Attached files
| file | filename |
|---|---|
| EX-32.1 - EXHIBIT 32.1 - SUMMER ENERGY HOLDINGS INC | sume_ex32z1.htm |
| EX-31.2 - EXHIBIT 31.2 - SUMMER ENERGY HOLDINGS INC | sume_ex31z2.htm |
| EX-31.1 - EXHIBIT 31.1 - SUMMER ENERGY HOLDINGS INC | sume_ex31z1.htm |
| EX-23.1 - EXHIBIT 23.1 - SUMMER ENERGY HOLDINGS INC | sume_ex23z1.htm |
| EX-21.1 - EXHIBIT 21.1 - SUMMER ENERGY HOLDINGS INC | sume_ex21z1.htm |
| EX-4.1 - EXHIBIT 4.1 - SUMMER ENERGY HOLDINGS INC | sume_ex4z1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019.
[  ] 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
(Exact name of registrant as specified in its charter)
Nevada | 20-2722022 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer |
5847 San Felipe Street, Suite 3700, Houston, Texas, 77057
(Address of principal executive offices) (Zip Code)
(Registrant’s telephone number, including area code)
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Trading Symbol(s) | Principal U.S. Market for Securities | |
Common Stock, $0.001 par value | SUME | OTCQB |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
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 [X]No [ ]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec.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 [X]No [ ]
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨Accelerated filer ¨
Non-accelerated filer ýSmaller reporting company ý
Emerging growth company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standard provided pursuant to Section 13(a) of the Exchange Act.
The aggregate market value of the registrant’s common stock, $0.001 par value per share, held by non-affiliates of the registrant on June 30, 2019, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $33,420,316 (based on the average bid price of the common stock on that date as reported by OTC Markets). For this purpose, shares of common stock held by each officer and director and each person known to the registrant to own 10% or more of the outstanding voting securities of the registrant were excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not a determination for other purposes. The registrant has one class of securities, its common stock.
As of March 24, 2020, the registrant had 31,562,486 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE.
Part III incorporates by reference certain information from the registrant’s definitive proxy statement (the “Proxy Statement”) for the 2020 Annual Meeting of Stockholders.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2019
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Item 1 | 2 | |
Item 1A | 6 | |
Item 1B | 16 | |
Item 2 | 17 | |
Item 3 | 18 | |
Item 4 | 18 | |
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Item 5 | 18 | |
Item 6 | 19 | |
Item 7 | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 20 |
Item 7A | 29 | |
Item 8 | 29 | |
Item 9 | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE | 29 |
Item 9A | 30 | |
Item 9B | 30 | |
| 30 | |
Item 10 | 31 | |
Item 11 | 32 | |
Item 12 | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS | 32 |
Item 13 | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE | 32 |
Item 14 | 32 | |
| F-1 | |
Item 15 | F-1 | |
Item 16 | FORM 10-K SUMMARY | F-1 |
Cautionary Note Regarding Forward-Looking Statements
From time to time, we and our representatives may provide information, whether orally or in writing, including certain statements in this Annual Report on Form 10-K (this “Annual Report”), which are deemed to be “forward-looking” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that concern matters that involve risks and uncertainties which could cause actual results to differ materially from those projected in the forward-looking statements. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995 (the “Litigation Reform Act”) and are based on our beliefs as well as assumptions made by us using information currently available. All statements other than statements of historical fact contained in this Annual Report, including statements regarding future events, our future financial performance, our future business strategy and the plans and objectives of management for future operations, are forward-looking statements. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “will,” “should” and similar expressions, as they relate to us, are intended to identify forward-looking statements. Such statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended or using other similar expressions. In accordance with the provisions of the Litigation Reform Act, we are making investors aware that such forward-looking statements, because they relate to future events, are by their very nature subject to many important factors that could cause actual results to differ materially from those contemplated by the forward-looking statements contained in this Annual Report, any exhibits to this Annual Report and other public statements we make. Such factors are set forth in the “Business” section, the “Risk Factors” section, the “Legal Proceedings” section, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and other sections of this Annual Report, as well as in our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. We expressly disclaim any intent or obligation to update any forward-looking statements after the date hereof to conform such statements to actual results or to changes in our opinions or expectations, except as required by applicable law.
Summer Energy Holdings, Inc. (including our subsidiaries, Summer Energy, LLC (“Summer LLC”), Summer Energy Midwest, LLC (“Summer Midwest”), Summer EM Marketing, LLC (“Marketing LLC”) and Summer Energy Northeast, LLC (“Summer Northeast”), are referred to collectively in this Annual Report, as the “Company,” “Summer Energy,” “we,” “our” and “us”). The Company’s primary business operations are conducted through our subsidiaries Summer LLC and Summer Northeast. Summer LLC is a Texas limited liability company that is licensed within the state of Texas as a Retail Electric Provider (“REP”) by the Public Utility Commission of Texas (“PUCT”). Summer Northeast is a Texas limited liability company that is licensed as a REP in New Hampshire, Massachusetts, Connecticut and Rhode Island and currently operates in Massachusetts and New Hampshire. Summer Midwest is an Ohio limited liability company that is licensed in the state of Ohio as a REP. As stated above, references to the “Company,” the “Registrant,” “we,” our,” and “us” or similar terms, refer to Summer Energy Holdings, Inc. (f/k/a Castwell Precast Corporation), and its predecessors and its subsidiaries, except where the context makes clear that the reference is only to a specific subsidiary.
For more information on the Company and our products and services, please see the information set forth below or visit our website at www.summerenergy.com. The inclusion of our internet address in this Annual Report does not include or incorporate by reference into this Annual Report any information on our website. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports and other filings with the Securities and Exchange Commission (the “SEC”) are generally available through the EDGAR system maintained by the SEC at www.sec.gov.
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Description of Our Company and Predecessor
The Company was incorporated in the state of Nevada under the name Castwell Precast Corporation on March 25, 2005. On March 27, 2012, the Company (f/k/a Castwell Precast Corporation), closed the transaction (the “Transaction”) contemplated by that certain Agreement and Plan of Contribution entered into on January 17, 2012 among the Company, Summer LLC, and the individual members of Summer LLC (the “Contribution Agreement”). A copy of the Contribution Agreement was filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated January 19, 2012, and the description contained herein of the terms of the Contribution Agreement is qualified in its entirety by reference to the provisions thereof. Further, a more complete description of the Transaction is set forth in the Company’s Current Report on Form 8-K dated March 30, 2012. Prior to the consummation of the Transaction, the Company’s principal business activity, carried out entirely through its wholly-owned subsidiary Castwell Precast Inc., was the manufacture and installation of decorative window wells made from precast concrete. Castwell Precast Inc. was incorporated in the state of Utah on March 24, 2005. The Company ceased the business of manufacturing and installing decorative window wells, and currently conducts the business of purchasing and reselling electric power within the states of Texas, Massachusetts, New Hampshire, Ohio and Illinois through its wholly-owned subsidiaries Summer LLC, Summer Northeast and Summer Midwest.
Overview
Following the Transaction, the Company now carries on, through Summer LLC, Summer Northeast and Summer Midwest, the business of an REP in the states of Texas, Massachusetts, New Hampshire, Ohio and Illinois with head offices located at 5847 San Felipe Street, Suite 3700, Houston, Texas 77057. The Company’s telephone number is (713) 375-2790, its fax number is (713) 375-2794, and its website is www.summerenergy.com. The information accessible through the Company’s website does not constitute part of, and is not incorporated by reference into, this Annual Report.
Summer LLC was organized as a Texas limited liability company on April 6, 2011, by the filing of a certificate of organization with the Texas Secretary of State. In September of 2011, Summer LLC was awarded a license by the PUCT to operate as a REP in Texas. In general, Texas regulatory structure permits REPs, such as Summer LLC, to procure and sell electricity at unregulated prices. All REPs in Texas must be certified by the Electric Reliability Council of Texas (“ERCOT”) to operate within the Texas market. In Texas, ERCOT serves as the Independent System Operator (“ISO”) of the power grid and enables REPs, generators, regulated transmission and distribution service providers (“TDSPs”), and ultimately customers, to operate in a deregulated marketplace. ERCOT is responsible for coordinating and monitoring all communications by and between the power generator, the retail electric provider and the TDSP, including customer sign up, meter reading and billing between the end user, power generator and the REP.
Summer Northeast was organized as a Texas limited liability company on December 21, 2007 and was awarded licenses to operate as a REP by the public utility commissions of New Hampshire, Massachusetts, Rhode Island and Connecticut. 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 our customers competitive electricity rates, flexible payment and pricing choices, simple offers with understandable terms and responsive customer service.
Summer Midwest 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 issued a certificate as a Retail Electric Service Provider to Summer Midwest on June 16, 2015. On May 2, 2019, the Illinois Commerce Commission approved Summer Midwest as a Retail Electric Service Provider in the state of Illinois. During July 2019, Summer Midwest began to serve customers in the state of Ohio but has not commenced serving customers in the state of Illinois.
We offer retail electricity to commercial and residential customers in designated target markets within the states of Texas, Massachusetts, New Hampshire and Ohio. In the commercial market, the primary targets are small to medium-sized commercial customers (less than one megawatt of peak usage), but we will also selectively pursue larger commercial customers. Residential customers are a secondary target market. At this time, a majority of our customers are located in the Houston and Dallas-Fort Worth metropolitan areas, although our footprint extends to
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metropolitan and rural areas.
We rely upon established relationships and low-cost branding programs to attract commercial and residential customers. We continue to evaluate opportunities to expand our areas of operations as certain market regions elect to opt-in to deregulation. In addition, we continue to evaluate and pursue opportunities to acquire other REPs to the extent these acquisitions would provide value to us.
In most jurisdictions, we are required to enter into agreements with local transmission and distribution service providers for use of the local distribution and transmission systems and operation of functional interfaces necessary for us to serve our customers. With respect to energy supply, we utilize wholesale purchase agreements with wholesale energy providers. We serve as our own qualified scheduling entity for open market purchases and sales of electricity, forecasting our energy demand, and conducting procurement activities through an experienced team of professionals. The forecast for electricity load requirements is based on our aggregate customer base currently served and anticipated weather conditions, as well as forecasted customer acquisition and attrition. We continuously monitor and update our supply positions based on our retail demand forecasts and market conditions. Our policy is to maintain a balanced supply/demand book to limit commodity risk exposure. At this time, we do not plan on maintaining a financial book in addition to our physical supply/demand book for risk-hedging purposes.
We began delivering electricity to customers in mid-February 2012. We have continued to experience growth in our customer base since that time.
As of December 31, 2019, we had 90 full-time employees. Our employees are not represented by any collective bargaining agreement, and we have never experienced a work stoppage. We believe our employee relations are good.
Expansion into New Markets
If the Company enters additional deregulated markets, we will be required to operate within the specific regulatory environment of such state or region. We will evaluate the regulatory environment of each market, in addition to other operational, financial and customer considerations, before determining whether to pursue other market area opportunities.
Principal Supplier
Our subsidiaries, Summer LLC, Summer Northeast and Summer Midwest, are parties to an Amended and Restated Energy Services Agreement with EDF Trading North America, LLC (collectively, “EDFTNA”) whereby, with limited exceptions, they are required to purchase all of their electric power and associated services requirements from EDFTNA. We therefore rely substantially on EDF in order to meet our customers’ needs.
Marketing and Sales
The Company seeks to employ a multi-tiered marketing and sales strategy. The short-term emphasis is on controlled growth, utilizing indirect marketing through third-party relationships. Indirect marketing efforts, including the following, allow the Company to facilitate growth while keeping expenses low by avoiding the expense associated with creating and managing a full sales team:
·Aggregators, Brokers, Consultants - often referred to as “ABC’s” in the retail power industry;
·Affinity Programs - Gift card programs; Company-branded product incentives;
·Multifamily Housing Programs - incentivizing property management companies based on referrals to their tenants;
·Referrals - reaching out to individuals connected to the community and providing incentives for sign-ups; and
·Charitable Programs - enhancing referral programs and offering customers the chance to donate referral fees to local charitable organizations.
As the Company grows, we expect to achieve long-term growth by enhancing our indirect marketing efforts as well
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as growing our residential customer base. These initiatives include or will include, without limitation:
·Releasing an online portal for third parties to manage their commercial pricing requests and customer data remotely with minimal intervention of sales staff;
·Further business development by strengthening existing and revisiting weakened or less active relationships;
·Improving efficiency of our sales teams through further IT development and automation;
·Increasing our pre-paid electric residential segment via online and relationship marketing; and
·Refining our multi-family marketing division through IT improvements, increased staffing, and onsite marketing support to properties promoting our product.
Direct marketing efforts continue to be a result of management’s existing relationships, direct traffic to our enrollment platform on our website, and customer referrals.
Competition and Perceived Competitive Advantages
As more fully set forth under the heading entitled “Risk Factors,” the Company faces competition from many competitors who have significantly greater financial resources, well-established brand names, and large, existing installed customer bases. We expect the level of competition to intensify in the future. There is also significant competition from incumbent, traditional, and new electricity providers which may be better capitalized than the Company.
It is understood that there is significant competition in the retail electric market; however, we have observed that most established competitors target the larger customer segment such as large commercial and industrial operations. This creates a niche that we aggressively target. We focus on small to medium size commercial, residential, and select large businesses in our core marketing efforts. We believe this market segment will yield a higher per-unit-margin with improved customer loyalty.
The Company anticipates the addition of new market participants. Recent entries into the marketplace include single-client companies established for a select number of large electricity users such as refineries or industrial plants. These new participants’ strategy is to focus most of their marketing dollars on high-end users, as they assume the larger customers provide the highest return. The Company differentiates its strategy by focusing on the small to mid-size customer segment and building lasting relationships through excellent customer service, flexible terms, unique sales techniques, and competitive pricing.
The Company’s present management and staff have significant experience working in the Texas retail energy market. Management and staff also have experience with REPs who operate in Maryland, New Hampshire, the District of Columbia and Massachusetts. We believe management’s experience with these entities will contribute to management’s ability to market and continue to grow the Company in the markets in which we operate.
Because of management’s prior experience, management and staff have developed and maintained strong connections with agents, brokers, property owners and others in the markets in which we operate. Through these relationships, the Company anticipates building sales momentum.
Intellectual Property
The Company has not applied for any patents or copyrights. The Company has filed trademark applications for “Summer Energy” and for “Pronto Power.” The Company has not spent any significant time since its inception on research and development activities.
Additional Information
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As more fully set forth under the heading entitled “Risk Factors,” the Company is subject to governmental regulation and will face additional costs in complying with such regulations. At this time, the Company does not have an estimate of its annual regulatory compliance costs.
Before deciding to purchase, hold or sell our common stock, you should carefully consider the risks described below in addition to the other information contained in this Annual Report and in our other filings with the SEC, including subsequent reports on Forms 10-Q and 8-K. The risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business. If any of these known or unknown risks or uncertainties actually occurs with material adverse effects on the Company, our business, financial condition, results of operations and/or liquidity could be seriously harmed. In that event, the market price of our common stock will likely decline, and you may lose all or part of your investment.
Risks Factors Related to Our Business and Industry
We depend on key personnel.
For the foreseeable future, our success will depend largely on management’s industry knowledge, marketing skills and relationships with key investors, customer bases and industry leaders. The Company has employment agreements with management and other key personnel. We do not maintain key life insurance policies for our executive officers. Should any of these individuals leave the Company, it may have a material adverse effect on our future results of operations.
Recourse to the Company’s assets.
Outside of our wholesale contracts, our customer contracts and our REP certificates, the Company currently has limited assets that are available to satisfy liabilities and other obligations of the Company. If the Company becomes subject to a liability, parties seeking to have the liability satisfied may have recourse to the Company’s assets.
We will indemnify management and the members of the Board of Directors.
Members of our executive management (“Management”) and other key decision-makers will be entitled to indemnification from the Company except in certain circumstances, as more fully set forth in our Articles of Incorporation, Bylaws and separate indemnification agreements.
Stockholders will have no right to participate in management of the Company.
Stockholders in the Company will not have the right to participate in the management of the Company or in decisions made by Management on the Company’s behalf. As a result, stockholders will have almost no control over their investments in the Company or their prospects with respect thereto.
Uncertain economic conditions.
Recent economic events have created uncertainty with respect to the condition of the economy in the United States. Certain economic factors and indicators have suggested that such events have had a substantial negative effect on the economies of the United States and the states in which we operate. Furthermore, several industries have experienced financial difficulties. Other equity markets have been similarly affected. It is impossible to determine at this time the long-term effects of these events and conditions on the economy. Any negative change in the general economic conditions could adversely affect the financial condition and our operating results. Unforeseen incidents, such as terrorist attacks, corporate fraud or general weakness in the economy, could have a negative impact on the overall economic state of the market in which we intend to market and utilize our products and services. The Company may experience difficulty in raising additional capital necessary for expenses and growth, may experience underfunding due to the timing of payments received and due to the seasonality of the markets in which we operate and customer electricity usage.
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Our business may be adversely affected by the recent coronavirus (COVID-19) outbreak.
In December 2019, a novel strain of coronavirus was reported to have surfaced in Wuhan, China. In January 2020, this coronavirus spread to other countries, including the United States, and efforts to contain the spread of this coronavirus intensified. The outbreak and any preventative or protective actions that governments or we may take in respect of this coronavirus may result in a period of business disruption, reduced customer traffic and reduced operations. Any resulting financial impact cannot be reasonably estimated at this time but may materially affect our business, financial condition and results of operations. The extent to which the coronavirus impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others. Moreover, the coronavirus outbreak has begun to have indeterminable adverse effects on general commercial activity and the world economy, and our business and results of operations could be adversely affected to the extent that this coronavirus or any other epidemic harms the global economy generally.
In addition, we may take temporary precautionary measures intended to help minimize the risk of the virus to our employees, including temporarily requiring all employees to work remotely, suspending all non-essential travel for our employees, and discouraging employee attendance at industry events and in-person work-related meetings, which could negatively affect our business.
The impact of any deterioration in the U.S. economy as a result of the coronavirus (COVID-19) outbreak may negatively affect our business.
A deterioration in the U.S. economy or our industry as a result of the coronavirus outbreak could result in a period of substantial turmoil. The impact of this event on our business and the severity of an economic crisis is uncertain. It is likely that a crisis (such as the coronavirus outbreak) in the U.S. economy could adversely affect our business, vendors and prospects as well as our liquidity and financial condition. This could impact our ability to increase our customer base and customers could delay deploying our services which could impact our ability to generate positive cash flows. Our current service offerings and our future growth may be minimized to a point that would be detrimental to our business development activities. These events would be detrimental to our business prospects and result in material changes to our operations and financial position.
The Centers for Disease Control and Prevention has stated a risk exists of a pandemic in the United States, which would mean that the current methods in place to control of the spread of the virus have been ineffective. In such a situation, the effect on the economy and on the public may be severe. There are no comparable recent events which may provide guidance as to the effect of the spread of coronavirus and a potential pandemic, and, as a result, there is considerable uncertainty of its potential effect on our business and results of operations.
Adequacy of funds for operations or capital expenditures.
To the extent that the Company’s expenses increase, unanticipated expenses arise, or capital expenditures are necessary, and accumulated reserves are insufficient to meet such expenses, the Company may be required to obtain cash advances and additional funds through borrowing or additional equity raises, if available. Such debt and/or equity raises may have a material negative adverse effect on the Company’s profitability.
We are substantially dependent on a single party to purchase our electricity.
Our subsidiaries, Summer LLC, Summer Northeast and Summer Midwest, are parties to an Amended and Restated Energy Services Agreement with EDFTNA whereby, with limited exceptions, they are required to purchase all of their electric power and associated services requirements from EDFTNA. We therefore rely substantially on EDFTNA in order to meet our customers’ needs. If we default in our obligations to EDFTNA, we may be unable to purchase the required electricity supply to service our customers. If we are unable to purchase through EDFTNA, we may be forced to purchase substantial electricity supply in the open market to meet customer demand at a time when energy prices are volatile, which could have an adverse impact on our financial condition. Our obligations to EDFTNA are secured by a first position security interest in all of our assets, equipment and inventory.
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Our business is dependent on retaining licenses in the markets in which we operate.
Our business model is dependent on continuing to be licensed in existing markets. If we have a license revoked or are not granted renewal of a license, or if our license is adversely conditioned or modified, it could materially and adversely affect our business, financial condition, cash flows and results of operations.
Volatile energy prices and regulatory risk.
Sustained high energy prices, ongoing price volatility, decreasing reserve margins, and changing environmental regulation all creates a risk of increased regulatory and/or legislative intervention, which may limit our flexibility within the deregulated market. In addition, ISOs, public utility commissions, and state legislatures possess significant regulatory control over our business operations in all markets. Factors outside of our control may cause changes to the deregulated electricity structure at any time, which may have an adverse effect upon our business.
The Company believes that competitive markets yield a broad range of innovative product and service alternatives to consumers and ultimately lead to the most efficient use of resources. We believe regulatory entities should continue to take actions that encourage competition in the industry, but no assurance can be given that this will be the case. Regulatory and/or legislative intervention could disrupt the market structure of electricity prices, which could impact the Company’s results of operations. The Company’s earnings and cash flows may also be adversely affected in any period in which the demand for power significantly varies from forecasted supply, which may occur due to, among other factors, weather events, competition and economic conditions.
Reliance on TDSPs affiliated with our competitors to perform some functions for our customers.
Under our regulatory structure, we are often required to enter into agreements with local incumbent utilities for use of the local distribution systems, and for the creation and operation of functional interfaces necessary for us to serve our customers. While we are optimistic about our ability to enter into acceptable agreements in relevant markets, any delay in future negotiations for access or our inability to enter into reasonable agreements to operate could delay or negatively impact our ability to serve our customers, which could have a material negative impact on our business, results of operations, and financial condition.
In certain markets we are dependent on TDSPs for maintenance of the infrastructure through which we deliver electricity to our retail customers. Any infrastructure failure that interrupts or impairs delivery of electricity to our customers could negatively impact the satisfaction of our customers with our service and could have a material adverse effect on our results of operations, financial condition and cash flow. Additionally, in certain markets we are dependent on TDSPs for performing service initiations and changes, and for reading our customers’ energy meters. We are required to rely on the TDSPs, or, in some cases, ERCOT, to provide us with our customers’ information regarding energy usage, and we may be limited in our ability to confirm the accuracy of the information. The provision of inaccurate information or delayed provision of such information by the TDSPs or ERCOT could have a material adverse effect on our business, results of operations, financial condition and cash flow. In addition, any operational problems with our new systems and processes could similarly have a material adverse effect on our business, results of operations, financial condition and cash flow. Further, we rely on the TDSPs to properly repair and maintain electrical lines in outages caused by severe weather, which may produce a delay in providing service to the Company’s customers, which can negatively impact the Company.
