In previous articles we’ve discussed how investors should avoid over-the-counter companies at all costs. With rare exceptions, 99% of the time long term investors who buy into the promises of OTC companies will end up losing their investments in the long run. Whether with malicious intent or not, the management of these companies will often publish their scientific accomplishments and promises of future revenues through frequent company press releases, and while speculators may make money on the long and short sides, long term investors almost always lose. Nonetheless, each OTC company should be evaluated on its own merits. One OTC company, Principal Solar, is looking to become a utility-scale solar operation, and announced today that it plans to build the largest solar facility east of the Rockies.
Principal Solar (OTCMKTS:PSWW) was incorporated in 2010 and began trading on the OTC market through a reverse merger with Kupper Parker Communications, Inc. in March 2011. Principal Solar wants to create a distributed solar utility that acquires, finances, and develops solar power generating facilities. Last Friday, shares in Principal Solar jumped +41% on plans to build the largest solar facility east of the Rockies with shares jumping another +100% on Monday. Shares for Principal Solar have been very volatile over time with almost no liquidity. This leads to a very wide “bid ask spread” which penalizes investors to the benefit of the market maker. For example, if you executed a market order to buy shares and then a market order to sell shares immediately after, you would lose upwards of 25% immediately in most cases. The price action on the last day of trading totaled just $5,760 USD with the average trading volume sitting at $1,642 USD at today’s closing price.
Principal Solar’s primary revenue-generating asset is Powerhouse One LLC, a solar installation acquired in 2013 that has a purchasing commitment for their generated power for a 20 year term ending in 2031. For the nine months ended September 30, 2014, the Company generated total revenues of $784,188 (a 100% increase over the same period in 2013), generated a net loss of $2,567,407, and used cash of $1,327,800 in operating activities. As of Monday’s close, Principal Solar had a market cap of $81 million.
In November 2014, Principal Solar purchased from Innovative Solar Systems, LLC a 15-year power purchase agreement PPA with Duke Energy Progress, Inc for $6.28 million. Now they need to raise $173 million to develop a project that can generate power to be sold through that agreement.
The latest Company financials made the following statement:
As of September 30, 2014, we had approximately $429,000 of cash on hand, and have generated only approximately $1,100,000 of total revenues since the Company’s change in business focus in connection with the Exchange Agreement, and there remain questions about the Company’s ability to continue as a going concern.
While any new venture may face questions about the Company’s ability to continue as a going concern, the very small amount of cash on hand means the Company will need to raise funds soon. In fact, the same filing went on to say that Principal Solar needs to raise just shy of $179 million to pursue their business plan:
In addition to needing approximately $173 million in project financing required to build and operate a solar project which is in the process of being acquired, the Company anticipates the need for approximately $5,000,000 of additional funding over the next 24 months. We anticipate raising this funding through the sale of debt or equity securities (subsequent to the effectiveness of our Registration Statement) and/or through traditional bank funding. If we are unable to raise the additional funding, the value of our securities, if any, would likely become worthless and we may be forced to abandon our business plan.
This is a very large amount of financing for any sparsely traded OTC company to raise. Investors should steer clear of Principal Solar until the liquidity problem is resolved and even then, consider that if funding is not raised their shares would likely become worthless. Should the project achieve financing, it is scheduled to be operational by early 2016. Can Principal really raise funding for, construct, and bring to operational capacity a $173 million 78.5MW solar power project in just over a year’s time?