Principal Solar, Inc. - Quarter Report: 2016 March (Form 10-Q)

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		March 31, 2016				December 31, 2015
ASSETS
Current Assets
Cash and equivalents		$	263,871			$	498,330
Accounts receivable			-				1,949
Prepaid assets			29,154				43,116
Other receivable			1,624,000				1,624,000
Total current assets			1,917,025				2,167,395
Other Assets
Construction in progress			12,791,661				9,567,324
Total other assets			12,791,661				9,567,324
Total assets		$	14,708,686			$	11,734,719
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable		$	1,050,748			$	513,363
Compensation payable			424,248				390,702
Interest payable			191,604				60,892
Accrued expenses and other liabilities			204,816				97,754
Note payable for insurance premiums			21,099				33,495
Note payable, related party			300,000				-
Arowana notes payable			8,149,191				5,871,119
Commissions payable			1,540,000				1,540,000
Mediation settlement			800,000				800,000
Liabilities arising from reverse merger			1,003,839				1,003,839
Total current liabilities			13,685,545				10,311,164
Total liabilities			13,685,545				10,311,164
Commitments and Contingencies
Stockholders' Equity
Preferred stock: $0.01 par value; 2,000,000 shares authorized; 500,000 designated as Series A and 0 shares outstanding at March 31, 2016 and December 31, 2015			-				-
Common stock: $0.01 par value, 15,000,000 shares authorized, 5,564,258 shares issued and outstanding at March 31, 2016 and December 31, 2015			55,642				55,642
Additional paid-in capital			12,364,250				12,355,916
Accumulated deficit			(11,396,751	)			(10,988,003	)
Total stockholders' equity			1,023,141				1,423,555
Total liabilities and stockholders' equity		$	14,708,686			$	11,734,719

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		Three Months Ended. March 31,
		2016				2015
Revenues
Power generation		$	5,010			$	184,075
Total revenues			5,010				184,075
Cost of revenues
Depreciation			-				75,495
Direct operating costs			5,024				52,227
Total cost of revenues			5,024				127,722
Gross profit (loss)			(14	)			56,353
General and administrative expenses			277,557				919,671
Operating loss			(277,571	)			(863,318	)
Other expense
Interest expense			131,177				333,474
Loss on derivative liability warrants			-				19,215
Total other expense			131,177				352,689
Loss before provision for income taxes			(408,748	)			(1,216,007	)
Provision for income taxes			-				1,233
Net loss			(408,748	)			(1,217,240	)
Income attributable to noncontrolling interest in subsidiary			-				6,483
Net loss attributable to common stockholders		$	(408,748	)		$	(1,223,723	)
Net loss per share attributable to common stockholders, basic and diluted		$	(0.07	)		$	(0.23	)
Weighted average shares outstanding, basic and diluted			5,564,258				5,435,120

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		Common Stock								Additional Paid-in				Accumulated				Principal Solar, Inc.				Non- Controlling
		Shares				Amount				Capital				Deficit				Total				Interest				Total
December 31, 2015			5,564,258			$	55,642			$	12,355,916			$	(10,988,003	)		$	1,423,555			$	-			$	1,423,555
Stock-based employee compensation expense			-				-				8,334				-				8,334				-				8,334
Net income			-				-				-				(408,748	)			(408,748	)			-				(408,748	)
March 31, 2016			5,564,258			$	55,642			$	12,364,250			$	(11,396,751	)		$	1,023,141			$	-			$	1,023,141

