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

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2015

Commission File No. 333-193058

PRINCIPAL SOLAR, INC.

(Exact name of registrant as specified in its charter)

211 N. Ervay, Suite 300 Dallas, Texas 75201

(Address of principal executive offices)

(855) 774-7799

(Registrant’s telephone number, including area code)

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

Large accelerated filer ☐          Accelerated filer ☐          Non-accelerated filer ☐          Smaller reporting company ☑

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

The number of shares outstanding of the registrant’s common stock as of August 14, 2015 was 5,604,181.

TABLE OF CONTENTS

INTRODUCTORY COMMENT

In this Quarterly Report on Form 10-Q, 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 in our Annual Report on Form 10-K filed on March 17, 2015, and Form 10-Q filed May 13, 2015. 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

ITEM 1 - FINANCIAL STATEMENTS

PRINCIPAL SOLAR, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - OVERVIEW

Basis of Presentation

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

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

Going Concern

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As of June 30, 2015, the Company has an accumulated deficit of approximately $12.8 million, and the Company has had cumulative negative cash flows from operations since inception. Its ability to continue as a going concern is dependent upon the ability of the Company to obtain the necessary financing, likely through the continued sale of its equity and equity-linked securities, to meet its obligations and pay its liabilities arising from normal business operations when they come due. The outcome of these matters cannot be predicted with any certainty at this time and raise substantial doubt that the Company will be able to continue as a going concern. These consolidated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should the Company be unable to continue as a going concern.

Concentration

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

Reverse Stock Split

On May 5, 2015, the Company's Board of Directors and stockholders representing a majority of the shares outstanding on that date voted to effect a 1:4 reverse stock split (the "May 2015 Reverse"). Unless otherwise stated or the context would require otherwise, all share amounts disclosed throughout these financial statements retroactively 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. Significant intercompany accounts and transactions have been eliminated in consolidation.

Fair Value

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

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

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

Fair Value Instruments

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

(See NOTE 8 - DERIVATIVE LIABILITY ON WARRANTS).

Use of Estimates

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

Cash and Equivalents

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

Restricted Cash

As part of the June 2013 financing with Bridge Bank, National Association (see "Acquisition Note Payable" herein), the Company agreed to maintain in a restricted cash account all proceeds, less debt service and approved expenses, generated by our Powerhouse One subsidiary. Such account provides a minimum of $82,050 replacement reserve ("module reserve") on solar panels found to be defective and potentially not covered under the 25-year manufacturer's warranty. Funds in excess of the module reserve may be accessed by the Company whenever the debt service coverage ratio is greater than or equal to 1.1:1.0.

Accounts Receivable

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

Solar Arrays

Solar arrays are stated at historical cost, net of accumulated depreciation. Depreciation is computed using the straight-line method over the remaining estimated useful lives of the assets. The estimated useful lives of solar arrays are 25 years from the date first placed in service. Accumulated depreciation was $647,885 and $496,894 at June 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 PPA with reference to Accounting Standards Codification ("ASC") 805-20-25-10 entitled "Identifiable Intangible Assets" and determined that, while it is not separable from other assets, it does meet the contractual-legal criteria for separate recognition. Further evaluation with reference to ASC 840-10-15-6 entitled "Arrangements that qualify as Leases" concluded the PPA is not a lease, and reference to ASC 805-20-25-10 entitled "Identifiable Intangible Assets" concluded the PPA has no separately recordable value.

Revenue Recognition

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

Income Taxes

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

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

Equity Transaction Fair Values

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

Net Income (Loss) per Share

Basic net income or loss per share is computed by dividing the net income or loss attributable to common stockholders for the period by the weighted average number of shares of Common Stock outstanding for the period. Diluted income per share reflects the potential dilution of other potential issuances of Common Stock including shares to be issued upon exercise of options and warrants and upon conversion of convertible debt and preferred stock. Potentially dilutive shares are not included in the event of a loss as the effect of doing so would be anti-dilutive. As of June 30, 2015, options to purchase 819,591 shares, warrants to purchase 464,013 shares of our Common Stock, and 467,501 shares issuable upon the conversion of convertible notes payable have been excluded from the calculation of diluted loss per share, as their effect would have been anti-dilutive. As of June 30, 2014, options to purchase 408,834 shares and warrants to purchase 587,592 shares of our Common Stock have been excluded from the calculation of diluted loss per share as their effect would have been anti-dilutive.

