SUMMER ENERGY HOLDINGS INC - FORM 10-Q - November 12, 2015

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q

[X]           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015


[   ]           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

Commission file number 001-35496

   
SUMMER ENERGY HOLDINGS, INC.
(Exact name of registrant as specified in charter)
   
Nevada
20-2722022
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
   
800 Bering Drive, Suite 260, Houston, Texas
77057
(Address of principal executive offices)
(Zip Code)
   
(713) 375-2790
(Issuer’s telephone number, including area code)
   
N/A
(Former name, former address, and former fiscal year, if changed since last report)

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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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 þ No o

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 o                                                                                                           Accelerated filer                   o
Non-accelerated filer   o                                                                                                           Smaller reporting company  þ

Indicate by check mark whether the registrant is a shell company (as defined by Section 12b-2 of the Exchange Act). Yes o No þ.

The number of shares of the issuer’s common stock, $0.001 par value, outstanding as of November 12, 2015 was 16,017,353.

 
 
 


FORM 10-Q

 



PART I – FINANCIAL INFORMATION

ITEM 1.                      FINANCIAL STATEMENTS
SUMMER ENERGY HOLDINGS, INC.
AND SUBSIDIARIES
SEPTEMBER 30, 2015 AND DECEMBER 31, 2014
(UNAUDITED)
  
   
September 30 , 2015
    
December 31, 2014
  
             
 ASSETS
            
  Current Assets
            
    Cash
   $ 545,185     $ 550,342  
    Restricted cash
     776,302       582,743  
    Accounts receivable, net
     15,350,007       8,686,913  
    Related party receivable
     130,000       -  
    Prepaid and other current assets
     164,191       856,642  
                 
        Total current assets
     16,965,685       10,676,640  
                 
    Property and Equipment, net
     352,202       473,046  
                 
    Certificates of Deposit – Restricted
     -       15,044  
                 
                 
                     Total assets
   $ 17,317,887     $ 11,164,730  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
          
  Current Liabilities
                
    Accounts payable
   $ 340,906     $ 302,697  
    Accrued wholesale power purchased
     6,004,899       6,469,098  
    Accrued expenses
     5,004,375       3,757,230  
    Advance to loan amount note
     269,157       1,010,000  
     Short-term debt, net of debt discount
     3,100,000       -  
                 
        Total current liabilities
     14,719,337       11,539,025  
                 
        Commitments and contingencies
     -       -  
                 
  Stockholders' Equity (Deficit)
                
Series B Preferred  Stock - $.001 par value, 3,000,000 authorized,1,900,000 shares and 1,900,000 shares issued and outstanding at September 30, 2015 and December 31, 2014  respectively
       1,900         1,900  
    Common Stock - $.001 par value, 100,000,000 shares authorized, 15,825,347 and
    14,943,426 shares issued and outstanding at September 30, 2015 and December 31, 2014,
    respectively
     15,825       14,943  
    Subscription receivable
     (52,000 )     (52,000 )
    Additional paid in capital
     9,090,723       8,135,134  
    Accumulated deficit
     (6,457,898 )     (8,474,272 )
                 
         Total stockholders’ equity (deficit)
     2,598,550       (374,295 )
                 
                    Total liabilities and stockholders' equity (deficit)
   $ 17,317,887     $ 11,164,730  

See accompanying notes to the consolidated financial statements.



SUMMER ENERGY HOLDINGS, INC.
AND SUBSIDIARIES
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014
(UNAUDITED)
 
   
For the Three Months Ended September 30, 2015
    
 
For the Three Months Ended September 30, 2014
    
 
For the Nine Months Ended September 30, 2015
    
 
For the Nine Months Ended September 30, 2014
  
                         
 Electricity Revenue
   $ 25,551,126     $ 17,665,118     $ 62,416,285     $ 34,707,850  
                                 
 Cost of Goods Sold
                                
    Power purchases and balancing/ancillary
     12,342,503       9,872,079       28,004,319       18,710,814  
    Transportation and distribution providers charge
     8,103,843       6,626,792       22,226,565       13,189,459  
                                 
        Total cost of goods sold
     20,446,346       16,498,871       50,230,884       31,900,273  
                                 
 Gross Profit
     5,104,780       1,166,247       12,185,401       2,807,577  
                                 
 General and Administrative
     3,106,175       2,210,591       8,792,037       5,134,939  
                                 
 Operating Income/(Loss)
     1,998,605       (1,044,344 )     3,393,364       (2,327,362 )
                                 
 Other Income (Expense)
                                
    Financing costs
     (234,884 )     (295,067 )     (749,445 )     (1,287,737 )
    Interest expense, net
     (159,322 )     (15,914 )     (457,010 )     (118,150 )
                                 
        Total other expense
     (394,206 )     (310,981 )     (1,206,455 )     (1,405,887 )
                                 
 Net Income/(Loss) Before Income Taxes
     1,604,399       (1,355,325 )     2,186,909       (3,733,249 )
                                 
 Income Taxes
     -       -       -       -  
                                 
 Net Income/(Loss)
   $ 1,604,399     $ (1,355,325 )   $ 2,186,909     $ (3,733,249 )
                                 
Series A Preferred shares dividend
     -       (53,221 )     -        (161,128 )
Series B Preferred shares dividend
     (57,470 )     -       (170,535 )     -  
                                 
 Net Income/(Loss) applicable to common shareholders
   $ 1,546,929     $ (1,408,546 )   $ 2,016,374     $ ( 3,894,377 )
                                 
Net income(Loss) per common share:
                                             Basic
   $ 0.10     $ (0.10 )   $ 0.13     $ (0.27 )
                                             Dilutive
   $ 0.10     $ (0.10 )   $ 0.13     $ (0.27 )
 Weighted average number of shares:
                                              Basic
     15,671,201       14,445,106        15,611,650       14,197,394  
                                             Dilutive
     15,771,745       14,445,106       15,659,853       14,197,394  

See accompanying notes to the consolidated financial statements.
 
