Principal Solar, Inc. - Quarter Report: 2015 September (Form 10-Q)

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		September 30,				December 31,
		2015				2014
ASSETS
Current Assets
Cash and equivalents		$	862,164			$	104,328
Accounts receivable			2,832				105,143
Deposits			2,500,000				250,000
Prepaid assets			18,112				49,831
Other receivable			1,624,000				-
Total current assets			5,007,108				509,302
Other Assets
Solar arrays at cost, net			326,346				6,563,704
Construction in progress			5,044,070				912,445
Restricted cash			-				103,094
Total other assets			5,370,416				7,579,243
Total assets		$	10,377,524			$	8,088,545
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable		$	632,481			$	293,239
Compensation payable			476,756				1,076,448
Interest payable			10,783				81,748
Accrued expenses and other liabilities			51,564				15,881
Note payable for insurance premiums			-				33,250
Current portion of acquisition note payable, net of discount			-				249,816
Convertible notes, related parties			-				630,000
Convertible note, Arowana			1,880,595				-
Deferred gain on assignment of Principal Sunrise IV			2,500,000				-
Liabilities arising from reverse merger			1,003,839				1,003,839
Income taxes payable			83,953				-
Total current liabilities			6,639,971				3,384,221
Other Liabilities
Acquisition note payable, net of discount			-				4,403,163
Total liabilities			6,639,971				7,787,384
Commitments and Contingencies
Stockholders' Equity
Preferred stock: $0.01 par value; 100,000,000 shares authorized; 500,000 designated as Series A and 0 shares outstanding at September 30, 2015			-				-
Common stock: $0.01 par value, 300,000,000 shares authorized, 5,604,181 and 5,311,817 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively			56,042				53,118
Additional paid-in capital			12,249,838				9,897,412
Accumulated deficit			(8,568,327	)			(10,482,079	)
Equity (deficit) attributable to common stockholders			3,737,553				(531,550	)
Noncontrolling interest in subsidiary			-				832,711
Total stockholders' equity			3,737,553				301,161
Total liabilities and stockholders' equity		$	10,377,524			$	8,088,545

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		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2015				2014				2015				2014
Revenues
Power generation		$	7,601			$	283,582			$	479,489			$	784,188
Total revenues			7,601				283,582				479,489				784,188
Cost of revenues
Depreciation			4,220				93,972				155,210				249,345
Direct operating costs			6,655				64,672				110,658				174,829
Total cost of revenues			10,875				158,644				265,868				424,174
Gross profit (loss)			(3,274	)			124,938				213,621				360,014
General and administrative expenses			378,289				1,597,718				2,701,815				2,586,958
Gain on sale and assignment of assets			(4,945,145	)			-				(4,945,145	)			-
Operating profit (loss)			4,563,582				(1,472,780	)			2,456,951				(2,226,944	)
Other (income) expense
Interest expense			575,760				147,130				1,682,178				368,789
Gain on derivative liability warrants			(306,451	)			(31,079	)			(1,250,000	)			(32,239	)
Total other (income) expense			269,309				116,051				432,178				336,550
Income (loss) before provision for income taxes			4,294,273				(1,588,831	)			2,024,773				(2,563,494	)
Provision for income taxes			83,953				614				86,486				3,915
Net income (loss)			4,210,320				(1,589,445	)			1,938,287				(2,567,409	)
Income attributable to noncontrolling interest in subsidiary			-				(14,509	)			(24,535	)			(34,932	)
Net income (loss) before preferred stock accretion and dividends			4,210,320				(1,603,954	)			1,913,752				(2,602,341	)
Redeemable Series A preferred stock accretion and dividends			-				-				(184,896	)			-
Net income (loss) attributable to common stockholders		$	4,210,320			$	(1,603,954	)		$	1,728,856			$	(2,602,341	)
Net income (loss) per share attributable to common stockholders, basic		$	0.75			$	(0.32	)		$	0.31			$	(0.53	)
Net income (loss) per share attributable to common stockholders, diluted		$	0.63			$	(0.32	)		$	0.31			$	(0.53	)
Weighted average shares outstanding, basic			5,604,181				4,991,432				5,550,505				4,880,992
Weighted average shares outstanding, diluted			6,808,998				4,991,432				6,261,432				4,880,992

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										Additional								Principal				Non-
		Common Stock								Paid-in				Accumulated				Solar, Inc.				Controlling
		Shares				Amount				Capital				Deficit				Total				Interest				Total
December 31, 2014			5,311,817			$	53,118			$	9,897,412			$	(10,482,079	)		$	(531,549	)		$	832,711			$	301,162
Fractional shares issued in reverse stock split			25				-				-				-				-				-				-
Common stock issued for cash			279,839				2,799				1,676,201				-				1,679,000				-				1,679,000
Series A Preferred stock and warrants issued for cash			-				-				(10,293	)			-				(10,293	)			-				(10,293	)
Stock-based employee compensation expense			-				-				482,615				-				482,615				-				482,615
Stock-based advisor compensation			12,500				125				146,875				-				147,000				-				147,000
Preferred stock dividends			-				-				(18,333	)			-				(18,333	)			-				(18,333	)
Warrants issued with debt			-				-				75,361				-				75,361				-				75,361
Sale of Powerhouse One			-				-				-								-				(857,246	)			(857,246	)
Net income			-				-				-				1,913,752				1,913,752				24,535				1,938,287
September 30, 2015			5,604,181			$	56,042			$	12,249,838			$	(8,568,327	)		$	3,737,553			$	-			$	3,737,553