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		Three Months Ended March 31,
		2016				2015
OPERATING ACTIVITIES
Net loss		$	(408,748	)		$	(1,217,240	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation			-				75,494
Stock-based employee compensation expense			8,334				341,071
Stock-based advisor compensation expense			-				75,000
Loss on derivative liability on warrants			-				19,215
Amortization of debt discounts			-				206,480
Change in operating assets and liabilities:
Accounts receivable			1,949				(17,645	)
Prepaid assets			13,962				12,875
Accounts payable			537,384				50,551
Compensation payable			33,546				116,500
Interest payable			130,712				32,842
Accrued expenses and other liabilities			107,062				39,567
Net cash provided by (used in) operating activities			424,201				(265,290	)
INVESTING ACTIVITIES
Construction in progress			(3,224,336	)			(2,202,092	)
Net cash used in investing activities			(3,224,336	)			(2,202,092	)
FINANCING ACTIVITIES
Proceeds from Arowana note			2,278,072				-
Proceeds from sale of common stock			-				1,679,001
Proceeds from convertible debenture payable (Alpha)			-				1,250,000
Payment of acquisition note payable			-				(62,455	)
Proceeds from convertible note, non-related party			-				50,000
Proceeds from short-term note, related party			300,000				-
Payments on note payable for insurance premiums			(12,396	)			(16,268	)
Change in restricted cash			-				28,451
Net cash used in financing activities			2,565,676				2,928,729
(Decrease) increase in cash and equivalents			(234,459	)			461,347
Cash and equivalents, beginning of period			498,330				104,328
Cash and equivalents, end of period		$	263,871			$	565,675
Supplemental Disclosures
Interest paid		$	465			$	94,152
Income taxes paid		$	-			$	-
Non-Cash Transactions:
Discount on covertible debenture recorded as a derivative liability		$	-			$	1,250,000
Construction in progress in accounts payable			473,407				349,950
Deposit applied to construction in progress			-				250,000

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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 2015 Annual Report on Form 10-K. The results of operations for the periods reflected herein are not necessarily indicative of the results to be expected for the full year.

 

Going Concern

 

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As of March 31, 2016, the Company has an accumulated deficit of approximately $11.4 million, and the Company has cumulatively had negative cash flows from operations since inception. Further, the Company is not considering any new large utility-scale solar projects at this time. Its ability to continue as a going concern is dependent upon the ability of the Company to collect its amounts receivable and dispose of its remaining development assets under development in order to meet its obligations, pay its liabilities arising from normal business operations when they come due, and potentially develop and execute upon a new business strategy. 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. As of the date of this report, the Company does not have any expectation of replacing the revenue generated by its Powerhouse One subsidiary with any other solar project.

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Recent Accounting Pronouncements

 

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, "Leases (Topic 842)". ASU 2016-02 requires all leases in excess of 12 months to be reported on the balance sheet as a liability based on the net present value of the expected lease payments, and a right-to-use asset for the term of the lease. On the statement of operations, capital leases will continue to be treated as financing transactions, meaning interest and amortization will be included as rent expense. Because interest is calculated on a declining balance over time, the cost of capital leases will look more expensive at the beginning of a lease. Leases that qualify as operating leases will be reported as rent expense. The standard is effective for annual periods beginning after December 15, 2018. We are evaluating the impact of this standard on our consolidated financial position, results of operations and cash flows.

 

In March 2016, the FASB issued ASU No. 2016-09 Compensation - Stock Compensation (Topic 718) Improvement to Employee Share-Based Payment Accounting, which affects the accounting for the income tax consequences of share-based payments, the classifications of awards as either equities or liabilities, and the classification on the statement of cash flows. ASU No. 2016-09 is effective for fiscal years beginning after December 15, 2016, and for interim periods within those annual periods. We are evaluating the impact of this standard 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 date of sale, July 1, 2015). All 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 did have a derivative instrument treated as a liability whose value was measured on a recurring basis (see "Fair Value Instruments" and "Derivative Liability on Warrants" included herein).

 

Fair Value Instruments

 

On March 2, 2015, the Company entered into a convertible debenture with Alpha Capital Anstalt ("Alpha") (See NOTE 6 "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-valued these warrants at the end of each reporting period and any changes are reflected as gains or losses in current period results. (See NOTE 10 - 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.

 

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.

 

Other Receivable

 

Other receivable reflects the remaining amount due from the August 2015 assignment of Principal Sunrise IV. Payable by the assignee at the project's commercial operation date ("COD"), the project is expected to reach COD in June 2016. No allowance has been recorded against the receivable.