 

 
SUMMER ENERGY HOLDINGS, INC.
AND SUBSIDIARIES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015
AND SEPTEMBER 30, 2014
(UNAUDITED)
  
   
For the Nine Months Ended September 30, 2015
    
For the Nine Months Ended September 30, 2014
  
             
 Cash Flows from Operating Activities
            
    Net income (loss)
   $ 2,186,909     $ (3,733,249 )
    Adjustments to reconcile net income (loss) to net cash used in operating activities:
                
        Common stock for financing costs
     724,995       513,444  
        Stock compensation expense
     74,547       22,685  
        Interest earned on restricted certificate of deposit
     -       (19 )
        Depreciation of property and equipment
     212,188       173,649  
        Amortization of debt discount
     -       774,294  
        Bad debt expense
     1,178,915       522,370  
        Changes in operating assets and liabilities:
                
             Accounts receivable
     (7,972,009 )     (5,391,683 )
             Prepaid and other current assets
     692,451       56,908  
             Accounts payable
     38,209       196,537  
             Accrued wholesale power purchases
     (464,199 )     1,726,878  
             Accrued expenses
     1,247,145       2,363,511  
                 
                  Net cash (used in) provided by operating activities
     (2,080,849 )     (2,774,675 )
                 
 Cash Flows from Investing Activities
                
    Sale (Purchase) of restricted cash
     (193,559 )     (316,871 )
    Proceeds from certificate of deposit – restricted
     15,044       -  
    Purchase of property and equipment
     (91,344 )     (219,130 )
                 
                  Net cash (used in) provided by investing activities
     (269,859 )     (536,001 )
                 
 Cash Flows from Financing Activity
                
    Proceeds from note payable
     3,100,000       -  
    Proceeds from advance from loan note
     -       1,500,000  
    Repayment from advance from loan note
     (740,843 )     (340,000 )
    Advances related party, net
     -       70,000  
    Payment of dividends in cash on Series B Preferred stock
     (143,606 )     (22,883 )
    Proceeds from issuance of Series B Preferred stock
     -       1,900,000  
    Proceeds from issuance of units  in a private placement offering
     130,000       40,000  
                 
                 Net cash provided by financing activities
     2,345,551       3,147,117  
                 
 Net Change in Cash
     (5,157 )     (163,559 )
                 
 Cash at Beginning of Period
     550,342       739,966  
                 
 Cash at End of Period
   $ 545,185     $ 576,407  
                 
 Supplemental Disclosure of Cash Flow Information:
                
    Income taxes paid
   $ -     $ -  
    Interest paid, net
   $ 457,073     $ 118,303  
                 
 Non-Cash Transactions
                
Common shares issued for Series A dividends
   $ -     $ 80,108  
    Series A Preferred stock called
   $ -     $ 826  
Series B Preferred stock dividends
   $ 26,929     $ 104,029  

See accompanying notes to the consolidated financial statements.

 
 
 
SUMMER ENERGY HOLDINGS, INC.
AND SUBSIDIARIES
NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014
 (UNAUDITED)


NOTE 1 - ORGANIZATION

The unaudited consolidated financial statements include the accounts of Summer Energy Holdings, Inc. and its wholly-owned subsidiaries Summer Energy, LLC (“Summer LLC”), Summer EM Marketing, LLC (“Marketing LLC”) and Summer Energy of Ohio, LLC (“Summer Ohio) (collectively referred to as the “Company,” “we,” “us,” or “our”).  All significant intercompany transactions and balances have been eliminated in these consolidated financial statements.

Summer LLC is a retail electric provider in the state of Texas under a license with the Public Utility Commission of Texas (“PUCT”).  Summer LLC procures wholesale energy and resells it to commercial and residential customers.  Summer LLC was organized on April 6, 2011, under the laws of the state of Texas.  The operations of Summer LLC are the Company’s sole line of business.  

Marketing LLC was formed in the state of Texas on November 6, 2012, to provide certain marketing services to Summer LLC.

Summer Ohio was formed in the State of Ohio on December 16, 2013 to procure and sell electricity in the state of Ohio.   The Public Utilities Commission of Ohio (“PUCO”) issued a certificate as a Retail Electric Service Provider to Summer Ohio on June 16, 2015.   At this time, there is no business activity in the State of Ohio.

NOTE 2 - BASIS OF PRESENTATION

The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles of the United States of America (“GAAP”) for interim financial statements pursuant to the rules and regulations of the Securities and Exchange Commission.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the nine-month period ended September 30, 2015, are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.  These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, as filed with the Securities and Exchange Commission (“SEC”) on March 31, 2015.
 
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amount of revenues and expenses during the reporting period.  Actual results may differ from these estimates.

Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation.

NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

Our electricity revenue is recognized by our Company upon delivery of electricity to a customer’s meter.  This method of revenue recognition is commonly referred to as the flow method.  The flow method of revenue relies upon the Electric Reliability Council of Texas (“ERCOT”) settlement statements to determine the estimated revenue for a given month. Supply delivered to customers for the month, measured on a daily basis, provides the basis for revenues.  Electricity revenue consists of proceeds from energy sales, including pass through charges from the Transmission and Distribution Providers (“TDSPs”) billed to the customer at cost.
 



NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)

Unbilled Revenue and Accounts Receivable

Electric services not billed by month-end are accrued based upon estimated deliveries to customers as tracked and recorded by ERCOT multiplied by our  average billing rate per kilowatt hour (“kWh”) in effect at the time.  At the end of each calendar month, revenue is accrued to unbilled receivables based on the estimated amount of power delivered to customers using the flow technique.

Unbilled revenue also includes accruals for estimated TDSP charges and monthly service charges applicable to the estimated electricity usage for the period.  All charges that were physically billed to customers in the calendar month are recorded from the unbilled account to the customer receivable account.  Unbilled accounts as of September 30, 2015, were estimated at $8,890,838.

Accounts receivable are customer obligations billed at the customer’s monthly meter read date for that period’s electricity usage and due within 16 days of the date of the invoice.  Balances past due are subject to a late fee that is assessed on that billing.

Cost Recognition

Direct energy costs are recorded when the electricity is delivered to the customer’s meter.

Cost of Goods Sold (“COGS”) include electric power purchased and pass through charges from the TDSPs in the areas serviced by the Company.  TDSP charges are costs for metering services and maintenance of the electric grid.  TDSP charges are established by regulation of the PUCT.

The energy portion of our COGS is comprised of two components:  bilateral wholesale costs and balancing/ancillary costs.  These two cost components are incurred and recognized differently as follows:

Bilateral wholesale costs are incurred through contractual arrangements with wholesale power suppliers for firm delivery of power at a fixed volume and fixed price.  We are invoiced for these wholesale volumes at the end of each calendar month for the volumes purchased for delivery during the month, with payment due 20 days after the end of the month.

Balancing/ancillary costs are based on the customer load and are determined by ERCOT through a multiple step settlement process.  Balancing costs/revenues are related to the differential between supply that we provided through our bilateral wholesale supply and the supply required to serve our customer load.  The Company endeavors to minimize the amount of balancing/ancillary costs through our load forecasting and forward purchasing programs.
 
Derivative Instruments
The Company’s business operations require entering into physically settled commodity contracts that meets the definition of a derivative; however the Company has elected "normal purchases and normal sales" exception to avoid derivative accounting and related disclosures. The term is specific to ASC 815-10-15-22. When the contract satisfies certain criteria, including a requirement that physical delivery of the underlying commodity is probable and is expected to be used in normal course of business. Retail revenues and retail cost of revenues resulting from deliveries of commodities under normal purchase contracts and normal sales contracts are included in earnings at the time of contract settlement.