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		Nine Months Ended September 30,
		2015				2014
OPERATING ACTIVITIES
Net income (loss )		$	1,938,287			$	(2,567,407	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization			155,210				249,345
Stock-based employee compensation expense			482,615				85,990
Stock-based advisor compensation expense			109,500				987,882
Gain on sale and assignment of assets			(4,945,145	)			-
Gain on derivative liability on warrants			(1,250,000	)			(32,239	)
Amortization of debt discounts			1,375,419				15,273
Option to acquire noncontrolling interest			-				46,010
Change in operating assets and liabilities:
Accounts receivable			102,311				(66,903	)
Deposits			-				(490,000	)
Prepaid assets			31,719				11,250
Other receivables			(1,624,000	)			-
Liabilities arising from reverse merger			-				37,404
Accounts payable			285,785				322,022
Compensation payable			(599,692	)			36,046
Interest payable			(70,965	)			27,527
Accrued expenses and other liabilities			35,683				10,000
Income taxes payable			83,953				-
Net cash used in operating activities			(3,889,320	)			(1,327,800	)
INVESTING ACTIVITIES
Sale and assignment of assets			15,440,002				-
Non-controlling interest in Powerhouse One			(857,246	)			-
Construction in progress			(8,203,376	)			-
Net cash provided by investing activities			6,379,380				-
FINANCING ACTIVITIES
Proceeds from convertible note (Arowana)			1,880,595				-
Proceeds from sale of common stock			1,679,000				1,356,100
Proceeds from convertible debenture (Alpha)			1,250,000				-
Repayment of convertible debendure (Alpha)			(1,250,000	)			-
Series A Preferred stock and warrants issued for cash			989,707				-
Redemption of Series A Preferred stock			(1,000,000	)			-
Proceeds from convertible debentures (TCH)			1,089,535				-
Repayment of convertible debentures (TCH)			(1,089,535	)			-
Proceeds from convertible note, non-related party			50,000				-
Repayment of convertible note, non-related party			(50,000	)			-
Repayment of acquisition note payable			(4,703,037	)			(173,482	)
Proceeds from short-term note, related party			240,293				500,000
Repayment of convertible notes, related parties			(870,293	)			-
Payments on note payable for insurance premiums			(33,250	)			(9,040	)
Dividends on Series A Preferred Stock			(18,333	)			-
Change in restricted cash			103,094				(39,231	)
Net cash provided by (used in) financing activities			(1,732,224	)			1,634,347
Increase in cash and equivalents			757,836				306,547
Cash and equivalents, beginning of period			104,328				122,533
Cash and equivalents, end of period		$	862,164			$	429,080
Supplemental Disclosures
Interest paid		$	492,961			$	288,527
Income taxes paid		$	-			$	-
Non-Cash Transactions:
Deposit for deferred gain on assignment of Principal Sunrise IV		$	2,500,000			$	-
Deposit applied to construction in progress			250,000				-
Construction in progress in accounts payable			53,457				-
Stock based advisor compensation expense			37,500				-
Derivative liability on investor warrants			-				1,170,459
Redemption of convertible notes payable and accrued interest for stock			-				145,990
Discount on acquisition note payable			-				81,449
Option to acquire non-controlling intereset in subsidiary			-				46,010
Note payable for insurance premiums			-				11,250

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NOTE 1 - OVERVIEW

 

Basis of Presentation

 

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

 

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

 

Going Concern

 

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As of September 30, 2015, the Company has an accumulated deficit of approximately $8.6 million, and the Company has had cumulative negative cash flows from operations since inception. Its ability to continue as a going concern is dependent upon the ability of the Company to obtain the necessary financing, likely through the continued sale of its equity and equity-linked securities or through a strategic partnership, to meet its obligations and pay its liabilities arising from normal business operations when they come due. The outcome of these matters cannot be predicted with any certainty at this time and raise substantial doubt that the Company will be able to continue as a going concern. These consolidated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should the Company be unable to continue as a going concern.

 

Concentration

 

Historically, approximately 96% of our consolidated power generation revenue arose from our Powerhouse One solar installation. The Powerhouse One subsidiary was sold in August 2015 (see NOTE 6, "Sale of Powerhouse One").