 

Construction in Progress

 

The Company records as construction in progress those items of a capital and expense nature necessary to develop, construct, and place into service a solar project. Such costs consists primarily of the cost of the project company's acquisition rights, equipment costs, interconnection costs, and the costs of independent engineers, valuation firms, and rent, property taxes, financing costs, and insurance during the construction period.

 

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.

 

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.

 

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 $.01 par value common stock ("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 Loss per Share

 

Basic net income or loss per share is computed by dividing the net income or loss for the period by the weighted average number of shares of Common Stock outstanding for the period. Diluted income per share reflects the potential dilution of derivative securities by including other potential issuances of Common Stock including shares to be issued upon exercise of options and warrants and upon conversion of convertible debt. Potentially dilutive shares are not included in the event of a loss as the effect of doing so would be anti-dilutive. As of March 31, 2016, options to purchase 794,816 shares, and warrants to purchase 550,434 shares of our Common Stock have been excluded from the calculation of diluted loss per share, as their effect would have been anti-dilutive. As of March 31, 2015, options to purchase 765,590 shares and warrants to purchase 276,513 shares of our Common Stock, and 467,500 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.

 

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. The cancellation of 50,000 of the shares was effected in December 2015, and the remaining will be recognized for accounting purposes once they are received from Pegasus.

 

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

 

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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 - DISPOSAL OF ASSETS

 

Disposition of Principal Sunrise V (aka IS 42)

 

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

 

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

 

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 ("Bridge Bank") 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 bore a fixed interest rate of 7.5% annually. In August 2015, as a part of the disposal of Powerhouse One, all principal and interest pursuant to the Acquisition Note Payable was paid in full.

 

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 was $0 and $5,091 for the three months in 2015 and 2014, 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 to borrow $1,250,000. In August 2015, all principal and interest pursuant to the convertible debenture was paid in full. Amortization of the discount and interest expense recognized during the three months in 2015 totaled $209,722.

 

 

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

 

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

 

In March 2016, a trust maintained by a contractor to the Company made a short-term unsecured loan to the Company in the amount of $300,000 under a short-term promissory note. The note bore a flat fee of $45,000 that was recorded as interest expense, and matures on June 24, 2016. Amounts outstanding beyond the maturity date bear interest at a rate of 12% per annum. Proceeds from the loan were used primarily for development costs of Principal Sunrise V.

 

Interest expense for the notes payable, related parties, recognized during the three months in 2016 and 2015 totaled $45,000 and $18,641, respectively.

 

Convertible Note Payable, 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. Interest expense for the notes payable, non-related party, recognized during the three months in 2015 totaled $1,266.

 

Arowana Notes

 

Additional Projects

 

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

 

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

 

Arowana continues to fund the development costs of the Additional Projects and, at March 31, 2016, the cumulative investment in the Additional Projects totaled $7.8 million, and the balance of the Arowana Note was $7.9 million, including interest. There can be no assurance Arowana will continue funding the two projects and failing to do so could, depending upon the finality, timing, and proceeds from the assignment of Principal Sunrise V, could cause the related power purchase agreements to be in default, resulting in a loss of all amounts invested to date.

 

Principal Sunrise V

 

Effective November 25, 2015, the Company issued a promissory note to Arowana in the principal amount of $269,688. The note matures on December 31, 2016, and bears simple interest at the rate of 12% per annum (the "Second Arowana Note").

 

The Company used the proceeds from the Second Arowana Note to make an interconnection payment for Principal Sunrise V, and the note is secured by proceeds from the expected disposition of the project.

 

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NOTE 7 - COMMISSIONS PAYABLE

 

Carlyle Capital Markets, Inc.

 

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

 

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

 

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

 

Vis Solis, Inc.

 

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

 

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

 

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

 

NOTE 8 - MEDIATION SETTLEMENT

 

TCH Principal Solar, LP

 

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

  

 

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

 

 

NOTE 9 - LEASES

 

The Company's solar array sits on a rooftop subject to a service agreement with initial terms equal to the energy sales agreement and having one or more renewal options. There are no separate rental payments in the case of rooftop installations. The Company's current solar array installations is as follows:

 

 

Rent expense for Powerhouse One was $6,645 during the three months in 2015.