NOTE 4 – 2012 STOCK OPTION AND STOCK AWARD PLAN

On April 21, 2015, the Company granted a total of 31,250 stock options to non-employee members of the Company’s Board of Directors under the 2012 Stock Option and Stock Award Plan as compensation for service on the Company’s Board. The director stock options were fully vested on the date of grant, have an exercise price of $1.50 per share, will expire ten (10) years from the date of the grant and are estimated to have a fair value of approximately $1,282 on the date of grant determined using the Black-Scholes option-pricing model.  The assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate of 0.87% (ii) estimated volatility of 17% (iii) dividend yield of 0.00% and (iv) expected life of the options of five years.

On May 15, 2015, the Company granted a total of 31,250 stock options to non-employee members of the Company’s Board of Directors under the 2012 Stock Option and Stock Award Plan as compensation for service on the Company’s Board. The director stock options were fully vested on the date of grant, have an exercise price of $1.50 per share, will expire ten (10) years from the date of the grant and are estimated to have a fair value of approximately $1,282 on the date of grant determined using the Black-Scholes option-pricing model.  The assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate of 0.87% (ii) estimated volatility of 17% (iii) dividend yield of 0.00% and (iv) expected life of the options of five years.

As of September 30, 2015, 750,750 securities have been awarded, net of forfeitures, from the 2012 Stock Option and Stock Award Plan with a remaining unissued balance of 34,250 securities.



NOTE 5 – 2015 STOCK OPTION AND STOCK AWARD PLAN

During the nine months ended September 30, 2015, the Company’s stockholders approved the 2015 Stock Option and Stock Award Plan (“Plan”), which was established to advance the interest of the Company and its stockholders by providing an incentive to attract, retain and reward persons performing services for the Company and by motivating such persons to contribute to the growth and profitability of the Company.

The maximum aggregate number of (i) shares of stock that may be issued under the Plan, and (ii) shares of stock with respect to which stock appreciation rights may be granted, is 1,500,000 and consists of authorized but unissued or reacquired shares of stock or any combination thereof.  Such number of shares of stock may be issued under the Plan pursuant to Incentive Stock Options, Nonstatutory

Stock Options, Restricted Stock Grants, Stock Appreciation Right Grants or any combination thereof, so long as the aggregate number of shares so issued does not exceed such number of shares, as adjusted.

The Plan continues in effect until the earlier of its termination by the Board or the date on which all the shares of stock available for issuance under the Plan have been issued and all restrictions on such shares under the terms on the Plan and the agreement evidencing awards granted under the Plan have lapsed.  However, all awards shall be granted, if at all, within ten (10) years from the earlier of the date the Plan is adopted by the Board or the date the Plan is duly approved by the Shareholders of the Company.

On July 2, 2015, a Form S-8 Registration Statement was filed with the United States Securities and Exchange Commission regarding the Plan.

On July 3, 2015 the Company granted stock options to purchase up to 50,000 shares of the Company’s common stock to a certain key officer. The options covering a total of 25,000 shares vested at the date of grant and 25,000 shares vested on January 1, 2016.  The stock options have an exercise price of $1.00 per share and will expire ten (10) years from the date of grant.  The fair value of the options of $8,483 was determined using the Black-Scholes option-pricing model.  The assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate of 0.87% (ii) estimated volatility of 17% (iii) dividend yield of 0.00% and (iv) expected life of the options of five years.

On July 3, 2015, the Company granted stock options to purchase up to 260,000 shares of the Company’s common stock to key officers. The options covering a total of 260,000 shares vested at the date of grant.  The stock options have an exercise price of $1.00 per share and will expire ten (10) years from the date of grant.  The fair value of the options of $44,111 was determined using the Black-Scholes option-pricing model.  The assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate of 0.87% (ii) estimated volatility of 17% (iii) dividend yield of 0.00% and (iv) expected life of the options of five years.

On July 3, 2015, the Company granted stock options to purchase up to 130,000 shares of the Company’s common stock to key employees. The options covering a total of 130,000 shares vest over two years from the date of grant.  The stock options have an exercise price of $1.50 per share and will expire ten (10) years from the date of grant.  The fair value of the options of $5,333 was determined using the Black-Scholes option-pricing model.  The assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate of 0.87% (ii) estimated volatility of 17% (iii) dividend yield of 0.00% and (iv) expected life of the options of five years.

On August 6, 2015, the Company granted stock options to purchase up to 105,000 shares of the Company’s common stock to key officers. The options covering a total of 105,000 shares vested at the date of grant.  The stock options have an exercise price of $1.50 per share and will expire ten (10) years from the date of grant.  The fair value of the options of $4,308 was determined using the Black-Scholes option-pricing model.  The assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate of 0.87% (ii) estimated volatility of 17% (iii) dividend yield of 0.00% and (iv) expected life of the options of five years.

On August 20, 2015, the Company granted stock options to purchase up to 2,500 shares of the Company’s common stock to a key employee. The options covering a total of 2,500 shares vested at the date of grant.  The stock options have an exercise price of $1.50 per share and will expire ten (10) years from the date of grant.  The fair value of the options of $103 was determined using the Black-Scholes option-pricing model.  The assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate of 0.87% (ii) estimated volatility of 17% (iii) dividend yield of 0.00% and (iv) expected life of the options of five years.

On September 15, 2015, the Company granted stock options to purchase up to 5,000 shares of the Company’s common stock to two key employees. The options covering a total of 5,000 shares vested over two years from the date of grant.  The stock options have an exercise



NOTE 5 – 2015 STOCK OPTION AND STOCK AWARD PLAN (CONTINUED)

price of $1.50 per share and will expire ten (10) years from the date of grant.  The fair value of the options of $226 was determined using the Black-Scholes option-pricing model.  The assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate of 0.87% (ii) estimated volatility of 17% (iii) dividend yield of 0.00% and (iv) expected life of the options of five years.

On September 15, 2015, the Company granted a total of 31,250 stock options to non-employee members of the Company’s Board of Directors under the 2015 Stock Option and Stock Award Plan as compensation for service on the Company’s Board. The director stock options were fully vested on the date of grant, have an exercise price of $1.50 per share, will expire ten (10) years from the date of the grant and are estimated to have a fair value of approximately $1,412 on the date of grant determined using the Black-Scholes option-pricing model.  The assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate of 0.87% (ii) estimated volatility of 17% (iii) dividend yield of 0.00% and (iv) expected life of the options of ten years.

As of September 30, 2015, 583,750 securities have been awarded, net of forfeitures, from the 2015 Stock Option and Stock Award Plan with a remaining unissued balance of 916,250 securities.