 

Reverse Stock Split

 

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

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Recent Accounting Pronouncements

 

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

  

 

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

 

Principles of Consolidation

 

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

 

Fair Value

 

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

 

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

 

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

 

Fair Value Instruments

 

On March 2, 2015, the Company entered into a convertible debenture with Alpha Capital Anstalt ("Alpha") (See NOTE 7 - "Convertible Debenture (Alpha)"). In connection with the loan, the Company granted Alpha complex warrants with certain "down round" protection. As such, they were treated as a derivative liability and were valued using a binomial lattice-based option valuation model using holding period assumptions developed from the Company's business plan and management assumptions, and expected volatility from comparable companies including OTC Pink® and small-cap companies. Increases or decreases in the Company's share price, the volatility of the share price, changes in interest rates in general, and the passage of time all impacted the value of these warrants. The Company re-values these warrants at the end of each reporting period and any changes are reflected as gains or losses in current period results. (See NOTE 9 - DERIVATIVE LIABILITY ON WARRANTS). In August 2015, all principal and interest pursuant to the convertible debenture was paid in full thus eliminating the terms giving rise to a potential down round price adjustment of the warrants. As such, a final re-valuation as of the repayment date was recorded and the warrants are now considered equity instruments.

 

Use of Estimates

 

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

 

 

Cash and Equivalents

 

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

 

Restricted Cash

 

As part of the June 2013 financing with Bridge Bank, National Association (see "Acquisition Note Payable" herein), the Company agreed to maintain in a restricted cash account all proceeds, less debt service and approved expenses, generated by our Powerhouse One subsidiary. In August 2015, all principal and interest pursuant to the Acquisition Note Payable was paid in full and the requirement to restrict cash was eliminated.

 

Accounts Receivable

 

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

 

Solar Arrays

 

Solar arrays are stated at historical cost, net of accumulated depreciation. Depreciation is computed using the straight-line method over the remaining estimated useful lives of the assets. The estimated useful lives of solar arrays are 25 years from the date first placed in service. Accumulated depreciation was $68,935 and $496,894 at September 30, 2015 and December 31, 2014, respectively. During the construction period, all costs and expenses related to the development and construction of a project, excluding administrative expenses, are recorded as construction in process.

 

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

 

Long-Lived Assets

 

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

 

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

 

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

 

Power Purchase Agreement

 

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

  

 

Revenue Recognition

 

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

 

Income Taxes

 

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

 

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

 

Equity Transaction Fair Values

 

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

 

Net Income (Loss) per Share

 

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

 

NOTE 3 - LIABILITIES ARISING FROM REVERSE MERGER

 

Liabilities arising from the reverse merger represent long term real estate leases which had been abandoned, general unsecured liabilities, commercial liens, and tax liens filed with various states all associated with the Company’s pre-reverse merger operations, which were unknowingly assumed in the March 2011 reverse merger transaction. The statute of limitations for most of such liabilities is five years and for most liens is ten years, subject to renewal at the lien holders’ option, depending upon the jurisdiction.  Although the liens accrue interest at between 8% and 12% per year, the Company has ceased accruing interest as it believes the liability recorded to date is adequate to cover the ultimate claims that may, one day, be presented. Liabilities not associated with a lien have been accrued based upon management’s estimation of the amount to be paid.  Liabilities associated with a lien have been accrued at face value.  Management believes all such liabilities have been indemnified by Pegasus Funds, LLC (and/or its affiliates or related parties, "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. Cancellation of the shares will be recognized for accounting purposes once they are received from Pegasus.

 

In the settlement with Pegasus, the Company preserved its rights to pursue the individual(s) serving as officers of Kupper Parker Communications, Inc. 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.

NOTE 4 - COMPENSATION PAYABLE

 

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

NOTE 5 - ACQUISITIONS

 

Principal Sunrise IV (fka "IS 46")

 

See NOTE 6 "Assignment of Principal Sunrise IV".

  

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

 

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 ("Principal Sunrise V"), the owner of a 72.9mw AC solar project to be built in Fayetteville, North Carolina. Principal Sunrise V holds a single and intangible asset, a 10-year power purchase agreement with Duke Energy Progress, Inc. Principal Sunrise V does not have, nor has it ever had, any other assets, any liabilities, any employees, any revenues, or any operations of any kind. As such, Principal Sunrise V is not a "business" as defined in the accounting literature, and it has no historical financial statements. PSI agreed to pay Innovative Solar Systems, LLC $5.8 million for 100% of the membership interest of Principal Sunrise V in a series of payments of approximately $300 thousand per month between execution of the MIPA and the financial close (the point at which all project financing is arranged). Payments to date total $1.5 million. In August 2015, the Company modified the terms of the MIPA to suspend further payments until financial close at which time $3.7 million will become due reflecting cumulative payments of 90% of the purchase price. The remaining 10% of the purchase price, approximately $600 thousand, will be paid at the project's commercial operation date. In addition, Principal Sunrise V has a monthly payment obligation for ongoing engineering and infrastructure development work estimated at approximately $400 thousand per month.

