Principal Solar, Inc. - Annual Report: 2015 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2015

Commission File No. 333-193058

PRINCIPAL SOLAR, INC.

(Exact name of registrant as specified in its charter)

2560 King Arthur Blvd Suite 124 PMB 65

Lewisville, TX 75056 

(Address of principal executive offices)

(855) 774-7799

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act

None

Securities registered pursuant to Section 12(g) of the Act

None

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐

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

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

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates was $2,135,680, computed by reference to the price at which the common equity was last sold. For purposes of the foregoing calculation, we have assumed that only directors, executive officers, and holders of 10% or more of the issuer’s common capital stock are affiliates.

The number of shares outstanding of the registrant’s common stock as of April 8, 2016, was 5,564,258.

Documents Incorporated By Reference

None

Table of Contents

INTRODUCTORY COMMENT

In this report, the terms "we," "us," "our," "Company," “PSWW”, “PSI”, and “Principal Solar” refer to Principal Solar, Inc., a Delaware corporation, and its subsidiaries.

FORWARD-LOOKING STATEMENTS

When used in this report, the words “may,” “will,” “expect,” “anticipate,” “continue,” “estimate,” “intend,” and similar expressions are intended to identify forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) regarding events, conditions and financial trends which may affect the Company’s future plans of operations, business strategy, operating results, and financial position. Such statements are not guarantees of future performance and are subject to risks and uncertainties and actual results may differ materially from those included within the forward-looking statements for various reasons, including those identified under Risk Factors included herein. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date made. Except as required under federal securities laws and the rules and regulations of the United States Securities and Exchange Commission, the Company does not undertake, and specifically declines, any obligation to update any of these statements or to publicly announce the results of any revisions to any forward-looking statements after the distribution of this report, whether as a result of new information, future events, changes in assumptions, or otherwise.

PART I

Corporate Information

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.

Business

Historically, our business plan has been to acquire, build, own, and operate profitable, large-scale solar generation facilities (collectively, "solar development"). The Company has failed to secure sufficient project financing to build large-scale solar generation facilities as planned, and is not considering any new large utility-scale solar projects at this time. Currently, the Company is negotiating to assign its interest in its Sunrise V (IS 42) project in order to create liquidity or otherwise remove obligations of the Company regarding current projects. The consummation of any agreement is subject to entering into a separate construction contract, and final closing is subject to the buyer securing financing and other conditions, some of which may be beyond the Company’s control. If all of the conditions are satisfied, the consummation of the assignment is expected to occur in the second quarter of 2016. See discussion below under "Disposition of Principal Sunrise V". The Company is also considering disposition of its remaining development projects acquired in partnership with Arowana International Limited ("Arowana"). See discussion below under “Additional Projects”. Successful disposition of one or more of the Company's projects is necessary to the Company's ability to meet its obligations coming due during 2016. Failure to complete the dispositions, or complete them on expected terms, could cause the Company to lose its cumulative investment in one or more of the projects and cause it to cease operations.

Resulting from the expected and considered dispositions, the Company expects to make changes to its leadership team, including the expected departure concurrent with this filing of its Chief Financial Officer, Chief Operating Officer, and Chief Technology Officer whose services may remain available to us for a time through a transition services agreement with their new employer, VivoPower USA, LLC, an affiliate of Arowana.

Recent Events

 Disposition of Principal Sunrise V (aka IS 42)