NOTE 6 – PRIVATE PLACEMENT OF SERIES B PREFERRED SHARES

On February 19, 2014, the Company filed a Certificate of Designation of Rights, Preferences, Privileges and Restrictions (the “Series B Designation”) with respect to a class of preferred stock designated as Series B Preferred Stock (the “Series B Preferred”).   The Series B Preferred entitles holders thereof to receive a dividend payable in cash or common stock, at the election of the holder, at an annual rate of 12% of the Deemed Original Issue Price. The “Deemed Original Issue Price” of the Series B Preferred for purposes of calculating the Series B Preferred dividend is $1.00 per share, which the board of directors of the Company determined represents the estimated fair market value as of the date of grant.   The Series B Preferred dividends are payable in cash or by the issuance of common stock ten (10) days following the end of each month, or portion thereof.   The number of shares to be paid as a dividend shall be determined based on the fair market value of the shares of common stock on the record date for the dividend.  On February 21, 2014, the Company entered into Series B Preferred Stock Purchase Agreements (each an “Agreement” and collectively the “Agreements”) with several investors.  Pursuant to the Agreements, the Company sold an aggregate of 1,900,000 shares of the Series B Preferred, for an aggregate purchase price of $1,900,000.   Several members of the Company’s board of directors directly or indirectly participated in the offering.

Additional terms, conditions, rights, and privileges of the Series B Preferred include:
 
Voting:  Each holder of Series B Preferred is entitled to the number of votes equal to the number of shares of the Company’s common stock into which such shares of Series B Preferred held by such holder could then be converted.  The initial conversion price is $1.00 per share, and the per-share purchase price was $1.00.  As such, the initial conversion ratio is 1-1.

Conversion:  Optional Conversion.  The Series B Preferred is convertible into common stock at the election of the holder, with an initial conversion price of $1.00 per share.  The Certificate of Designation provides certain adjustments to the conversion price to adjust for stock splits, adjustments, and issuance of additional shares of stock.  Mandatory Conversion.  Additionally, the Series B Preferred will automatically be converted upon the earlier to occur of (A) the affirmative election of the holders of fifty percent (50%) of the outstanding shares of Series B Preferred, voting as a separate class, or (B) the affirmative vote of the board of directors upon the closing of a firmly underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, which values the Company at least $50 million and in which the gross proceeds to the Company (after underwriting discounts, commissions and fees) are at least $10 million.
 
Liquidation. Upon the occurrence of any “Liquidation Event” (including a liquidation of the Company or a sale of the Company), before any distribution or payment will be made to the holders of common stock, the holders of Series B Preferred will be entitled to be paid out of the assets of the Company an amount equal to the amount of cash paid for the shares of Series B Preferred and accumulated but unpaid dividends. The Series B Preferred ranks pari passu with the Series A Preferred Stock with regard to liquidation payments, as well as to any subsequent series of preferred stock.
 
Redemption. The Company may, at any time, redeem all or a portion of the Series B Preferred upon 20 days’ notice at a price of $1.20 per share.

The foregoing is only a brief description of the material terms of the Series B Designation and the offering of the Series B Preferred, and does not purport to be a complete description of the rights and obligations of the parties thereunder and such descriptions are qualified in their entirety by reference to the full text of the Series B Designation., which is included as Exhibit 3.1 to our Form 8-K filed with the SEC on February 24, 2014.

NOTE 6 – PRIVATE PLACEMENT OF SERIES B PREFERRED SHARES (CONTINUED)

In accordance with the Series B Designation, dividends due to holders of Series B Preferred may be paid at the option of the holder in shares of the Company’s $0.001 par value common stock valued at the fair market value of such shares of common stock as determined in good faith by the Board of Directors on the record date of the dividend.

During the quarter ended September 2015, one holder who is a member of the Company’s board of directors opted to be paid in common stock as opposed to cash.  Holders of Series B Preferred not electing to be paid dividends with shares of common stock were paid cash dividends.

As of September 30, 2015, the Company had paid $170,535 of cumulative monthly dividends on Series B Preferred Stock.  The one who elected to be paid in shares of the Company’s common stock received 26,929 shares valued at $26,929 and the remaining holders were paid a total of $143,606 in cash.

NOTE 7 – MASTER MARKETING AGREEMENT AND ISSUANCE OF WARRANTS

On March 11, 2014, the Company entered into a Master Marketing Agreement with an entity which provides marketing services. The Marketer is in the business of using its multi-level marketing network to broker the services of electric providers to potential residential customers.
 
The Company issued a warrant to the Marketer to purchase up to 275,000 shares (“Warrant Shares”) of the Company’s common stock at an exercise price of $1.00 per share (the “Warrant”).   The Warrant has a term of ten (10) years and vests as follows: (i) as to one Warrant Share for each customer introduced by the Marketer that enters into a relationship with Summer LLC in a one year contract; (ii) as to two (2) Warrant Shares for each customer introduced by the Marketer that enters into a contract with Summer LLC with a two (2) year term; and (iii) in the event that the Marketer meets certain other milestones related to the number of customers introduced to the Company by the Marketer, the Warrant becomes exercisable with respect to an additional 75,000 shares of the Company’s common stock.

The fair value of the warrants of $46,656 was determined using the Black-Scholes option-pricing model.  The assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate of 0.87% (ii) estimated volatility of 17% (iii) dividend yield of 0.00% and (iv) expected life of the warrant of 10 years.

As of September 30, 2015, the number of Warrant Shares vested was 9,763.  

NOTE 8 - ADVANCE TO LOAN AMOUNT NOTE

On April 18, 2014, the Company signed an Advance to Loan Amount Note with Comerica Bank in the amount of $1,500,000.  The Note had an original maturity date of December 22, 2014, which was extended through February, 22, 2015.  On February 22, 2015, the Advance to Loan Note was increased from $1,500,000 to $1,700,000 and extended again to November 4, 2016, with interest thereon at a per annum rate equal to the “Prime Referenced Rate” plus the “Applicable Margin.” On August 22, 2015, the Advance to Loan Note was renewed and extended until November 4, 2016.  The “Prime Referenced Rate” means, for any day, a per annum interest rate which is equal to the “Prime Rate” in effect on such day, but in no event and at no time shall the “Prime Reference Rate” be less than the sum of the Daily Adjusting LIBOR Rate for such day plus two and one-half percent (2.5%) per annum.   “Prime Rate” means the per annum rate established by Comerica Bank as its prime rate for its borrowers at any such time.  “Applicable Margin” means 2% per annum.   Accrued and unpaid interest on the unpaid principal balance outstanding shall be payable monthly, in arrears, on the first Business Day of each month.