 

At September 30, 2015, a total of $3.2 million has been invested to date to acquire Principal Sunrise V and for related infrastructure work, and failure by the Company to make any future scheduled payments may result in the loss of the total investment made through such date. The Company is working with engineering and construction firms on final designs, and the total cost of the project based upon the preliminary work is expected to be approximately $145 million. The Company is in discussions with multiple parties to provide the acquisition, construction, and permanent financing for the project; however, no assurance can be given that adequate financing on terms acceptable, or even available, to the Company will be obtained. Closing of the acquisition is expected to occur by February 1, 2016 (which date may be further extended), and construction is expected to be completed in mid-2016.

  

 

Additional Projects

 

On August 21, 2015, the Company entered into non-binding term sheets to acquire additional solar projects for development having a combined capacity of approximately 98.5mw AC and a combined purchase price of $5.9 million. The Company is working with engineering and construction firms on preliminary designs, and the total combined cost of the projects based upon the preliminary work is expected to be approximately $193 million. At September 30, 2015, a total of $1.9 million has been invested to date for the additional projects, all funded by advances by Arowana International Limited ("Arowana") under a promissory note, as amended (see NOTE 7 "Convertible Note (Arowana)". In addition, the additional projects have a combined monthly payment obligation for ongoing engineering and infrastructure development work estimated at approximately $800 thousand per month. These monthly development costs have also been funded by advances under the Arowana promissory note, though no assurance can be given that such advances from Arowana will continue. Confirmations of the additional projects are expected to occur by February 1, 2016 (which date may be extended), and construction is expected to be completed in late 2016.

 

Terminated Projects

 

The acquisition of Principal Sunrise VII for which the Company entered into a binding term sheet on June 9, 2015, did not meet our expectations and was abandoned. Evaluation costs incurred to the point the acquisition was abandoned were not material and were expensed in the current period.

NOTE 6 - DISPOSAL OF ASSETS

 

Assignment of Principal Sunrise IV

 

On August 11, 2015, the Company assigned its contractual rights under the MIPA to acquire Principal Sunrise IV for the amount of $7.0 million and the reimbursement of its advances to date under the MIPA of $4.7 million. Proceeds still to be received include $2.5 million escrowed on August 31, 2015, pending resolution of a fee dispute related to the project (see NOTE 14 "Pending or Threatened Litigation"). The balance of proceeds of $1.6 million is due at the project's commercial operation date, expected to be early 2016, pending the Company's completing its on-going responsibilities as co-developer including, but not limited to, advising on engineering matters, providing technical assistance on project design, overseeing substation design and construction, organizing documentation and permitting, interpreting test results, and opining on final acceptance matters. Gain on the assignment of Principal Sunrise IV totaled $6.8 million after transaction costs of approximately $136 thousand. Of the gain, $2.5 million was deferred pending resolution of the fee dispute and reflected as "Deferred gain on assignment of Principal Sunrise IV" on the balance sheet. Cash equal to the deferred gain is held in escrow held by a third party and included in "Deposits" on the balance sheet.

 

Proceeds from the assignment were used to repay outstanding debts (other than the Acquisition Note Payable and the note payable for insurance premiums) and to redeem preferred stock. Assigning its rights to Principal Sunrise IV also relieved the Company of ongoing payment obligations totaling more than $500 thousand per month, eliminated the costs of ongoing development efforts, and eliminated a contingent liability under an $800 thousand letter of credit. Using the proceeds, the Company was also able to reduce its deferred compensation ($1.2 million) and its accounts payable.

 

In addition to the amounts owed by the assignee to the Company at the project’s commercial operation date, the assignee owes the seller, Innovative Solar Systems, LLC, an additional $600 thousand. If the assignee, for whatever reason, fails to pay the amount due the seller, the Company has agreed to do so thereby creating a contingent liability of the Company.

 

Sale of Powerhouse One

 

In July 2015, the Company decided to sell Powerhouse One in order to 1) focus full attention to our current projects under development 2) eliminate an asset having a high level of debt service costs, and 3) raise cash to meet upcoming debt obligations.

 

Prior to its disposal, Powerhouse One's assets were reflected in the Balance Sheet at June 30, 2015, within the caption "Solar arrays at cost, net" at a value of $6.1 million and had associated liabilities reflected in "Acquisition note payable, net of discount" (including the current portion) of $4.6 million. As a part of the transaction, the buyer repaid all principal and interest pursuant to the Acquisition Note Payable at closing.

 

Gain on the sale of Powerhouse One totaled $644 thousand, and proceeds of $1.6 million, net of transaction costs totaling $244 thousand, were used to further reduce accounts payable, deferred compensation, and for general working capital purposes.

  

 

Pretax profit from Powerhouse One recognized by the Company was as follows:

 

 

 

 

ASU No. 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity" restricts the presentation of the sale of a component of an entity as a "discontinued operation" to those instances reflecting a strategic shift in the business. Our recent sale of Powerhouse One does not reflect a strategic shift in the business, so our presentation of the sale herein does not reflect a discontinued operation.