We are subject to government regulation and extensive government regulation may increase our costs and slow our growth.
Significant regulations imposed at the federal, state and local levels govern the provision of utility services and affect our business and our existing and potential competitors. Delays in receiving required regulatory approvals, the enactment of adverse legislation, regulations or regulatory requirements, or the application of existing laws and regulations to certain services may have a material adverse effect on our business, financial condition, results of operations and cash flow. In addition, future legislative, judicial and regulatory agency actions could alter competitive conditions in the markets in which we intend to operate, in ways not necessarily to our advantage.
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Moreover, existing regulations may be revised or reinterpreted and new laws and regulations may be adopted or become applicable to our commercial activities. These actions could have a material adverse effect on our results of operations, financial conditions and cash flows.
New legislation or regulation.
We cannot determine what effect additional state or federal governmental legislation, regulations, or administrative orders, when and if promulgated, would have on our business in the future. New legislation or regulations may require the reformulation of our business to meet new standards, require us to cease operations, impose stricter qualification and/or registration standards, impose additional record keeping, or require expanded consumer protection measures.
Reliance on information technology systems; collection of sensitive customer data.
Our business is dependent on information sharing among market participants. This information includes customer enrollment information, ERCOT transactions, meter readings, invoices for wire line charges, etc. Therefore, our success as an independent REP is impacted by our ability to handle this information, and we are dependent on third parties to provide timely and accurate information to us. We rely on a combination of internal systems including telephone, Internet, load forecasting, as well as systems operated by third parties. Failure to receive timely and accurate information could have an adverse impact on our business.
We have implemented, or intend to implement, both processes and infrastructure to provide for redundancy of core data due to business interruption associated with our billing platform; however, that is only one component of our business model. In addition, our systems and those we rely upon from third parties need continued development and investment to ensure reliability and scalability as our business grows at a rapid rate.
Despite the implementation of security measures, our networks may be vulnerable to unauthorized access, computer viruses and other disruptive problems. A party who is able to circumvent security measures could misappropriate proprietary information or cause interruptions in our Internet operations. We may be required to expend significant capital or other resources to protect against the threat of security breaches or to alleviate problems caused by such breaches. Although we intend to continue to implement industry-standard security measures, there can be no assurance that measures implemented by us will not be circumvented in the future.
Our business requires access to sensitive customer data in the ordinary course of business. Examples of sensitive customer data are names, addresses, account information, historical electricity usage, expected patterns of use, payment history, credit bureau data, credit and debit card account numbers, driver’s license numbers, social security numbers and bank account information. We may need to provide sensitive customer data to vendors and service providers who require access to this information in order to provide services. It is possible that our security controls over personal data, our training of employees and consultants on data security, and other practices we follow may not prevent the improper disclosure of personally identifiable information. If a significant breach occurred, our reputation may be adversely affected, customer confidence may be diminished, or our business may be subject to legal claims, any of which may contribute to the loss of customers and have a negative impact on the business and/or results of operations.
We depend on the accuracy of data in our information management systems, which subjects us to risks.
We depend on the accuracy and timeliness of our information management systems for billing, collections, consumption and other important data. We rely on many internal and external sources for this information, including:
·our marketing, pricing and customer operations functions; and
·various local regulated utilities and independent system operators (ISOs) for volume or meter read information, certain billing rates and billing types (e.g., budget billing) and other fees and expenses.
Inaccurate or untimely information, which may be outside of our direct control, could result in:
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·inaccurate and/or untimely bills sent to customers;
·reduced effectiveness and efficiency of our operations;
·inability to adequately hedge our portfolio;
·increased overhead costs;
·inaccurate accounting and reporting of customer revenues, gross margin and accounts receivable activity;
·inaccurate measurement of usage rates, throughput and imbalances;
·customer complaints; and
·increased regulatory scrutiny.
We are also subject to disruptions in our information management systems arising out of events beyond our control, such as natural disasters, epidemics, failures in hardware or software, power fluctuations, telecommunications and other similar disruptions. In addition, our information management systems may be vulnerable to computer viruses, incursions by intruders or hackers and cyber terrorists and other similar disruptions. A successful cyber-attack on our information management systems could severely disrupt business operations, preventing us from billing and collecting revenues, and could result in significant expenses to investigate and repair security breaches or system damage, lead to litigation, fines, other remedial action, heightened regulatory scrutiny, diminished customer confidence and damage to our reputation. We do not maintain cyber-liability insurance that covers certain damage caused by cyber events.
Inaccurate data and disruptions of our information management systems to perform as anticipated for any reason could materially and adversely affect our business, financial condition, cash flows and results of operations.
Certain political and natural events may affect our Company.
Catastrophic events or geo-political conditions may disrupt our business. A disruption or failure of our systems or operations in the event of a major earthquake, weather event, cyber-attack, terrorist attack, or other catastrophic event or natural disaster could cause delays in performing critical functions. A catastrophic event that results in the destruction or disruption of any of our critical business or information technology systems could harm our ability to conduct normal business operations and our operating results.
Weather and other related commodity risks may affect our ability to manage and maintain a balanced supply/demand book.
Commitments for future purchase of electricity supply (i.e., forward power contracts) are based solely on our current customer base under contract. No speculative positions to buy or sell electricity are allowed by our internal risk policy. Long term supply positions are consistently monitored and rebalanced due to adding or removing customers, long term weather assumptions, and economic indicators. Short term supply positions are also monitored and rebalanced due to changing demand positions. Short term changes in demand are driven primarily by the weather forecasts for the geographical areas in which we operate. We plan to continue to maximize retail earnings through efficient procurement practices, with the primary goal being to protect the earnings generated by the retail business. However, fluctuations in actual weather conditions, generation availability, transmission constraints, and generation reserve margins may all have an impact on the actual power prices and the electricity consumption of our customers on a given day. Extreme weather conditions may force us to purchase electricity in the balancing market on days when weather is unexpectedly severe, and the pricing for balancing market energy may be significantly higher on such days than the cost of electricity in our existing fixed priced contracts. Unusually mild weather conditions could leave us with excess power which may be sold in the balancing market at a loss if the balancing market price is lower than the Company’s cost of electricity in our existing fixed priced contracts.
Commodity pricing is an inherent risk component of our business operations and our financial results. The prevailing market prices for electricity and fuel may fluctuate substantially over relatively short periods of time, potentially adversely impacting our results of operations, financial condition and cash flows. Changes in market prices for electricity and fuel may result from any of the following:
·weather conditions;
·seasonality;
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·demand for energy commodities and general economic conditions;
·forced or unscheduled plant outages;
·disruption of electricity or gas transmission or transportation infrastructure or other constraints or inefficiencies;
·addition or reduction of generating capacity;
·environmental and emissions regulation;
·availability of competitively priced alternative energy sources;
·availability and levels of storage and inventory for fuel stocks;
·natural gas, crude oil and refined products, and coal production levels;
·the creditworthiness or bankruptcy or other financial distress of market participants;
·changes in market liquidity;
·natural disasters, wars, embargoes, pandemics, acts of terrorism and other catastrophic events; and
·Federal and state governmental regulation and legislation.
Natural disasters, public health crises, and other events beyond our control could negatively impact us and/or our suppliers or customers.
We are subject to the risk of disruption by earthquakes, hurricanes, floods and other natural disasters, fire, power shortages, geopolitical unrest, war, terrorist attacks and other hostile acts, public health issues, epidemics or pandemics and other events beyond our control and the control of the third parties on which we depend. Any of these catastrophic events, whether in the United States or abroad, may have a strong negative impact on the global economy, our employees, facilities, partners, suppliers, distributors or customers, and could decrease demand for our products and services, create delays and inefficiencies in our supply chain and make it difficult or impossible for us to deliver products or services to our customers. For example, in December 2019 an outbreak of a novel strain of coronavirus originated in Wuhan, China, and has since spread to a number of other countries, including the United States. This outbreak may result in disruptions to our and our customer’s supply chain and business operations. Global health concerns, such as coronavirus, could also result in social, economic, and labor instability in the cities and states in which we or our customers and suppliers operate and live. These uncertainties could have a material adverse effect on our business and our results of operation and financial condition. In addition, a catastrophic event that results in the destruction or disruption of our information technology systems would severely affect our ability to conduct normal business operations and, as a result, our operating results would be adversely affected
Our financial results fluctuate on a seasonal, quarterly and annual basis.
Our overall operating results fluctuate substantially on a seasonal, quarterly and annual basis depending on: (1) the geographic mix of our customer base; (2) the concentration of our product mix; (3) the impact of weather conditions on commodity pricing and demand; (4) variability in market prices for electricity; and (5) changes in the cost of delivery of commodities through energy delivery networks. These factors can have material short-term impacts on monthly and quarterly operating results, which may be misleading when considered outside of the context of our annual operating cycle. In addition, our accounts payable and accounts receivable are impacted by seasonality due to the timing differences between when we pay our suppliers for accounts payable versus when we collect from our customers on accounts receivable.
Accordingly, we may experience seasonal, quarterly and annual fluctuations, which could materially and adversely affect our business, financial condition, cash flows and results of operations.
We may have difficulty retaining our existing customers or obtaining a sufficient number of new customers, due to competition and for other reasons.
The markets in which we compete are highly competitive, and we may face difficulty retaining our existing customers or obtaining new customers due to competition. We encounter significant competition from local regulated utilities or their retail affiliates and traditional and new REPs. Many of these competitors or potential competitors are larger than us, have access to more significant capital resources, have more well-established brand names and have larger existing installed customer bases. Additionally, existing customers may switch to other REPs during their contract terms in the event of a significant decrease in the retail price of electricity in order to obtain
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more favorable prices. Although we generally have a right to collect a termination fee from each customer on a fixed-price contract that terminates its contract early, we may not be able to collect the termination fees in full or at all.
If we are unable to obtain new customers or maintain our existing customers, due to competition or otherwise, it could materially and adversely affect our business, financial condition, cash flows and results of operations.
We are subject to direct credit risk for certain customers who may fail to pay their bills as they become due.
We bear direct credit risk related to our customers located in markets that have not implemented purchase of accounts receivable (“POR”) programs as well as indirect credit risk in those POR markets that pass collection efforts along to us after a specified non-payment period. We generally have the ability to terminate contracts with customers in the event of non-payment, but in most states in which we operate we cannot disconnect their electricity service. In POR markets where the local regulated utility has the ability to return non-paying customers to us after specified periods, we may realize a loss for one to two billing periods until we can terminate these customers’ contracts. We may also realize a loss on fixed-price customers in this scenario due to the fact that we will have already fully hedged the customer’s expected commodity usage for the life of the contract and we also remain liable to our suppliers of electricity for the cost of our supply commodities. Furthermore, in the Texas market, we are responsible for billing the distribution charges for the local regulated utility and are at risk for these charges, in addition to the cost of the commodity, in the event customers fail to pay their bills. Changing economic factors, such as rising unemployment rates and energy prices also result in a higher risk of customers being unable to pay their bills when due.
The failure of our customers to pay their bills or our failure to maintain adequate billing and collection procedures could adversely affect our financial results.
We may not be able to manage our growth successfully.
The development of our operations will depend upon, among other things, our ability to create and expand our customer base in our existing markets and to enter new markets in a timely manner and at reasonable costs. In addition, we anticipate that our employee base will grow in order for us to accommodate our increased customer base. We may experience difficulty managing the growth of a portfolio of customers that is diverse both with respect to the types of services they will require, the market rules in their jurisdiction and the infrastructure required to deliver electricity to those customers. Expanding our operations may also require continued development of our operating and financial controls and may place additional stress on our management, finances and operational resources. If we are unable to manage our growth and development successfully, our operating results and financial condition could be materially adversely affected.
Achieving the desired benefits of acquisitions may be subject to a number of challenges and uncertainties which make it hard to predict the future success of each entity.
We acquired Summer Energy Northeast, LLC (formerly known as REP Energy, LLC) with expected benefits including, among other things, operating efficiencies, entering into new markets, procurement savings, innovation, sharing of best practices and increased market share that may allow for future growth. Achieving the anticipated benefits may be subject to a number of significant challenges and uncertainties, including, without limitation, whether unique corporate cultures will work collaboratively in an efficient and effective manner, the coordination of separate organizations, the possibility of imprecise assumptions underlying expectations regarding potential synergies and the integration process, unforeseen expenses and delays, and competitive factors in the marketplace. We could also encounter unforeseen transaction and integration-related costs or other circumstances such as unforeseen liabilities or other issues. Many of these potential circumstances are outside of our control and any of them could result in increased costs, decreased revenue, decreased synergies and the diversion of management time and attention. If we are unable to achieve our objectives within the anticipated time frame, or at all, the expected benefits may not be realized fully or at all, or may take longer to realize than expected, which could have an adverse effect on our business, financial condition and results of operations.
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We rely on a third-party vendor for our customer billing and transactions platform that exposes us to third party performance risk.
We have outsourced our back-office customer billing and transactions functions to a third party, and we rely heavily on the continued performance of that vendor under our commercial agreement. Failure of our vendor to operate in accordance with the terms of the agreement or the vendor’s bankruptcy or other event that prevents it from performing under our agreement could materially and adversely affect our business, financial condition, cash flows and results of operations.
We face strong competition from incumbent utilities and other competitors.
The market in which the Company operates is highly competitive. The Company faces competition from many competitors with significantly greater financial resources, well-established brand names and large, existing installed customer bases. We expect the level of competition to intensify in the future. We expect significant competition from incumbent, traditional, and new electricity providers, which may be better capitalized than the Company.
In some markets, our principal competitor may be the local incumbent utility’s unregulated affiliates. These affiliates have the advantage of long-standing relationships with their customers, and they may have longer operating histories, greater financial and other resources and greater name recognition in their markets than we do. In addition, incumbent utilities have been subject to regulatory oversight, in some cases for close to a century, and thus have a significant amount of experience regarding the regulators’ policy preferences as well as a critical economic interest in the outcome of proceedings concerning their revenues and terms and conditions of service.
Some of our competitors, including affiliated retailers, have formed alliances and joint ventures in order to compete in the restructured, deregulated retail electricity industry. Many customers of these incumbent utilities may decide to stay with their long-time energy provider if they have been satisfied with its service in the past.
In addition to competition from the incumbent utilities and their affiliates, we face competition from a number of other energy service providers, including start-up companies focusing on internet marketing and online services, and other energy industry participants who may develop businesses that will compete with us in both local and national markets. Many of these competitors or potential competitors are larger than the Company and have access to more significant capital resources.
Payment defaults by other REPs to ERCOT.
In the event of a default by a REP of its payment obligations to ERCOT, the portion of that obligation that is unrecoverable by ERCOT from the defaulting REP is assumed by the remaining market participants in proportion to each participant’s load ratio. As a REP and market participant in ERCOT, we may have to pay a portion of the amount owed to ERCOT should such a default occur, and ERCOT is not successful in recovering such amounts. As a relatively small company, any such default of a REP in its obligations to ERCOT could have a material adverse effect on our business, results of operations, financial conditions and cash flows.
ERCOT has experienced problems with its information systems.
Problems in the flow of information between ERCOT, TDSPs and the REPs have resulted in delays and other problems in enrolling and billing customers. In some instances, the Company has been erroneously charged by TDSPs for delivered power, resulting in a negative effect on the Company’s results of operations and financial condition. When customer enrollment transactions are not successfully processed by all involved parties, ownership records in the various systems supporting the market are not synchronized properly and subsequent transactions for billing and settlement are adversely affected. The impact may mean that we are not listed as the electric provider-of-record for intended or agreed upon time periods, delays in receiving customer consumption data that is necessary for billing and settlement either through ERCOT or directly with TDSPs, as well as the incorrect application of rates or prices and imbalances in our electricity supply forecast and actual sales.
Our future results of operations may be negatively impacted by settlement adjustments determined by ERCOT related to prior periods.
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Settlement information for most operating activity is due from ERCOT within two months after the operating day, and true-up settlements are due from ERCOT within six months after the operating day. ERCOT has the ability to resettle any operating day at any time after the six-month settlement period, usually the result of a lingering dispute, an alternative dispute resolution process, or litigated event. As a result, we are subject to settlement adjustments from ERCOT related to prior periods, which may result in charges or credits impacting our future reported results of operations.
Our results of operations and financial condition could be negatively impacted by any development or event beyond our control that causes economic weakness in the markets in which we operate.
Currently, we operate in Texas, New Hampshire, Massachusetts and Ohio. As a result, regardless of the state of the economy in areas outside the markets in which we operate, economic weakness in these markets could lead to reduced demand for electricity in these markets. Such a reduction could have a material negative impact on our results of operations, liquidity and financial condition.
Risks Related to the Company
We have a substantial amount of indebtedness, which may adversely affect our financial resources and our ability to operate our business.
Our subsidiary, Summer LLC, is party with Digital Lending Services US Corp. (the “Lender”), to, and we are liable with Summer LLC for, up to $10 million of outstanding debt under a revolving loan made pursuant to a loan agreement and accompanying revolving promissory note, security agreement and guaranty, dated as of March 12, 2020 (collectively, the “Loan Agreement”). The maturity date of the outstanding Loan Agreement is March 11, 2023. Further, under the Loan Agreement, Summer LLC is subject to certain restrictive covenants that, among other things, may limit our ability to obtain additional financing for working capital requirements, product development activities, debt service requirements, and general corporate or other purposes. If Summer LLC breaches any of its restrictive covenants or is unable to pay the indebtedness under the Loan Agreement when due, this could result in a default under the Loan Agreement. In such event, the Lender may elect (after the expiration of any applicable notice or grace periods) to declare all outstanding borrowings, together with accrued and unpaid interest and other amounts payable under the Loan Agreement, to be immediately due and payable. Any such occurrence would have an immediate and materially adverse impact on our business and results of operations. The Loan Agreement is secured by a second position security interest in all assets of Summer LLC and is guaranteed by the Company. Further, pursuant to the Amended and Restated Energy Services Agreement and related agreements with EDFTNA, we are generally indebted to EDFTNA for short-term debt related to our purchase of electricity and EDFTNA has a first priority security interest in, and lien on, substantially all of our assets. Our resulting substantial level of indebtedness and other financial obligations increase the possibility that we may be unable to pay, when due, the principal of, interest on, or other amounts due in respect of, our indebtedness.
Risks Related to the Transaction and the Ownership of the Common Stock of the Company
We face increased costs and demands upon management and accounting and finance resources as a result of complying with the laws and regulations affecting public companies; any failure to establish and maintain adequate internal controls over financial reporting or to recruit, train and retain necessary accounting and finance personnel could have an adverse effect on our ability to accurately and timely prepare our consolidated financial statements.
As a public operating company, we incur significant administrative, legal, accounting and other burdens and expenses beyond those of a private company, including those associated with corporate governance requirements and public company reporting obligations. In particular, we may need to enhance and supplement our internal accounting resources with additional accounting and finance personnel with the requisite technical and public company experience and expertise, as well as refine our quarterly and annual financial statement closing process, to enable us to satisfy such reporting obligations. However, even if we are successful in doing so, there can be no assurance that our finance and accounting organization will be able to adequately meet the increased demands that result from being a public company.
Furthermore, we are required to comply with Section 404 of the Sarbanes-Oxley Act of 2002. In order to satisfy the
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requirements of Section 404 of the Sarbanes-Oxley Act of 2002, we are required to document and test our internal control procedures and prepare annual management assessments of the effectiveness of our internal control over financial reporting. These assessments will need to include disclosure of identified material weaknesses in our internal control over financial reporting. Testing and maintaining internal control over financial reporting will involve significant costs and could divert management’s attention from other matters that are important to our business. Additionally, we cannot provide any assurances that we will be successful in remediating any deficiencies that may be identified. If we are unable to remediate any such deficiencies or otherwise fail to establish and maintain adequate accounting systems and internal control over financial reporting, or we are unable to recruit, train and retain necessary accounting and finance personnel, we may not be able to accurately and timely prepare our consolidated financial statements and otherwise satisfy our public reporting obligations. Any inaccuracies in our financial statements or other public disclosures (in particular if resulting in the need to restate previously filed financial statements), or delays in our making required SEC filings, could have a material adverse effect on the confidence in our financial reporting, our credibility in the marketplace and the trading price of our common stock.
We devote significant resources to address these public company-associated requirements, including compliance programs and investor relations, as well as our financial reporting obligations. Complying with these rules and regulations increases our legal and financial compliance costs and makes some activities more time-consuming and costly.
An active, liquid and orderly trading market for our common stock may not develop, and the price of our stock may be volatile and may decline in value.
There currently is not an active public market for our common stock. An active trading market may not develop or, if developed, may not be sustained. The lack of an active market may impair the ability of stockholders to sell shares of common stock at the time they wish to sell them or at a price they consider reasonable. An inactive market may also impair our ability to raise capital by selling shares of common stock and may impair our ability to acquire other companies or assets by using shares of our common stock as consideration.
The stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of companies with securities traded in those markets. Due in part to the outbreak of Covid-19, the stock market has recently experienced substantial volatility. Broad market and industry factors may seriously affect the market price of companies’ stock, including ours, regardless of actual operating performance.
The Company may not be able to attract the attention of brokerage firms.
Because the Transaction is characterized as a “reverse acquisition,” securities analysts of brokerage firms may not provide coverage of the Company. No assurance can be given that brokerage firms will want to conduct any secondary offerings on behalf of the Company in the future, should the need arise.
Our common stock may not be eligible for listing on a national securities exchange.
Our common stock is not currently listed on a national securities exchange, and we do not currently meet the initial quantitative listing standards of a national securities exchange. We cannot assure you that we will be able to meet the initial listing standards of any national securities exchange, or, if we do meet such initial qualitative listing standards, that we will be able to maintain any such listing. Our common stock is currently quoted on the OTC Markets and, until our common stock is listed on a national securities exchange, we expect that it will continue to be eligible and quoted on the OTC Markets, another over-the-counter quotation system, or in the “pink sheets.” In these venues, an investor may find it difficult to obtain accurate quotations as to the market value of our common stock. In addition, if we fail to meet the criteria set forth in SEC regulations, various requirements would be imposed by law on broker-dealers who sell our securities to persons other than established customers and accredited investors. Consequently, such regulations may deter broker-dealers from recommending or selling our common stock, which may further affect its liquidity. This would also make it more difficult for us to raise additional capital in the future.
The Company’s common stock may be considered “a penny stock” and may be difficult to sell.