Guaranty of the Advance to Loan Amount Note has been made by four members of the Company’s board of directors (“Guarantors”).  The Company agreed to issue the four Guarantors a total of 120,000 shares of the Company’s common stock per month (30,000 shares of common stock per month per Guarantor) reduced accordingly as the loan is reduced for agreeing to act as a Guarantor of the Advance to Loan Amount.

During the nine months ended September 30, 2015, the Company issued 724,995 shares of common stock to the Guarantors and recognized $724,995 in financing cost.
 

NOTE 8 - ADVANCE TO LOAN AMOUNT NOTE (CONINUED)

As of September 30, 2015, the outstanding cash balance of the Advance to Loan Amount Note was $269,157 and $728,000 was utilized for Letters of Credit (Footnote 9), with $702,843 of remaining available credit under the Advance to Loan Amount Note.

NOTE 9 – LETTERS OF CREDIT

During the quarter ended September 30, 2015, the Company secured ten irrevocable stand-by letters of credit totaling $728,000 with a financial institution for the benefit of the Transmission and Distribution Providers (“TDSPs”) that provide transition services to the Company.   The ten letters of credit will expire during the second quarter of 2016 and are subject to automatic extension and renewal provisions.   The ten letters of credit are secured by the Advance to Loan Note (See Footnote 8) in the amount of $728,000 (See Footnote 8).

As of September 30, 2015, none of the letters of credit issued on behalf of the Company were drawn upon.

NOTE 10 – PRIVATE PLACEMENT
 
On March 12, 2015, pursuant to a securities purchase agreement (the “Purchase Agreement”), the Company accepted a subscription from an accredited investor to purchase 100,000 Investment Units (“Units”), comprised of common stock and warrants for a purchase price of $1.00 per Unit, resulting in gross proceeds to the Company of $100,000. Each Unit consists of (i) one (1) share of the Company’s common stock, par value $0.001 per share, and (ii) a warrant to purchase one (1) share of common stock at an exercise price of $1.50 per share. The Company granted piggyback registration rights to the investor in connection with this investment.  The Company intends to use the proceeds from this investment for general corporate and working capital purposes.
 
The shares of Common Stock have a relative fair value of $92,417 and the warrant has a relative fair value of $7,583 at the date of issuance determined using the Black-Scholes option-pricing model.  The assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate of 0.87% (ii) estimated volatility of 17% (iii) dividend yield of 0.00% and (iv) expected life of the options of five years.
 
On May 7, 2015, the Company accepted a subscription from an accredited investor to purchase a total of one (1) Investment Unit (“Unit”) comprised of common stock and warrants for a purchase price of $30,000 per Unit, for gross proceeds to the Company of $30,000.  Each Unit consists of (i) 30,000 shares of the Company’s common stock (the “Common Stock”) and (ii) a five (5) year warrant (each a “Warrant” and collectively “Warrants”) to purchase 15,000 shares of Common Stock for an exercise price of $1.50 per share
 
The shares of Common Stock have a relative fair value of $29,385 and the warrant has a relative fair value of $615 at the date of issuance. determined using the Black-Scholes option-pricing model.  The assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate of 0.87% (ii) estimated volatility of 17% (iii) dividend yield of 0.00% and (iv) expected life of the options of five years.

NOTE 11 – PROMISSORY NOTE

On March 12, 2015, the Company issued an unsecured promissory note in the principal amount of $100,000 which also included a five (5) year warrant to purchase 100,000 shares of Common Stock for an exercise price of $1.50 per share in favor of said investor mentioned above (Note 10) (the “Note”). Interest accrues on the Note at a rate of 15% per annum. The Company agreed to make quarterly interest-only payments throughout the term of the Note. The entire unpaid principal balance of the Note, together with any accrued interest and other unpaid charges or fees, is due and payable on or before September 12, 2016. The Company may prepay the Note, in whole or in part, at any time without penalty.

The unsecured promissory note has a relative fair value of $92,417 and the warrant has a relative fair value of $7,583 at the date of issuance determined using the Black-Scholes option-pricing model.  The assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate of 0.87% (ii) estimated volatility of 17% (iii) dividend yield of 0.00% and (iv) expected life of the options of five years.

As of September 30, 2015, the Company had paid $8,292 in interest on the promissory note and the outstanding balance on the promissory note was $100,000.

 


NOTE 12 - FINANCING FROM BLACK INK ENERGY LLC

On March 2, 2015, Summer Energy, LLC (the “Borrower”), a wholly owned subsidiary of the Company, entered into a Second Lien Term Loan Agreement (the “Agreement”) with Black Ink Energy, LLC (“BIE”).  Pursuant to the Agreement, BIE agreed to provide a term loan (the “Term Loan”) to the Borrower, and the Borrower agreed to borrow and repay funds loaned by BIE.

The amount of the Term Loan is Three Million Dollars $3,000,000, and the loan is not revolving in nature.  Pursuant to the Agreement, any amounts prepaid or repaid may not be re-borrowed by the Borrower.  The maturity date of the loan is September 2, 2016.  The Term Loan bears interest at a rate of 15% per annum, except in the occurrence of an event of default, at which point the default interest rate will be 18%.  Interest is payable in arrears on the last day of each month and on the maturity date of the loan. The Term Loan was not evidenced by a promissory note.

Pursuant to the Agreement, the Borrower has the option to prepay the loan amount in whole by providing prior notice to BIE and by paying a pre-payment premium of $300,000.

Additionally, the Borrower agreed to pay to BIE a facility fee.  The facility fee in the amount of $24,450 was expensed immediately as fees occurred to obtain financial resource.

In connection with the Agreement and the Term Loan, the Company agreed to issue to BIE a warrant (the “Warrant”) to purchase up to 800,000 shares of the Company’s common stock.  The Warrant has a term of ten (10) years, has an exercise price of $1.50 per share, and is subject to adjustment as set forth in the Warrant.  The Warrant also contains a cashless or net exercise provision, pursuant to which the holder of the Warrant may elect to convert all or a portion of the Warrant without the payment of additional consideration, by receiving a net number of shares calculated pursuant to a formula set forth in the Warrant.  The Company agreed to reserve 120% of the number of shares issuable upon the exercise of the Warrant so long as the Warrant is exercisable and outstanding.  Additionally, the Company agreed to grant to the holder piggyback registration rights.

The term loan has a relative fair value of $2,967,535 and the warrant has a relative fair value of $32,465 at the date of issuance determined using the Black-Scholes option-pricing model.  The assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate of 0.87% (ii) estimated volatility of 17% (iii) dividend yield of 0.00% and (iv) expected life of the options of five years.

During the nine months ended September 30, 2015, the Company had paid $266,250 in interest on the BIE loan and the outstanding balance of the BIE loan was $3,000,000 at September 30, 2015.