NOTE 7 - NOTES PAYABLE

 

Acquisition Note Payable

 

On June 17, 2013, Powerhouse One, LLC secured financing of $5,050,000 from Bridge Bank, National Association to acquire the membership interest (and the underlying solar arrays) of co-sellers, Vis Solis, Inc., a Tennessee limited liability company, and AstroSol, Inc., a Tennessee corporation. In August 2015, all principal and interest pursuant to the Acquisition Note Payable was paid in full.

 

The note, originally scheduled to mature on June 17, 2017, bore a fixed interest rate of 7.5% annually. Interest was paid monthly and principal was paid quarterly beginning in September 2013 based on an 11-year amortization schedule.

 

In conjunction with the acquisition note payable, warrants to purchase 37,763 shares of Common Stock were issued to Bridge Bank with an exercise price of $4.00 and a contractual life of 10 years. The value of the warrants issued in connection with this debt, as determined using the Black-Scholes model, was $81,449 and was recorded as a discount to the debt. Amortization expense for the three and nine months ended September 30, 2015, were $39,876 and $50,057, respectively.

 

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

 

Convertible Debenture (Alpha)

 

On March 2, 2015, the Company entered into a convertible debenture with Alpha Capital Anstalt ("Alpha") to borrow $1,250,000. In August 2015, all principal and interest pursuant to the convertible debenture was paid in full.

 

The debenture was convertible into shares of Common Stock at a rate of $4.00 per share, bore interest at a rate of 8.0% per annum, and all principal and interest was due on September 2, 2015. The debenture also contained certain "down round" protection that, due to its short maturity, the prohibition in the debenture of issuing further debt, and management's assessment of the probability of issuing future convertible debt below $4.00 as remote, no separate value had been assigned to this aspect of the debt. In connection with the Loan, the Company granted Alpha 234,375 warrants having a term of 5 years and an exercise price of $6.00 per share (See NOTE 9 - DERIVATIVE LIABILITY ON WARRANTS).

 

On May 6, 2015, the Company issued Series A Preferred stock (NOTE 10 “Preferred Stock”) resetting the exercise price of the warrants to $4.00 per share.

 

On July 1, 2015, the Company issued Convertible Debentures with a conversion price of $.50 per share and warrants exercisable at $6.00 per share (see "Convertible Debentures (TCH)" below). In its consent to this later transaction, Alpha waived its "down round" rights in this single instance.

  

 

As the debentures were repaid in full in August 2015, by the terms of the debenture, no further adjustment to the exercise price of the warrants is possible.

 

Convertible Notes, 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. In August 2015, all principal and interest pursuant to the convertible notes were paid in full.

 

The notes initially bore interest at a rate of 18% per year, and matured on December 5, 2014. In February 2015 (made effective on the original maturity date), the notes were modified to extend the maturity date to September 30, 2015, and to reduce the interest rate from 18% to 12% per annum.

 

In December 2014, Michael Gorton, the Company's Chief Executive Officer, loaned to the Company pursuant to a convertible note the amount of $130,000. In August 2015, all principal and interest pursuant to the convertible notes were paid in full.

 

The note bore interest at a rate of 12% per annum and was scheduled to mature, after being modified in February 2015, on September 30, 2015.

 

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.

 

Convertible Notes, Non-Related Party

 

In January 2015, the Company issued a convertible note to an unrelated party in the amount of $50,000. In August 2015, all principal and interest pursuant to the convertible note was paid in full.

 

The note bore interest at a rate of 12% per year and was scheduled to mature on September 30, 2015

 

Convertible Debentures (TCH)

 

On July 1, 2015, the Company agreed to issue, in one or more separate tranches, up to $2.0 million of a newly created Senior Secured Convertible Debenture ("Debentures") security to three of its existing equity investors: Steuben Investment Company II, L.P. ("Steuben"), TCH Principal Solar, LP, ("TCH"), and SMCDLB, LLC ("SMC").

 

The first tranche of approximately $1.1 million was funded beginning July 1, 2015, and proceeds were used to meet obligations of our Principal Sunrise IV and Principal Sunrise V solar projects under development. In August 2015, all principal and interest pursuant to the Debentures were paid in full.

 

The Debentures bore interest at a rate of 8% per annum, and were scheduled to mature on September 1, 2015.

 

In connection with the Debentures, the Company granted to the holders 60-month warrants to purchase up to 90,796 shares of Common Stock at a price of $6.00 per share. As the warrants were not complex, they were valued using a Black-Scholes model at $75,361, initially recorded as a discount to the debt, and fully amortized to interest expense in the current period. Input assumptions on the issuance date were as follows:

 

  

 

Convertible Note (Arowana)

 

On August 20, 2015, the Company issued a convertible note 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 Company used the proceeds from the Arowana Note to make investments in additional projects (see NOTE 5 "Additional Projects"). 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.