NOTE 3 - LIABILITIES ARISING FROM REVERSE MERGER

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

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

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

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")

In November 2014, the Company entered into a Membership Interest Purchase Agreement ("MIPA") with Innovative Solar Systems, LLC, a solar developer operating primarily in North Carolina, to acquire Innovative Solar 46, LLC ("PS IV"), the owner of a 78.5mw AC solar project to be built in Cumberland County, North Carolina.

On August 11, 2015, the Company assigned its contractual rights under the MIPA for the amount of $7.0 million and the reimbursement of its advances to date under the MIPA of $4.7 million. The net proceeds from the assignment were scheduled to be received by the Company as follows: $7.6 million at closing; $2.5 million on August 31, 2015; $1.6 million at the project's commercial operation date, expected to be early 2016. The gain on the transaction is expected to be approximately $6.8 million after transaction costs estimated at $200,000. See NOTE 14 "Assignment of Principal Sunrise IV".

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

On March 2, 2015, the Company entered into a MIPA with Innovative Solar Systems, LLC, a solar developer operating primarily in North Carolina, to acquire Innovative Solar 42, LLC ("PS V"), the owner of a 72.9mw AC solar project to be built in Fayetteville, North Carolina. PS V holds a single and intangible asset, a 10-year power purchase agreement ("PPA") with Duke Energy Progress, Inc. PS V does not have, nor has it ever had, any other assets, any liabilities, any employees, any revenues, or any operations of any kind. As such, PS V is not a "business" as defined in the accounting literature, and it has no historical financial statements. PSI agreed to pay Innovative Solar Systems, LLC $5,832,000 for 100% of the membership interest of PS V in a series of payments of approximately $300,000 per month between execution of the MIPA and the financial close (the point at which all project financing is arranged), and a balloon payment at financial close sufficient to having cumulatively paid 70% of the $5,832,000 purchase price. The remaining 30% of the purchase price will be paid in installments of $150,000 per month through the project's commercial operation date. At June 30, 2015, a total of $1,170,000 has been paid to date, and failure by the Company to make any of the future scheduled payments may result in the loss of all payments made through such date. The Company is working with engineering and construction firms on final designs, and the total cost of the project based upon the preliminary work is expected to be approximately $147.2 million. The Company is in discussion with multiple parties to provide the acquisition, construction, and permanent financing for the project, however, no assurance can be given that adequate financing on terms acceptable, or even available, to the Company will be obtained. Closing of the acquisition is expected to occur no later than August 30, 2015, and construction is expected to be completed in early 2016.

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 expensed in the current period.

NOTE 6 - NOTES PAYABLE

Acquisition Note Payable

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

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

The Bridge Bank warrants have cashless exercise rights, redemption rights providing the Company the right to redeem the warrants for $604,200, anti-dilution rights associated with offerings of equity securities, a term expiring on the first to occur of (i) the 10 year anniversary of the grant, (ii) the closing of the Company’s initial public offering, 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 loan agreement with Alpha Capital Anstalt ("Alpha") to borrow $1,250,000 (the "Loan"). The Loan is convertible into shares of Common Stock at a rate of $4.00 per share, bears interest at a rate of 8.0% per annum, all principal and interest is due on September 2, 2015, and the loan is secured by the assets of the Company and its subsidiaries (excluding Powerhouse One and all interest in its operations, its assets, and proceeds or distributions therefrom). The loan also contains certain "down round" protection that, due to the loan's short maturity, the prohibition in the debenture of issuing further debt, and management's assessment of the probability of issuing future convertible debt below $4.00 as remote, no separate value has been assigned to this aspect of the debt. The principal and accrued interest amounts on the Loan are convertible at any time into shares of Common Stock at a rate of $4.00 per share. In connection with the Loan, the Company granted Alpha 234,375 warrants having a term of 5 years and an exercise price of $6.00 per share (See NOTE 8 - DERIVATIVE LIABILITY ON WARRANTS). 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 14 "Convertible Debentures (TCH)"). In its consent to this later transaction, Alpha waived its "down round" rights in this single instance.

Convertible Notes Payable, Related Parties

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

On February 27, 2015 (made effective on the original maturity date), the notes were modified to extend the maturity date to September 30, 2015, to reduce the interest rate from 18% to 12% per annum, to eliminate all collateral securing the notes, and to subordinate the note to the Convertible Debenture issued March 2, 2015. In May 2015, in connection with the issuance of Series A Preferred (See NOTE 9 "Series A Preferred"), the notes were again modified to subordinate them to the Series A Preferred. All other aspects of the notes remained unchanged.