NOTE 13 - WHOLESALE POWER PURCHASE AGREEMENT

On April 25, 2014, the Company closed a transaction with DTE Energy Trading, Inc. (“DTE”), with an effective date of April 1, 2014.  As part of the transaction, the Company and DTE entered into an Energy Marketing Agreement for Electric Power (the “Energy Marketing Agreement”). Pursuant to the terms of the Energy Marketing Agreement, the Company agreed to purchase its electric power and associated services requirements from DTE, and DTE agreed to provide the Company with certain credit facilities to assist the Company in the purchase of its electric power and associated service requirements.  The Company also agreed to pay DTE a fixed monthly fee, as well as certain fees based on megawatt hours purchased.  The terms of the Energy Marketing Agreement are governed by the ISDA 2002 Master Agreement, as well as a Schedule and Power Annex thereto (the “2002 Master Agreement”).    In conjunction therewith, the Company and DTE also entered into a Credit Agreement, a Security Agreement and a Membership Interest Pledge Agreement.

Pursuant to the Credit Agreement, among other things DTE agreed to (i) provide a guaranty (a “Credit Guaranty”) to the Electric Reliability Council of Texas (“ERCOT”) for the benefit of the Company, and (ii) provide commodity loans for the purchase of electricity (“Commodity Loans”).  Each Commodity Loan and any Credit Guaranty shall bear interest on the outstanding principal amount thereof, from the date such Commodity Loan or Credit Guaranty is issued until it becomes due or is revoked, respectively, at a rate per annum equal to the Prime Rate (as reported by the Wall Street Journal) plus two percent (2%).  The Company covenanted not to, among other things, (a) merge or consolidate with any other person, (b) acquire all or substantially all of the capital stock or property of another person, (c) create, assume or suffer to exist any lien on any property now owned or hereafter acquired by the Company except for permitted liens (as set forth in the Credit Agreement) or (d) become liable for any indebtedness (other than permitted indebtedness, as set forth in the Credit Agreement).  

In consideration of the services and credit support provided by DTE to the Company, and pursuant to the Security Agreement, the Company is required to, among other things (i) grant a priority security interest to DTE in all of its assets, equipment and inventory; (ii) require its customers to remit monthly payments into a lockbox account over which DTE has a security interest; and (iii) deliver monthly and annual forecasted and audited statements to DTE.
 
 

NOTE 13 - WHOLESALE POWER PURCHASE AGREEMENT (CONTINUED)

Pursuant to the Membership Interest Pledge Agreement, the Company pledged to DTE, and granted to DTE a security interest in all of the membership interests of Summer Energy, LLC owned by the Company, as well as all additional membership interests of Summer Energy, LLC from time to time acquired by the Company.

NOTE 14 – EMPLOYMENT AGREEMENT

On January 21, 2015, the Company entered into employment agreements with certain key employees.  The agreements require total annual base compensation of $290,000 and provide the ability for the key employees to receive certain option or stock grants based on the achievement of performance goals.  The agreements provide an average of six months of severance for Termination Without Cause or Change of Control (each as defined in the employment agreements) totaling $145,000 along with the acceleration and immediate vesting of all unvested stock options, warrants and/or restricted stock granted.

On June 10, 2015, the Company entered into an employment agreement with a certain key employee.  The agreement requires a total annual base compensation of $140,000 and provides the ability for the key employee to receive certain options or stock grants based on the achievement of performance goals.  The agreement provides an average of six months of severance for Termination Without Cause or Change of Control (each as defined in the employment agreement) totaling $70,000 along with the acceleration and immediate vesting of all unvested stock options, warrants and/or restricted stock granted.

NOTE 15 – CONTINGENCIES

On June 2, 2015, the Company entered into a settlement agreement with a former employee and current shareholder.  The Company agreed to pay such individual a total of $156,000 in contractual severance to be paid in six installments, the first installment of $91,000 on June 2, 2015 and five succeeding payments in the amount of $13,000 due on the 5th of each month until the total settlement amount is paid in full.

For the quarter ended September 30, 2015, a total cash of $143,000 had been paid to such individual with a remaining balance due of $13,000.

NOTE 16 – SUBSEQUENT EVENTS

Contingencies

On October 5, 2015, the final installment in the amount of $13,000 paid was by the Company to a former employee in a settlement agreement.   The total amount due under the settlement agreement has been paid in full (See Footnote 15).

Dividends of Series B Preferred Shares

On October 27, 2015, the Company issued 3,058 shares of common stock and paid $16,364 in cash as dividend payments on Series B Preferred Shares relating to the month of October 2015 (See Footnote 6).

Common Shares Issued as Interest on Personal Guaranty
 
On October 28, 2015, the Company issued 88,950 shares of common stock to the Guarantors of the Advance to Loan Amount as interest due relating to the month of October 2015 (See Footnote 8).

Promissory Note

On October 19, 2015, the Company entered into a Note Conversion Agreement with an investor to convert $100,000 unsecured debt into shares of the Company common stock at a conversion price of $1.00 per share, and the Company is willing to allow such conversion.     As additional consideration for the conversion, the Company issued the investor a five-year warrant to purchase 50,000 shares of the Company’s common stock at an exercise price of $2.00 per share.

The warrant has a relative fair value of $2,925 at the date of issuance determined using the Black-Scholes option-pricing model.  The assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate of 0.87% (ii) estimated volatility of 17% (iii) dividend yield of 0.00% and (iv) expected life of the options of five years.

The Company paid $792 interest expense relating to the period of October 1, 2015 through the date of conversion (See Footnote 11).

 


NOTE 16 – SUBSEQUENT EVENTS (CONTINUED)

Financing From Black Ink Energy, LLC

On October 27, 2015, the Company paid $38,750 of interest relating to the month of October 2015 bringing total interest paid for the calendar year 2015 to $305,000 (See Footnote 12).

2015 Stock Option and Stock Award Plan

On October 26, 2015, the Company granted stock options to purchase up to 5,000 shares of the Company’s common stock to a key employee. The options covering a total of 5,000 shares vested at the date of grant.  The stock options have an exercise price of $2.00 per share and will expire ten (10) years from the date of grant.  The fair value of the options of $734 was determined using the Black-Scholes option-pricing model.  The assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate of 0.87% (ii) estimated volatility of 17% (iii) dividend yield of 0.00% and (iv) expected life of the options of ten years.

Advance to Loan Amount Note and Letters of Credit

During the month of October, 2015, the Company amended four irrevocable stand-by letters of credit with the financial institution for the benefit of a certain Transmission and Distribution Providers (“TDSPs”) that provide transition services to the Company (See Footnote 9).