 

The principal amount of the Arowana Note may be converted, at Arowana’s option, into limited liability company membership interests in Principal Sunrise V, LLC at a conversion price determined with reference to the unlevered after tax project internal rate of return ("IRR") that reflects the lender’s investment valuation of Principal Sunrise V and other projects funded by the proceeds of the Arowana Note. The Company may pre-pay the Arowana Note at any time without pre-payment premium or penalty.

 

Subject to satisfactory completion of its due diligence, Arowana commits to contribute equity capital in amounts sufficient to fund project development to completion of Principal Sunrise V and the additional projects funded by the proceeds of the Arowana Note. If, following Arowana's completion of its due diligence on Principal Sunrise V, the Company and Arowana agree the project does not meet its investment return requirements, the parties agree to work in good faith to identify other project(s) as security under the Arowana Note.

 

The parties are further obligated to enter into a strategic relationship providing Arowana an opportunity to invest in the project equity in each of the additional projects, or equivalent substitute projects. Failure of the Company and Arowana to reach such agreement on or before September 30, 2015, which such date may be extended by mutual agreement, shall be an event of default giving rise to Company's forfeiture of the collateral, and the satisfaction and cancellation of the Arowana Note.

 

On September 30, 2015, the Arowana Note was modified to increase the amount by $280,594 to $1,880,594, and the date by which the parties should reach further agreement as to a strategic relationship was extended to December 31, 2015. The note was again increased on October 30, 2015, to $2,680,881 to meet the ongoing cost of development of the additional projects. Such additional increases in the future are possible, but not assured.

NOTE 8 - LEASES

 

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

 

 

Prior to its sale in August 2015, rent expense for Powerhouse One was $17,806 and $20,541 in the nine months ended September 30, 2015 and 2014, respectively.

 

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

 

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

NOTE 9 - DERIVATIVE LIABILITY ON WARRANTS

 

On March 2, 2015, the Company issued warrants to purchase 234,375 shares of Common Stock with a 66-month contractual term to Alpha Capital Anstalt in connection with the issuance of convertible debentures (See NOTE 7 "Convertible Debenture (Alpha)"). The warrants were immediately exercisable into the Company’s Common Stock with an exercise price of $6.00 per share.

  

 

However, as the warrants had “down round” protection, they were treated as a derivative liability and were valued each period using a binomial lattice-based option valuation model using holding period assumptions developed from the Company's business plan and management assumptions, and expected volatility from comparable companies including OTC Pink^® and small-cap companies. Increases or decreases in the Company's share price, the volatility of the share price, changes in interest rates in general, and the passage of time all impacted the value of these warrants. On May 6, 2015, the Company issued Series A Preferred stock (NOTE 10 “Preferred Stock”) resetting the exercise price of the warrants to $4.00 per share, and the valuation was updated and reflected in the balance sheet.

 

Input assumptions on the issuance date were as follows:

 

  

In this issuance of convertible debentures and warrants, completed as a result of arm's length negotiations between unrelated parties, the value of the warrants alone exceeded the proceeds received. The Company's need for ongoing financing made the transaction attractive, despite the economics of the transaction. The application of FASB Topic 820 entitled "Fair Value Measurement", resulted in a loss on the date of issuance of $336,884, offset by a subsequent gain of $1,586,884 stemming from the subsequent movement in the price of our Common Stock, together resulting in a net gain on derivative liability warrants of $306,451 and $1,250,000 for the three and nine months ended September 30, 2015, respectively, offset by equivalent amounts recognized as additional interest expense reflecting the amortization of the debt discount.

 

On July 1, 2015, the Company issued Convertible Debentures with a conversion price of $.50 per share and warrants exercisable at $6.00 per share (see NOTE 7 "Convertible Debentures (TCH)"). In its consent to this later transaction, Alpha waived its "down round" rights in this single instance.

 

In August 2015, all principal and interest pursuant to the Convertible Debenture was paid in full thus eliminating the terms giving rise to a potential down round price adjustment of the warrants. As such, a final re-valuation as of the repayment date was recorded and the derivative liability was eliminated from the balance sheet.

 

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

 

NOTE 10 – CAPITAL STOCK

 

Preferred Stock

 

The Company has authorized 100,000,000 shares of $.01 par value Class A preferred stock.

Series A Preferred (Mandatorily Redeemable)

 

On May 6, 2015, the Company contracted to issue, in two separate tranches, up to 500,000 shares of its newly designated $.01 par value Series A Preferred stock ("Series A Preferred") to an unrelated investor at a purchase price of $4.00 per share that could result in proceeds to the Company of up to $2,000,000.

 

The first tranche of $1,000,000 was funded on May 6, 2015, and all Series A Preferred shares were redeemed in August 2015.

 

The preferred shares had a dividend rate of 12% per annum and, along with accrued dividends, were convertible into shares of our Common Stock at a price of $4.00 per share.