On December 1, 2014, Michael Gorton, the Company's Chief Executive Officer, loaned to the Company pursuant to a convertible promissory note the amount of $130,000. The note initially would have matured on June 30, 2015, bears interest at a rate of 12% per annum, is convertible into shares of our Common Stock at a price of $6.00 per share, and was secured by a claim on proceeds, if any, of a solar project being acquired (PS IV). The notes can be prepaid at any time prior to maturity without penalty. On February 27, 2015, the note was modified to extend the maturity date to September 30, 2015, eliminate all collateral securing the note, and subordinate the note to the Convertible Debenture issued March 2, 2015. In May 2015, in connection with the issuance of Series A Preferred (See NOTE 9 "Series A Preferred"), the note was again modified to subordinate it to the Series A Preferred. All other aspects of the note remained unchanged.

Convertible Notes Payable, Non-Related Party

In January 2015, the Company issued a convertible note to an unrelated party in the amount of $50,000. The note bears interest at a rate of 12% per year and matures on September 30, 2015, and all principal and interest is due at maturity. Principal and interest is payable in cash or shares of Common Stock, at the option of the holder, at a conversion price of $6.00 per share. The note is secured pursuant to a security agreement by our interest in proceeds, if any, stemming from our interest in PS IV. The Company may prepay the note at any time without penalty.

NOTE 7 - LEASES

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

The Company recognized expenses of $17,806 and $20,541 in rent under the Powerhouse One lease in the six months ended June 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 8 - DERIVATIVE LIABILITY ON WARRANTS

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

Input assumptions on the issuance date were as follows:

The fair value of the warrant derivative liability outstanding as of June 30, 2015, was determined using "Level 2 Observable Inputs" as defined in ASC 820, entitled "Fair Value Measurement".

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

In this issuance of convertible debentures and warrants, done at arm's length between unrelated parties, the value of the warrants alone exceeded the proceeds received. The Company's need for ongoing financing made the transaction attractive, despite the economics. The application of FASB Topic 820 entitled "Fair Value Measurement", resulted in a loss on the date of issuance of $336,884, offset by a subsequent gain of $1,280,433 stemming from the subsequent movement in the price of our Common Stock, together resulting in a net gain on derivative liability warrants of $962,764 and $943,549 for the three and six months ended June 30, 2015, respectively.

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 14 "Convertible Debentures (TCH)"). In its consent to this later transaction, Alpha waived its "down round" rights in this single instance.

On May 6, 2015, the Company issued Series A Preferred stock (NOTE 9 “Preferred Stock”) resetting the exercise price of the warrants to $4.00 per share.

NOTE 9 – 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, 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 preferred shares have a dividend rate of 12% per annum and, along with accrued dividends, are convertible into shares of our Common Stock at a price of $4.00 per share at any time on or before the third day following the receipt of proceeds from a public offering of securities of the Company. If the shares are not converted by the holder during that time, the Company shall redeem the shares at face value plus accrued dividends from the proceeds of the public offering.

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

In connection with the issuance, the Company agreed to grant the holder warrants to purchase 375,000 shares of its Common Stock, 187,500 with each tranche, 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.

Use of proceeds from the issuance is limited to repayment of a certain convertible note outstanding in the amount of $50,000, development of PS IV and PS V, and general corporate purposes. The incurrence of additional debt or issuance of additional preferred equity instruments, the payment of dividends, or the repurchase of our Common shares is prohibited.

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 the Company agreed to aggressively seek strategic alternatives including, without limitation, marketing the Company to a private equity group, seeking out a strategic purchaser, seeking a merger of equals, or selling its interest in one or more of the solar projects. The Company has taken such steps and considers the event of default of no further consequence.

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 will incur interest expense thereafter.

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

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.  The options were valued using the Black-Scholes model and the resulting equity-based compensation expense included in general and administrative expenses for three month period ending June 30, 2015 was $146,065 and $48,688 of compensation expense related to options not yet vested remains unrecognized at June 30, 2015. Such amount is expected to be recognized during the remainder of 2015.  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 options were valued using the Black-Scholes model and the resulting equity-based compensation expense included in general and administrative expenses for the three and six months ended June 30, 2015 was $8,115 and $89,262 of compensation expense related to options not yet vested remains unrecognized at June 30, 2015. Such amount is expected to be recognized during the years 2015 through 2017.