The Company is negotiating to assign its interest in Principal Sunrise V to a buyer contingent upon the assignee's ability to secure the necessary tax equity and debt financing (approximately $108 million combined) to build and operate the project. Tax equity is defined as temporary equity invested whose primary source of return is monetizing the tax attributes of the underlying investment ("tax equity"). The parties have selected a date of June 30, 2016, to secure the financing and close the transaction, and such date may be extended by the parties. If completed, under the assignment agreement the Company would be repaid its cumulative investment through the closing date ($5.1 million at March 31, 2016) and a separate development fee up to $4.0 million. As a part of the assignment, the Company guaranteed the assignee a 10% after-tax rate of return, with any deficit being deducted from the development fee to be received by the Company. Due to its variable nature, the ultimate development fee received by the Company is expected to range between $0 and $4 million to be paid incrementally between closing and commercial operation date ("COD") as the costs to construct the project become more certain. As a part of the transaction, the assignee has agreed to fund a portion of the development costs between signing and closing through a loan to the Company of up to $333 thousand, and the project seller has agreed to be paid their balance due at closing, both lessening the monthly cash burden to the Company.

There can be no assurance the assignment of Principal Sunrise V will be closed or closed upon the terms described above, and failure to close or to close timely would result in a loss of the Company's investment to date.

Additional Projects

On August 20, 2015, the Company issued a promissory note and security agreement to Arowana in the original principal amount of $1,600,000. The note matures on December 31, 2016, and bears simple interest at the rate of 6% per annum (the "Arowana Note"). The note is convertible, at the option of the holder, into membership interests in our Principal Sunrise V project based upon a valuation not yet determinable.

The Company used the proceeds from the Arowana Note to make investments in two additional projects totaling 68MW AC ("Additional Projects"). The first of the two projects, 34.2MW AC in North Carolina, should begin construction in the second quarter of 2016 and is expected to be completed in the fourth quarter of 2016. The second of the two projects, 33.8 MW AC also in North Carolina, is approximately 6 weeks behind the first. The Additional Projects serve as collateral for the Company’s obligations under the Arowana Note, which is otherwise unsecured and non-recourse to the Company.

Arowana continues to fund the development costs of the Additional Projects and, at March 31, 2016, the cumulative investment in the Additional Projects totaled $7.9 million, and the balance of the Arowana Note was $8.0 million, including interest. There can be no assurance Arowana will continue funding the two projects and failing to do so could, depending upon the completion, timing, and proceeds from the assignment of Principal Sunrise V, cause the related power purchase agreements to be in default, resulting in a loss of all amounts invested to date.

White Papers, Standards, and Thought Leadership

Over the past four 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. 

Emerging Growth Company

We are and we will remain an "emerging growth company" as defined under the Jumpstart Our Business Startups Act (the “JOBS Act”), 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 Securities and Exchange Act of 1934, as amended (the “Exchange Act”). 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.

Pursuant to Section 102 of the JOBS Act, we have provided reduced executive compensation disclosure and have omitted a compensation discussion and analysis from this report.

In addition, Section 107 of the JOBS Act 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 of 1933, as amended (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.

Risks Relating to Our Business and Our Industry

Our business is subject to numerous risks and uncertainties, including those listed below. Some of these risks include risks associated with:

Our future liquidity and ability to continue operations is dependent upon our collection of current amounts receivable.

On August 11, 2015, the Company assigned its contractual rights to acquire Principal Sunrise IV to Carolina Energy Partners II. The balance of proceeds due to the Company of $1.6 million is due at the project's commercial operation date, expected in early May 2016. Failure to collect that amount would jeopardize the Company's ability to meet its near-term obligations.

Our future liquidity and ability to continue operations is dependent upon the disposition of remaining development assets.

The current negotiation to assign Principal Sunrise V, if successful, is expected to result in the Company's reimbursement of its cumulative investment ($5.1 million at March 31, 2016) and a separate development fee expected to be between $0 and $4.0 million. Completion of the disposition of the existing terms is key to the Company's ability to meet its obligations coming due during 2016. Failure to complete the disposition, or complete it upon terms or timing different than expected, could cause the Company to lose its cumulative investment in the project and cause the Company to cease operations.

Our ability to build a sustainable continuing operation is dependent on our ability to execute on a new business strategy.