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The SEC has adopted regulations that generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share, or an exercise price of less than $5.00 per share, subject to specific exemptions. The market price of our common stock is likely to be less than $5.00 per share and, therefore, may be designated as a “penny stock” according to SEC rules. This designation requires any broker or dealer selling these securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities. These rules may restrict the ability of brokers or dealers to sell our common stock and may affect the ability of investors to sell their shares.
Our stockholders may experience significant dilution if future equity offerings are used to fund operations or acquire complementary businesses.
If we engage in capital raising activities in the future, including issuances of common stock, to fund the growth of our business, our stockholders could experience significant dilution. In addition, securities issued in connection with future financing activities or potential acquisitions may have rights and preferences senior to the rights and preferences of our common stock. We have an equity incentive plan pursuant to which equity awards may be granted to eligible employees (including our executive officers), directors and consultants, if our board of directors determines that it is in the best interest of the Company and our stockholders to do so. The issuance of shares of our common stock upon the exercise of any such equity awards may result in dilution to our stockholders and adversely affect our earnings.
If securities or industry analysts do not publish, or cease publishing, research or reports about us, our business or our market, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.
The trading market for our common stock will be influenced by whether industry or securities analysts publish research and reports about us, our business, our market or our competitors and, if any analysts do publish such reports, what they publish in those reports. We may not obtain analyst coverage in the future. Any analysts that do cover us may make adverse recommendations regarding our stock, adversely change their recommendations from time to time, and/or provide more favorable relative recommendations about our competitors. If any analyst who may cover us in the future were to cease coverage of our company or fail to regularly publish reports on us, or if analysts fail to cover us or publish reports about us at all, we could lose, or never gain, visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
We do not anticipate paying any dividends in the foreseeable future.
We currently intend to retain our future earnings to support operations and to finance expansion and, therefore, we do not anticipate paying any cash dividends to holders of our common stock in the foreseeable future.
The forward-looking statements contained in this Annual Report may prove incorrect.
This Annual Report contains certain forward-looking statements. These forward-looking statements are based largely on our current expectations and are subject to a number of risks and uncertainties. Actual results could differ materially from these forward-looking statements. In addition to the other risks described elsewhere in this “Risk Factors” discussion, important factors to consider in evaluating such forward-looking statements include: (i) changes to external competitive market factors or in our internal budgeting process which might impact trends in our results of operations; (ii) anticipated working capital or other cash requirements; (iii) changes in our business strategy or an inability to execute our strategy due to unanticipated changes in our industry; and (iv) various competitive factors that may prevent us from competing successfully in the marketplace. In light of these risks and uncertainties, many of which are described in greater detail elsewhere in this “Risk Factors” discussion, there can be no assurance that the events predicted in forward-looking statements contained in this Annual Report will, in fact, transpire. Any negative change in the factors listed above could adversely affect the financial condition and operating results of the Company and its products.
ITEM 1B.UNRESOLVED STAFF COMMENTS
Not applicable.
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Effective December 1, 2017, we lease approximately 20,073 square feet of office space on the 37th floor of 5847 San Felipe, Houston, Texas, pursuant to a sublease agreement dated October 11, 2017 with ENSCO International Incorporated (“Sublandlord”) for a term beginning on December 1, 2017 and terminating on December 31, 2025. The rent payment is $15,891 per month during the term of the sublease agreement. The Company is also responsible for 12.08% of the operating expenses, utilities and taxes charged to the Sublandlord.
We paid lease payments through October 31, 2019 for the remaining term of the lease agreement for our former office space located at 800 Bering Drive, Suite 260, Houston, Texas 77057. From November 1, 2018 through October 31, 2019 the base lease payments were $13,203. As of December 31, 2019, the obligation for the former office space was paid in full.
Summer Northeast entered into a sublease agreement with PDS Management Group, LLC (“PDS”) on October 31, 2017 at 800 Bering Drive, Suite 250, Houston, Texas, under a non-cancellable lease obligation which expired on February 28, 2020. PDS is 100% owned by Tom O’Leary who is a member of the Company Board of Directors. On September 1, 2018, PDS subleased 800 Bering Drive, Suite 250, Houston, Texas to an outside party, and Summer Northeast receives a monthly credit in the amount of $1,698 until the end of the lease obligation on February 28, 2020. Beginning on September 1, 2018 through the termination of the lease on February 28, 2020, the monthly rent, net of credit, is $2,255.
The premises are sufficient for the Company’s current needs.
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ITEM 4.MINE SAFETY DISCLOSURES
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the OTC Markets, OTCQB, under the symbol “SUME.” As such, the market for our common stock may be less liquid, receive less coverage by security analysts and news media, and generate lower prices than might otherwise be obtained if it were listed on a national exchange.
The trading in our common stock is limited, with a low volume of daily trading. The following table presents quarterly information on the high and low sales prices of our common stock during the fiscal years ended December 31, 2019 and 2018, furnished by the OTC Markets.
| High | Low |
|
|
|
Fiscal Year Ended December 31, 2019 |
|
|
First Quarter | $1.99 | $1.35 |
Second Quarter | $2.49 | $1.50 |
Third Quarter | $2.00 | $1.50 |
Fourth Quarter | $2.00 | $1.38 |
|
|
|
Fiscal Year Ended December 31, 2018 |
|
|
First Quarter | $5.00 | $1.75 |
Second Quarter | $3.00 | $1.52 |
Third Quarter | $2.45 | $1.40 |
Fourth Quarter | $1.99 | $1.35 |
Holders
On March 24, 2020, we had approximately 144 stockholders of record.
We have never paid cash dividends on our common stock and do not anticipate paying such dividends in the foreseeable future. The future payment of dividends, if any, will be determined by our Board of Directors (the “Board”) in light of conditions then existing, including our financial condition and requirements, future prospects, restrictions in financing agreements, business conditions and other factors deemed relevant by the Board.
Repurchases
During the fiscal year ended December 31, 2019, we did not repurchase any of our securities.
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Recent Sales of Unregistered Equity Securities
On December 30, 2019, the Company granted nonqualified options to purchase a total of up to 53,750 shares of the Company’s common stock to six non-employee directors as compensation. The options have a term of ten years and an exercise price of $2.25 per share. The options to purchase shares of common stock were issued in reliance upon an exemption from registration under Section 4(a)(2) of the Securities Act.
On December 30, 2019, the Company issued a total 30,176 shares of the Company’s common stock in lieu of cash to four individuals (7,544 shares each) in consideration for acting as guarantors of a loan to the Company from Comerica Bank. The Company agreed to pay interest at a rate of 12% of the outstanding balance of such loan for the guarantee and such interest is to be paid with the issuance of shares of the Company’s common stock. The four individuals are also members of the Company’s Board of Directors: Neil Leibman, Tom O’Leary, Andrew Bursten and Stuart Gaylor. The shares of common stock were issued in reliance upon an exemption from registration under Section 4(a)(2) of the Securities Act.
Our reliance upon Section 4(a)(2) of the Securities Act was based in part upon the following factors: (a) the issuance of the securities was in connection with isolated private transactions which did not involve any public offering; (b) there were a limited number of offerees; (c) there were no subsequent or contemporaneous public offerings of the securities by the Company; (d) the purchasers made certain representations to the Company relating to their investment intent, that they were acquiring the securities for their own accounts and not for the accounts of others; and (e) the negotiations for the sale of the securities took place directly between the offerees and the Company.
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides certain information as of December 31, 2019 with respect to our existing equity compensation plans under which shares of our common stock are authorized for issuance.
Plan | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | Weighted Average Exercise Price of Outstanding Options, Warrants and Rights | Number of Securities Remaining Available for Future Issuances Under Plans (excluding securities reflected in column (a)) |
| (a) | (b) | (c) |
Equity compensation plans approved by security holders (1): | 632,000 | $1.24 | 2,000 |
Equity compensation plans approved by security holders (2): | 1,481,000 | $1.76 | 19,000 |
Equity compensation plans approved by security holders (3): | 1,331,250 | $2.14 | 168,750 |
Equity compensation plans not approved by security holders (4): | 1,085,697 | $1.59 | - |
Total | 4,529,947 |
| 189,750 |
(1) This plan is the 2012 Stock Option and Stock Award Plan.
(2) This plan is the 2015 Stock Option and Stock Award Plan.
(3) This plan is the 2018 Stock Option and Stock Award Plan.
(4)From time to time and at the discretion of the Board, we may issue warrants and stock options to our key individuals or officers as performance-based compensation.
ITEM 6. SELECTED FINANCIAL DATA.
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ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion presents information about our consolidated results of operations, financial condition, liquidity and capital resources and should be read in conjunction with our consolidated financial statements and the notes thereto beginning on page F-2 of this Annual Report.
Background
The consolidated financial statements include the accounts of Summer Energy Holdings, Inc. (formerly Castwell Precast Corporation) and its wholly-owned subsidiaries Summer Energy, LLC (“Summer LLC”), Summer Energy Midwest, LLC (“Summer Midwest”), Summer EM Marketing, LLC (“Marketing LLC”) and Summer Energy Northeast, LLC (“Summer Northeast”) (collectively referred to as the “Company,” “we,” “us,” or “our”). All significant intercompany transactions and balances have been eliminated in these consolidated financial statements.
On March 27, 2012, Summer LLC became a wholly-owned subsidiary of Summer Energy Holdings, Inc. (previously known as Castwell Precast Corporation) through a reverse acquisition transaction, which resulted in the former members of Summer LLC owning approximately 92.3% of Summer Energy Holdings, Inc.’s outstanding common stock. The transaction was treated as a recapitalization of Summer LLC, and Summer LLC (and its historical financial statements) is the continuing entity for financial reporting purposes.
Summer LLC is a Retail Electricity Provider (“REP”) in the state of Texas under a license with the Public Utility Commission of Texas (“PUCT”). Summer LLC procures wholesale energy and resells to commercial and residential customers. Summer LLC was organized on April 6, 2011, under the laws of the state of Texas.
Marketing, LLC was formed in the state of Texas on November 6, 2012 to provide marketing services to Summer LLC. Marketing, LLC is currently inactive and there is no business activity.
Summer Northeast, a Texas limited liability company (formerly known as REP Energy, LLC), was acquired on November 1, 2017 and became a wholly-owned subsidiary of Summer Energy Holdings, Inc. Summer Northeast is a REP serving electric load to both residential and commercial customers in New Hampshire and Massachusetts and holds licenses in Massachusetts, Rhode Island, New Hampshire and Connecticut.
Summer Midwest (formerly Summer Energy of Ohio, LLC) 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 issued a certificate as a Retail Electric Service Provider to Summer Midwest on June 16, 2015. On May 2, 2019, the Illinois Commerce Commission approved Summer Midwest as a Retail Electric Service Provider in the state of Illinois. Summer Midwest began serving customers in Ohio in July 2019.
Our wholly-owned subsidiary, Summer LLC, is licensed 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, Summer LLC sells electricity and provides the related billing, customer service, collections and remittance services to residential and commercial customers. Summer LLC offers 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 Summer LLC’s 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 the Texas market mid-February 2012.
Our wholly-owned subsidiary, Summer Northeast, is a licensed REP in the states of Massachusetts, New Hampshire, Rhode Island and Connecticut. In general, the regulatory structure in these states permits REPs, such as Summer
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Northeast, to procure and sell electricity at unregulated prices. As a REP, Summer Northeast sells electricity to residential and commercial customers. 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. At this time, Summer Northeast sells electricity in Massachusetts and New Hampshire. There is no sales activity in the states of Connecticut and Rhode Island.
Our wholly-owned subsidiary, Summer Midwest, is a licensed REP in the states of Ohio and Illinois. In general, the regulatory structure in these states permits REPs, such as Summer Midwest, to procure and sell electricity at unregulated prices. As a REP, Summer Midwest sells electricity to residential and commercial customers. 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. Summer Midwest began flowing electricity in the state of Ohio, which is in the Pennsylvania, Jersey, Maryland Power Pool (“PJM”) market in July 2019 but has not commenced serving customers in the state of Illinois.
During the year ended December 31, 2019, we added nine full-time employees to our workforce, and we anticipate these staffing additions will enable us to effectively expand our presence throughout the Texas market and in the Northeast United States (“U.S.”) market.
As of December 31, 2019, we had 90 full-time employees.
Application of Critical Accounting Policies
The SEC defines critical accounting policies as those that are, in management’s view, most important to the portrayal of our financial condition and results of operations and most demanding of our judgment. The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which were prepared in accordance with accounting principles generally accepted in the U.S., which is referred to as “GAAP.” The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate these estimates, including those related to stock-based compensation, customer programs and incentives, bad debts, supply inventories, intangible assets, income taxes, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We consider the following accounting policies to be those most important to the portrayal of our financial condition and those that require the most subjective judgment:
Our electricity revenue in the Texas market 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 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.
The Company’s revenue in the Northeast market is recorded based on the flow method of revenue recognition for electricity delivered through the end of the calendar month to retail customers’ meters and relies upon the settlement statements from ISO New England Inc. (“ISO New England”) 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.
The Company’s revenue in the Midwest market is recorded based on the flow method of revenue recognition for electricity delivered through the end of the calendar month to retail customers’ meters and relies upon the settlement
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statements from PJM 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
Unbilled Revenue and Accounts Receivable
Electric services in the Texas market 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 in the calendar month are recorded from the unbilled account to the customer’s receivable account. 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. The customers’ past due balances are subject to a late fee that is assessed on that billing.
Electric services in the ISO New England market not billed by month-end are accrued based upon estimated deliveries to customers as tracked and recorded by ISO New England multiplied by our average billing rate per kWh in effect at the time. The customer billing in the ISO New England market is performed by the local utility company.
The Company began service in the PJM market during the third quarter of 2019. In the PJM market, electricity services not billed by month end are accrued based upon estimated deliveries to customers as tracked and recorded by PJM multiplied by our average billing rate per kilowatt hour (“kWh”) in effect at the time. The customer billing in the PJM market is performed by the local utility company.
The Company, in the Texas market, determines an allowance for doubtful accounts based upon a review of outstanding receivables, historical write-off experience and existing economic conditions. Receivables past due over 90 days are considered delinquent and reviewed individually for collectability. After all means of collection have been exhausted, delinquent receivables are written off. Billed receivables over 90 days and 2% of unbilled receivables are reserved by the Company.
Within the ISO New England market, the local utility companies in the state of Massachusetts purchase the Company’s billed receivables at a statutory published discounted rate without recourse, therefore, no allowance for doubtful accounts are recorded as of December 31, 2019.
Within the PJM market, the local utility companies in the state of Ohio purchases the Company’s billed receivables at a statutory published discounted rate without recourse, therefore, no allowance for doubtful accounts are recorded as of December 31, 2019.
Cost Recognition
Direct energy costs are recorded when the electricity is delivered to the customer’s meter.
Cost of goods sold (“COGS”) within the Texas market include electric power purchased and pass through charges from the transmission and distribution service providers (“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. COGS within the Independent System Operator (“ISO”) for the New England market is comprised of wholesale costs based upon the wholesale power tariff rate for volumes purchased during the delivery month and scheduling fees. Summer Midwest began flowing electricity within the PJM market in July 2019, and the COGS for the PJM market is comprised of wholesale costs based upon the wholesale power tariff for volumes purchased during the delivery month as well as scheduling fees.
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
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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, ISO New England and PJM 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.
Under the fair value recognition provisions of the authoritative guidance, stock-based compensation cost granted to employees is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service or performance period, which is the vesting period. Stock options and warrants issued to consultants and other non-employees as compensation for services to be provided to us are accounted for based upon the fair value of the services provided or the estimated fair value of the option or warrant, whichever can be more clearly determined. We currently use the Black-Scholes option pricing model to determine the fair value of stock options. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the term of the awards, the expected term of the award, the risk-free interest rate and any expected dividends. Compensation cost associated with grants of restricted stock units are also measured at fair value. We evaluate the assumptions used to value restricted stock units on a quarterly basis. When factors change, including the market price of the stock, share-based compensation expense may differ significantly from what has been recorded in the past. If there are any modifications or cancellations of the underlying unvested securities, we may be required to accelerate, increase or cancel any remaining unearned share-based compensation expense.
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of tax-related assets and liabilities and income tax expense. These estimates and assumptions are based on the requirements of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) relating to accounting for uncertainty in income taxes. Our policy is to classify interest and penalties related to unrecognized income tax benefits as a component of income tax expense.
We assess whether previously unrecognized tax benefits may be recognized when the tax position is (i) more likely than not of being sustained based on its technical merits, (ii) effectively settled through examination, negotiation or litigation, or (iii) settled through actual expiration of the relevant tax statutes. Implementation of this requirement requires the exercise of significant judgment. Recognizing deferred tax assets will increase tax benefits and increase net income.
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the period in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date.
The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest related to unrecognized tax benefits and penalties in income tax expense.
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New Customer Implementation Costs
We ordinarily incur additional costs to implement our services for new customers. These costs are comprised primarily of additional labor and support. These costs are expensed as incurred and have a negative impact on our statements of operations and cash flows during the implementation phase. We attempt to maintain a disciplined approach to customer implementation costs since these costs influence our profitability. We do not capitalize new customer implementation costs as such costs are typically associated with contracts that are less than one year in duration.
Warrants
The Company’s common stock warrants are measured at fair value using the Black-Scholes valuation model which takes into account, as of the measurement date, factors including the current exercise price, the term of the instrument, the current price of the underlying stock and its expected volatility, expected dividends on the stock and the risk-free interest rate for the term of the item.
The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP, with no need for management’s judgment in its application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. Please see our audited consolidated financial statements and notes thereto which begin on page F-2 of this Annual Report on Form 10-K, which contain accounting policies and other disclosures required by GAAP and please refer to the disclosures in Note 2 of our financial statements for a summary of our significant accounting policies.
Year Ended December 31, 2019 compared to the Year Ended December 31, 2018
The success of our business and our profitability is impacted by a number of drivers with customer growth and weather conditions being at the forefront.
Customer Growth
Customer growth is a key driver of our operations as well as our ability to acquire customers organically, by acquisition or through customer attrition. Our organic sales strategies are designed to offer competitive pricing and price certainty to residential and commercial customers. We manage growth on a market-by-market basis by developing price curves in each of the markets we serve and comparing the market prices to the price offered by the local regulated utility. We then determine if there is an opportunity in a particular market based on our ability to create a competitive product on economic terms that provides customer value and satisfies our profitability objectives. We develop marketing campaigns using a combination of sales channels. Our marketing team continuously evaluates the effectiveness of each customer acquisition channel and makes adjustments in order to achieve desired targets. Customer attrition occurs primarily as a result of: (i) customer-initiated switches; (ii) residential moves and (iii) disconnection resulting from customer payment defaults. Our customer growth strategy includes growing organically through traditional sales channels complemented by customer portfolio and business acquisitions as well as our expansion into new markets.
For the year ended December 31, 2019 compared to 2018, the Company’s overall delivered volumes of electricity increased by 8.12% attributed primarily to the increase in the ERCOT market and the ERCOT pre-paid market.
In 2020, the Company’s growth strategy is to continue to focus on the expansion of the PJM market within the states of Ohio and Illinois and to continue to expand within the ERCOT pre-paid market. Management plans to continue to execute on its current sales and marketing program to solicit individual commercial and residential customers and to evaluate and acquire portfolios of commercial and residential customers where they make sense economically or strategically.
Weather Conditions
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Weather conditions is a key driver to our success and weather directly influences the demand for electricity and affects the prices of energy commodities. We are particularly sensitive to this variability with our residential customers in which energy is highly sensitive to weather conditions that impart heating and cooling demand. Our hedging strategy is based on forecasted customer energy usage, which can vary substantially as a result of weather patterns deviating from historical norms. Our risk management policies direct that we hedge substantially all of our forecasted demand, which is typically hedged to long-term weather patterns. We also attempt to add additional contracts from time to time to protect us from volatility in markets where we have historically experienced higher exposure to extreme weather conditions. Because we attempt to match commodity purchases to anticipated demand, unanticipated changes in weather patterns can have a significant impact on our operating results and cash flows from period to period.
During the summer of 2019, we experienced warmer than normal weather across many of our markets which increased demand for electricity from our customers. Specifically, the summer months in the ERCOT market proved to be one of the hottest in recent years. In anticipation of the increased demand, the Company positioned itself so that weather did not significantly impact the earnings and purchased additional power to mitigate the volatility risk observed in late August and early September of 2019. For the years ended December 31, 2019 compared to 2018, the Company’s unit gross margin remained stable.
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| For the Years Ended December 31, |
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| 2019 |
| 2018 |
| $$ Variance |
| Percentage Variance |
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Revenue | $ | 166,315,793 | $ | 151,903,328 | $ | 14,412,465 |
| 9.49 % |
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Cost of goods sold |
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Power purchases and balancing/ancillary |
| 90,407,407 |
| 81,273,173 |
| 9,134,234 |
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Transportation and distribution providers charge |
| 62,276,104 |
| 57,054,879 |
| 5,221,225 |
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Total cost of goods sold |
| 152,683,511 |
| 138,328,052 |
| 14,355,459 |
| 10.38 % |
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Gross Margin | $ | 13,632,282 | $ | 13,575,276 | $ | 57,006 |
| 0.42 % |
In 2020, the Company anticipates unit gross margin to improve, and the Company is evaluating temperature contingent options to mitigate the impact of weather events on its earnings and manage its exposure. Such instruments will be implanted if a suitable solution is determined.
Revenue – For the year ended December 31, 2019, the Company generated $166,315,793 in electricity revenue from commercial customers and various long and short-term residential customers. The majority of our revenue comes from the flow of electricity to customers. However, included within these revenues are revenues from contract cancellation fees, disconnection fees and late fees in the amount of $3,867,088. Electricity revenues for the year ended December 31, 2018 were $151,903,328, including $3,320,374 from contract cancellation fees, disconnection fees and late fees.