Equity-based compensation expense included in general and administrative expenses for the three and six month in 2015 was $192,339 and $533,410, respectively.

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

Warrants

The Company had 464,013 warrants outstanding at June 30, 2015, with a weighted average term of 5 years and a weighted average exercise price of $5.81 per share.

NOTE 10 - NONCONTROLLING INTEREST

The original owners of Powerhouse One continue to own approximately 11% of the membership interest of the limited liability company. The noncontrolling interests of equity investors in Powerhouse One is reported on the consolidated balance sheet and statement of operations as "Noncontrolling interest in subsidiary" ("noncontrolling interest") and reflects their respective interests in the equity and the income or loss of the limited liability company.

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

NOTE 11 – RELATED PARTY TRANSACTIONS

Other than the Board member options described herein in a note entitled "Stock Options”, the issuance of convertible notes described herein in the note entitled "Convertible Notes Payable, Related Parties", no other related party transactions occurred during the three and six months ended June 30, 2015 and 2014.

NOTE 12 - TAXES

Our estimated $9.2 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 2011. We have taken no tax positions that, more likely than not, may not be realized.

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

NOTE 13 - COMMITMENTS AND CONTINGENCIES

In connection with the acquisition of Principal Sunrise IV (fka IS 46), a third-party arranged, on behalf of the Company, a letter of credit with the off-taker, Duke Energy Progress, Inc., in the amount of $800,000. In the event the letter of credit is drawn upon by the beneficiary, the Company is liable to the provider for the notional amount of the letter of credit plus its costs.

NOTE 14 - SUBSEQUENT EVENT

Convertible Debentures (TCH)

On July 1, 2015, the Company agreed to issue, in one or more separate tranches, up to $2,000,000 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 Debentures:

In connection with the Debentures, the Company granted to the holders 60-month warrants to purchase up to 166,667 shares of Common Stock at a price of $6.00 per share.

On August 12, 2015, the Convertible Debentures (TCH) were repaid in full for an amount of $1.1 million including $10 thousand of accrued interest.

Short-Term Advance

On August 3, 2015, the Company accepted a short-term advance from one of its consultants of approximately $240 thousand. The advance was non-interest bearing except amounts outstanding beyond October 3, 2015, bear interest at a rate of 12% per annum. The Company incurred a one-time fee of $36 thousand in connection with the advance.

On August 12, 2015, the short-term advance was repaid in full for an amount of $240 thousand plus the fee of $36 thousand.

Assignment of Principal Sunrise IV

On August 11, 2015, the Company assigned its contractual rights under the MIPA for the amount of $7.0 million and the reimbursement of its advances to date under the MIPA of $4.7 million. The net proceeds from the assignment were scheduled to be received by the Company as follows: $7.6 million at closing; $2.5 million on August 31, 2015; $1.6 million at the project's commercial operation date, expected to be early 2016. The gain on the transaction is expected to be approximately $6.8 million after transaction costs estimated at $200,000.

Proceeds from the assignment were used to: repay debt and accrued interest of the Convertible Debentures held by Alpha ($1.3 million); redeem the outstanding Series A Preferred ($1.03 million); repay the Convertible Debenture (TCH) issued July 1, 2015 ($1.1 million); repay convertible notes payable, related party ($724 thousand); repay convertible notes payable ($51 thousand); repay a short-term advance of August 3, 2015 ($276 thousand); pay deferred compensation ($1.2 million), accounts payable, and for general working capital. Following application of the proceeds as described above, the Company has no debt or redeemable preferred stock outstanding except the Acquisition Note Payable (NOTE 5) and the note payable for insurance premiums.

In addition to 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. Additionally, as a part of the closing, the assignee and the Company agreed to escrow the scheduled August 31, 2015, payment pending the Company meeting 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, and resolving a fee dispute related to the project. 
Finally, the assignee, the Company, and the third-party arranging a letter of credit in connection with Principal Sunrise IV (see NOTE 13), have separately agreed to relieve the Company of its obligation under the letter of credit.

Sale of Powerhouse One

On August 17, 2015, the Company sold its Powerhouse One subsidiary in exchange for $1.6 million, the payment of $767 thousand due to the minority owners, and extinguishmentof the Acquisition Note Payable (see NOTE 5) having an outstanding balance of $4.5 million. Proceeds from the sale will be used to further reduce accounts payable, deferred compensation, and for general working capital purposes. Though the asset represented the Company's primary source of revenue, the cost of operations and debt service consumed nearly all the net cash flow.