Potentially disposing of its current development assets, and not considering any new large utility-scale solar development assets, makes the Company's ability to continue as a going concern dependent on our ability to develop, adopt, finance, and execute on a new business strategy.

The sale of the Company's Powerhouse One subsidiary leaves us with no meaningful source of revenue.

Historically, more than 96% of our consolidated power generation revenue arose from our Powerhouse One solar installation in Fayetteville, Tennessee. With the sale of Powerhouse One in August 2015 the Company has eliminated its primary source of revenue and is dependent upon the remaining payments from the assignment of its contractual rights in Principal Sunrise IV and the potential proceeds from the sale of Principal Sunrise V to maintain its business.

General Risks

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

The Company has consistently experienced 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.

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 investors 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.

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 possess significant influence over the Company.

Our executive officers and directors 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 influence by the executive officers and directors, gives them substantial ability to determine our future as a business.  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.

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 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. 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:

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.

Our Common Stock is deemed a “penny stock” which makes it more difficult for our investors to sell their shares.

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.

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 current 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 current 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 15,000,000 shares of common stock, $0.01 par value per share, and 2,000,000 shares of preferred stock, $0.01 par value per share (“Preferred Stock”). As of the date of this filing, we have 5,564,258 shares of common stock issued and outstanding and no preferred shares outstanding.  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 2,000,000 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.

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.

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.

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 direct current that is operating at 120/208 volts providing approximately 124,000 kilowatt hours of electricity per year. The underlying lease dated September 2009 has a term of 25 years and two 25-year renewal options. There are no lease payments in the lease.

The Company maintains no offices, but has access to shared conference facilities upon request.   We believe maintaining an office is not material to the operations of the business.

Legacy Liabilities

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, "Pegasus") 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 regarding its indemnification of the Company in regards 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. The cancellation of 50,000 of the shares was effected in December 2015, and the remaining 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. who, prior to the exchange of shares, 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.

Carlyle Capital Markets, Inc.

In December 2013, the Company engaged Carlyle Capital Markets, Inc. and its affiliate, Friedman, Luzzatto & Co. (together "CCMI"), to assist it in identifying sources of and securing financing for its solar projects to be built. CCMI is a firm of three professionals having its sole office in Dallas, Texas and, though having a similar name, is not affiliated with the well-known and respected firm, The Carlyle Group, headquartered in Washington, D.C.

In more than 20 months, CCMI was unable to arrange financing of any type or amount and was unable to even generate enough interest to produce a financing proposal from a prospective investor or lender. With CCMI failing its promise, the Company raised money on its own to maintain operations and further its solar development efforts. Despite CCMI's failure to secure even a single financing proposal (let alone a proposal acceptable to the Company), and despite CCMI having no involvement in non-project related financing efforts undertaken by the Company, CCMI claimed an entitlement to extensive fees.

Initially set for arbitration in February 2016, the parties mediated the matter instead in November 2015 and settled with the Company paying CCMI $1.7 million in connection with the August 2015 assignment of Principal Sunrise IV. Funds to pay the settlement came from the $2.5 million escrow Deposit established concurrent with the assignment of the project. Additionally, the Company agreed to pay CCMI 10% of any proceeds from financing or disposition of Principal Sunrise V (aka IS 42), should such event take place on or before July 30, 2016. The Company has accrued a Commission payable of $600 thousand at December 31, 2015, based upon its expected proceeds from the disposition of Principal Sunrise V, and funds to pay this later amount are expected to come from the disposition of Principal Sunrise V.

Vis Solis, Inc.

In November 2014, the Company entered into a services agreement (the “Services Agreement”) with Vis Solis, Inc. ("VIS"), the minority interest holder of our former Powerhouse One subsidiary, wherein VIS would refer to the Company "economically viable solar generation projects" for acquisition; identify and source engineering procurement and construction firms; identify and source operations and maintenance contractors; among other things necessary to build, own, and operate solar projects. In exchange for its services, VIS would be compensated from the construction and permanent financing arranged by the Company based upon the installed kilowatts of each project the Company accepted, took under contract, and put into commercial operation. Any compensation owing to VIS from the Company under the Services Agreement would be due either at the project’s "Financial Close" or its COD.