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| 2019 | 2018 | Variances | ||||||||
| Delivered Volume after Line Loss (Mwh) |
| $$ | Delivered Volume after Line Loss (Mwh) |
| $$ | Change in Delivered Volume (Mwh) | Volume Percentage Change |
| Change in $$ | $$ Percentage Change |
Electricity Revenues from Contracts with Customers |
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ERCOT Market | 1,749,285 | $ | 149,140,983 | 1,587,329 | $ | 133,379,103 | 161,956 | 10.20% | $ | 15,761,880 | 11.82% |
ERCOT Pre-Paid Market | 50,802 |
| 5,993,295 | 41,775 |
| 4,829,172 | 9,027 | 21.61% |
| 1,164,123 | 24.11% |
Northeast Market | 67,603 |
| 7,258,467 | 99,296 |
| 10,374,679 | (31,693) | -31.92% |
| (3,116,212) | -30.04% |
Midwest Market | 1,102 |
| 55,960 | - |
| - | 1,102 | 100.00% |
| 55,960 | 100.00% |
Total | 1,868,792 |
| 162,448,705 | 1,728,400 |
| 148,582,954 | 140,392 | 8.12% |
| 13,865,751 | 9.33% |
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Other Revenues: |
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Fees Revenue |
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| 3,867,088 |
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| 3,320,374 |
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| 546,714 | 16.47% |
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Total Revenues: |
| $ | 166,315,793 |
| $ | 151,903,328 |
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| $ | 14,412,465 | 9.49% |
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Electricity revenues from contracts with customers for the year ended December 31, 2019 increased approximately 9% from the year ended December 31, 2018. This increase was primarily due to an increase of 12% in electricity volumes delivered in the ERCOT market and 24% increase in the ERCOT pre-paid market. Fee revenue increased by approximately 16% in 2019 from 2018.
Cost of Goods Sold and Gross Profit – For the year ended December 31, 2019, cost of goods sold and gross profit totaled $152,683,511 and $13,632,282, respectively. Cost of goods sold and gross profit for the year ended December 31, 2018 totaled $138,328,052 and $13,575,276, respectively.
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| For the Years Ended December 31, |
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| 2019 |
| 2018 |
| $$ Increase in Costs |
| Percentage Increase (Decrease) |
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Cost of Goods Sold |
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ERCOT Market | $ | 144,577,770 | $ | 128,266,903 | $ | 16,310,867 |
| 12.72% |
Northeast Market |
| 8,041,836 |
| 10,050,628 |
| (2,008,792) |
| -19.99% |
Midwest Market |
| 63,905 |
| 10,521 |
| 53,384 |
| 507.40% |
| $ | 152,683,511 | $ | 138,328,052 | $ | 14,355,459 |
| 10.38% |
Total wholesale cost of power increased approximately 10% for the year ended December 31, 2019 from December 31, 2018. The increase in costs is primarily due to the increased volumes delivered in 2019 compared to 2018 as well as the increase in the unit cost per MWh in the ERCOT market during the summer months. Although the 2019 summer months in the ERCOT market proved to be one of the hottest in recent years, the Company had positioned itself so that the weather did not significantly impact the earnings The Northeast market decreased by approximately 20% due to the compression of the customer base from 2019 compared to 2018.
Operating expenses – Operating expenses for the year ended December 31, 2019, totaled $22,441,190, consisting of general and administrative of $12,951,090, bank services fees of $1,359,506, collection fees/sales verification fees of $89,021, outside commissions’ expense of $5,012,685, professional fees of $1,050,849, bad debt reserve of $1,010,549 and $967,490 of billing fees. Billing fees are primarily costs paid to a third-party Electronic Data Inter-Chain (“EDI”) providers to handle transactions between us, ERCOT and the TSDPs in order to produce customer bills.
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Operating expenses for the year ended December 31, 2018, totaled $19,913,508, consisting of general and administrative of $11,309,711, bank services fees of $1,220,786, collection fees/sales verification fees of $77,293, outside commissions’ expense of $5,039,347, professional fees of $609,530, bad debt reserve of $1,121,396 and $535,445 of billing fees.
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| For the year ended December 31, |
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| 2019 |
| 2018 |
| Variance | Percentage Change |
General and administrative | $ | 12,951,090 | $ | 11,309,711 | $ | 1,641,379 | 14.51% |
Bank service fees |
| 1,359,506 |
| 1,220,786 |
| 138,720 | 11.36% |
Collection fees/sales verification fees |
| 89,021 |
| 77,293 |
| 11,728 | 15.17% |
Professional fees |
| 1,050,849 |
| 609,530 |
| 441,319 | 72.40% |
Outside commission expense |
| 5,012,685 |
| 5,039,347 |
| (26,662) | -0.53% |
Bad debt reserve |
| 1,010,549 |
| 1,121,396 |
| (110,847) | -9.88% |
Billing fees |
| 967,490 |
| 535,445 |
| 432,045 | 80.69% |
| $ | 22,441,190 | $ | 19,913,508 | $ | 2,527,682 | 12.69% |
Total operating expenses for the year ended December 31, 2019 compared to December 31, 2018 increased by approximately 13%. This increase is primarily due to an increase of professional fees associated with entering new markets, increases in payroll costs with the net addition of nine full-time employees during 2019 and other variable costs associated with increased growth and increased general and administrative expenses.
Net Loss – Net loss for the years ended December 31, 2019 and 2018, totaled $(10,733,089) and $(7,753,870), respectively. The 2019 net loss compared to the 2018 net loss relates primarily to higher cost of goods sold, especially during the summer months of 2019 as well as the increase of operating expenses related to growth into new markets.
Liquidity and Capital Resources
At December 31, 2019 and 2018, our cash totaled $814,360 and $451,995, respectively. Our principal cash requirements for the year ended December 31, 2019 and 2018, were for operating expenses and cost of goods sold, including power purchases, employee cost, customer acquisition and capital expenditures. During the year ended December 31, 2019, the primary source of cash was from electricity revenues, $5,730,000 from capital raised pursuant to a private placement of our common stock, $2,938,000 from related party lending and $4,300,000 from outside loan proceeds. In 2018, the primary source of cash was from electricity revenues, $3,637,500 from capital raised pursuant to a private placement of our common stock and from $9,456,006 in loan proceeds.
General – The Company’s increase in net cash flows during the year ended December 31, 2019 is attributable to $9,795,278 cash used in operating activities, $12,947 cash used in investing activities for the purchase of property and equipment, and net cash of $9,965,408 provided by financing activities primarily consisting of $5,730,000 received by the Company from the sale of our common stock through private placements. During the year ended December 31, 2018, the Company’s increase in net cash flow was attributable to $10,377,919 cash used in operating activities $32,561 for the purchase of property and equipment, and net cash of $12,273,329 provided by financing activities primarily consisting of $3,637,500 received by the Company from the sale of our common stock through private placements.
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.
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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 in the upcoming year ending December 31, 2020. The anticipated source of funds is electricity revenues, lending and capital raised in the upcoming year ending December 31, 2020.
Future Financing Needs
The Company commenced operations and the generation of revenue during the year ended December 31, 2012. Management believes that we have adequate liquidity to support operations, 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 raise 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, if and 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.
Related Party Transactions
On December 18, 2018, four members of the Company’s Board of Directors, Stuart Gaylor, Andrew Bursten, Tom O’Leary and Neil Leibman (Mr. Leibman is also an executive officer) (collectively, the “Guarantors”) guaranteed a single payment note with Comerica Bank in the amount of $2,900,000. On December 9, 2019, the single payment note was converted to a master revolving note, which is payable in full on demand from the Bank. The Company agreed to pay interest at a rate of 12% for the guarantee and such interest is to be paid with the issuance of the Company’s common stock.
On January 7, 2019, the Company executed a promissory note in the amount of $473,000 to evidence an advance by Mr. O’Leary for purposes of short-term financing. The promissory note accrued interest at a rate of 5% per annum based upon 365 days in a year and had a maturity date of July 7, 2019. On February 7, 2019, the Company paid back in full the loan from Mr. O’Leary. As of December 31, 2019, the balance of the loan to Mr. O’Leary was $0 and the loan was paid in full.
On January 7, 2019, the Company executed a promissory note in the amount of $25,000 to evidence an advance by Messrs. O’Leary and Leibman for purposes of short-term financing. The promissory note accrued interest at a rate of 5% per annum based upon 365 days in a year and had a maturity date of July 7, 2019. On February 7, 2019, the Company paid back in full the loan from Messrs. O’Leary and Leibman. As of December 31, 2019, the balance of the loan to Messrs. O’Leary and Leibman was $0 and the loan was paid in full.
On November 8, 2019, the Company executed a promissory note in the amount of $850,000 to evidence an advance by Mr. Leibman for purposes of short-term financing. The promissory note accrued interest at a rate of 5% per annum based upon 365 days in a year and had a maturity date of February 6, 2020. As of December 31, 2019, the balance of the loan from Mr. Leibman was $850,000. On February 6, 2020, the Company amended such promissory note to extend the maturity date of such note to May 7, 2020. All other provisions of the original note remain in full force and effect.
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On November 8, 2019, the Company executed a promissory note in the amount of $1,000,000 to evidence an advance by LaRose Holdings LLLP, an entity controlled by Al LaRose for purposes of short-term financing. Mr. LaRose is a director of the Company. The promissory note accrued interest at a rate of 5% per annum based upon 365 days in a year and had a maturity date of February 6, 2020. As of December 31, 2019, the balance of the loan from Mr. LaRose was $1,000,000. On February 6, 2020, the Company amended such promissory note to extend the maturity date of such note to May 7, 2020. All other provisions of the original note remain in full force and effect.
On December 18, 2019, the Company executed a promissory note in the amount of $590,000 to evidence an advance by Mr. Leibman for purposes of short-term financing. The promissory note accrued interest at a rate of 5% per annum based upon 365 days in a year and had a maturity date of March 18 2020. On December 20, 2019, the Company paid back in full the loan from Mr. Leibman. As of December 31, 2019, the balance of the loan from Mr. Leibman was $0.
On December 20, 2019, four members of the Company’s Board of Directors, Stuart Gaylor, Andrew Bursten, Tom O’Leary and Neil Leibman (Mr. Leibman is also an executive officer) (collectively, the “Guarantors”) guaranteed a single payment note with Comerica Bank in the amount of $2,100,000. The Company agreed to pay interest at a rate of 12% for the guarantee and such interest is to be paid with the issuance of the Company’s common stock.
Contractual Obligations, Contingent Liabilities and Commitments
We currently lease approximately 20,073 square feet of office space at 5847 San Felipe Street, Suite 3700, Houston, Texas pursuant to a sublease agreement effective December 1, 2017 and terminating on December 31, 2025. The rent payments are approximately $15,900 per month during the term of the sublease agreement. The Company is also responsible for 12.08% of the operating expenses, utilities and taxes charged to the sublandlord.
The base lease payments under the assumed lease are $13,203 per month and the lease payments were paid in full as of December 31, 2019 according to the schedule below.
Rent Period |
| Monthly Base Rent |
09/01/2014 – 08/31/2015 | $ | 11,182 |
09/01/2015 – 08/31/2016 | $ | 11,451 |
09/01/2016 – 10/31/2016 | $ | - |
11/01/2016 – 10/31/2017 | $ | 12,665 |
11/01/2017 – 10/31/2018 | $ | 12,934 |
11/01/2018 – 10/31/2019 | $ | 13,203 |
Summer Northeast entered into a sublease agreement with PDS Management Group, LLC (“PDS”) on October 31, 2017 at 800 Bering Drive, Suite 250, Houston, Texas, under a non-cancellable lease obligation which will expire on February 28, 2020. On September 1, 2018, PDS subleased 800 Bering Drive, Suite 250, Houston, Texas to an outside party, and Summer Northeast receives a monthly credit in the amount of $1,698 until the end of the lease obligation on February 28, 2020. Beginning on September 1, 2018 through the termination of the lease on February 28, 2020, the monthly rent, net of credit, is $2,255.
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item are included in Part IV, Item 15 of this Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
29
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) under 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.
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our “disclosure controls and procedures” as of the end of the period covered by this Annual Report, pursuant to Rules 13a-15(b) and 15d-15(b) under the Exchange Act. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures, as of the end of the period covered by this Annual Report, were effective.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Management conducted an assessment of the effectiveness, as of December 31, 2019, of our internal control over financial reporting, based on the 2013 framework established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on their assessment under the COSO framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2019.
This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to final rules of the Securities and Exchange Commission that permit us to provide only management’s report in this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during the most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Short-term Loans
On January 15, 2020, the Company executed a promissory note in the amount of $600,000 to evidence an advance by Neil Leibman for purposes of short-term financing. The promissory note accrued interest at a rate of 5% per annum based upon 365 days in a year and had a maturity date of April 14, 2020. Mr. Leibman is an officer and director of the Company.
On December 18, 2019, the Company executed a promissory note in the amount of $590,000 to evidence an advance by Mr. Leibman for purposes of short-term financing. The promissory note accrued interest at a rate of 5% per annum based upon 365 days in a year and had a maturity date of March 18 2020. On December 20, 2019, the Company paid back in full the loan from Mr. Leibman. As of December 31, 2019, the balance of the loan from Mr. Leibman was $0.
On November 8, 2019, the Company executed a promissory note in the amount of $850,000 to evidence an advance by Mr. Leibman for purposes of short-term financing. The promissory note accrued interest at a rate of 5% per annum based upon 365 days in a year and had a maturity date of February 6, 2020. As of December 31, 2019, the
30
balance of the loan from Mr. Leibman was $850,000. On February 6, 2020, the Company amended such promissory note to extend the maturity date of such note to May 7, 2020. All other provisions of the original note remain in full force and effect.
On November 8, 2019, the Company executed a promissory note in the amount of $1,000,000 to evidence an advance by LaRose Holdings LLLP, an entity controlled by Al LaRose for purposes of short-term financing. Mr. LaRose is a director of the Company. The promissory note accrued interest at a rate of 5% per annum based upon 365 days in a year and had a maturity date of February 6, 2020. As of December 31, 2019, the balance of the loan from Mr. LaRose was $1,000,000. On February 6, 2020, the Company amended such promissory note to extend the maturity date of such note to May 7, 2020. All other provisions of the original note remain in full force and effect.
Guarantees
On December 20, 2019, four members of the Company’s Board of Directors, Stuart Gaylor, Andrew Bursten, Tom O’Leary and Neil Leibman (Mr. Leibman is also an executive officer) guaranteed a single payment note with Comerica Bank in the amount of $2,100,000. The Company agreed to pay interest at a rate of 12% for the guarantee and such interest is to be paid with the issuance of the Company’s common stock.
Departure of Officer; Appointment of Officer.
On March 27, 2020, the Company’s Board of Directors appointed Neil M. Leibman, 60, the current Chief Executive Officer of the Company, to serve as the President of the Company, thus replacing the current President, Angela Hanley, effective April 1, 2020, in connection with her departure from the Company effective April 1, 2020. Mr. Leibman will serve as President and Chief Executive Officer.
Mr. Leibman has been a member of the Company’s Board of Directors since January 2013. Mr. Leibman is the Company’s Chief Executive Officer and has served in such capacity since January 2013. From January 2013 through February 2014, Mr. Leibman served as the Company’s President and Chief Executive Officer. Since 2006, Mr. Leibman has been Chairman and CEO of Aspen Pipeline, LP, a company which develops and operates midstream pipeline projects, primarily in Texas. Since 2006, Mr. Leibman has also been an officer of Horizon Power and Light, LLC, a retail electric provider in the northeastern United States. Mr. Leibman served, from 2001-2005, as Chairman and CEO of Gexa Energy Corp., a pioneer in the Texas retail electricity marketplace, where he helped grow the company from a start-up to an established firm with revenues of $500 million, and also oversaw the sale of that company to FPL Group, Inc. (NYSE: FPL) in June 2005. Prior to his time at Gexa, Mr. Leibman was an entrepreneur and corporate attorney, investing in and advising a variety of companies. Mr. Leibman currently serves on the board of the Texas Rangers, the Texas Rangers Foundation, Tumbleweed Resources, LLC and the St. Francis Episcopal Day School. Mr. Leibman has previously served as a director of both private and public companies, as well as a director of various charitable organizations. Mr. Leibman received a BA from Emory University and a Masters of Business Administration and Juris Doctorate, with honors, from the State University of New York, Buffalo
There are no arrangements or understandings between Mr. Leibman and any other persons pursuant to which he was appointed as President. There are also no family relationships between Mr. Leibman and any of our directors or executive officers and he has no direct or indirect material interest in any transaction required to be disclosed pursuant to Item 404(a) of Regulation S-K, other than as set forth in this Annual Report on Form 10-K and in the other SEC filings of the Company.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information with respect to our executive officers and directors appearing in our Definitive Proxy Statement which is expected to be filed with the SEC on or prior to April 29, 2020 in connection with the 2020 Annual Meeting of Stockholders (“Proxy Statement”) is hereby incorporated by reference.
31
ITEM 11. EXECUTIVE COMPENSATION
The information with respect to compensation of our executive officers appearing in our Proxy Statement is hereby incorporated by reference.
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information with respect to the security ownership of certain beneficial owners and management appearing in our Proxy Statement is hereby incorporated by reference.
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information with respect to certain relationships and related transactions with management appearing in our Proxy Statement is hereby incorporated by reference.
ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES
The information with respect to the principal accounting fees and services appearing in the Proxy Statement is hereby incorporated by reference.
32
ITEM 15.EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements, and related notes thereto of our independent auditor are filed as part of this Annual Report:
(2)Financial Statement Schedules
All financial statement schedules were omitted because they are not applicable, not required or the information required is shown in the financial statements or the notes thereto.
The exhibits listed on the accompanying index to exhibits immediately following the financial statements are filed as part of, or hereby incorporated by reference into, this Annual Report.
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Summer Energy Holdings, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Summer Energy Holdings, Inc. and subsidiaries (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ WHITLEY PENN LLP
We have served as the Company's auditor since 2017.
Houston, Texas
March 27, 2020
F-2
SUMMER ENERGY HOLDINGS, INC.
AND SUBSIDIARIES
|
| December 31, 2019 |
| December 31, 2018 |
|
|
|
| |
Current assets: |
|
|
|
|
Cash | $ | 814,360 | $ | 451,995 |
Restricted cash |
| 3,197,708 |
| 3,402,890 |
Accounts receivable, net |
| 41,847,949 |
| 34,270,548 |
Prepaid and other current assets |
| 3,612,607 |
| 4,014,194 |
Total current assets |
| 49,472,624 |
| 42,139,627 |
|
|
|
|
|
Property and equipment, net |
| 58,418 |
| 82,209 |
|
|
|
|
|
Deferred financing cost, net |
| 3,125 |
| 9,375 |
|
|
|
|
|
Operating lease right-of-use assets, net |
| 979,185 |
| - |
|
|
|
|
|
Intangible asset, net |
| 984,420 |
| 2,165,724 |
|
|
|
|
|
Total assets | $ | 51,497,772 | $ | 44,396,935 |
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
Current liabilities: |
|
|
|
|
Accounts payable | $ | 1,496,461 | $ | 3,208,088 |
Accrued wholesale power purchased |
| 17,538,120 |
| 12,202,099 |
Accrued transportation and distribution charges |
| 5,320,851 |
| 4,151,678 |
Accrued expenses |
| 4,809,533 |
| 4,636,911 |
Related party loans |
| 1,850,000 |
| - |
Current-portion operating lease obligation |
| 144,902 |
| - |
Current-portion of obligations |
| 5,038,397 |
| - |
Total current liabilities |
| 36,198,264 |
| 24,198,776 |
|
|
|
|
|
Long-term liabilities: |
|
|
|
|
Long-term obligations, net of current portion |
| 10,265,289 |
| 11,956,006 |
|
|
|
|
|
Total liabilities |
| 46,463,553 |
| 36,154,782 |
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
Stockholders’ equity |
|
|
|
|
Common stock - $.001 par value, 100,000,000 shares authorized, |
|
|
|
|
31,532,486 and 27,480,833 shares issued and outstanding at |
|
|
|
|
December 31, 2019 and 2018, respectively |
| 31,531 |
| 27,480 |
Subscription receivable |
| (52,000) |
| (52,000) |
Additional paid-in capital |
| 30,879,055 |
| 23,357,951 |
Accumulated deficit |
| (25,824,367) |
| (15,091,278) |
Total stockholders’ equity |
| 5,034,219 |
| 8,242,153 |
|
|
|
|
|
Total liabilities and stockholders’ equity | $ | 51,497,772 | $ | 44,396,935 |
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
F-3
SUMMER ENERGY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
|
| Years Ended December 31, | ||
|
| 2019 |
| 2018 |
|
|
|
|
|
Revenue | $ | 166,315,793 | $ | 151,903,328 |
|
|
|
|
|
Cost of goods sold |
|
|
|
|
Power purchases and balancing/ancillary |
| 90,407,407 |
| 81,273,173 |
Transportation and distribution providers charge |
| 62,276,104 |
| 57,054,879 |
|
|
|
|
|
Total cost of goods sold |
| 152,683,511 |
| 138,328,052 |
|
|
|
|
|
Gross profit |
| 13,632,282 |
| 13,575,276 |
|
|
|
|
|
Operating expenses |
| 22,441,190 |
| 19,913,508 |
|
|
|
|
|
Operating loss |
| (8,808,908) |
| (6,338,232) |
|
|
|
|
|
Other expense |
|
|
|
|
Financing costs |
| (6,250) |
| (48,097) |
Interest expense, net |
| (1,842,983) |
| (1,272,009) |
Total other expense |
| (1,849,233) |
| (1,320,106) |
|
|
|
|
|
Net loss before income tax |
| (10,658,141) |
| (7,658,338) |
|
|
|
|
|
Income tax expense |
| 74,948 |
| 95,532 |
|
|
|
|
|
Net loss | $ | (10,733,089) | $ | (7,753,870) |
|
|
|
|
|
Net loss per common share: |
|
|
|
|
Basic | $ | (0.35) | $ | (0.29) |
Dilutive | $ | (0.35) | $ | (0.29) |
Weighted average number of shares |
|
|
|
|
Basic |
| 30,832,119 |
| 26,727,477 |
Dilutive |
| 30,832,119 |
| 26,727,477 |
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
F-4
SUMMER ENERGY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Years Ended December 31, 2019 and 2018
|
|
|
| Additional paid in |
|
|
|
| |||
Common Stock |
| Subscription | Accumulated | ||||||||
| Shares |
| Amount |
| Receivable |
| capital |
| Deficit |
| Total |
Balance at December 31, 2017 | 25,055,833 | $ | 25,055 | $ | (52,000) | $ | 18,891,252 | $ | (7,337,408) | $ | 11,526,899 |
|
|
|
|
|
|
|
|
|
|
|
|
Vesting of stock options and restricted shares associated with the 2015 Stock Option and Award Plan | - |
| - |
| - |
| 206,748 |
| - |
| 206,748 |
|
|
|
|
|
|
|
|
|
|
|
|
Vesting of stock options and restricted shares associated with the 2018 Stock Option and Award Plan | - |
| - |
| - |
| 624,876 |
| - |
| 624,876 |
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock associated with a private placement offering | 2,425,000 |
| 2,425 |
| - |
| 3,635,075 |
| - |
| 3,637,500 |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss | - |
| - |
| - |
| - |
| (7,753,870) |
| (7,753,870) |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018 | 27,480,833 | $ | 27,480 | $ | (52,000) | $ | 23,357,951 | $ | (15,091,278) | $ | 8,242,153 |
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of warrants | - |
| - |
| - |
| 248,682 |
| - |
| 248,682 |
|
|
|
|
|
|
|
|
|
|
|
|
Vesting of stock options and restricted shares associated with the 2015 Stock Option and Award Plan | - |
| - |
| - |
| 157,645 |
| - |
| 157,645 |
|
|
|
|
|
|
|
|
|
|
|
|
Vesting of stock options and restricted shares associated with the 2018 Stock Option and Award Plan | - |
| - |
| - |
| 1,009,303 |
| - |
| 1,009,303 |
|
|
|
|
|
|
|
|
|
|
|
|
Vesting of stock options and restricted shares outside of stock option and award plans | - |
| - |
| - |
| 191,126 |
| - |
| 191,126 |
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock as interest payment for personal guaranty | 125,600 |
| 125 |
| - |
| 188,274 |
| - |
| 188,399 |
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock associated with a private placement offering | 3,820,000 |
| 3,820 |
| - |
| 5,726,180 |
| - |
| 5,730,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock associated with the cashless exercise of warrants | 106,053 |
| 106 |
| - |
| (106) |
| - |
| - |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss | - |
| - |
| - |
| - |
| (10,733,089) |
| (10,733,089) |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019 | 31,532,486 | $ | 31,531 | $ | (52,000) | $ | 30,879,055 | $ | (25,824,367) | $ | 5,034,219 |
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
F-5
SUMMER ENERGY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES OF CASH FLOWS
|
| For the Years Ended | ||
|
| 2019 |
| 2018 |
Cash Flows from Operating Activities |
|
|
|
|
Net loss | $ | (10,733,089) | $ | (7,753,870) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
Non-cash deferred financing costs |
| 6,250 |
| 48,097 |
Broker warrant compensation expense |
| 104,951 |
| - |
Consulting warrant compensation expense |
| 143,731 |
| - |
Stock compensation expense |
| 1,358,074 |
| 831,624 |
Interest payment in common stock for personal guaranty |
| 188,399 |
| - |
Depreciation of property and equipment |
| 36,738 |
| 106,718 |
Non-cash lease costs |
| 286,378 |
| - |
Amortization of intangible asset |
| 1,181,304 |
| 1,181,304 |
Bad debt expense |
| 1,010,549 |
| 1,121,396 |
Changes in operating assets and liabilities: |
|
|
|
|
Accounts receivable |
| (8,587,950) |
| (8,261,108) |
Prepaid and other current assets |
| 529,576 |
| (3,098,832) |
Accounts payable |
| (1,711,627) |
| 2,602,970 |
Accrued wholesale power purchased |
| 5,336,021 |
| 3,257,824 |
Accrued transportation and distribution charges |
| 1,169,173 |
| (1,790,779) |
Accrued expenses and other |
| (113,756) |
| 1,376,737 |
Net cash used in operating activities |
| (9,795,278) |
| (10,377,919) |
|
|
|
|
|
Cash Flows from Investing Activities |
|
|
|
|
Purchase of property and equipment |
| (12,947) |
| (32,561) |
Net cash used in investing activities |
| (12,947) |
| (32,561) |
|
|
|
|
|
Cash Flows from Financing Activities |
|
|
|
|
Advances from Blue Water Capital Funding, LLC |
| - |
| 2,420,000 |
| 963,000 |
| 4,136,006 | |
Payments to wholesale provider |
| (588,000) |
| - |
Proceeds from Comerica Bank notes |
| 4,300,000 |
| 2,900,000 |
Payments on Comerica Bank note |
| (2,200,000) |
| - |
Payments on financing of directors and officer's insurance policy |
| (89,592) |
| - |
Payment on master revolver note |
| - |
| (40,000) |
Deferred financing costs |
| - |
| (12,500) |
Proceeds from related party loans |
| 2,938,000 |
| - |
Repayment of related party loans |
| (1,088,000) |
| (767,677) |
Proceeds from issuance of common shares in a private placement, net of fees |
| 5,730,000 |
| 3,637,500 |
Net cash provided by financing activities |
| 9,965,408 |
| 12,273,329 |
|
|
|
|
|
Net Increase in Cash and Restricted Cash |
| 157,183 |
| 1,862,849 |
|
|
|
|
|
Cash and Restricted Cash at Beginning of Period |
| 3,854,885 |
| 1,992,036 |
|
|
|
|
|
Cash and Restricted Cash at End of Period | $ | 4,012,068 | $ | 3,854,885 |
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information: |
|
|
|
|
Income taxes paid | $ | 95,500 | $ | 128,500 |
Interest paid in cash | $ | 1,416,039 | $ | 1,285,321 |
|
|
|
|
|
Non-Cash Investing and Financing Activities |
|
|
|
|
Operating lease right of use assumed through operating lease obligation | $ | 1,265,563 | $ | - |
Cashless exercise of warrant for 106,053 shares of common stock | $ | 106 | $ | - |
Financing of directors and officer insurance policy | $ | 127,989 | $ | - |
See accompanying notes to the consolidated financial statements.