ITEM 2   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Item 2 should be read in the context of the information included in our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission and elsewhere in this Quarterly Report, including our financial statements and accompanying notes in Item 1 of this Quarterly Report.

BUSINESS

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

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

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

COMPARISON OF OPERATING RESULTS

(all amounts rounded to the nearest thousand)

Three Months Ended June 2015 and 2014

Power generation revenue was $288 thousand in 2015 compared to $283 thousand in 2014.

Direct operating costs declined $23 thousand in 2015 compared to 2014. Repairs and maintenance decreased by $15 thousand reflecting 2014 costs incurred to clear trees and perform additional preventative maintenance. Insurance and lease expense each decreased by $5 thousand as 2014 reflecting a cumulative adjustment from prior periods. Property taxes increased by $5 thousand as 2015 included cumulative adjustments from prior periods. Other direct costs netted to a decrease of $3 thousand.

The increase in general and administrative expenses of approximately $850 thousand was comprised of:

Increases

Decreases

Interest expense increased by $662 thousand including an increase of $676 thousand ($44 thousand in cash and $632 thousand non-cash reflecting the amortization of the debt discount attributed to the warrants) resulting from the March 2, 2015, issuance of debentures to Alpha Capital Anstalt; offset by a $12 thousand decrease resulting from the cessation at December 31, 2014, of the interest accrual for legacy liabilities; and other insignificant changes.

Due to movements in the price of the Company's stock, the withdrawal of a public offering, and changes in the Company's future prospects, our independent valuation firm estimated a decline at June 30, 2015, in the value of the warrants issued in connection with the March 2, 2015, issuance of debentures to Alpha Capital Anstalt. As a result, the derivative liability was reduced and the Company recorded a gain of $963 thousand in the three months ended June 30, 2015.

Six Months Ended June 2015 and 2014

Power generation revenue was $472 thousand in 2015 compared to $501 thousand in 2014, a decrease of $29 thousand. The decrease is due to protracted snows in the northeastern U.S. during the last winter (the location of our SunGen Mill 77 facility) and extended periods of rain in the Midwest in the spring (the location of our Powerhouse One facility).

Direct operating costs declined $23 thousand in 2015 compared to 2014. Repairs and maintenance decreased by $15 thousand reflecting 2014 costs incurred to clear trees and perform additional preventative maintenance. Insurance and lease expense each decreased by $5 thousand as 2014 reflecting a cumulative adjustment from prior periods. Property taxes increased by $5 thousand as 2015 included cumulative adjustments from prior periods. Other direct costs netted to a decrease of $3 thousand.

The increase in general and administrative expenses of approximately $1.3 million was comprised of:

Increases

Decreases

Interest expense increased by $885 thousand including an increase of $866 thousand ($33 thousand in cash and $833 thousand non-cash reflecting the amortization of the debt discount attributed to the warrants) resulting from the March 2, 2015, issuance of debentures to Alpha Capital Anstalt; an increase of $44 thousand incurred for the convertible notes (related parties and others); offset by a $25 thousand decrease resulting from the cessation at December 31, 2014, of the interest accrual for legacy liabilities; and other insignificant changes.

Due to movements in the price of the Company's stock, the withdrawal of a public offering, and changes in the Company's future prospects, our independent valuation firm estimated a decline at June 30, 2015, in the value of the warrants issued in connection with the March 2, 2015, issuance of debentures to Alpha Capital Anstalt. As a result, the derivative liability was reduced and the Company recorded a gain of $944 thousand in the six months ended June 30, 2015.

COMPARISON OF BALANCE SHEETS

(all amounts rounded to the nearest thousand)

Significant changes in the balance sheet between June 30, 2015, and December 31, 2014, include the following:

Accounts receivable increased by $92 thousand due to better production in May/June compared to the November/December.

Deposits were $250 thousand in December 2014 consisting on money advances on Principal Sunrise V, and $70 thousand in June 2015 consisting of amounts advanced in anticipation a public offering later withdrawn. The funds were refunded to the Company in July 2015.

Construction in progress increased $4.4 million between December 2014 and June 2014 reflecting additional development on Principal Sunrise IV.