After amendment, the Company has ten letters of credit secured by the Advance to Loan Note (See Footnote 8) totaling $1,009,000 which will expire during 2016 and are subject to automatic extension and renewal provisions.
 
NOTE 17 - RELATED PARTY
 
During the period ended September 30, 2015 the Company has a receivable from a related party of $130,000. The receivable is due on demand, unsecured, and accrues no interest.
 
 



The following discussion of our financial condition and results of operations should be read in conjunction with the unaudited consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q.  This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 27A of the Securities Act, and is subject to the safe harbors created by those sections.  Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “will” and variations of these words or similar expressions are intended to identify forward-looking statements.  In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements.  These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict.  Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors.  We undertake no obligation to revise or publicly release the results of any revisions to these forward-looking statements.

Due to possible uncertainties and risks, readers are cautioned not to place undue reliance on the forward-looking statements contained in this Quarterly Report, which speak only as of the date of this Quarterly Report, or to make predictions about future performance based solely on historical financial performance.  We disclaim any obligation to update forward-looking statements contained in this Quarterly Report.

Readers should carefully review the risk factors described below under the heading “Risk Factors”  and in other documents we file from time to time with the SEC, including our Form 10-K for the fiscal year ended December 31, 2014, which was filed with the SEC on March 31, 2015.  Our filings with the SEC, including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those filings, pursuant to Sections 13(a) and 15(d) of the Exchange Act, are available free of charge at www.summerenergy.com, when such reports are available via the EDGAR system maintained by the SEC at www.sec.gov.

Recent Developments

The unaudited consolidated financial statements include the accounts of Summer Energy Holdings, Inc., a Nevada corporation and its wholly-owned subsidiaries Summer Energy, LLC, a Texas limited liability company (“Summer LLC”), Summer EM Marketing (“Marketing LLC”) and Summer Energy of Ohio, LLC (“Summer Ohio”) (collectively referred to as the “Company,” “we,” “our,” or “us”).
 
Summer Ohio was formed in the State of Ohio on December 16, 2013 to procure and sell electricity in the state of Ohio.   The Public Utilities Commission of Ohio (“PUCO”) issued a certificate as a Retail Electric Service Provider to Summer Ohio on June 16, 2015.   At this time, there is no business activity in the State of Ohio.

Plan of Operation

Our wholly owned subsidiary, Summer LLC, is a licensed Retail Electricity Provider (REP) in the State of Texas.  In general, Texas regulatory structure permits REPs, such as Summer LLC, to procure and sell electricity at unregulated prices.  REPs pay the local transmission and distribution utilities a regulated tariff rate for delivering electricity to their customers.  As a REP, we sell electricity and provide the related billing, customer service, collections and remittance services to residential and commercial customers.  We offer retail electricity to commercial and residential customers in designated target markets within the State of Texas.  In the commercial market, the primary target is small to medium-sized customers (less than one megawatt of peak usage), but we will also selectively pursue larger commercial customers through management’s existing, historical relationships.  Residential customers are a secondary target market.  We anticipate that a majority of our customers will be located in the Houston and Dallas-Fort Worth metropolitan areas; although, we anticipate a growing number will be located in a variety of other metropolitan and rural areas within Texas.

We began delivering electricity to customers in mid-February 2012.
 
 


Results of Operations

Three Months Ended September 30, 2015, compared to the Three Months ended September 30, 2014

Revenue – For the quarter ended September 30, 2015, we generated $25,551,126 in electricity revenue primarily from commercial customers, and from various long and short-term residential customers.  The majority of our revenue comes from the flow of electricity to customers which includes revenues from contract cancellation fees, disconnection fees and late fees of $2,148,215.  Revenues for the quarter ended September 30, 2014 were $17,665,118 from electricity revenue which includes $518,125 from disconnection and late fees.

Management plans to continue to execute on its sales and marketing program to solicit individual commercial and residential customers.   Management also plans to continue to acquire portfolios of commercial and residential customers when offered at reasonable prices.

Cost of Goods Sold and Gross Profit – For the quarter ended September 30, 2015, cost of goods sold and gross profit totaled $20,446,346 and $5,104,780, respectively.  Cost of goods sold and gross profit recorded in the quarter ended September 30, 2014 were $16,498,871 and $1,166,247, respectively.

Operating expenses – Operating expenses for the quarter ended September 30, 2015 totaled $3,106,175 consisting primarily of general and administrative expenses of $1,858,717, stock compensation of $61,431, bank service fees of $152,953, professional fees of $38,136, outside commissions of $748,337 and $246,601 of billing fees.  Billing fees are primarily costs paid to third party Electronic Data Inter-Chain (EDI) provider to handle transactions between us, ERCOT and the TDSPs in order to produce customer bills.

Operating expenses for the quarter ended September 30, 2014 totaled $2,210,591, consisting primarily of general and administrative expenses of $1,363,313, stock compensation of $3,577, bank service fees of $136,539, professional fees of $34,270, outside commissions of $525,865 and $145,027 of billing fees.

Net Income/(Loss) – Net income/(loss) for the quarter ended September 30, 2015 and 2014, totaled $1,604,399 and $(1,355,325), respectively, relating primarily to operating expenses and cost of goods sold incurred in excess of revenue as we attempt to obtain economies of scale.

Nine Months Ended September 30, 2015, compared to the Nine Months ended September 30, 2014

Revenue – For the nine months ended September 30, 2015, we generated $62,416,285 in electricity revenue primarily from commercial customers, and from the addition of various long and short-term residential customers.  The majority of our revenue comes from the flow of electricity to customers which includes revenues from contract cancellation fees, disconnection fees and late fees of $3,470,536.   For the nine months ended September 30, 2014, the Company generated $34,707,850 in electricity revenue which includes $827,851 from contract cancellation fees, disconnection fees and late fees.

Cost of Goods Sold and Gross Profit – For the nine months ended September 30, 2015, cost of goods sold and gross profit totaled $50,230,884 and $12,185,401, respectively.  Cost of goods sold and gross profit recorded in the nine months ended September 30, 2014 were $31,900,273 and $2,807,577, respectively.

Operating expenses – Operating expenses for the nine months ended September 30, 2015 totaled $8,792,037, consisting primarily of general and administrative expenses of $5,229,103, stock compensation of $74,547, bank service fees of $ 420,357, professional fees of $272,871, outside commission expense of $1,951,096, litigation settlement of $163,500, and $680,563 of billing fees.  Billing fees are primarily costs paid to third party Electronic Data Inter-Chain (EDI) provider to handle transactions between us, ERCOT and the TDSPs in order to produce customer bills.

Operating expenses for the nine months ended September 30, 2014 totaled $5,134,939, consisting primarily of general and administrative expenses of $3,511,386, stock compensation of $22,685, bank service fees of $334,974, professional fees of $189,318, outside commission expense of $732,903 and $343,673 of billing fees.
 