F-6
SUMMER ENERGY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019 and 2018
NOTE 1 - ORGANIZATION
The consolidated financial statements include the accounts of Summer Energy Holdings, Inc. and its wholly-owned subsidiaries Summer Energy, LLC (“Summer LLC”), Summer Energy Midwest, LLC (“Summer Midwest”), Summer EM Marketing, LLC (“Marketing LLC”) and Summer Energy Northeast, LLC (“Summer Northeast”) (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 to commercial and residential customers. Summer LLC was organized on April 6, 2011 under the laws of the state of Texas.
Summer Midwest (formerly Summer Energy of Ohio, LLC) 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 issued a certificate as a Retail Electric Service Provider to Summer Midwest on June 16, 2015. On May 2, 2019, the Illinois Commerce Commission approved Summer Midwest as a Retail Electric Service Provider in the state of Illinois. Summer Midwest began serving customers in Ohio in July 2019.
Marketing LLC was formed in the state of Texas on November 6, 2012 to provide marketing services to Summer LLC. Marketing LLC is currently inactive and there is no business activity.
Summer Northeast, a Texas limited liability company formerly named REP Energy, LLC, was acquired on November 1, 2017 and became a wholly-owned subsidiary of Summer Energy Holdings, Inc. Summer Northeast is a retail electric provider serving electric load to both residential and commercial customers in the Northeastern U.S. and holds licenses in Massachusetts, New Hampshire, Connecticut and Rhode Island.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).
The consolidated financial statements have been prepared assuming the Company will continue to operate as a going concern, which contemplates the realization of assets and settlement of liabilities in the normal course of business, and does not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from uncertainty related to its ability to continue as a going concern within one year from the date of issuance of these consolidated financial statements.
For the years ended December 31, 2019 and 2018, the Company incurred a net loss of $10.7 million and $7.8 million, respectively, and used cash in continuing operations of $9.8 million and $10.4 million, respectively. The Company’s operations have been financed principally from electricity revenues and from capital raised under private placement offerings during the years ended December 31, 2019 and 2018 totaling $5.7 million and $3.6 million, respectively. The Company’s primary sources of liquidity are cash generated from operations, borrowings under credit facility agreements as well as capital raises. The Company’s liquidity requirements are to finance current operations, meet financial commitments, fund organic growth and/or acquisitions, and service debt. The liquidity requirements fluctuate with the level of customer acquisition costs, collateral posting requirements, the effects of the timing between the settlement of payables and receivables, including the effect of weather conditions, and our general working capital needs for ongoing operations. Estimating liquidity requirements is highly dependent on then-current market conditions, including weather events, forward prices for natural gas and electricity, market volatility and our then existing capital structure and requirements.
F-7
The Company’s continuation as a going concern is dependent upon its ability to increase sales, and/or raise additional funds through the capital markets as well as outside lending. In March 2020, the Company secured additional financing for a revolving loan in the amount of $10,000,000 with a maturity date of March 2023. In addition, commitments for additional lending up to $2,000,000 may be provided by members of the Board of Directors of the Company, if necessary. Management has concluded that its existing capital resources and availability, proceeds from a 2020 offering and outside lending will be sufficient to fund operations through the second quarter of 2021.
Revenue and Cost Recognition
Our revenues are primarily derived from the sale of electricity to residential and small commercial customers. Revenues for sales of electricity are recognized under the accrual method of accounting.
Direct energy costs are recorded when the electricity is delivered to the customer’s meter.
Cost of goods sold (“COGS”) within the Texas market include electric power purchased and pass through charges from the transmission and distribution service providers (“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. COGS within the Independent System Operator (“ISO”) for the New England market is comprised of wholesale costs based upon the wholesale power tariff rate for volumes purchased during the delivery month and scheduling fees. Summer Midwest began flowing electricity within the Pennsylvania, Jersey, Maryland Power Pool (“PJM”) market in July 2019, and the COGS for the PJM market is comprised of wholesale costs based upon the wholesale power tariff for volumes purchased during the delivery month as well as scheduling fees.
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 the Electric Reliability Council of Texas (“ERCOT”), ISO New England and PJM 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.
Basic and Diluted Income/(Loss) Per Share
Basic income/(loss) per share are computed by dividing net income/(loss) applicable to the weighted-average number of shares outstanding during the period. Diluted income per share is determined using the weighted-average number of shares outstanding during the period, adjusted for the dilutive effect of share equivalents, using the treasury method, consisting of shares that might be issued upon exercise of share equivalents. In periods where losses are reported, the weighted average number of shares outstanding excludes share equivalents, because their inclusion would be anti-dilutive.
At December 31, 2019, the weighted-average number of dilutive shares equivalents of 815,197 were excluded because their inclusion would have been anti-dilutive. In 2018, the weighted-average number of dilutive share equivalents were 1,209,388 and were excluded as their inclusion would have been anti-dilutive.
Stock-Based Compensation
Stock-based awards granted to employees are measured at the grant date based on the fair value of the award and recognized as expense over the requisite service or performance period, which is the vesting period.
F-8
Stock options and warrants issued to consultants and other non-employees as compensation for services to be provided to us are accounted for based upon the fair value of the services provided or the estimated fair value of the option or warrant, whichever can be more clearly determined. We currently use the Black-Scholes option-pricing model to determine the fair value of stock options. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the term of the awards, the expected term of the award, the risk-free interest rate and any expected dividends. Compensation cost associated with grants of restricted stock units are also measured at fair value. We evaluate the assumptions used to value restricted stock units on a quarterly basis. When factors change, including the market price of the stock, share-based compensation expense may differ significantly from what has been recorded in the past. The Company estimates forfeitures at the date of grant and revises the estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
If there are any modifications or cancellations of the underlying unvested securities, we may be required to accelerate, increase or cancel any remaining unearned share-based compensation expense.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the period in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date.
The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest related to unrecognized tax benefits and penalties in income tax expense.
Advertising Costs
The Company expenses advertising costs as incurred and such costs are included in the operating expenses on the consolidated statements of operations. For the years ended December 31, 2019 and 2018, advertising costs were $281,989 and $241,131, respectively.
New Customer Implementation Costs
We ordinarily incur additional costs to implement our services for new customers. These costs are comprised primarily of additional labor and support. These costs are expensed as incurred and have a negative impact on our statements of operations and cash flows during the implementation phase. We attempt to maintain a disciplined approach to customer implementation costs since these costs influence our profitability. We do not capitalize new customer implementation costs as such costs are typically associated with contracts that are less than one year in duration.
Warrants
The Company’s common stock warrants are measured at fair value using the Black-Scholes valuation model, which takes into account, as of the measurement date, factors including the current exercise price, the term of the instrument, the current price of the underlying stock and its expected volatility, expected dividends on the stock and the risk-free interest rate for the term of the item.
Use of Estimates
F-9
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.
Concentration of Credit Risk
The Company maintains its cash in demand deposit accounts or “noninterest-bearing transaction accounts” which, at times, may exceed federally insured limits. The Company’s management periodically assesses the financial stability of these banks. The Company has not experienced any losses on such accounts.
Intangibles or Long-lived assets
The Company periodically evaluates the carrying value of definite-lived intangibles when events or changes in circumstances indicate that the carrying value may not be recoverable. Factors the Company considers important that could trigger an impairment review include, but are not limited to, significant under-performance relative to historical or projected future operating results, significant changes in the manner of its use of acquired assets or its overall business strategy, and significant industry or economic trends.
When the Company determines that the carrying value of a long-lived asset may not be recoverable based upon the existence of one or more of the above indicators, the Company determines the recoverability by comparing the carrying amount of the asset to net future undiscounted cash flows that the asset is expected to generate and recognizes an impairment charge equal to the amount by which the carrying amount exceeds the fair market value of the asset.
If the Company’s revenues or other estimated operating results are not achieved at or above our forecasted level, and the Company is unable to recover such costs through price increases, the carrying value of certain of the Company’s assets may prove to be unrecoverable and we may incur impairment charges of definitive-live intangible assets. The Company recorded no impairment loss for definite-lived intangible assets during the years ended December 31, 2019 or 2018.
The Company amortizes definite-lived intangible assets on a straight-line basis over their useful lives. The Company’s capitalized intangible asset for customer relationships in the amount of $3,543,912 is amortized over the three-year life of various customer contracts acquired in the Summer Energy Northeast, LLC acquisition on November 1, 2017. Amortization of the capitalized customer relationships for the years ended December 31, 2019 and 2018 was $1,181,304 and $1,181,304, respectively. The unamortized amount of capitalized customer relationships as of December 31, 2019 and 2018 was $984,420 and $2,165,724, respectively.
Cash and Restricted Cash
The Company considers all short-term investments with an original maturity of three months or less to be cash equivalents. There were no such investments at December 31, 2019 or 2018.
Restricted cash represents funds held in escrow for customer deposits, funds held in a controlled account by the wholesale provider (See Note 11) and funds securing irrevocable stand-by letters of credit.
|
| December 31, 2019 |
| December 31, 2018 |
Cash | $ | 814,360 | $ | 451,995 |
Restricted cash: |
|
|
|
|
Escrow for customer deposits |
| 511,461 |
| 510,012 |
Funds controlled by wholesale provider |
| 1,936,247 |
| 1,527,578 |
Funds securing letters of credit |
| 750,000 |
| 1,365,300 |
Total restricted cash |
| 3,197,708 |
| 3,402,890 |
|
|
|
|
|
Total cash and restricted cash | $ | 4,012,068 | $ | 3,854,885 |
F-10
Accounts Receivable and Unbilled Revenue
Accounts receivable are comprised of trade receivables and unbilled receivables (accrued revenue). Customers are billed monthly in cycles having billing dates that do not generally coincide with the end of a calendar month. This results in customers having received electricity that they have not been billed for as of month end. Therefore, 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 in the calendar month are recorded from the unbilled account to the customer’s receivable account.
Property and Equipment
Property and equipment are stated at cost and depreciated on a straight-line basis over the following estimated useful lives:
| Estimated Lives |
Computer software | 3 years |
Computer hardware | 3 years |
Furniture and fixtures | 5 years |
Leasehold improvements | 5 years |
Website | 3 years |
Expenditures for additions, major renewals and betterments are capitalized, and expenditures for maintenance and repairs are charged against income as incurred. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in results of operations.
Deferred Financing Costs
The Company’s deferred financing costs in the amount of $179,887 was amortized over the two-year life of the financing from Blue Water Capital Funding LLC ended on June 27, 2018. The Company entered into an Amendment to Loan Documents Agreement with Blue Water Capital Funding, LLC on June 27, 2018 and capitalized $12,500 of deferred financing costs to be amortized over the two-year life of the amended loan (See Note 8). Amortization of deferred financing costs for the years ended December 31, 2019 and 2018 were $6,250 and $48,097, respectively. The unamortized amount of deferred financing costs as of December 31, 2019 and 2018 were $3,125 and $9,375, respectively.
Derivative Instruments
The Company’s business operations require entering into physically-settled commodity contracts that meets the definition of a derivative. The Company has elected “normal purchases and normal sales” exception, which is a term 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.
Fair Value of Financial Instruments
The carrying amounts reported in the consolidated balance sheets for cash, accounts receivable, accounts payable and accrued expenses approximate fair value because of the immediate or short-term maturity of these financial instruments. None of these instruments are held for trading purposes.
The recorded value of short-term and long-term debt approximates the fair value as the interest rate approximates
F-11
market interest rates.
Accounting Pronouncements Issued But Not Yet Effective
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, which reduces the complexity of FASB ASC Topic 740, “Income Taxes” as part of the FASB’s Simplification Initiative. The amendments in this guidance simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This guidance is effective for annual reporting periods ending after December 15, 2020, with early adoption permitted, and should be applied on either a retrospective basis for all periods presented or a modified retrospective basis. Management is still assessing the impact this might have on the Company’s consolidated financial statements.
The Company has reviewed all other recently issued, but not yet adopted, accounting standards, in order to determine their effects, if any, on its results of operations, financial position or cash flows. Based on that review, the Company believes that no other pronouncements will have a significant effect on its financial statements.
Accounting Pronouncement Issued and Recently Adopted
The Company adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), as of January 1, 2019, using the modified retrospective approach. The modified retrospective approach provides a method for recording existing leases at the application date. In addition, the Company elected the available practical expedients permitted under the transaction guidance within the new standard. The most significant impact from the adoption of the new standard was the recognition of operating lease right-of-use assets and operating lease liabilities. Adoption of the new standard resulted in the recording of assets and liabilities of $1,265,562 as of January 1, 2019. The standard did not materially impact the consolidated results of operations and had no impact on cash flows.
NOTE 3 - INCOME TAXES
The components of income tax expense from continuing operations for the years ended December 31, 2019 and 2018 are as follows:
|
| Current |
| Deferred |
| Total |
2019 |
|
|
|
|
|
|
U.S. Federal | $ | - | $ | - | $ | - |
States and Local |
| 74,948 |
| - |
| 74,948 |
Total | $ | 74,948 | $ | - | $ | 74,948 |
|
|
|
|
|
|
|
2018 |
|
|
|
|
|
|
U.S. Federal | $ | - | $ | - | $ | - |
States and Local |
| 95,110 |
| - |
| 95,110 |
Total | $ | 95,110 | $ | - | $ | 95,110 |
|
|
|
|
|
|
|
F-12
Actual income tax expense for the years ended December 31, 2019 and 2018 is reconciled from the amount computed by applying the U.S. federal income tax rate of 21% to income before income taxes as follows:
|
| 2019 |
| 2018 |
Expected tax benefit | $ | (2,238,210) | $ | (1,623,190) |
Reconciling items: |
|
|
|
|
Permanent Differences/Discrete Items |
| 252,308 |
| 131,100 |
Change in Valuation Allowance |
| 2,060,850 |
| 1,587,200 |
Change in Tax Rate |
| - |
| - |
Total tax expense | $ | 74,948 | $ | 95,110 |
|
|
|
|
|
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2019 and 2018 are presented below:
|
| 2019 |
| 2018 |
Deferred tax assets: |
|
|
|
|
Net operating loss carryforward - Federal | $ | 2,916,740 | $ | 1,748,600 |
Federal Minimum Tax |
| 37,860 |
| 73,750 |
Reserve for uncollectible receivables |
| 248,550 |
| 172,500 |
Amortization of intangible asset |
| 434,430 |
| 236,600 |
Disallowed Business Interest Expense |
| 639,220 |
| 277,150 |
Donations |
| 3,700 |
| 1,500 |
Accrued expenses |
| 685,000 |
| 398,000 |
Total gross deferred tax assets |
| 4,965,500 |
| 2,908,100 |
Valuation allowance |
| (4,969,150) |
| (2,908,300) |
Net deferred tax assets |
| (3,650) |
| (200) |
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
Depreciation of plant and equipment |
| 3,650 |
| 200 |
Net deferred tax liabilities |
| 3,650 |
| 200 |
|
|
|
|
|
Net deferred tax assets | $ | - | $ | - |
|
|
|
|
|
There was a valuation allowance of $4,969,150 and $2,908,300 as of December 31, 2019 and 2018, respectively. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income, projections for future taxable income over the periods in which the deferred tax assets are deductible, and the scheduled reversal of deferred tax liabilities, management does not believe it is more likely than not the Company will realize the full benefits of these deductible differences at December 31, 2019.
Federal net operating loss carryforwards is $13,889,200 as of December 31, 2019 of which $3,181,900 expires at different dates through the year 2038 and $10,707,300 is carried forward indefinitely. Due to a Section 382 limitation, some of the net operating loss will be limited each year until 2032.
F-13
There is no provision for material uncertain tax positions for the Company as of December 31, 2019.
As of December 31, 2019, with few exceptions, the Company is no longer subject to U.S. Federal income tax examinations by tax authorities for years before 2016 and for state for years before 2015.
NOTE 4 – REVENUE
The table below represents the Company’s reportable revenues for the years ended December 31, 2019 and 2018 from customers, net of respective provisions for refund:
|
| For the year ended December 31, 2019 |
| For the year ended December 31, 2018 |
Electricity Revenues from Contracts with Customers |
|
|
|
|
ERCOT Market | $ | 149,140,983 | $ | 133,379,103 |
ERCOT Pre-paid Market |
| 5,993,295 |
| 4,829,172 |
ISO New England Market |
| 7,258,467 |
| 10,374,679 |
PJM Market |
| 55,960 |
| - |
Total Electricity Revenues from Contracts with Customers |
| 162,448,705 |
| 148,582,954 |
Other Revenues: |
|
|
|
|
Fees Revenue |
| 3,867,088 |
| 3,320,374 |
|
|
|
|
|
Total Revenues: | $ | 166,315,793 | $ | 151,903,328 |
|
|
|
|
|
Presented in the following table are the components of accounts receivable and accrued revenue:
|
| December 31, 2019 |
| December 31, 2018 |
Accounts receivable from customers |
|
|
|
|
ERCOT Market | $ | 9,041,871 | $ | 7,729,016 |
ISO New England Market |
| 257,942 |
| 544,454 |
PJM Market |
| 11,244 |
| - |
Total accounts receivable from customers |
| 9,311,057 |
| 8,273,470 |
|
|
|
|
|
Accrued revenue from customers |
|
|
|
|
ERCOT Market |
| 32,916,970 |
| 25,811,607 |
ISO New England Market |
| 788,395 |
| 1,006,895 |
PJM Market |
| 15,088 |
| - |
Total accrued revenue with customers |
| 33,720,453 |
| 26,818,502 |
|
|
|
|
|
Allowance for doubtful accounts |
| (1,183,561) |
| (821,424) |
|
|
|
|
|
Total accounts receivable and accrued revenue | $ | 41,847,949 | $ | 34,270,548 |
|
|
|
|
|
The Company recognizes revenue from the sale of electricity to consumers and is recognized upon the performance obligation to deliver electricity to the customer’s meter. This method of revenue recognition is commonly referred to as the flow method. The Company’s customer base consists of a mix of residential and commercial customers in the ERCOT, ISO New England and PJM markets. Also, the Company recognizes revenues from contract cancellation fees, disconnection fees and late fees.