Compensation payable increased $399 thousand between December 2014 and June 2014 reflecting the ongoing deferral of compensation by the Company's senior team.

Accounts payable increased $1.0 million between December 2014 and June 2014 reflecting the Company's limited availability of funds during that time.

Increases in convertible notes payable, convertible debenture payable, mandatorily redeemable Series A preferred stock, and the interest payable and additional paid in capital between December 2014 and June 2014 reflects the Company's ongoing fundraising efforts to meet its finding needs.

The increase in accrued expenses of $574 thousand between December 2014 and June 2014 reflects estimated costs associated with an anticipated public offering later withdrawn.

The creation of the derivative liability on warrants arising between December 2014 and June 2014 reflects the warrants issued in connection with the convertible debenture with Alpha Capital Anstalt.

LIQUIDITY AND CAPITAL RESOURCES

Sources of Liquidity and Trends In Liquidity

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. The net proceeds from the assignment were scheduled to be received by the Company as follows: $7.6 million at closing; $2.5 million on August 31, 2015; $1.6 million at the project's commercial operation date, expected to be early 2016.

Proceeds from the assignment were used to: repay all outstanding debt and redeemable preferred stock other than the Acquisition Note Payable and the note payable for insurance premiums. Assigning its rights to Principal Sunrise IV also relieved the Company of ongoing payment obligations totaling more than $500 thousand per month plus the cost of ongoing development efforts. Using the proceeds, the Company was also able to reduce its deferred compensation ($1.2 million) and its accounts payable. Following application of the proceeds from the assignment, the Company has no debt or redeemable preferred stock outstanding except the Acquisition Note Payable (NOTE 6 in Item 1 Financial Statements hereof.) and the note payable for insurance premiums.

Sale of Powerhouse One

On August 17, 2015, the Company sold its Powerhouse One subsidiary in exchange for $1.5 million, the payment of $767 thousand due to the minority owners, and assumption of the Acquisition Note Payable (see NOTE 5) having an outstanding balance of $4.5 million. Proceeds from the sale will be used to further reduce accounts payable, deferred compensation, and for general working capital purposes. Though the asset represented the Company's primary source of revenue, the cost of operations and debt service consumed nearly all the net cash flow.

Eliminating a significant amount of debt, the redeemable preferred stock, and the ongoing monthly obligations for Principal Sunrise IV, the Company is in an improved situation but remains dependent upon the remaining payments from the assignment of Principal Sunrise IV to maintain its business. Eliminating the debt, the redeemable preferred stock, and having the Acquisition Note Payable assumed as a part of the sale of Powerhouse One, also removed all prohibitions to raise money through future debt and equity offerings.

Cash flows from existing sources do not cover the costs of administering our business and our monthly net cash flow reflects a deficit of between $150,000 and $200,000 each month. We also expect the need for additional funds to increase as we seek additional acquisitions and meet our increasing reporting obligations (which will increase our quarterly operating expenses in connection with costs relating to the preparation of and filing of periodic reports, financial statements and other disclosures and filings with the Securities and Exchange Commission, which we estimate in the amount of $100,000 per quarter), and provide for the ongoing payments for our pending acquisitions until permanent financing is arranged, an additional $550,000 to $700,000 per month.

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

To date, we have funded our operations primarily through private placements of common stock and convertible debt securities.  Since the date of the reverse merger with Principal Solar Texas, we have sold 2,085,004 shares of our common stock for aggregate proceeds of $8,453,041. These sales of our common stock reflect issuance prices ranging from $2.20 to $6.76 per share (weighted average of $4.05). Though no longer outstanding, we have previously sold convertible debt yielding gross proceeds of $1,930,000, and preferred shares yielding proceeds of $990 thousand. Although we have successfully financed our operations through the issuance of common stock and convertible debt to date, we cannot be assured that we will be able to continue to be successful in financing our operations in the future.

Future acquisitions are expected to be separately financed and self-supporting from a cash flow perspective.

OFF-BALANCE SHEET ARRANGEMENTS 

The assignment of the Company's contractual rights under the MIPA to acquire Principal Sunrise IV described under Liquidity and Capital Resources, eliminated the off-balance sheet obligation thereunder.

