 1 to the Registration Statement on Form S-1 (File: 333-203075) filed on May 19, 2015

 

  

EXHIBIT INDEX

 

Exhibit Number	Description of Exhibit
1.1(14)	Form of Underwriting Agreement with Northland Securities, Inc.
2.1(1)	Exchange Agreement (March 7, 2011), Principal Solar (Texas), the Company, the shareholders of Principal Solar (Texas) and Pegasus Funds LLC
3.1(13)	Certificate of Incorporation (Delaware), as amended on May 6, 2015, and conformed
3.2(13)	Certificate of Designation of Series A Preferred (May 15, 2015)
3.3(12)	Bylaws
4.1(1)	Form of Common Stock Certificate
4.2(5)	2014 Equity Incentive Plan (June 11, 2014)
4.3(6)	8% Senior Secured Convertible Debenture due September 2, 2015, with Alpha Capital Anstalt (March 2, 2015)
4.4(6)	Common Stock Purchase Warrant with Alpha Capital Anstalt (March 2, 2015)
4.5(10)	Binding Term Sheet for Issuance of Series A Preferred (May 6, 2015)
4.6(13)	Warrant Agreement with SMCDLB, LLC (May 15, 2015)
5.1(15)	Opinion of Andrews Kurth LLP
10.1(1)	Employment Agreement with Michael Gorton (January 1, 2012)
10.2(1)	Form of Nonstatutory Stock Option Agreement
10.3(1)	Form of Nonstatutory Stock Option Grant Notice
10.4(1)	Employment Agreement with R. Michael Martin
10.5(1)	Common Stock Warrant to Purchase Shares of Common Stock (Bridge Bank) (June 17, 2013)
10.6(1)	Warrant to Purchase Shares of Common Stock (Steuben Investment Company II, L.P.) (June 14, 2013)
10.7(1)	Registration Rights Agreement (Steuben Investment Company II, L.P.) (June 14, 2013)
10.8(1)	Purchase and Sale Agreement (Powerhouse One, LLC Acquisition) (December 31, 2012)
10.9(1)	First Amendment to Purchase and Sale Agreement (Powerhouse One, LLC Acquisition) (June 2013)
10.10(1)	Loan and Security Agreement (Powerhouse One, LLC Acquisition) (June 2013)
10.11(1)	Pledge and Security Agreement dated June 10, 2013, by and between the Company, Vis Solis, Inc. and Astrosol, Inc. in favor of Bridge Bank
10.12(1)	Guaranty dated June 10, 2013 by the Company in favor of Bridge Bank
10.13(1)	Consulting Agreement with Carlyle Capital Markets, Inc. (December 4, 2013)

 

 

 

10.14(2)	Letter Agreement with Steuben Investment Company II, L.P. Regarding Registration Rights Agreement Penalties (February 5, 2014)
10.15(2)	Professional Services Agreement with DNP Financial, LLC (January 14, 2014)
10.16(2)	Form of Generation Partners Amended and Restated Pilot Extended Participation Agreement (power purchase agreement)
10.17(3)	Form of Convertible Corporate Promissory Note (Secured) with Messrs. Heller and Marmol (June 5, 2014)
10.18(3)	Form of Corporate Security Agreement with Messrs. Heller and Marmol (June 5, 2014)
10.19(4)	Amendment #1 to Registration Rights Agreement (October 7, 2014)
10.20(5)	Membership Interest Purchase Agreement with Innovative Solar Systems, LLC re Innovative Solar 46, LLC (November 6, 2014)
10.21(5)	Warrant Exercise Agreement with Steuben Investment Company II, L.P. (November 1, 2014)
10.22(5)	Form of Note and Security Modification Agreement re Corporate Convertible Promissory Note (Secured) with Messrs. Heller and Marmol (December 5, 2014)
10.23(5)	Form of Stock Option Notice and Agreement
10.24(6)	Securities Purchase Agreement with Alpha Capital Anstalt (March 2, 2015)
10.25(6)	Security Agreement with Alpha Capital Anstalt (March 2, 2015)
10.26(6)	Subsidiary Guaranty with Alpha Capital Anstalt (March 2, 2015)
10.27 (9)	Engineering, Procurement, and Construction Agreement between Principal Solar, Inc. and Alpha Technologies Services (April 27, 2015)
10.28 (11)	Membership Interest Purchase Agreement with Innovative Solar Systems, LLC re Innovative Solar 42, LLC (March 2, 2015)
10.29(13)	Purchase and Sale Agreement with SMCDLB, LLC re Series A Preferred Stock (May 15, 2015)
10.30(13)	Warrant to Purchase Common Stock issued to SMCDLB, LLC (May 15, 2015)
10.31(13)	Form of Note and Security 2nd Modification Agreement re Corporate Convertible Promissory Note (Secured) with Messrs. Gorton, Heller, and Marmol (May 11, 2015)
10.32(15)	Binding Term Sheet re Joint Development Agreement by and between Principal Solar, Inc. and Energy Surety Partners, LLC dated June 5, 2015.
10.33(16)	Binding Term Sheet by and between Principal Solar, Inc. and Innovative Solar Systems, LLC dated June 9, 2015
14.1(7)	Code of Business conduct (March 10, 2015)
21.1(15)	Subsidiaries of the Registrant
23.1*	Consent of Whitley Penn LLP
23.2(15)	Consent of Andrews Kurth LLP (included in Exhibit 5.1)
24.1 (13)	Power of Attorney set forth on the signature page of this Registration Statement.
99.1(1)	Glossary
101.INS***	XBRL Instance
101.SCH***	XBRL Taxonomy Extension Schema
101.CAL***	XBRL Taxonomy Extension Calculation
101.DEF***	XBRL Taxonomy Extension Definition
101.LAB***	XBRL Taxonomy Extension Labels
101.PRE***	XBRL Taxonomy Extension Presentation