 

Net Income/(Loss) – Net income/(loss) for the nine months ended September 30, 2015 and 2014, totaled $2,186,909 and $(3,733,249), respectively, relating primarily to operating expenses and cost of goods sold incurred in excess of revenue as we attempt to obtain economies of scale.

Liquidity and Capital Resources

At September 30, 2015 and December 31, 2014, our cash totaled $545,185 and $550,342, respectively.  Our principal cash requirements for the quarter ended September 30, 2015, were for operating expenses and cost of goods sold (including power purchases, employee cost, and customer acquisition) and capital expenditures. During the nine months ended September 30, 2015, the primary source of cash was from electricity revenues, $130,000 of capital raised pursuant to private placements of common stock and warrants and $3,100,000 in financing.  During the quarter ended September 30, 2014, the primary source of cash was from electricity revenues.

General – The Company’s decrease in net cash flow during the first nine months of 2015 is attributable to $2,080,849 cash used by operating activities, $269,859, cash used in investing activities which includes $91,344 for the purchase of property and equipment and $2,345,551 provided by financing activity.  In 2014, the Company’s net cash decrease resulted from cash used by operations of $2,774,675, net cash used in investing activities of $536,001 which includes $219,130 for the purchase of property and equipment and $3,147,117 provided by financing activity.

The Company has no present agreements or commitments with respect to any material acquisitions of other businesses, products, product rights or technologies. However, we will continue to evaluate acquisitions of and/or investments in products, technologies, or companies that complement our business and may make such acquisitions and/or investments in the future. Accordingly, we may need to obtain additional sources of capital in the future to finance any such acquisitions and/or investments. We may not be able to obtain such financing on commercially reasonable terms, if at all.  If we are able to obtain additional financing, such financing may result in restrictions on our operations, in the case of debt financing, or substantial dilution for stockholders, in the case of equity financing.

Cash Outflows for Capital Assets, Customer Acquisition and Deposits

We expect to expend funds for capital assets, customer acquisition and deposits in connection with the expansion of our business during the remainder of the current fiscal year.  The anticipated source of funds will be cash on hand and the capital raised through the year ended December 31, 2015.

Future Financing Needs

The Company did not commence operations and the generation of revenue until middle of the three month period ended March 31, 2012.  Our cash position may not be significant enough to support daily operations.  Management believes that we have adequate liquidity to support operations during the short-term, but this belief is based upon many assumptions and is subject to numerous risks.

While we believe in the viability of our plan of operations and strategy to generate revenues and in our ability to obtain additional funds, there can be no assurances that our plan of operations or ability to raise capital will be successful.  The ability to grow is dependent upon our ability to further implement our business plan, generate revenues, and obtain additional financing, as needed.

Off-Balance Sheet Arrangements

Our existing wholesale power purchase agreement provides that we will provide additional credit support to cover mark-to-market risk in connection with the purchase of long term power.  A mark-to-market credit risk occurs when the price of previously purchased long term power is greater than the current market price for power purchased for the same term.  While we believe that the current environment of historically low power prices limits our exposure to risk, a collateral call, should it occur, could limit our working capital and, if we fail to meet the collateral call, could cause liquidation of power positions.
 
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide this information.


Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this Quarterly Report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures, as of the end of the period covered by this Quarterly Report, were effective at the reasonable assurance level to ensure that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

Changes in Internal Control over Financial Reporting

There have been no changes in internal control over financial reporting during the period of time covered by this Quarterly Report has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Our process for evaluating controls and procedures is continuous and encompasses constant improvement of the design and effectiveness of established controls and procedures and the remediation of any deficiencies which may be identified during this process.





As of the date of this filing, there have been no material changes to the Risk Factors included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, filed with the SEC on March 31, 2015 (the “2014 Form 10-K”).  The Risk Factors set forth in the 2014 Form 10-K should be read carefully in connection with evaluating our business and in connection with the forward-looking statements contained in this Quarterly Report on Form 10-Q.  Any of the risks described in the 2014 Form 10-K could materially adversely affect our business, financial condition or future results and the actual outcome of matters as to which forward-looking statements are made.  These are not the only risks we face.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.


On October 19, 2015, the Company entered into a Note Conversion Agreement with an investor, pursuant to which the investor converted the principal amount, $100,000, of a promissory note issued by the Company on March 12, 2015 (the “Note”) into 100,000 shares (the “Shares”) of the Company’s common stock.  As additional consideration for the conversion, the Company issued the investor a warrant to purchase 50,000 shares of the Company’s common stock with an exercise price of $2.00 per share (the “Warrant”).

The Shares and Warrant issued in connection with the conversion of the Note were issued in reliance upon the exemption from securities registration afforded by the provisions of Section 4(a)(2) of the Securities Act of 1933, as amended, (“Securities Act”), based upon the following: (a) there was no public offering or general solicitation with respect to the offering of such shares, (b) the investor had access to materials and other information with respect to the Company, (c) the investor represented and warranted that he is an “accredited investor,” and (d) the investor acknowledged that the shares of the Company’s common stock were being acquired for investment intent and constitute “restricted securities” for purposes of the Securities Act, and agreed to transfer such securities only in a transaction registered under the Securities Act or exempt from registration under the Securities Act.
 


No.
Item
31.1
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
31.2
Certification  of the Chief Financial Officer  pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
32.1*
Certification of the CEO and CFO pursuant to Rule 13a-14(b) and Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
101.INS**
XBRL Instance Document
101.SCH**
XBRL Taxonomy Extension Schema Document
101.CAL**
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF**
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB**
XBRL Taxonomy Extension Label Linkbase Document
101.PRE**
XBRL Taxonomy Extension Presentation Linkbase Document

* In accordance with Item 601(b)(32)(ii) of Regulation S-K, this exhibit shall not be deemed “filed” for the purposes of Section 18 of the Securities and Exchange Act of 1934 or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

** Pursuant to Rule 406T of Regulation S-T, this XBRL information will not be deemed “filed” for the purpose of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liability of that section, nor will it be deemed filed or made a part of a registration statement or prospectus for purposes of Sections 11 and 12 of the Securities Act of 1933, or otherwise subject to liability under those sections.




In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this Quarterly Report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
 
SUMMER ENERGY HOLDINGS, INC.
 
 
 
Date:                      November 12, 2015
     By:    /s/ Neil M. Leibman                                                                                       
 
Neil M. Leibman
 
Chief Executive Officer
 
(Principal Executive Officer)
   
   
Date:                      November 12, 2015
  
 
/s/ Jaleea P. George                                                                  
 
Jaleea P. George
Chief Financial Officer
 
(Principal Accounting Officer)


 
21
 
 

SUMMER ENERGY HOLDINGS INC Reports