F-14
The invoice practical expedient within the accounting guidance allows for the recognition of revenue from performance obligations in the amount of consideration to which there is a right to invoice the customer and when the amount for which there is a right to invoice corresponds directly to the value transferred to the customer. The purpose of the invoice practical expedient is to depict an entity’s measure of progress toward completion of the performance obligation within a contract and can only be applied to performance obligations that are satisfied over time and when the invoice is representative of services provided to date. The Company elected to apply the invoice practical expedient to recognize revenue for performance obligations satisfied over time as the invoices from the respective revenue streams are representative of services or goods provided to date to the customer.
Performance Obligations
Residential and Commercial – The Company has performance obligations for the service to deliver electricity to its customers and it satisfies these performance obligations over time as electricity is provided continuously to the customer who simultaneously receives and consumes the benefits provided. The Company recognizes revenue at a fixed base amount and a price per kilowatt hour as it provides these services on a fixed term contract. Contracts generally have fixed terms of 3-month increments not to exceed a 24-month fixed term. For customers whose fixed contracts have expired, the Company recognizes revenue at the market price per kilowatt hour as the service is provided.
Residential pre-paid – The Company has performance obligations for the service to deliver electricity to its customers and these performance obligations are satisfied over time as electricity is provided continuously to the customer who simultaneously receives and consumes the benefits provided. Revenues in the pre-paid market are variable at the market rate per kilowatt hour as the service is provided.
Accounts Receivable and Unbilled Revenue
In the Texas market, electricity revenues 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 in the calendar month are recorded from the unbilled account to the customer’s receivable account. 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. The past due customer balances are subject to a late fee that is assessed on that billing. Unbilled accounts in the Texas market as of December 31, 2019 and December 31, 2018 were estimated at $32,916,970 and $25,811,607, respectively.
In the ISO New England market, electricity services not billed by month end are accrued based upon estimated deliveries to customers as tracked and recorded by ISO New England multiplied by our average billing rate per kilowatt hour (“kWh”) in effect at the time. The customer billing in the ISO New England market is performed by the local utility company. Unbilled accounts in the ISO New England market as of December 31, 2019 and December 31, 2018 were estimated at $788,395 and $1,006,895, respectively.
The Company began service in the PJM market during the third quarter of 2019. In the PJM market, electricity services not billed by month end are accrued based upon estimated deliveries to customers as tracked and recorded by PJM multiplied by our average billing rate per kilowatt hour (“kWh”) in effect at the time. The customer billing in the PJM market is performed by the local utility company. Unbilled accounts in the PJM market as of December 31, 2019 and December 31, 2018 were estimated at $15,088 and $0, respectively.
The Company, in the Texas market, determines an allowance for doubtful accounts based upon a review of outstanding receivables, historical write-off experience and existing economic conditions. Receivables past due over 90 days are considered delinquent and reviewed individually for collectability. After all means of collection have been exhausted, delinquent receivables are written off. Billed receivables over 90 days and 2% of unbilled receivables are reserved by the Company.
F-15
Management has determined that the allowance for doubtful accounts as of December 31, 2019 and December 31, 2018 is $1,183,561 and $821,424, respectively. The allowance for doubtful accounts, bad debt expense, write-offs and recoveries were as follows:
|
| For the year ended December 31, 2019 |
| For the year ended December 31, 2018 |
|
|
|
|
|
Beginning of year | $ | 821,424 | $ | 1,176,958 |
Bad debt expense |
| 1,010,549 |
| 1,121,396 |
Net write offs/recoveries |
| (648,412) |
| (1,476,930) |
End of year | $ | 1,183,561 | $ | 821,424 |
Within the ISO New England market and the PJM market, the local utility companies within the state of operation purchase the Company’s billed receivables at a statutory published discounted rate without recourse; therefore, no allowance for doubtful accounts is recorded as of December 31, 2019 or December 31, 2018 for each of these markets.
NOTE 5 - LETTERS OF CREDIT AND CASH DEPOSITS
As of December 31, 2019, Summer LLC had no outstanding secured irrevocable stand-by letters of credit, and as of December 31, 2018, Summer LLC had five secured irrevocable stand-by letters of credit totaling $565,300 with a financial institution for the benefit of the TDSP’s that provide transition services to the Company. During the calendar year 2019, the five secured irrevocable stand-by letters of credit were cancelled and replaced with cash deposits. As of December 31, 2019 and 2018, the cash deposits held by various local utilities in the ERCOT market totaled at $1,004,059 and $1,181,480, respectively.
As of December 31, 2019 and 2018, Summer Northeast had two secured irrevocable stand-by letters of credit totaling $750,000 with a financial institution. The letters of credit were issued for the benefit of the following parties: Connecticut Department of Public Utility Control in the amount of $250,000 expiring on May 26, 2020 with automatic extension provisions and the State of New Hampshire Public Utilities Committee in the amount of $500,000 expiring on May 1, 2020. As of December 31, 2019 and 2018, Summer Northeast had cash collateral posted with ISO New England in the amount of $1,387,181 and $1,355,108, respectively.
As of December 31, 2019, Summer Midwest had no secured irrevocable stand-by letters of credit outstanding, and as of December 31, 2018, Summer Midwest had one irrevocable stand-by letter of credit in the amount of $50,000 for the benefit of Duke Energy Ohio, Inc. During the calendar year 2019, the letter of credit was cancelled and replaced with a $50,000 cash deposit to Duke Energy Ohio, Inc. As of December 31, 2019 and 2018, Summer Midwest had cash collateral held by various local utilities in the PJM market totaling $713,000 and $0, respectively.
As of December 31, 2019, none of the letters of credit issued on behalf of the Company were drawn upon.
NOTE 6 - SURETY BONDS
As of December 31, 2019, Summer Midwest had a surety bond in the amount of $500,000 issued to the Illinois Commerce Commission and a surety bond in the amount of $250,000 issued to the Pennsylvania Public Utility Commission. At December 31, 2019, cash in the amount of $300,000 was held by the surety bond company to secure the two bonds.
There were no surety bonds outstanding as of December 31, 2018.
NOTE 7 - FINANCING FROM FIRST INSURANCE FUNDING
In May 2019, the Company entered into a finance agreement with First Insurance Funding to finance the Company’s director’s and officer’s insurance policy premium for the period of May 1, 2019 through May 1, 2020. The amount
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for the premiums, taxes and fees totaled $150,575. A cash down payment in the amount of $22,586 was made by the Company in May 2019 leaving a remaining balance of $127,989 to be paid in 10 installments from June 1, 2019 through March 1, 2020. The annual percentage interest rate of the financing is 6.45%.
At December 31, 2019, the outstanding balance was $38,397 and the accrued interest was $3,185.
NOTE 8 - FINANCING FROM BLUE WATER CAPITAL FUNDING LLC
On June 29, 2016, Summer LLC (the “Borrower”) entered into a Loan Agreement (the “Agreement”) with Blue Water Capital Funding, LLC (“Blue Water”) and guaranteed by the Company (the “Guaranty”). Pursuant to the Agreement, Blue Water agreed to provide a revolving loan (the “Loan”) to the Borrower, and the Borrower agreed to borrow and repay funds loaned by Blue Water. Further, in connection with the Agreement, the Borrower granted to Blue Water a second position security interest in and to the Borrower’s collateral, which includes receivables, equipment, inventory, personal property, other intangibles, and proceeds from any of these, to secure the Borrower’s payment of its obligation under the Loan.
The amount of available credit under the Loan was $5,000,000. The Loan was revolving in nature and is evidenced by a Revolving Promissory Note (the “Note”). The maturity date of the Loan was June 30, 2018.
On June 27, 2018, Summer LLC entered into an amendment to the agreement (the “Amendment”) with Blue Water with respect to the Agreement.
Pursuant to the Amendment, the maturity date of the Note was extended through June 30, 2020, and the interest rate on the Note was changed from 11% per annum to a variable rate equal to the Prime Rate published by the Wall Street Journal plus 475 basis points. As of December 31, 2019 and 2018, the interest rate was 9.5% and 10.25%, respectively. The amount of credit available pursuant to the Agreement, as amended by the Amendment, continues to be $5,000,000. The Note continues to include a minimum monthly financing fee of $22,500 per month. Interest is payable on the tenth day of each month and on the maturity date of the Note. Summer LLC and Blue Water agreed that the security interest granted pursuant to the Agreement remains in effect, and the Company reaffirmed its obligations under the Guaranty.
Further, under the Agreement, Summer LLC is subject to certain restrictive covenants that, among other things, may limit our ability to obtain additional financing. These restrictive covenants include, without limitation, restrictions on Summer LLC’s ability to: (i) incur additional indebtedness; (ii) incur liens; (iii) make certain dispositions of assets; (iv) merge, dissolve, consolidate or sell all or substantially all of its assets; and (v) enter into certain transactions with affiliates during the term of the Agreement. If Summer LLC breaches any of these restrictive covenants or is unable to pay the indebtedness under the Agreement when due, this could result in a default under the Agreement. In such event, the Lender may elect (after the expiration of any applicable notice or grace periods) to declare all outstanding borrowings, together with accrued and unpaid interest and other amounts payable under the Agreement, to be immediately due and payable. As of December 31, 2019, Summer LLC was in compliance with the covenants of the Agreement.
At December 31, 2019 and 2018, the outstanding balance of financing from Blue Water Capital was $4,920,000.
Interest accrued during the years ended December 31, 2019 and 2018 was as follows:
|
| For the Years Ended December 31, | ||
|
| 2019 |
| 2018 |
Blue Water Capital interest expense | $ | 500,404 | $ | 459,068 |
NOTE 9 – COMERICA BANK MASTER REVOLVING NOTE
On December 18, 2018, the Company signed a single payment note (the “Note”) with Comerica Bank (the “Bank”) in the amount of $2,900,000. The Note has a maturity date of June 11, 2020, with interest thereon at a per annum rate equal to the “Prime Referenced Rate” plus the “Applicable Margin.” The “Prime Referenced Rate” means, for
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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 the Bank as its prime rate for its borrowers at any such time. “Applicable Rate” means 0.25% per annum. As of December 31, 2018, the interest rate was 5.75%. Accrued and unpaid interest on the unpaid principal balance outstanding on the Note shall be payable monthly on the first day of each month, commencing on February 1, 2019.
On December 9, 2019, the Note was converted from a single payment note to a master revolving note (the “Revolver Note”), which is payable in full on demand from the Bank. The Revolver note provides for advances, repayments and re-advances from time to time. Interest thereon at a per annum rate equal to the “Prime Referenced Rate” plus the “Applicable Margin.” 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 the Bank as its prime rate for its borrowers at any such time. “Applicable Rate” means 0.25% per annum. As of December 31, 2019, the interest rate was 5%. Unless sooner demanded, accrued and unpaid interest on the unpaid principal balance of each outstanding advance shall be payable monthly, in arrears on the first business day of each month, from the date made until the same is paid in full.
Guaranty of the Revolver Note has been made by four members of the Company’s board of directors (“Guarantors”). The Company agreed to issue the four Guarantors shares of the Company’s common stock on a monthly basis depending on the outstanding balance due and owing under the Revolver Note for agreeing to act as a Guarantor.
As of December 31, 2019 and 2018, the outstanding balance of financing on the Comerica Revolver Note was $2,900,000. Interest expense accrued as follows:
|
| For the Years Ended December 31, | ||
|
| 2019 |
| 2018 |
Comerica Revolver Note interest expense | $ | 77,715 | $ | 6,001 |
NOTE 10 – COMERICA BANK SINGLE PAYMENT NOTE
On December 20, 2019, the Company signed a Single Payment Note (the “Single Note”) with Comerica Bank in the amount of $2,100,000. The Note has a maturity date of June 20, 2020, with interest thereon at a per annum rate equal to the “Prime Referenced Rate” plus the “Applicable Margin.” 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 Referenced 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 0.25% per annum. As of December 31, 2019, the interest rate was 5%. Accrued and unpaid interest on the unpaid principal balance outstanding on the Note shall be payable monthly on the twentieth day of each month, commencing on January 20, 2020.
Guaranty of the Single Note has been made by four members of the Company’s board of directors (“Guarantors”). The Company agreed to issue the four Guarantors shares of the Company’s common stock on a monthly basis depending on the outstanding balance due and owing under the Note for agreeing to act as a Guarantor of the Single Note.
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As of December 31, 2019 and 2018, the outstanding balance of financing on the Comerica Single Note was $2,100,000 and $0, respectively. Interest expense accrued as follows:
|
| For the Years Ended December 31, | ||
|
| 2019 |
| 2018 |
Comerica Single Note interest expense | $ | 3,500 | $ | - |
NOTE 11 - WHOLESALE POWER PURCHASE AGREEMENT WITH EDF
On May 1, 2018, Summer Energy Holdings, Inc. (for purposes of this Note, “SEH”), together with its subsidiaries Summer LLC and Summer Northeast closed a transaction with EDF Energy Services, LLC and EDF Trading North America, LLC (collectively, “EDF”). As part of the transaction, Summer LLC, Summer Northeast and EDF entered into an Energy Services Agreement (the “Energy Services Agreement”) pursuant to which Summer LLC and Summer Northeast agreed to purchase their electric power and associated services requirements from EDF, and EDF agreed to provide Summer LLC and Summer Northeast with certain credit facilities to assist Summer LLC and Summer Northeast in the purchase of their electric power and associated service requirements (such transaction with EDF, the “Original Transaction”). The terms of the Energy Services Agreement are governed by the ISDA Master Agreement, as well as a Schedule and Power Annex thereto and the Credit Support Annex thereto.
In conjunction therewith, the Company and EDF also entered into a Security Agreement (the “Security Agreement”), a Pledge Agreement (the “Pledge Agreement”) and a Guaranty (the “Guaranty”) in favor of EDF. The Energy Services Agreement has a term of three years, and automatically renews for successive one-year periods unless either party provides written notice of termination 180 days prior to the renewal date. In addition to the market-based commodity price charged by EDF for each underlying commodity transaction, the Company will pay a “Commodity Fee” for each megawatt hour (“MWh”) of power that the Company requests for delivery from EDF during the term of the Energy Services Agreement. In addition, the Company is responsible for other mutually-agreed-upon fees incurred by EDF on its behalf. The Company is also responsible for any reasonable transmission or transportation costs incurred in connection with power transactions. Monthly supply obligations will accrue interest at a rate equal to three-month LIBOR plus 6% per annum. Any additional credit support will bear interest at the per annum rate equal to the lesser of (i) a rate per annum equal to three-month LIBOR rate plus 3% per annum, and (ii) the maximum rate of interest permitted by applicable law.
In consideration of the services and credit support provided by EDF to Summer LLC and Summer Northeast, and pursuant to the Security Agreement, Summer LLC and Summer Northeast agreed to, among other things (i) grant a priority security interest to EDF in all of their assets, equipment and inventory; (ii) require their customers to remit monthly payments into a lockbox account over which EDF has a security interest; and (iii) deliver monthly and annual forecasted and audited financial statements to EDF.
Pursuant to the Pledge Agreement, SEH pledged to EDF, and granted to EDF a security interest in, all of the membership interests of Summer LLC and Summer Northeast owned by SEH as well as all additional membership interests of such subsidiaries from time to time acquired by SEH. Pursuant to the Guaranty, SEH agreed to guaranty the obligations of Summer LLC and Summer Northeast under the Energy Services Agreement.
The foregoing is only a brief description of the material terms of the transaction with EDF 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 text of the Energy Services Agreement, the ISDA Master Agreement, the Security Agreement, the Pledge Agreement and the Guaranty, which are filed as Exhibits 10.1 through 10.5, respectively, to our quarterly report on Form 10-Q filed with the SEC on August 14, 2018.
On June 19, 2019, the Company closed a transaction (the “Amendment Transaction”) with EDF Trading North America, LLC (“EDFTNA”) in order to amend and/or restate certain of the agreements with EDF entered into in the Original Transaction.
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Pursuant to the Amendment Transaction, the Company and EDFTNA entered into an Amended and Restated Energy Services Agreement, which amended and restated the Energy Services Agreement (the “Amended Energy Services Agreement”), an amendment to ISDA Master Agreement which amends the ISDA Agreement (the “Amended ISDA Agreement”), an Omnibus Amendment to Pledge Agreement and Security Agreement and Joinder, which amends both the Security Agreement and the Pledge Agreement (the “Omnibus Amendment”) and an Amended and Restated Guaranty, which amends and restates the Guaranty (the “Amended Guaranty”). In general, the Amended Energy Services Agreement, the Amended ISDA Agreement, the Omnibus Amendment and the Amended Guaranty amend and/or restate the documents from the Original Transaction to (i) remove EDF Energy Services, LLC as a party to the agreements and (ii) add an additional subsidiary of SEH, Summer Midwest, as a party to the agreements, such that Summer Midwest is able to purchase its electric power and associated services requirements from EDFTNA and also utilize EDFTNA’s credit support. The term, pricing and interest payable under the Amended Energy Services Agreement are unchanged from the original Energy Services Agreement.
Pursuant to the Omnibus Amendment, in consideration of the services and credit support provided by EDFTNA to the Company, Summer Midwest agreed to, among other things (i) grant a priority security interest to EDFTNA in all of its assets, equipment and inventory; and (ii) require its customers to remit monthly payments into a lockbox account over which EDFTNA has a security interest. The security interest previously granted by Summer LLC and Summer Northeast is unchanged, except that EDFTNA is now the sole secured party. Also pursuant to the Omnibus Amendment, SEH pledged to EDFTNA, and granted to EDFTNA a security interest in, all of SEH’s membership interest in Summer Midwest. The previous pledge by SEH of its membership interest in Summer LLC and Summer Northeast is unchanged, except that EDFTNA is now the sole secured party. Pursuant to the Guaranty, SEH agreed to guaranty the obligations of Summer LLC, Summer Northeast and Summer Midwest under the Amended Energy Services Agreement.
The foregoing is only a brief description of the material terms of the Amendment Transaction 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 text of the Amended Energy Services Agreement, the Amended ISDA Master Agreement, the Omnibus Amendment and the Amended Guaranty, which are filed as Exhibits 10.1 through 10.4, respectively, to our Quarterly Report on Form 10-Q filed with the SEC on August 14, 2019.
On July 18, 2019, the Company repaid EDF for credit support in the amount of $588,000 related to the decreased TDSP collateral requirements of the local utility company. As of December 31, 2019 and 2018, EDF had provided additional credit support in the amount of $4,511,006 and $4,136,006, respectively, for cash collateral as well as to secure letters of credit (See Note 5) and surety bonds (See Note 6) for the benefit of the Company.
For the years ended December 31, 2019 and 2018, the Company expensed interest to EDF as follows:
|
| For the Years Ended December 31, | ||
|
| 2019 |
| 2018 |
EDF interest expense | $ | 1,128,231 | $ | 575,733 |
NOTE 12 - WHOLESALE POWER PURCHASE AGREEMENT SUMMER LLC WITH DTE
In April, 2014, Summer LLC closed a transaction with DTE Energy Trading, Inc. (“DTE”). As part of the transaction, Summer LLC and DTE entered into an Energy Marketing Agreement for Electric Power (the “Energy Marketing Agreement”). Pursuant to the terms of the Energy Marketing Agreement, Summer LLC agreed to purchase its electric power and associated services requirements from DTE, and DTE agreed to provide Summer LLC with certain credit facilities to assist Summer LLC in the purchase of its electric power and associated service requirements. Summer LLC 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, Summer LLC and DTE also entered into a Credit Agreement, a Security Agreement and a Membership Interest Pledge Agreement.
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Pursuant to the Credit Agreement, among other things DTE agreed to (i) provide a guaranty (a “Credit Guaranty”) to ERCOT for the benefit of Summer LLC, and (ii) provide commodity loans for the purchase of electricity (“Commodity Loans”). Each Commodity Loan and any Credit Guaranty bore interest on the outstanding principal amount thereof, from the date such Commodity Loan or Credit Guaranty was issued until it became due or revoked, respectively, at a rate per annum equal to the Prime Rate (as reported by the Wall Street Journal) plus two percent. Summer LLC covenanted not to, among other things, (i) merge or consolidate with any other person, (ii) acquire all or substantially all of the capital stock or property of another person, (iii) create, assume or suffer to exist any lien on any property now owned or hereafter acquired by Summer LLC except for permitted liens (as set forth in the Credit Agreement) or (iv) 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 Summer LLC, and pursuant to the Security Agreement, Summer LLC was 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.
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.
The Energy Marketing Agreement between Summer LLC and DTE was terminated on April 30, 2018.
For the years ended December 31, 2019 and 2018, interest accrued to DTE was as follows:
|
| For the Years Ended December 31, | ||
|
| 2019 |
| 2018 |
DTE interest expense | $ | - | $ | 144,192 |
NOTE 13 – LEASE LIABILITIES, COMMITMENTS AND CONTINGENCIES
Office Space
The Company leases office space and equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Lease expense is recognized on a straight-line basis over the term of the lease. For leases beginning in 2019 and later, the Company accounts for lease components separately from the non-lease components. Most leases include one or more options to renew. The exercise of the lease renewal options is at the sole discretion of the Company. Certain leases also include options to purchase the leased property. The depreciable life of the assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.
Beginning December 1, 2017, the Company procured approximately 20,073 square feet of office space on the 37th floor of 5847 San Felipe, Houston, Texas, pursuant to a sublease agreement dated October 13, 2017 with ENSCO International Incorporated (“Sublandlord”) for a term beginning on December 1, 2017 and terminating on December 31, 2025. The base rent payments are approximately $15,900 per month during the term of the sublease agreement. The Company is also responsible for 12.08% of the operating expenses, utilities and taxes charged to the Sublandlord.
Summer LLC assumed an operating lease for office space on November 1, 2011 at 800 Bering Drive, Suite 260, Houston, Texas, under a non-cancellable lease obligation that expired on August 31, 2016. The Sixth Amendment to the office space lease extended the obligation to October 31, 2019.