 

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.

 

 

NOTE 10 - 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 in connection with the issuance of convertible debentures (See NOTE 6 "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 11 “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 GAAP, resulted in a loss on the date of issuance of $336,884, offset by a subsequent gain of $317,669 stemming from the subsequent movement in the price of our Common Stock, together resulting in a net gain on derivative liability warrants of $19,215 for the period ended March 31, 2015.

 

 

NOTE 11 – CAPITAL STOCK

 

Preferred Stock

 

At December 31, 2015, the Company had authorized 2,000,000 shares of $.01 par value Class A preferred stock.

 

  

Common Stock

 

At December 31, 2015, the Company had authorized 15,000,000 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 794,816 shares of Common Stock outstanding at March 31, 2016.

 

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 794,816 of the total 966,090 shares of Common Stock reserved have been issued to date. The exercise of options, if any, will result in the issuance of new share by the Company.

 

2016 Issuances

 

There have been no issuances in 2016.

 

2015 Issuances

 

In February 2015, the Company granted options to purchase 6,250 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 each case above, the options were valued using the Black-Scholes model, and the resulting equity-based compensation expense included in general and administrative expense was $0 and $37,500 for the periods ended March 31, 2016 and March 31, 2015, 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 in 2015 were based upon the following parameters:

 

 

 

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.

 

 

Warrants

 

The Company had 550,434 warrants outstanding at March 31, 2016, with a weighted average term of 4.3 years and a weighted average exercise price of $5.86 per share.

 

 

NOTE 12 - NONCONTROLLING INTEREST

 

Prior to its sale effective July 1, 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.

 

 

NOTE 13 – RELATED PARTY TRANSACTIONS

 

Other than the Board member options described herein in a NOTE 11 "Stock Options”, and the issuance of convertible notes described herein in the NOTE 6 "Notes Payable, Related Parties", no other related party transactions occurred during 2016 and 2015.

 

NOTE 14 - TAXES

 

Our estimated $13.3 million federal income tax net operating loss carryover expires over the period from 2030 through 2035. Our federal and state income tax returns are not under examination by any taxing authorities and no statute extensions have been granted; therefore, only our December 31, 2012 to 2015 tax returns are subject to examination.

 

Management has evaluated all tax positions and determined that no uncertain tax positions exist at this time. As a result, no amounts have been recorded related to a tax position more likely than not to be sustained. The Company classifies interest and penalties related to income taxes, if any, as interest expense and general and administrative costs, respectively, in our consolidated financial statements.

 

The Company has established a valuation allowance to fully reserve the net deferred tax assets for all periods due to the uncertainty of the timing and amounts of future taxable income.

  

 

NOTE 15 - COMMITMENTS AND CONTINGENCIES

 

Contingent Obligation

 

In connection with the assignment of Principal Sunrise IV (see NOTE 5 "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.

 

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.

 

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NOTE 16 - SUBSEQUENT EVENTS

 

Note Payable, Related Party

 

In April 2016, a trust maintained by the Company's Director, Guillermo Marmol, made a short-term unsecured loan to the Company in the amount of $200,000. The promissory note bore a fee of 15% of the face amount, matures at the earlier of i) the financial closing of the disposition of Principal Sunrise V, ii) the receipt of remaining amounts due from the August 2015 assignment of Principal Sunrise IV, or iii) July 29, 2016. Amounts outstanding beyond the maturity date bear interest at a rate of 10% compounded daily. Proceeds were used primarily to pay development costs of the Principal Sunrise V project.

 

The note is i) subordinated to payment of amounts due under that certain settlement reached with Vis Solis (See NOTE 7 Commissions Payable - Vis Solis); ii) pari pasu to repayment of amounts outstanding under that certain promissory note with a trust maintained by a contractor to the Company; and iii) senior to all other unsecured debts of the Company.

 

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