In August 2015, the Company assigned its contractual rights to develop, finance, and put into commercial operation its project Principal Sunrise IV to Carolina Energy Partners II, LLC (“CEP”) as the Company had been unable to arrange either construction or permanent financing for this project.

In January 2016, the Company and VIS mediated the matter and reached a settlement wherein the Company will pay VIS $900 thousand to settle all matters between the parties and terminate the original agreement. As a part of its Gain on sale and assignment of assets, the Company has accrued a Commission payable of $900 thousand at December 31, 2015, and funds to pay such amount are expected to come from the earlier of COD of Principal Sunrise IV (upon which the Company expects to receive $1.6 million) or the disposition of Principal Sunrise V, if any.

TCH Principal Solar, LP

In March 2015, TCH Principal Solar, LP ("TCH") made two equity investments in our Common Stock (March 5th and 25th) of $500 thousand each. In September 2015, it notified the Company it had realized the Company had completed an issuance of debt securities to Alpha Capital Anstalt, including warrants, immediately before its first equity investment in March and that TCH wanted an "equal deal" despite the disparity of security instruments and other terms. The Company responded to the notice with a list of questions and such questions went unanswered by TCH.

In January 2016, TCH demanded mediation to resolve the matter and the mediation occurred on March 3, 2016. Though not final, the parties have tentatively agreed, subject to appropriate documentation, the Company would pay TCH an amount of $300 thousand and 10% of the proceeds from the disposition of Principal Sunrise V, if and when such occurs, with the total payment not to exceed $800 thousand. The Company has accrued an $800 thousand Mediation settlement at December 31, 2015, and funds to pay such amount are expected to come from proceeds from the disposition of Principal Sunrise V.

PART II

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, subject to large swings in trading price, and are only traded on a sporadic and limited basis.

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. On May 6, 2015, the Company completed a 1:4 reverse stock split of its outstanding common stock.  Unless otherwise stated or the context would require otherwise, all share amounts disclosed throughout this Annual Report retroactively take into account the Reverse Split.

Stockholders

As of April 8, 2016, there were 207 record holders of our Common Stock.

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.

Sales of Unregistered Securities

None

Shares Authorized for Issuance Under Equity Compensation Plans

The following table provides information as of December 31, 2015, regarding the 2014 Equity Incentive Plan under which equity securities are authorized for issuance:

Comparison of Operating Results

Year Ended December 31, 2015 and 2014

(all amounts rounded)

Power generation revenue was $483 thousand in 2015 compared to $975 thousand in 2014, a decrease of $492 thousand; and total cost of revenues was $278 thousand compared to $553 thousand in 2014, a decrease of $275 thousand. Both decreases are due primarily to the sale of our Powerhouse One subsidiary in August 2015 (effective July 1, 2015).

The increase in general and administrative expenses of approximately $168 thousand was comprised of:

Results of operations were further impacted by the following significant items:

Due to movements in the price of the Company's stock, the withdrawal of a public offering, and uncertainty surrounding the Company's future prospects, our independent valuation firm estimated a decline at September 30, 2015, in the value of the warrants issued to Alpha Capital Anstalt in connection with the March 2, 2015, issuance of debentures. As a result, the value of the derivative liability was reduced to zero and the Company recorded a gain of $1.2 million in the year ended December 31, 2015. Because all principal and interest pursuant to the debentures was repaid in August 2015, and the element of the debt giving rise to the derivative liability was eliminated, no future valuation adjustments will be made.