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

On March 2, 2015, the Company entered into a MIPA with Innovative Solar Systems, LLC, a solar developer operating primarily in North Carolina, to acquire Innovative Solar 42, LLC ("PS V"), the owner of a 72.9mw AC solar project to be built in Fayetteville, North Carolina. PS V holds a single and intangible asset, a 10-year power purchase agreement ("PPA") with Duke Energy Progress, Inc. PS V does not have, nor has it ever had, any other assets, any liabilities, any employees, any revenues, or any operations of any kind. As such, PS V is not a "business" as defined in the accounting literature, and it has no historical financial statements. PSI agreed to pay Innovative Solar Systems, LLC $5,832,000 for 100% of the membership interest of PS V in a series of payments of approximately $300,000 per month between execution of the MIPA and the financial close (the point at which all project financing is arranged), and a balloon payment at financial close sufficient to having cumulatively paid 70% of the $5,832,000 purchase price. The remaining 30% of the purchase price will be paid in installments of $150,000 per month through the project's commercial operation date. At June 30, 2015, a total of $1,170,000 has been paid to date, and failure by the Company to make any of the future scheduled payments may result in the loss of all payments made through such date. The Company is working with engineering and construction firms on final designs, and the total cost of the project based upon the preliminary work is expected to be approximately $147.2 million. The Company is in discussion with multiple parties to provide the acquisition, construction, and permanent financing for the project, however, no assurance can be given that adequate financing on terms acceptable, or even available, to the Company will be obtained. Closing of the acquisition is expected to occur no later than August 30, 2015, and construction is expected to be completed in early 2016.

CRITICAL ACCOUNTING POLICIES

We use estimates throughout our statements and changes in estimates could have a material impact on our operations and financial position. We consider an accounting estimate to be critical if: (1) the estimate requires us to make assumptions about matters that are highly uncertain at the time the estimate is made or (2) changes in the estimate are reasonably likely to occur from period to period, or use of different estimates we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations.

There have been no changes in the critical accounting policies disclosed in our Annual Report on Form 10-K filed March 17, 2015.

ITEM 3       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our primary market risk is the continued acceptance of our debt and equity securities, the sale of which is necessary to finance our administrative and acquisition-related needs. See "Liquidity and Capital Resources" in Item 2 herein. There have been no changes in management's assessment of its risk as disclosed in our Annual Report on Form 10-K filed March 17, 2015.

ITEM 4       CONTROLS AND PROCEDURES

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 June 30, 2015, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded the Company's disclosure controls and procedures were effective as of June 30, 2015.

Changes In Internal Controls Over Financial Reporting

There were no changes in our internal controls over financial reporting during the three months ended June 30, 2015, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. See Risk Factors in Part II item 1A herein.

Limitations on the Effectiveness of Controls

The Company’s disclosure controls and procedures are currently providing 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. 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 financial statements 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. 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 smaller reporting companies like us, such regulations have not yet been issued.

PART II

ITEM 1       LEGAL PROCEEDINGS

The descriptions of liabilities arising from the reverse merger in Note 3 of the Notes to Unaudited Consolidated Financial Statements in Part I Item 1 of this Quarterly Report is incorporated herein by reference.

ITEM 1A    RISK FACTORS

An additional risk factors not included in the Annual Report on Form 10-K filed with the SEC on March 17, 2015, or the Quarterly Reports on Form 10- Q filed May 13, 2015:

The sale of the Company's Powerhouse One subsidiary leaves it 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, the Company has eliminated it primary source of revenue and is dependent upon the remaining payments from the assignment of its contractual rights in Principal Sunrise IV and the proceeds from the sale of Powerhouse One to maintain its business.

ITEM 2       UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the quarterly period covered by this report, the Company completed additional closings of its private placement of equity securities pursuant to which it sold 279,835 shares of its Common Stock at a price of $6.00 per share resulting in gross proceeds to the Company of $1,679,001, all of which was used to fund the Company's administrative needs and further its acquisitions of PS IV and PS V.

On May 6, 2015, the Company contracted to issue, in two separate tranches, 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 preferred shares have a dividend rate of 12% per annum and, along with accrued dividends, are convertible into shares of our Common Stock at a price of $4.00 per share at any time on or before the third day following the receipt of proceeds from the Company's current public offering. If the shares are not converted by the holder during that time, the Company shall redeem the shares at face value plus accrued dividends from the proceeds of the public offering. In connection with the issuance, the Company granted the holder warrants to purchase 375,000 shares of its Common Stock, also in two tranches, at a purchase price of $6.00 per share. Use of proceeds from the issuance is limited to repayment of a certain convertible note outstanding in the amount of $50,000, development of PS IV and PS V, and general corporate purposes. The Company agreed to deliver subordination agreements regarding convertible notes held by related parties, and the incurrence of additional debt or issuance of additional equity instruments superior to the Series A Preferred, the payment of dividends, or the repurchase of our Common shares is prohibited.