Summer Northeast entered into a sublease agreement with PDS Management Group, LLC (“PDS”) on October 31, 2017 at 800 Bering Drive, Suite 250, Houston, Texas, under a non-cancellable lease obligation that will expire on February 28, 2020. On September 1, 2018, PDS subleased 800 Bering Drive, Suite 250, Houston, Texas to an outside party, and Summer Northeast receives a monthly credit in the amount of $1,698 until the end of the lease obligation on February 28, 2020. The monthly base rent is $3,727 for the period of November 1, 2017 to February 2018 and $3,904 until August 31, 2018. Beginning on September 1, 2018 through the termination of the lease on
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February 28, 2020, the monthly rent, net of credit, is $2,255.
As of December 31, 2019, the operating lease right-of-use assets and operating lease liabilities were $979,185, respectively. The long-term portion of the operating lease liabilities, $834,283, is included in long-term obligations.
As of December 31, 2019, the weighted-average remaining lease term for operating leases was 5.9 years. As of December 31, 2019, the weighted-average discount rate for operating leases was 6.5%.
Operating lease future minimum payments together with their present values as of December 31, 2019 are summarized as follows:
|
| Operating Leases |
2020 | $ | 204,156 |
2021 |
| 199,494 |
2022 |
| 199,494 |
2023 |
| 197,294 |
2024 |
| 190,694 |
Thereafter |
| 190,693 |
Total future minimum lease payments |
| 1,181,825 |
Less amounts representing interest |
| (202,640) |
Present value of lease liability | $ | 979,185 |
|
|
|
Current-portion operating lease liability |
| (144,902) |
|
|
|
Long-term portion operating lease liability | $ | 834,283 |
Lease expense for the office space for years ended December 31, 2019 and 2018 totaled $732,000 and $626,980, respectively, and was included in operating expenses on the consolidated statements of operations.
Significant Customers
For the years ended December 31, 2019 and 2018, the Company did not have any significant customers that individually accounted for more than 10% of our consolidated retail revenue.
Significant Suppliers
The Company had contractual commitments as of December 31, 2019 and 2018 to purchase its wholesale electric power from EDF and contracts for billing services with three vendors (Energy Services Group, DYNAMO Programs International, LLC and EC Infosystems, Inc.) totaling $967,490 and $535,445, respectively.
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NOTE 14 – LONG TERM OBILIGATIONS
Long-term obligations of the Company are comprised as follows:
|
| For the Years Ended December 31, | ||
|
| 2019 |
| 2018 |
Financing from First Insurance Funding (Note 7) | $ | 38,397 | $ | - |
Financing from Blue Water Capital Funding, LLC (Note 8) |
| 4,920,000 |
| 4,920,000 |
Comerica Bank Master Revolving Note (Note 9) |
| 2,900,000 |
| 2,900,000 |
Comerica Bank Single Payment Note (Note 10) |
| 2,100,000 |
| - |
Wholesale Power Purchase Agreement with EDF (Note 11) |
| 4,511,006 |
| 4,136,006 |
Operating lease obligations (Note 13) |
| 979,185 |
| - |
Total obligations | $ | 15,448,588 | $ | 11,956,006 |
|
|
|
|
|
Less current portion of obligations |
| (5,038,397) |
| - |
Less current portion operating lease obligations |
| (144,902) |
| - |
Long-term portion of obligations | $ | 10,265,289 | $ | 11,956,006 |
|
|
|
|
|
During the years ended December 31, 2019 and 2018, interest expense incurred on obligations of the Company was as follows:
|
| For the Years Ended December 31, | ||
|
| 2019 |
| 2018 |
Financing from First Insurance Funding (Note 7) | $ | 3,185 | $ | 2,182 |
Financing from Blue Water Capital Funding, LLC (Note 8) |
| 500,404 |
| 459,068 |
Comerica Master Revolving Note (Note 9) |
| 77,715 |
| 6,001 |
Comerica Bank Single Payment Note (Note 10) |
| 3,500 |
| - |
Wholesale Power Purchase Agreement with EDF (Note 11) |
| 1,128,231 |
| 575,733 |
Wholesale Power Purchase Agreement with DTE (Note 12) |
| - |
| 144,192 |
Master Revolver Note Assumed in Acquisition (Note 22) |
| - |
| 3,225 |
Debt to Related Party Assumed in Acquisition (Note 23) |
| - |
| 35,057 |
Related Party interest on Summer Northeast Guarantees Assumed |
| - |
| 59,515 |
Related Party Loans (Note 24) |
| 16,043 |
| 9,545 |
Related Party Guarantors (Note 25) |
| 175,833 |
| 12,567 |
Other interest |
| 276 |
| 349 |
Total interest expense | $ | 1,905,187 | $ | 1,307,434 |
|
|
|
|
|
Interest income |
| 62,204 |
| 35,425 |
|
|
|
|
|
Interest expense, net | $ | 1,842,983 | $ | 1,272,009 |
NOTE 15 – 2012 STOCK OPTION AND STOCK AWARD PLAN
During 2012, the Company approved the 2012 Stock Option and Stock Award Plan (“2012 Plan”) 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 2012 Plan, and (ii) shares of stock with respect to which stock appreciation rights may be granted, is 785,000 and consists of authorized but
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unissued or reacquired shares of stock or any combination thereof. Such number of shares of stock may be may be issued under the 2012 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 2012 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 2012 Plan have been issued and all restrictions on such shares under the terms on the 2012 Plan and the agreement evidencing awards granted under the 2012 Plan have lapsed. However, all awards shall be granted, if at all, within ten (10) years from the earlier of the date the 2012 Plan is adopted by the Board or the date the 2012 Plan is duly approved by the stockholders of the Company.
On December 6, 2012, a Form S-8 Registration Statement was filed with the United States Securities and Exchange Commission regarding shares under the 2012 Plan.
There were no stock options granted or exercised under the 2012 Plan for the years ended December 31, 2019 or 2018.
During the years ended December 31, 2019 and 2018, the Company had no stock compensation expenses relating to the vesting of stock options issued from the 2012 Plan.
As of December 31, 2019, 2,000 shares remain available for issuance under the 2012 Plan.
As of December 31, 2019, the Company had outstanding granted stock options from the 2012 Plan, net of forfeitures to purchase 632,000 shares summarized as follows:
|
| Options |
| Weighted Average Exercise Price |
| Weighted Average Remaining Contractual Life (in Years) |
| Aggregate Intrinsic Value |
Outstanding at December 31, 2017 |
| 632,000 | $ | 1.24 |
| 5.88 | $ | 798,250 |
Options granted |
| - |
|
|
|
|
|
|
Options exercised |
| - |
|
|
|
|
|
|
Options cancelled/forfeited/expired |
| - |
|
|
|
|
|
|
Outstanding at December 31, 2018 |
| 632,000 | $ | 1.24 |
| 4.87 | $ | 117,250 |
Options granted |
| - |
|
|
|
|
|
|
Options exercised |
| - |
|
|
|
|
|
|
Options cancelled/forfeited/expired |
| - |
|
|
|
|
|
|
Outstanding at December 31, 2019 |
| 632,000 | $ | 1.24 |
| 3.86 | $ | 316,258 |
|
|
|
|
|
|
|
|
|
Vested at December 31, 2019 |
| 632,000 | $ | 1.24 |
| 3.86 | $ | 316,258 |
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2019 |
| 632,000 | $ | 1.24 |
| 3.86 | $ | 316,258 |
The aggregate intrinsic value was calculated as the difference between the exercise price of the stock option and the fair value of the underlying common stock.
NOTE 16 – 2015 STOCK OPTION AND STOCK AWARD PLAN
During the year ended December 31, 2015, the Company’s stockholders approved the 2015 Stock Option and Stock Award Plan (“2015 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.
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The maximum aggregate number of (i) shares of stock that may be issued under the 2015 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 2015 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 2015 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 2015 Plan have been issued and all restrictions on such shares under the terms on the 2015 Plan and the agreements evidencing awards granted under the 2015 Plan have lapsed. However, all awards shall be granted, if at all, within ten years from the earlier of the date the 2015 Plan is adopted by the Board or the date the 2015 Plan is duly approved by the stockholders 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 2015 Plan.
During the year ended December 31, 2018, the Company granted a total of 51,000 stock options from the 2015 Plan with a fair value of approximately $111,911 on the date of grant. The fair value of the options in the amount of $111,911 was determined using the Black-Scholes option-pricing model. The weighted average assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate of 2.25% (ii) estimated volatility of 110.73% (iii) dividend yield of 0.00% and (iv) expected life of all options averaging 8 years.
There were no stock options granted under the 2015 Plan for the year ended December 31, 2019.
During the years ended December 31, 2019 and 2018, the Company recognized total stock compensation expenses of $157,645 and $206,748, respectively, for vesting options issued from the 2015 Plan.
As of December 31, 2019, the unrecognized expense for vesting of options issued from the 2015 Plan is $83,915 relating to 235,000 of unvested shares expected to be recognized over a weighted average period of approximately 6.96 years, and the unrecognized expense for vesting of options from the 2015 Plan at December 31, 2018 was $197,199 relating to 241,000 of unvested shares expected to be recognized over a weighted average period of years of approximately 7.78 years.
As of December 31, 2019, 19,000 shares remain available for issuance.
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As of December 31, 2019, the Company had outstanding granted stock options from the 2015 Stock Option and Stock Award Plan, net of forfeitures, to purchase 1,481,000 shares summarized as follows:
|
| Shares |
| Weighted Average Exercise Price |
| Weighted Average Remaining Contractual Life (in Years) |
| Aggregate Intrinsic Value |
Outstanding at December 31, 2017 |
| 1,430,000 | $ | 1.74 |
| 8.42 | $ | 1,086,750 |
Options granted |
| 51,000 | $ | 2.28 |
| 8.99 |
|
|
Options exercised |
| - |
|
|
|
|
|
|
Options cancelled/forfeited/expired |
| - |
|
|
|
|
|
|
Outstanding at December 31, 2018 |
| 1,481,000 | $ | 1.76 |
| 7.46 | $ | 133,500 |
Options granted |
| - |
|
|
|
|
|
|
Options exercised |
| - |
|
|
|
|
|
|
Options cancelled/forfeited/expired |
| - |
|
|
|
|
|
|
Outstanding at December 31, 2019 |
| 1,481,000 | $ | 1.76 |
| 6.45 | $ | 381,825 |
|
|
|
|
|
|
|
|
|
Vested at December 31, 2019 |
| 1,246,000 | $ | 1.62 |
| 6.35 | $ | 381,825 |
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2019 |
| 1,246,000 | $ | 1.62 |
| 6.35 | $ | 381,825 |
|
|
|
|
|
|
|
|
|
The weighted-average grant date fair value of stock options granted during the year ended December 31, 2018 was $0.92.
The aggregate intrinsic value was calculated as the difference between the exercise price of the stock option and the fair value of the underlying common stock.
None of these options were exercised during the years ended December 31, 2019 and 2018.
NOTE 17 - 2018 STOCK OPTION AND STOCK AWARD PLAN
Effective February 12, 2018, the Board of Directors of the Company approved and adopted the 2018 Stock Option and Stock Award Plan (“2018 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 Company’s named executive officers are eligible for grants or awards under the 2018 Plan. The Company’s stockholders approved the 2018 Plan on June 8, 2018.
The maximum aggregate number of (i) shares of stock that may be issued under the 2018 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 2018 Plan pursuant to incentive stock options, non-statutory stock options, restricted stock grants, restricted stock units, 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 2018 Plan continues in effect until the earlier of its termination by the Board or the date on which all shares of stock available for issuance under the 2018 Plan have been issued and all restrictions on such shares under the terms on the 2018 Plan and the agreement evidencing awards granted under the 2018 Plan have lapsed. However, all awards shall be granted, if at all, within ten years from the earlier of the date the 2018 Plan is adopted by the Board or the date the 2018 Plan is duly approved by the stockholders of the Company.
F-26
On September 20, 2018, a Form S-8 Registration Statement was filed with the United States Securities and Exchange Commission regarding shares under the 2018 Plan.
On February 20, 2018, the Company granted the following options to purchase common stock under the 2018 Plan to key officers of the Company:
Name |
| Number of Options |
| Exercise Price |
| Date of Vest |
Angela Hanley |
| 150,000 | $ | 2.50 |
| February 20, 2023 |
Jaleea George |
| 85,000 | $ | 2.50 |
| February 20, 2023 |
Angela Hanley |
| 15,000 | $ | 2.50 |
| July 1, 2018 |
Jaleea George |
| 15,000 | $ | 2.50 |
| July 1, 2018 |
Neil Leibman |
| 15,000 | $ | 2.50 |
| July 1, 2018 |
Total |
| 280,000 |
|
|
|
|
The options granted to key officers covering a total of 235,000 shares vest five years after the date of grant. The stock options have an exercise price of $2.50 per share and will expire 10 years from the date of grant. The fair value of the options of $539,132 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 2.65% (ii) estimated volatility of 119.27% (iii) dividend yield of 0.00% and (iv) expected life of the options of 8 years.
The options to key officers covering a total of 45,000 shares vested on July 1, 2018. The stock options have an exercise price of $2.50 per share and will expire 10 years from the date of grant. The fair value of the options of $103,238 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 2.65% (ii) estimated volatility of 119.27% (iii) dividend yield of 0.00% and (iv) expected life of the options of 8 years.
On April 19, 2018, the Company granted a total of 45,000 stock options to non-employee members of the Company’s Board of Directors under the 2018 Plan as compensation. The director stock options vested on July 1, 2018. The director options have an exercise price of $2.25 per share, will expire 10 years from the date of the grant and are estimated to have a fair value of approximately $81,659 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 2.77% (ii) estimated volatility of 141.02% (iii) dividend yield of 0.00% and (iv) expected life of the options of 8 years.
On June 29, 2018, the Company granted a total of 53,750 stock options from the 2018 Stock Option and Stock Award Plan to non-employee members of the Company’s Board of Directors. The director stock options vested on July 1, 2018. The approximate fair value of the options in the amount of $126,864 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 2.73% (ii) estimated volatility of 144.57% (iii) dividend yield of 0.00% and (iv) expected life of all options averaging 8 years.
On September 28, 2018, the Company granted a total of 53,750 stock options from the 2018 Stock Option and Stock Award Plan to non-employee members of the Company’s Board of Directors. The director stock options vested immediately on September 28, 2018. The approximate fair value of the options in the amount of $102,644 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 2.94% (ii) estimated volatility of 143.29% (iii) dividend yield of 0.00% and (iv) expected life of all options averaging 8 years.
On December 27, 2018, the Company granted a total of 53,750 stock options from the 2018 Stock Option and Stock Award Plan to non-employee members of the Company’s Board of Directors. The director stock options vested immediately on December 27, 2018. The approximate fair value of the options in the amount of $102,656 was determined using the Black-Scholes option-pricing model. The assumptions used to calculate the fair market value
F-27
are as follows: (i) risk-free interest rate of 2.60% (ii) estimated volatility of 143.77% (iii) dividend yield of 0.00% and (iv) expected life of all options averaging 8 years.
During the year ended December 31, 2018, the Company granted a total of 15,000 stock options from the 2018 Stock Option and Stock Award Plan to key employees of the Company. The options granted to the key employees’ vest in 1 year. The approximate fair value of the options in the amount of $29,698 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 2.81% (ii) estimated volatility of 143.28% (iii) dividend yield of 0.00% and (iv) expected life of all options averaging 8 years.
On March 29, 2019, the Company granted under the 2018 Plan a total of 53,750 stock options with an exercise price of $2.25 to non-employee members of the Company’s Board of Directors, and a total of 2,500 stock options with an exercise price of $2.50 to a key employee as compensation. The options granted to the non-employee members of the Company’s Board of Directors vested immediately on the date of grant, and the 2,500 options granted to the key employee vest one-year from the date of grant. The total 56,250 stock options granted had an approximate fair value of $107,960 determined using the Black-Scholes option-pricing model. The weighted average assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate of 2.21% (ii) estimated volatility of 147.94% (iii) dividend yield of 0.00% and (iv) expected life of all options averaging eight years.
On April 12, 2019, the Company granted under the 2018 Plan a total of 100,000 stock options with an exercise price of $1.50 to a key employee as compensation. The options granted to the non-employee members of the Company’s Board of Directors as well as to the key employee vested immediately on the date of grant. The total 100,000 stock options granted had an approximate fair value of $145,369 determined using the Black-Scholes option-pricing model. The weighted average assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate of 2.38% (ii) estimated volatility of 149.93% (iii) dividend yield of 0.00% and (iv) expected life of all options averaging eight years.
On June 28, 2019, the Company granted under the 2018 Plan a total of 53,750 stock options with an exercise price of $2.25 to non-employee members of the Company’s Board of Directors. The total 53,750 stock options granted had an approximate fair value of $103,829 determined using the Black-Scholes option-pricing model. The weighted average assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate of 1.76% (ii) estimated volatility of 149.46% (iii) dividend yield of 0.00% and (iv) expected life of all options averaging eight years.
On September 16, 2019, the Company granted under the 2018 Plan a total of 620,000 stock options with an exercise price of $2.00 to four officers of the Company as compensation. The total 620,000 stock options granted during the quarter ended September 30, 2019 had an approximate fair value of $1,192,515 determined using the Black-Scholes option-pricing model. The weighted average assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate of 1.69% (ii) estimated volatility of 144.51% (iii) dividend yield of 0.00% and (iv) expected life of all options averaging eight years.
During the year ended December 31, 2019, the Company granted a total of 830,000 stock options from the 2018 Stock Option and Stock Award Plan and recognized total stock compensation expenses of $1,009,303 relating to the vesting of stock options issued from the 2018 Plan. During the year ended December 31, 2018, the Company granted 501,250 stock options from the 2018 Stock Option and Stock Award Plan and recognized total stock compensation expenses of $624,876 relating to the vesting of stock options issued from the 2018 Plan.
As of December 31, 2019, the unrecognized expense for vesting of options issued from the 2018 Plan is $1,001,385 relating to 782,500 of unvested shares expected to be recognized over a weighted average period of approximately 7.23 years.
As of December 31, 2019, 168,750 shares remain available for issuance.
As of December 31, 2019, the Company had outstanding granted stock options from the 2018 Stock Option and Stock Award Plan, net of forfeitures to purchase 1,331,250 shares summarized as follows:
F-28
|
| Shares |
| Weighted Average Exercise Price |
| Weighted Average Remaining Contractual Life (in Years) |
| Aggregate Intrinsic Value |
Outstanding at December 31, 2017 |
| - | $ | - |
| - | $ | - |
Options granted |
| 501,250 | $ | 2.42 |
| 7.36 |
|
|
Options exercised |
| - |
|
|
|
|
|
|
Options cancelled/forfeited/expired |
| - |
|
|
|
|
|
|
Outstanding at December 31, 2018 |
| 501,250 | $ | 2.42 |
| 7.36 | $ | - |
Options granted |
| 830,000 | $ | 1.97 |
| 7.61 |
|
|
Options exercised |
| - |
|
|
|
|
|
|
Options cancelled/forfeited/expired |
| - |
|
|
|
|
|
|
Outstanding at December 31, 2019 |
| 1,331,250 | $ | 2.14 |
| 7.13 | $ | 23,500 |
|
|
|
|
|
|
|
|
|
Vested at December 31, 2019 |
| 548,750 | $ | 2.13 |
| 7.00 | $ | 23,500 |
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2019 |
| 548,750 | $ | 2.13 |
| 7.00 | $ | 23,500 |
|
|
|
|
|
|
|
|
|
The weighted-average grant date fair value of stock options granted during the years ended December 31, 2019 and 2018 was $1.98 and $2.17, respectively.
The aggregate intrinsic value was calculated as the difference between the exercise price of the stock option and the fair value of the underlying common stock.
None of these options were exercised during the years ended December 31, 2019 and 2018.
NOTE 18 – NONQUALIFIED STOCK OPTIONS GRANTED OUTSIDE OF A STOCK OPTION OR STOCK AWARD PLAN
In September 2019, the Company entered into stock option grant agreements to the six non-employee members of the Company’s Board of Directors whereby the Company would grant non-qualified stock options during the months of September 2019, December 2019, March 2020 and June 2020 as compensation for services. The stock options granted pursuant to these agreements and the shares issuable upon the exercise thereof have not been registered under the Securities Act of 1933, as amended.
On September 16, 2019, pursuant to the aforementioned grant agreements, the Company granted a total of 53,750 nonqualified stock options with an exercise price of $2.25 to six non-employee board members of the Company as compensation. The total 53,750 stock options granted on September 16, 2019 had an approximate fair value of $103,132 determined using the Black-Scholes option-pricing model. The weighted average assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate of 1.69% (ii) estimated volatility of 144.51% (iii) dividend yield of 0.00% and (iv) expected life of all options averaging eight years.
On December 30, 2019, pursuant to the aforementioned grant agreements, the Company granted a total of 53,750 nonqualified stock options with an exercise price of $2.25 to six non-employee board members of the Company as compensation. The total 53,750 stock options granted on December 30, 2019 had an approximate fair value of $87,994 determined using the Black-Scholes option-pricing model. The weighted average assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate of 1.68% (ii) estimated volatility of 132.54% (iii) dividend yield of 0.00% and (iv) expected life of all options averaging eight years.
The Company had previously granted stock options outside of a stock option and stock award plan on May 13, 2014 when the Company exercised its call right reflected within a then-existing credit facility agreement. As a result, Mr. Leibman and Mr. O’Leary, were granted a stock option each to purchase 151,115 shares of common stock at an exercise price of $1.50 per share. Messrs. O’Leary and Leibman are directors of the Company (Mr. Leibman is also
F-29
an executive officer).
As of December 31, 2019, the Company had outstanding stock options, net of forfeitures, granted outside of any stock option or stock award plan summarized as follows:
|
| Options |
| Weighted Average Exercise Price |
| Weighted Average Remaining Contractual Life (in Years) |
| Aggregate Intrinsic Value |
Outstanding at December 31, 2017 |
| 302,230 | $ | 1.50 |
| 4.31 | $ | 453,345 |
Options granted |
| - |
|
|
|
|
|
|
Options exercised |
| - |
|
|
|
|
|
|
Options cancelled/forfeited/expired |
| - |
|
|
|
|
|
|
Outstanding at December 31, 2018 |
| 302,230 | $ | 1.50 |
| 3.30 | $ | 105,781 |
Options granted |
| 107,500 | $ | 2.25 |
| 7.85 |
|
|
Options exercised |
| - |
|
|
|
|
|
|
Options cancelled/forfeited/expired |
| - |
|
|
|
|
|
|
Outstanding at December 31, 2019 |
| 409,730 | $ | 1.70 |
| 3.74 | $ | 222,139 |
|
|
|
|
|
|
|
|
|
Vested at December 31, 2019 |
| 409,730 | $ | 1.70 |
| 3.74 | $ | 222,139 |
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2019 |
| 409,730 | $ | 1.70 |
| 3.74 | $ | 222,139 |
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value was calculated as the difference between the exercise price of the stock option and the fair value of the underlying common stock.