Comparison Of Balance Sheets

December 31, 2015 to December 31, 2014

(all amounts rounded to the nearest thousand)

Significant changes in the balance sheet between December 31, 2015, and December 31, 2014, include the following:

Liquidity and Capital Resources

Sources of Liquidity and Trends In Liquidity

In August 2015, the Company sold its primary source of revenue, Powerhouse One representing 96% of its historical revenues. Also in August 2015, the Company assigned its interest in its most advanced solar project then under development, Principal Sunrise IV. Proceeds from these two transactions, approximately $11.6 million, was used to repay debts, repay other current obligations, fund the continued development of Principal Sunrise V, and fund ongoing administrative needs. Still, the company has significant negative working capital.

Stemming from its assignment of Principal Sunrise IV in August 2015, the Company is owed $1.6 million at COD from the Assignee. Latest estimates target COD in early May 2016.

The Company is negotiating to assign its interest in Principal Sunrise V to a buyer contingent upon the assignee's ability to secure the necessary tax equity and debt financing (approximately $108 million combined) to build and operate the project. Tax equity is defined as temporary equity invested whose primary source of return is monetizing the tax attributes of the underlying investment ("tax equity"). The parties have selected a date of June 30, 2016, to secure the financing and close the transaction, and such date may be extended by the parties. If completed, under the assignment agreement the Company would be repaid its cumulative investment through the closing date ($5.1 million at March 31, 2016) and a separate development fee up to $4.0 million. As a part of the assignment, the Company guaranteed the assignee a 10% after-tax rate of return, with any deficit being deducted from the development fee to be received by the Company. Due to its variable nature, the ultimate development fee received by the Company is expected to range between $0 and $4 million to be paid incrementally between closing and commercial operation date ("COD") as the costs to construct the project become more certain. As a part of the transaction, the assignee has agreed to fund a portion of the development costs between signing and closing through a loan to the Company of up to $333 thousand, and the project seller has agreed to be paid their balance due at closing, both lessening the monthly cash burden to the Company.

There can be no assurance the assignment of Principal Sunrise V will be closed or closed upon the terms described above, and failure to close or to close timely would result in a loss of the Company's investment to date.

The above two items represent the Company's total expected near-term funding, against which settlements, debt repayment, and other obligations range between $3.2 and $4.5 million leaving the Company with funds estimated to range between $2.0 million and $7.3 million to potentially develop and execute a new business strategy. Unlike in prior periods, the Company considers it unlikely that it will raise additional funds through the sale of debt or equity securities in the near term.

Off-Balance Sheet Arrangements

Principal Sunrise V (aka IS 42)

On March 2, 2015, 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 42, LLC ("IS 42"), the owner of a 72.9mw AC solar project to be built in Fayetteville, North Carolina. 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 between execution of the MIPA and the financial close, and a total of $1.5 million has been paid to date. As a part of the potential disposition of IS 42, the seller has agreed to defer all remaining payments to a cumulative amount of 90% of the purchase price to financial close, with the remaining 10% paid at COD. Failure by the Company to make any of the future payments may result in the loss of all payments made to date.

The financial statements and schedules are listed in Part IV, Item 15 of this Form 10-K and are incorporated by reference herein.

Disclosure Controls and Procedures

Disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized, and reported, within the time period specified in the SEC's rules and forms and is accumulated and communicated to the Company's management, as appropriate, in order to allow timely decisions in connection with required disclosure.

Evaluation of Disclosure Controls and Procedures

The Company's principal executive officer and its principal financial officer carried out an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2015, pursuant to Exchange Act Rule 13a-15. Such disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company is accumulated and communicated to the appropriate management on a basis that permits timely decisions regarding disclosure. Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded the Company's disclosure controls and procedures as of December 31, 2015, were effective.

Management's Report On Internal Control Over Financial Reporting 

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). The Company's internal control over financial reporting includes those policies and procedures that:

In connection with the preparation of our annual financial statements, we have assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or the COSO Framework (2013). Our assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of those controls.