No underwriters were involved in the transactions described above. The Company’s issuance of Common Stock, convertible debt, warrants, and any Common Stock issuable upon conversion or exercise thereof, was, or will be, exempt from registration under the Securities Act of 1933 pursuant to exemptions from registration provided by Rule 506 of Regulation D and Sections 4(2) of the Securities Act of 1933, insofar as such securities were issued only to “accredited investors” within the meaning of Rule 501 of Regulation D. The recipients of these securities took such securities for investment purposes without a view to distribution. Furthermore, they each had access to information concerning the Company and its business prospects. There was no general solicitation or advertising for the purchase of the securities and the securities are restricted pursuant to Rule 144.

ITEM 6       EXHIBITS

The Exhibit Index immediately preceding the exhibits required to be filed with this report is incorporated herein by reference.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

EXHIBIT INDEX

* Filed herewith.

(1) Filed as exhibits to the Company’s Registration Statement on Form S-1 (File: 333-193058), filed with the Securities and Exchange Commission on December 23, 2013, and incorporated herein by reference.

(2) Filed as exhibits to the Company’s Registration Statement on Form S-1/A, Amendment No. 1 (File: 333-193058), filed with the Securities and Exchange Commission on May 2, 2014, and incorporated herein by reference.

(3) Filed as exhibits to the Company’s Registration Statement on Form S-1/A, Amendment No. 2 (File: 333-193058), filed with the Securities and Exchange Commission on July 17, 2014, and incorporated herein by reference.

(4) Filed as exhibits to the Company’s Registration Statement on Form S-1/A, Amendment No. 4 (File: 333-193058), filed with the Securities and Exchange Commission on October 20, 2014, and incorporated herein by reference.

(5) Filed as exhibits to the Company’s Registration Statement on Form S-1/A, Amendment No. 5 (File: 333-193058), filed with the Securities and Exchange Commission on December 22, 2014, and incorporated herein by reference.

(6) Filed as exhibits to the Company’s Current Report on Form 8-K/A (File: 333-193058), filed with the Securities and Exchange Commission on March 5, 2015, and incorporated herein by reference.

(7) Filed as an exhibit to the Annual Report on Form 10-K (File: 333-193058), filed with the Securities and Exchange Commission on March 17, 2015, and incorporated herein by reference.

(8) Filed as Exhibits to the Company's Registration Statement on Form S-1/A, Amendment No. 3 (File: 333-203075), filed with the Securities and Exchange Commission on June 5, 2015.

(9) Filed as an exhibit to the Company's Current Report on Form 8-K (File: 333-193058) filed with the Securities and Exchange Commission on May 1, 2015, and incorporated herein by reference.

(10) Filed as an exhibit to the Company's Current Report on Form 8-K (File: 333-193058) filed with the Securities and Exchange Commission on May 12, 2015, and incorporated herein by reference.

(11) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q (File: 333-193058) filed with the Securities and Exchange Commission on May 13, 2015, and incorporated herein by reference.

(12) Filed as exhibit 3.2 to the Company’s Registration Statement on Form S-1 (File: 333-193058), filed with the Securities and Exchange Commission on December 23, 2013, and incorporated herein by reference.

(13) Filed as Exhibits to the Company’s Registration Statement Filed on Form S-1/A, Amendment No. 1 (File: 333-203075), filed with the Securities and Exchange Commission on May 19, 2015.

(14) Filed as Exhibits to the Company’s Registration Statements on Form S-1/A, Amendment No. 2 (File: 333-203075), filed with the Securities and Exchange Commission on May 21, 2015.

(16) Filed as an Exhibit to the Company’s Registration Statement on Form S-1/A, Amendment No. 4 (File: 333-203075), filed with the Securities and Exchange Commission on June 11, 2015.

(17) Filed as an exhibit to the Company's Current Report on Form 8-K/A (File: 333-193058) filed with the Securities and Exchange Commission on July 8, 2015, and incorporated herein by reference.

(18) Filed as an exhibit to the Company's Current Report on Form 8-K (File: 333-193058) filed with the Securities and Exchange Commission on August 17, 2015, and incorporated herein by reference.

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