 

 

 

* Filed herewith.

** To be filed by amendment.

*** XBRL information is furnished and not filed herewith for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

(1) Filed as exhibits to the Company’s Registration Statement on Form S-1 (File: 333-193058), filed with the Securities and Exchange Commission on December 23, 2013, and incorporated herein by reference.

 

(2) Filed as exhibits to the Company’s Registration Statement on Form S-1/A, Amendment No. 1 (File: 333-193058), filed with the Securities and Exchange Commission on May 2, 2014, and incorporated herein by reference.

 

(3) Filed as exhibits to the Company’s Registration Statement on Form S-1/A, Amendment No. 2 (File: 333-193058), filed with the Securities and Exchange Commission on July 17, 2014, and incorporated herein by reference.

 

(4) Filed as exhibits to the Company’s Registration Statement on Form S-1/A, Amendment No. 4 (File: 333-193058), filed with the Securities and Exchange Commission on October 20, 2014, and incorporated herein by reference.

 

(5) Filed as exhibits to the Company’s Registration Statement on Form S-1/A, Amendment No. 5 (File: 333-193058), filed with the Securities and Exchange Commission on December 22, 2014, and incorporated herein by reference.

 

(6) Filed as exhibits to the Company’s Current Report on Form 8-K/A (File: 333-193058), filed with the Securities and Exchange Commission on March 5, 2015, and incorporated herein by reference.

 

(7) Filed as an exhibit to the Company's Annual Report on Form 10-K (File: 333-193058), filed with the Securities and Exchange Commission on March 17, 2015, and incorporated herein by reference.

 

(8) Reserved.

 

(9) Filed as an exhibit to the Company's Current Report on Form 8-K (File: 333-193058) filed with the Securities and Exchange Commission on May 1, 2015, and incorporated herein by reference.

 

(10) Filed as an exhibit to the Company's Current Report on Form 8-K (File: 333-193058) filed with the Securities and Exchange Commission on May 12, 2015, and incorporated herein by reference.

 

(11) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q (File: 333-193058) filed with the Securities and Exchange Commission on May 13, 2015, and incorporated herein by reference.

 

(12) Filed as exhibit 3.2 to the Company’s Registration Statement on Form S-1 (File: 333-193058), filed with the Securities and Exchange Commission on December 23, 2013, and incorporated herein by reference.

 

(13) Filed as Exhibits to the Company’s Registration Statement Filed on Form S-1/A, Amendment No. 1 (File: 333-203075), filed with the Securities and Exchange Commission on May 19, 2015.

 

(14) Filed as Exhibits to the Company’s Registration Statements on Form S-1/A, Amendment No. 2 (File: 333-203075), filed with the Securities and Exchange Commission on May 21, 2015.

 

(15) Filed as Exhibits to the Company's Registration Statement on Form S-1/A, Amendment No. 3 (File: 333-203075), filed with the Securities and Exchange Commission on June 8, 2015.

 

(16) Filed as an Exhibit to the Company’s Registration Statement on Form S-1/A, Amendment No. 4 (File: 333-203075), filed with the Securities and Exchange Commission on June 11, 2015.

Exhibit 23.1

  

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

  

We consent to the inclusion in this Registration Statement on Form S-1/A (Amendment No. 5 to the Registration Statement filed on Form S-1, File No. 333-203075) of Principal Solar, Inc. of our report dated March 12, 2015, relating to our audits of the consolidated financial statements of Principal Solar, Inc. as of and for the years ended December 31, 2014 and 2013. We also consent to the reference to our firm under the heading “Experts” in this Registration Statement on Form S-1/A.

 

/s/ Whitley Penn LLP

 

Dallas, Texas

June 15, 2015