  

 

In connection with the issuance, the Company granted the holder warrants to purchase 187,500 shares of its Common Stock at a purchase price of $6.00 per share. As the warrants were not complex in nature, they were valued using the Black-Scholes option-pricing model.

 

Input assumptions on the issuance date were as follows:

 

  

The Company evaluated the detachable warrants in accordance with FASB ASC No. 470-20, “Debt with Conversion and Other Options” and FASB ASC 815, “Derivatives and Hedging” and allocated the proceeds from issuance of the Series A preferred to the warrants based on the relative fair value of the preferred stock and warrants at issuance, and recorded the allocation to the warrants as additional paid-in capital. The allocation of the warrants to additional paid-in capital was offset by the accretion of the Series A Preferred.

 

Absent an IPO

 

The Company's failure to complete a public offering on or before July 1, 2015, was an event of default under the Series A Preferred, the remedy for which was for the Company, in such instance, to aggressively seek strategic alternatives including, without limitation, marketing the Company to a private equity group, seeking out a strategic purchaser, seeking a merger of equals, or selling its interest in one or more of the solar projects. The Company took the required steps at such time, and since all shares of Series A Preferred have been fully redeemed, the event of default is of no further consequence and the Company is no longer under such obligation. However, the failure to complete an IPO on or before July 1, 2015, also caused the Series A Preferred to be reclassified from a convertible temporary equity to a mandatorily redeemable liability. Whereas the Series A Preferred incurred dividends prior to its reclassification on June 30, 2015, as a liability, it incurred interest expense thereafter.

    

   

In August 2015, all shares of Series A Preferred were redeemed using proceeds from the assignment of Principal Sunrise IV.

 

Common Stock

 

The Company has authorized 300,000,000 shares of $.01 par value Common Stock, and it trades on the OTC Pink^® under the symbol “PSWW.”  Holders of our Common Stock are entitled to one vote per share and receive dividends or other distributions when, and if, declared by our Board of Directors.  In addition to shares outstanding, we have reserved 966,090 shares for issuance upon exercise of equity incentive awards with options to purchase 819,591 shares of Common Stock granted to date.

  

 

Stueben Investment

 

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

 

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

 

Restricted Stock

 

In January 2015, the Company awarded to an engineering firm, in exchange for its services on Principal Sunrise IV, 12,500 restricted shares pursuant to the 2014 Equity incentive Plan. The value of the shares on the date of grant totaled $37,500 and the amount was capitalized as construction in progress.

 

Stock Options

 

The Company maintains the 2014 Equity Incentive Plan (the "Plan"), pursuant to which 716,090 shares of Common Stock had previously been reserved for issuance. In January 2015, the Board of Directors reserved an additional 250,000 shares of Common Stock pursuant to the Plan and 819,591 of the total 966,090 reserved have been issued to date.

 

2015 Grants

 

In February 2015, the Company granted 6,250 options to acquire shares of Common Stock having an exercise price of $6.00 per share, a 10-year term, and immediate vesting to each of five directors as a discretionary bonus. The Company also granted in February 2015, options to acquire 6,000 shares of Common Stock to each of two advisors. The options have an exercise price of $6.00 per share, immediate vesting, and expiration dates extending to 5-years based upon their continued service of two years from the grant date. Finally, the Company granted to a consultant in February 2015, options to acquire 6,250 shares of Common Stock. The options have an exercise price of $6.00 per share, immediate vesting, and expiration dates extending to 10-years based upon continued service of three years from the date of grant.

 

In May 2015, the Company granted to two Board members options to acquire 18,000 shares of Common Stock each.  The options have an exercise price of $6.00 per share, immediate vesting of 12,000 shares to reflect the grant that was overlooked in January 2014, and the balance vest over the following 8 months.  The options expire 10-years from the date of grant.

 

In May 2015, the Company granted to a new Board member options to acquire 18,000 shares of Common Stock.  The options have an exercise price of $6.00 per share, vest over 24 months, and expire 10-years from the date of grant.  The aforementioned Board member resigned in September 2015, and all options not yet vested were forfeited upon his resignation.

  

In each case above, the options were valued using the Black-Scholes model. Equity-based compensation expense included in general and administrative expenses for the three and nine months ended September 30, 2015, was $58,705 and $629,615, respectively, and, at September 30, 2015, $97,238 of additional compensation expense is expected to be recognized over the years 2016 and 2017.

 

As the Company does not have a significant history of post vesting exercises to estimate an expected life of the option, the simplified method was used wherein the expected life becomes the mid-point of the options vesting date and their contractual life. The valuation of all of the option issuances in 2015 were based upon the following parameters:

 

  

 

Warrants

 

The Company had 550,534 warrants outstanding at September 30, 2015, with a weighted average term of 4.7 years and a weighted average exercise price of $5.86 per share.