Based upon our evaluation, we have determined that, as of December 31, 2015, there were material weaknesses in our internal control over financial reporting. As defined by the Public Company Accounting Oversight Board (United States) Auditing Standard No. 5, a material weakness is a deficiency or a combination of deficiencies, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected. The material weaknesses identified during management’s assessment were (i) a lack of segregation of duties to ensure adequate review of financial transactions, (ii) a lack of written policies and procedures surrounding the accumulation and summarization of financial transactions, and (iii) a lack of documentation evidencing the controls that do exist were operating effectively. In light of these material weaknesses, management has concluded that, as of December 31, 2015, the Company did not maintain effective internal control over financial reporting.

During 2015, our accounting staff consisted of a single individual, our Chief Financial Officer, and an outsourced accounting function. Except for purposes of building and maintaining an environment of strong internal controls over financial reporting, our business model does not require an accounting staff beyond two or three individuals. As such, the Company may never achieve an effective control environment completely lacking of material control weaknesses.

Changes In Internal Control Over Financial Reporting

There were no changes in our internal controls over financial reporting during the fourth quarter of the year ended December 31, 2015, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls

The Company’s disclosure controls and procedures provide the Company’s Chief Executive Officer and Chief Financial Officer with reasonable assurances that the Company’s disclosure controls and procedures will achieve their objectives. However, the Company’s management does not expect that the Company’s disclosure controls and procedures or the Company’s internal control over financial reporting can or will prevent all human error. A control system, no matter how well designed and implemented, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Furthermore, the design of a control system must reflect the fact that there are internal resource constraints, and the benefit of controls must be weighed relative to their corresponding costs. Because of the limitations in all control systems, no evaluation of controls can provide complete assurance that all control issues and instances of error, if any, within the Company’s company are detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur due to human error or mistake. Additionally, controls, no matter how well designed, could be circumvented by the individual acts of specific persons within the organization. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated objectives under all potential future conditions.

We are a smaller reporting company and are required to comply with the internal control reporting and disclosure requirements of Section 404 of the Sarbanes-Oxley Act for fiscal years ending on or after July 15, 2007. Although we are working to comply with these requirements, we have limited financial personnel making compliance with Section 404 - especially with segregation of duty control requirements – very difficult, if not impossible, and cost prohibitive. While the SEC has indicated it expects to issue supplementary regulations easing the burden of Section 404 requirements for small entities like us, such regulations have not yet been issued.

Attestation Report of the Independent Registered Public Accounting Firm

This report does not include an attestation report of our independent registered public accounting firm regarding our internal controls over financial reporting. Under SEC rules, such attestation is not required for smaller reporting companies.

PART III

Directors And Executive Officers

Directors are elected to hold office for a term of two years, until the next applicable 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 had assembled a leadership team with a strong mix of senior executive experience across energy, consulting, procurement, corporate development, technology, sales and marketing, and that leadership is expected to change.

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.

* Resigned effective concurrently with this filing.

Executives

Michael Gorton, Chief Executive Officer

Mr. Gorton has served as our Chief Executive Officer 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.

Directors

Michael Gorton – Director (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 historic strategy.

Margaret Keliher, Director

Judge Keliher has been an independent director of the Company since March 2011, chairs the Audit Committee, and is a financial expert as defined in Section 407 of the Sarbanes-Oxley Act of 2002.

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 been an independent 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 an independent 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 an independent director of the Company since October 2013. Ms. Jackson 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 an independent 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 is a Director of Foot Locker, Inc., chairs their Audit Committee, and serves on their Finance and Strategic Planning and Executive Committees. He also serves on the Board of The Vitamin Shoppe and serves on its Nomination and Governance Committee.

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.

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:

Independence of Directors

Even though the Company is not currently required to maintain independent directors, management believes that, with the exception of Mr. Gorton, 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 Chairperson, Ms. Keliher, and Messrs. Heller and Seidel. While we are not required to so qualify, 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

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 Chairperson, Ms. Jackson, and Mr. Marmol. While we are not required to so qualify, 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.