NOTE 11 - NONCONTROLLING INTEREST

 

Prior to its sale in August 2015, the original owners of Powerhouse One continued to own approximately 11% of the membership interest of the limited liability company. The noncontrolling interests of equity investors in Powerhouse One was reported on the consolidated balance sheet and statement of operations as "Noncontrolling interest in subsidiary" ("noncontrolling interest") and reflected their respective interests in the equity and the income or loss of the limited liability company.

 

The following table sets forth the activity in the noncontrolling interest equity account during 2015:

 

NOTE 12 – RELATED PARTY TRANSACTIONS

 

Other than the Board member options described herein in a NOTE 10 "Stock Options”, the issuance of convertible notes described herein in the NOTE 7 "Convertible Notes, Related Parties", no other related party transactions occurred during the three and nine months ended September 30, 2015 and 2014.

NOTE 13 - TAXES

 

Our estimated $1.8 million federal income tax net operating loss carryover expires over the period from 2030 through 2034. Our federal and state income tax returns are no longer subject to examination for years before 2012. We have taken no tax positions that, more likely than not, may not be realized.

 

The Company has established a valuation allowance to fully reserve the net deferred tax assets in the accompanying financial statements, due to the uncertainty of the timing and amounts of future taxable income.

NOTE 14 - COMMITMENTS AND CONTINGENCIES

 

Contingent Obligation

 

In connection with the assignment of Principal Sunrise IV (see NOTE 6 "DISPOSAL OF ASSETS"), the Company became contingently liable to the solar project's original developer in the amount of $600,000, if and only if the assignee of the Company's rights to that project fails to pay the original developer a like amount at the commercial operation date. No liability has been recorded in the financial statements as the failure of the assignee to pay the amount when due is not probable.

 

Pending or Threatened Litigation

 

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 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 now claims in arbitration proceedings an entitlement to:

 

●

a fee for the assignment of Principal Sunrise IV based upon an inflated value as if the Company had already financed and built the project

●

a fee for the Company's financing of Principal Sunrise V which financing has not yet occurred

●

a fee for monies borrowed from members of the Company's Board of Directors

●

a fee for monies borrowed from the Company's Chief Executive Officer

●

a fee for monies raised from the Company's the sale of Common Stock to parties not introduced by CCMI

●

a fee for funds raised from the Company's sale of Preferred Stock to parties not introduced by CCMI

●

a fee for monies raised from the company's sale of debentures to a group including the Company's largest stockholder, not introduced by CCMI

●

a fee for monies borrowed from a current employee of the Company not introduced by CCMI

●

a fee for monies borrowed by the Company even after their termination from a party not introduced by CCMI

 

CCMI had no involvement and provided no services in securing financing in the above situations for which it now claims an entitlement to fees. In its responsive filing, CCMI admits it first learned of the non-project related financings from the Company's Quarterly Report on Form 10-Q filed August 27, 2015, 7 days after the Company commenced arbitration proceedings in Dallas, Texas.

 

The Company, as claimant, has requested the arbitrator to declare CCMI liable for breach of fiduciary duty, breach of contract, tortious interference with a prospective business relationship, and tortious interference with a contract and seeks to terminate the engagement for convenience and/or cause, for unspecified compensatory damages, interest, and fees. CCMI's claim in arbitration totals $5,183,263, of which $2,500,000 was escrowed in connection with the assignment of the Company's rights to Principal Sunrise IV (see "Deposit" on the Balance Sheet). The Company believes the claims by Carlyle Capital Markets, Inc. are without merit, and no estimate of loss can be made. Management is vigorously pursuing this case, and the arbitration hearing is scheduled for February 2016.

 

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 commercial operation date ("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. As such, the Company will never be in a position to reach either Financial Close or COD with Principal Sunrise IV. VIS failed to identify any solar generation projects that proved to be economical for the Company, and the Company does not believe that any compensation is due and owing to VIS under the Services Agreement. However, CEP’s attorneys informed us that VIS had contacted CEP with a claim that it had earned approximately $2.2 million under the Services Agreement combined with a threat to place a lien on Principal Sunrise IV unless proceeds from the assignment of the project were escrowed while this compensation matter was resolved. CEP’s attorneys have made a claim for indemnification under the terms of the Assignment Agreement and a demand for our quick resolution of the matter should VIS be successful in filing a lien against Principal Sunrise IV and to make CEP whole in the event any actions by VIS resulted in damages to CEP.

 

No assessment had been made as to VIS’s ability to successfully file a lien on the Principal Sunrise IV project, nor do we have any data on which to calculate potential damages to CEP in the event such a lien is, in fact, successfully filed on the project. No liability has been recorded in the financial statements as no estimate of loss, if any, can be made at this time.

 

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NOTE 15 - EARNINGS PER SHARE

  

Our basic and diluted earning per share attributable to common stockholders are computed as follows:

 

 

 

Potentially dilutive securities at September 30, 2015 and 2014 which could have had an antidilutive effect on our diluted earning per share attributable to common stockholders were:

 

 

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