Board and Committee Meetings

The Board met 25 times in 2015, and no member of the Board attended fewer than 75% of the meetings. The Compensation Committee and the Audit Committee each met once during 2015.

Code of Business Conduct

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

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., 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.

Indemnification

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.

We have purchased 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.

Stockholder Communications

Any stockholders wishing to communicate directly with one or more of the Directors can do so by addressing such communication to Michael Gorton, Chief Executive Officer, at the address on the cover page of this report. All such communications will be forwarded promptly to all Board members.

Summary Compensation Table

The following summary compensation table indicates the cash and non-cash compensation earned during the fiscal years ended December 31, 2015, 2014 and 2013 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.

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.

Our current policy is to compensate directors with a grant of options to acquire 18,000 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. Options to purchase 18,000 shares of our Common Stock were granted to each of two Directors upon their re-election in 2015.

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) $22,000 per month ($264,000 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. Mr. Gorton's current base compensation is $288,000 per year.

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 $16,000 per month ($192,000 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. Mr. Martin's current base compensation is $216,000 per year.

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. DNP and the Company have since modified the agreement providing for a fixed retainer of $30,000 per month.

Compensation Discussion and Analysis

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

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:

The following table presents certain information regarding the beneficial ownership of shares of common stock as of the date of this Annual Report by (i) each person who owns beneficially more than five percent (5%) of the outstanding shares of common stock based on 5,564,258 shares outstanding as of the date of this Annual Report, (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 Annual Report, 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 is 2560 King Arthur Blvd Suite 124 PMB 65

Lewisville, TX 75056.

Equity Compensation Plan Information

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 following table provides information as of December 31, 2015, regarding the Plan under which equity securities are authorized for issuance:

Steuben Investment

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.

2013-2015 Private Placement Offering

From May 2013 through October 2014, we sold an aggregate of 481,500 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 $1.9 million 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).

From November 2014 through March 2015, we sold an aggregate of 288,173 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 $1.7 million 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).

Management Compensation Deferral

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 December 31, 2015, and December 31, 2014 were $390,702, and $1,076,448, respectively.

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. 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 was 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 could 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. In August 2015, all principal and interest was paid in full.

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, was 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 could 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 August 2015, all principal and interest pursuant was paid in full.

In August 2015, a contractor to the Company made a short-term loan to the Company in the amount of $240,293 under a short-term promissory note. In August 2015, all principal and interest pursuant to the short-term promissory note was paid in full. The note bore a flat fee of $36,000 that was recorded as interest expense, and was scheduled to mature on October 3, 2015. In August 2015, all principal and interest was paid in full.

Option Repricing

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.

Option Grants

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 $1.00 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.

During 2015 and pursuant to the Plan, the Company granted to its Board members options to acquire 85,250 shares of its Common Stock. The options have an exercise price of $6.00 per share, vested in period ranging from immediate to 8 months, and have expiration dates of 10 years from the date of grant. All options were valued using the Black-Scholes options pricing model and resulted in an expense of $398,482 recognized during 2015.

Preferred Stock Placement

Our then current 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.

The following table sets forth the fees billed for professional services performed by Whitley Penn LLP, our independent registered public accounting firm, for the years ended December 31, 2015 and 2014.

It is the policy of our Board of Directors that all services to be provided by our independent registered public accounting firm, including audit services and permitted audit-related and non-audit services, must be pre-approved by our Board. Our Board of Directors pre-approved all services, audit and non-audit, provided in 2015 and 2014.

PART IV

PRINCIPAL SOLAR, INC.

CONSOLIDATED FINANCIAL STATEMENTS

For The Years Ended December 31, 2015 and 2014

Table of Contents

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, 2015 and 2014, 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, 2015 and 2014, 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 $11.0 million as of December 31, 2015. 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

April 14, 2016