None of these options were exercised during the years ended December 31, 2019 and 2018.
NOTE 19 - WARRANTS
The Company has issued warrants to purchase shares of the Company’s common stock associated with various
agreements and has vested warrants from a previously terminated Master Marketing Agreement.
On January 25, 2019, the Company issued a warrant for 43,772 shares of the Company’s common stock under a Referral Agreement whereby the sales broker introduces the Company potential sales leads. The five-year warrant has an exercise price of $1.50 per share. The fair value of the warrant was $80,307 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 2.58%, (ii) estimated volatility of 148.70%, (iii) dividend yield of 0.00%, and (iv) expected life of the warrant of 5 years.
On January 25, 2019, the Company issued two warrants, each for 6,715 shares, of the Company’s common stock under a Referral Agreement whereby the sales broker introduces the Company potential sales leads. The five-year warrants have an exercise price of $1.50 per share. The fair value of the two warrants totaled $24,640 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 2.58%, (ii) estimated volatility of 148.70%, (iii) dividend yield of 0.00%, and (iv) expected life of the warrant of 5 years.
On May 22, 2019, the Company issued a warrant for 80,000 shares of common stock under a Consulting Agreement (Note 30). The five-year warrant has an exercise price of $1.50 per share. The fair value of the warrant was $143,731 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 2.19%, (ii) estimated volatility of 149.28%, (iii) dividend yield of 0.00%, and (iv) expected life of the warrant of 5 years.
F-30
On June 11, 2019, the Company issued 106,053 shares of common stock to Black Ink Energy, LLC (“Black Ink”) pursuant to the cashless exercise of a warrant dated March 2, 2015 issued by the Company to Black Ink to purchase up to 536,000 shares of common stock of the Company at $1.50 per share. The Black Ink warrant was terminated and cancelled upon the issuance of the 106,053 shares of common stock. There was no warrant expense associated with the cashless exercise of this warrant.
On July 19, 2019, the Company issued a warrant to purchase up to two (2) shares of the Company’s common stock under a Referral Agreement whereby the sales broker introduces the Company to potential sales leads. The five-year warrant has an exercise price of $1.50 per share. The fair value of the warrant is $4 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 1.76%, (ii) estimated volatility of 149.46%, (iii) dividend yield of 0.00%, and (iv) expected life of the warrant of 5 years.
The Company issued a total of 137,204 warrants during the year ended December 31, 2019 and the Company issued no warrants during the year ended December 31, 2018.
Total warrant expense of the Company for years ended December 31, 2019 and 2018 is summarized as follows:
|
| For the year ended December 31, 2019 |
| For the year ended December 31, 2018 |
|
|
|
|
|
Broker warrant compensation expense | $ | 104,951 | $ | - |
Consulting warrant compensation expense |
| 143,731 |
| - |
| $ | 248,682 | $ | - |
Warrant activity for the years ended December 31, 2019 and 2018 was as follows:
Outstanding at December 31, 2017 |
| Shares |
| Weighted Average Exercise Price |
| Weighted Average Remaining Contractual Life (in Years) |
| Grant Date Fair Value |
|
| 1,620,000 | $ | 1.43 |
| 1.73 | $ | 102,744 |
Warrants granted |
| - |
| - |
| - |
| - |
Warrants exercised |
| - |
| - |
| - |
| - |
Warrants cancelled/forfeited/expired |
| (260,000) |
| 1.50 |
| - |
| (10,666) |
Outstanding at December 31, 2018 |
| 1,360,000 | $ | 1.42 |
| 0.93 | $ | 92,078 |
Warrants granted |
| 137,204 |
| 1.50 |
| 4.25 |
| 248,683 |
Warrants exercised |
| (536,000) |
| 1.50 |
| - |
| (21,976) |
Warrants cancelled/forfeited/expired |
| (20,000) |
| 1.50 |
| - |
| (820) |
Outstanding at December 31, 2019 |
| 941,204 | $ | 1.38 |
| 3.32 | $ | 317,965 |
|
|
|
|
|
|
|
|
|
Vested at December 31, 2019 |
| 675,967 | $ | 1.53 |
| 3.01 | $ | 272,915 |
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2019 |
| 675,967 | $ | 1.53 |
| 3.01 | $ | 272,915 |
|
|
|
|
|
|
|
|
|
NOTE 20 - PRIVATE PLACEMENT OFFERINGS
During the year ended December 31, 2019, the Company commenced a private placement offering (the “2019 Offering”) to certain accredited investors with whom the Company, its management and/or agents have a pre-
F-31
existing relationship. As of December 31, 2019, the 2019 Offering had resulted in the issuance of 3,820,000 shares of common stock in exchange for proceeds in the amount of $5,730,000.
During the year ended December, 31, 2018, the Company commenced a private placement offering (the “2018 Offering”) to certain investors with whom the Company, its management and/or agents have a pre-existing relationship. The 2018 Offering was to accredited investors to purchase shares of the Company’s common stock at a purchase price of $1.50 per share. The 2018 Offering resulted in the issuance of 2,425,000 shares of common stock in exchange for cash proceeds in the amount of $3,637,500.
NOTE 21 – PROPERTY AND EQUIPMENT
As of December 31, 2019, and 2018, property and equipment consisted of the following:
|
| 2019 |
| 2018 |
Computer software | $ | 137,091 | $ | 127,954 |
Computer hardware |
| 204,768 |
| 199,830 |
Furniture and fixtures |
| 56,023 |
| 56,023 |
Leasehold improvements |
| 128,593 |
| 129,721 |
Website |
| 775,881 |
| 775,881 |
Total property and equipment |
| 1,302,356 |
| 1,289,409 |
Less: Accumulated depreciation |
| (1,243,938) |
| (1,207,200) |
Property and equipment, net | $ | 58,418 | $ | 82,209 |
|
|
|
|
|
Depreciation expense charged, to operations totaled $36,738 for the year ended December 31, 2019 and $106,718 for the year ended December 31, 2018.
NOTE 22 - MASTER REVOLVER NOTE ASSUMED IN ACQUISTION
The Company entered into a Membership Interest Purchase Agreement (“the Purchase Agreement”) with REP Energy, LLC, a Texas limited liability company (“REP Energy”) on November 1, 2017 whereby the Company acquired 100% of the issued and outstanding membership units of REP Energy. After acquisition, REP Energy changed its name to Summer Northeast. As part of this 2017 transaction, the Company assumed a Master Revolver Note (“Master Note”) held by Summer Northeast (formerly Rep Energy) pursuant to the terms of the Purchase Agreement.
The amount of available credit under the Master Note was $800,000 issued by Comerica Bank. The Master Note was dated July 25, 2017 and had a maturity date of July 25, 2018. Each advance under the Master Note bore interest thereon at a per annum rate equal to the “Prime Referenced Rate” plus the “Applicable Margin.” 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 Referenced Rate” be less than the sum of the Daily Adjusting LIBOR 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 one percent (1%) per annum. Accrued and unpaid interest on the unpaid principal balance outstanding was payable monthly, in arrears, on the first business day of each month.
On February 22, 2018, the Company paid $40,000 to Comerica Bank to pay off the balance of the Master Note.
Guaranty of the Master Note at origination on July 25, 2017 was made by two members of Summer Northeast (Neil Leibman and Tom O’Leary) who are also members of the Company’s Board (Mr. Leibman is also an executive officer). In accordance with the provisions of purchase agreement relating to the acquisition of Summer Northeast (the “Purchase Agreement”), the Company paid the guarantors monthly interest at the lowest applicable federal rate published by the Internal Revenue Service, on the outstanding balance of such credit facility until the credit facilities secured by the Master Note were replaced by the Company.
F-32
The Company paid the following interest related to the Master Note for the years ended December 31, 2019 and 2018 as follows:
|
| For the year ended December 31, 2019 |
| For the year ended December 31, 2018 |
Master Revolver Note interest expense | $ | - | $ | 3,225 |
NOTE 23 - DEBT TO RELATED PARTIES ASSUMED IN ACQUISITION
As part of the 2017 acquisition of Summer Northeast, the Company assumed $767,677 of related party debt owed by Summer Northeast to members Tom O’Leary and Neil Leibman pursuant to the terms of the Purchase Agreement. Messrs. O’Leary and Leibman are directors of the Company (Mr. Leibman is also an executive officer).
In accordance with the Amended and Restated Limited Liability Company Agreement of Summer Northeast, the amount of any loan or advance by a member shall not be treated as a contribution to the capital of the lending member but shall be considered a debt. The loan bears interest at the rate of the greater of (i) 12% per annum or (ii) the Prime Rate plus 5%, payable monthly with a maturity date of October 31, 2018.
The related party debt in the amount of $767,677 was paid in full by the Company to the related parties Messrs. O’Leary and Leibman on June 1, 2018.
For the years ended December 31, 2019 and 2018, the Company incurred interest on such related party debt assumed as follows:
|
| For the year ended December 31, 2019 |
| For the year ended December 31, 2018 |
Related Party Debt Assumed interest expense | $ | - | $ | 35,057 |
NOTE 24 – RELATED PARTY LOANS
On January 7, 2019, the Company executed a promissory note in the amount of $473,000 to evidence an advance by Tom O’Leary for purposes of short-term financing. The promissory note accrued interest at a rate of 5% per annum based upon 365 days in a year and had a maturity date of July 7, 2019. On February 7, 2019, the Company paid back in full the loan from Mr. O’Leary. As of December 31, 2019, the balance of the loan to Mr. O’Leary was $0 and the loan was paid in full. Mr. O’Leary is a director of the Company.
On January 7, 2019, the Company executed a promissory note in the amount of $25,000 to evidence an advance by Messrs. O’Leary and Neil Leibman for purposes of short-term financing. The promissory note accrued interest at a rate of 5% per annum based upon 365 days in a year and had a maturity date of July 7, 2019. On February 7, 2019, the Company paid back in full the loan from Messrs. O’Leary and Leibman. As of December 31, 2019, the balance of the loan to Messrs. O’Leary and Leibman was $0 and the loan was paid in full. Mr. Leibman is an officer and director of the Company.
On November 8, 2019, the Company executed a promissory note in the amount of $850,000 to evidence an advance by Mr. Leibman for purposes of short-term financing. The promissory note accrued interest at a rate of 5% per annum based upon 365 days in a year and had a maturity date of February 6, 2020. As of December 31, 2019, the balance of the loan from Mr. Leibman was $850,000. On February 6, 2020, the Company amended such promissory note to extend the maturity date of such note to May 7, 2020. All other provisions of the original note remain in full force and effect.
On November 8, 2019, the Company executed a promissory note in the amount of $1,000,000 to evidence an advance by LaRose Holdings LLLP, an entity controlled by Al LaRose, for purposes of short-term financing. Mr. LaRose is a director of the Company. The promissory note accrued interest at a rate of 5% per annum based upon
F-33
365 days in a year and had a maturity date of February 6, 2020. As of December 31, 2019, the balance of the loan from LaRose Holdings LLLP was $1,000,000. On February 6, 2020, the Company amended such promissory note to extend the maturity date of such note to May 7, 2020. All other provisions of the original note remain in full force and effect.
On December 18, 2019, the Company executed a promissory note in the amount of $590,000 to evidence an advance by Mr. Leibman for purposes of short-term financing. The promissory note accrued interest at a rate of 5% per annum based upon 365 days in a year and had a maturity date of March 18, 2020. On December 20, 2019, the Company paid back in full the loan from Mr. Leibman. As of December 31, 2019, the balance of the loan from Mr. Leibman was $0.
On January 3, 2018, the Company executed two separate promissory notes in the amount of $125,000 each for to evidence advance of $250,000 by Mr. O’Leary and Mr. Leibman for purposes of short-term financing. The promissory notes accrued interest at the rate of 5% per annum based upon 365 days a year with a maturity date of July 3, 2018. The loans from Mr. O’Leary and Mr. Leibman were paid in full on June 1, 2018.
On January 8, 2018, the Company entered into a promissory note in the amount of $373,000 for an advance by Mr. Leibman for purposes of short-term financing. The promissory note accrued interest at a rate of 5% per annum based upon 365 days in a year and had a maturity date of July 8, 2018. On March 6, 2018, $200,000 was paid back to Mr. Leibman and on April 16, 2018, the remaining balance of $173,000 was paid. As of December 31, 2018, the balance was $0 and the loan was paid in full.
On January 8, 2018, the Company entered into a promissory note with Pinnacle Power, LLC (“Pinnacle”), in the amount of $80,000 for purposes of short-term financing. Mr. O’Leary and Mr. Leibman hold membership interests in Pinnacle. The promissory note accrued interest at a rate of 5% per annum based upon 365 days a year and had a maturity date of July 8, 2019. On February 22, 2018, $40,000 was repaid to Pinnacle and on March 6, 2018, $40,000 was repaid to Pinnacle. As of December 31, 2018, the balance of the Pinnacle loan was $0 and the loan was paid in full.
The following table summarizes interest paid to related parties during the years ended December 31, 2019 and 2018:
|
| For the Years Ended December 31, | ||
|
| 2019 |
| 2018 |
Related party interest expense for $250,000 loan | $ | - | $ | 5,103 |
Related party interest expense for $373,000 loan |
| - |
| 3,884 |
Related party interest expense for $80,000 loan |
| - |
| 558 |
Related party interest expense for $473,000 loan |
| 2,009 |
| - |
Related party interest expense for $25,000 loan |
| 106 |
| - |
Related party interest expense for $850,000 loan |
| 6,288 |
| - |
Related party interest expense for $1,000,000 loan |
| 7,398 |
| - |
Related party interest expense for $590,000 loan |
| 242 |
| - |
Total | $ | 16,043 | $ | 9,545 |
|
|
|
|
|
NOTE 25 - RELATED PARTY GUARANTORS
On December 18, 2018, four members of the Company’s Board of Directors, Stuart Gaylor, Andrew Bursten, Tom O’Leary and Neil Leibman (Mr. Leibman is also an executive officer) (collectively, the “Guarantors”) guaranteed a single payment note with Comerica Bank (See Note 9) in the amount of $2,900,000. On December 9, 2019, the single payment note was converted to a master revolving note, which is payable in full on demand from Comerica Bank. The Company agreed to pay interest at a rate of 12% for the guarantee and such interest is to be paid with the issuance of the Company’s common stock.
On December 20, 2019, four members of the Company’s Board of Directors, Stuart Gaylor, Andrew Bursten, Tom O’Leary and Neil Leibman (Mr. Leibman is also an executive officer) (collectively, the “Guarantors”) guaranteed a
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single payment note with Comerica Bank (See Note 10) in the amount of $2,100,000. The Company agreed to pay interest at a rate of 12% for the guarantee and such interest is to be paid with the issuance of the Company’s common stock.
The Company accrued interest expense as follows:
|
| For the year ended December 31, 2019 |
| For the year ended December 31, 2018 |
Guarantor interest expense on Comerica revolver note | $ | 167,433 | $ | 12,567 |
Guarantor interest expense on Comerica single note | $ | 8,400 | $ | - |
As of December 31, 2019 and 2018, the Company had accrued interest in the amount of $175,833 and $12,567, respectively, to the Guarantors and had issued a total of 125,600 shares during the year ended December 31, 2019 as payments.
NOTE 26 – OTHER RELATED PARTY TRANSACTIONS
On October 31, 2017, Summer Northeast entered into a sublease agreement with PDS for office space located at 800 Bering Drive, Suite 250, Houston, Texas (See Note 13). PDS is 100% owned by Tom O’Leary who is a member of the Company’s Board of Directors. During the years ended December 31, 2019 and 2018, the following expense was accrued in association with the Summer Northeast sublease:
|
| For the year ended December 31, 2019 |
| For the year ended December 31, 2018 |
Summer Northeast sublease payments | $ | 27,970 | $ | 41,583 |
In January 2018, Mr. Leibman provided aviation transportation and the Company paid $4,000 in fuel costs for purposes of a company off-site management meeting.
On May 17, 2018, the Company disbursed $45,500 to each of Mr. O’Leary and Mr. Leibman for a total of $91,000, which was in accordance with the Membership Interest Purchase Agreement dated November 1, 2017 between the Company and Summer Northeast (formerly REP Energy, LLC).
On June 28, 2018, the Company entered into individual Securities Purchase Agreements and Registration Rights Agreements with four investors for such investors to purchase from the Company a total of 125,000 shares of common stock at a purchase price of $1.50 per share for a total purchase price of $187,500. A member of the Company’s Board of Directors, Andrew Bursten, purchased 85,100 of such shares and his family members purchased 39,900 of such shares.
NOTE 27 - SUMMER ENERGY 401(K) PLAN
In January 2017, the Company adopted a qualified 401(K) Retirement Plan (the “Plan”) whereby eligible employees may elect to save for retirement on a tax-advantaged basis. There are two types of salary deferrals: pre-tax 401(K) deferrals and Roth 401(K) deferrals. Eligible employee participants are automatically enrolled at 3% of compensation unless a participant elects an alternative deferral percentage limited to dollar amount of $19,000 in 2019 or elects not to defer under the Plan. There is no Company match to the Plan.
NOTE 28 - EMPLOYEE STOCK PURCHASE PLAN
Effective May 2017, the Company began offering an Employee Stock Purchase Plan (the “ESPP”) whereby eligible employees may elect to purchase common stock of the Company through a registered broker/dealer. Eligible employees who so elect may authorize payroll deductions for contributions to the ESPP up to a maximum of $25,000 each calendar year. The Company will match 10% of eligible employee contributions up to an aggregate maximum of $24,000 for all ESPP participants (not each individual ESPP participant). The employer match for the
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year ended December 31, 2019 and 2018 was as follows:
|
| For the year ended December 31, 2019 |
| For the year ended December 31, 2018 |
Employee Stock Purchase Plan | $ | 3,023 | $ | 5,208 |
NOTE 29 – EXECUTIVE EMPLOYMENT AGREEMENTS
On June 20, 2019, the Company’s Board of Directors approved a new employment agreement with Angela Hanley (the “Hanley Employment Agreement”) pursuant to which Ms. Hanley will continue to serve as the President of the Company. Ms. Hanley will continue to report to the Board and will have the duties and responsibilities assigned by the Board. Ms. Hanley was originally appointed to the position of President in February 2014. The Hanley Employment Agreement provides for a semi-monthly salary of $4,231. Ms. Hanley will also receive the customary employee benefits paid by Company and will be eligible to receive equity grants from time to time as determined by the Board and the Compensation Committee of the Board. The foregoing is a summary of the Hanley Employment Agreement and is qualified in its entirety by the actual terms of such agreement, a copy of which was included as Exhibit 10.5 to our Quarterly Report on Form 10-Q filed with the SEC on August 14, 2019.
Effective August 1, 2019, the Company entered into an employment agreement with Kelli Mitchell (the “Mitchell Employment Agreement”) pursuant to which Ms. Mitchell will serve as the Chief Operating Officer of the Company. The Mitchell Employment Agreement provides for an annual base salary of $250,000 and for Ms. Mitchell to be granted an option to purchase 150,000 shares of the Company’s common stock with a strike price equal to $1.50 per share, which shall vest in equal fifty percent (50%) portions on the first (1st) and second (2nd) anniversary of the effective date of the Mitchell Employment Agreement. Ms. Mitchell will be eligible to receive equity grants from time to time based on metrics determined by the Board. The foregoing is a summary of the Mitchell Employment Agreement and is qualified in its entirety by the actual terms of such agreement, a copy of which was included as Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on August 6, 2019.
On August 27, 2019, the Company entered into a First Amendment to Employment Agreement with Travis Andrews, Chief Supply Officer (the “Andrews Amendment”). The Andrews Amendment amended Section 1(a) of Mr. Andrews’ original employment agreement (the “Andrews Employment Agreement”) by extending the term thereof for an additional term of two years, with the new two-year term commencing effective July 1, 2019. The Andrews Amendment provides that Mr. Andrews’ annual base salary will be $300,000. Pursuant to the Andrews Amendment, the Company agreed to grant Mr. Andrews an option to purchase 150,000 shares of the Company’s common stock at an exercise price equal to the greater of (i) $1.50 per share and (ii) the price per share of common stock as reported on the OTC Markets on the date such option is granted, with 75,000 shares vesting on July 1, 2020 and the remaining 75,000 shares vesting on June 30, 2021. The foregoing is a summary of the Andrews Employment Agreement and Andrews Amendment and is qualified in its entirety by the actual terms of such agreements, copies of which are included as Exhibits 10.1 and 10.2, respectively, to our Quarterly Report on Form 10-Q filed with the SEC on November 14, 2019.
On September 5, 2019, the Company entered into a Second Amendment to Employment Agreement with each of Jaleea George, Secretary and Chief Financial Officer (the “George Amendment”), and Neil Leibman, Chief Executive Officer (the “Leibman Amendment”; together with the George Amendment, the “Amendments”) (Ms. George and Mr. Leibman, together, the “Executives”). The Amendments amended Section 1(a) of each Executives’ respective employment agreements by extending the terms thereof for an additional term of two years, with the new two-year term commencing effective January 1, 2019. The George Amendment provides that Ms. George’s annual base salary will be increased to $200,000. The Amendments also amended Exhibit A to each of the employment agreements pursuant to which the Executives were granted additional equity incentives in the form of options to purchase common stock of the Company. Pursuant to the Leibman Amendment, the Company agreed to grant Mr. Leibman an option to purchase 150,000 shares of the Company’s common stock at an exercise price equal to the greater of (i) $1.50 per share and (ii) the price per share of common stock as reported on the OTC Markets on the date such option is granted, with 75,000 shares vesting on January 1, 2020 and the remaining 75,000 shares vesting on January 1, 2021. Pursuant to the George Amendment, the Company agreed to grant Ms. George an option to purchase 170,000 shares of the Company’s common stock at an exercise price equal to the greater of (i) $1.50 per
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share and (ii) the price per share of common stock as reported on the OTC Markets on the date such option is granted, with 85,000 shares vesting on January 1, 2020 and the remaining 85,000 shares vesting on January 1, 2021. Pursuant to the Amendments, the Executives are also entitled to additional equity compensation in the form of options to purchase common stock of the Company in the event the Company achieves certain performance benchmarks. All other material provisions of the employment agreements remain in full force and effect. The foregoing is a summary of the George Amendment and the Leibman Amendment and is qualified in its entirety by the actual terms of such agreements, copies of which are included as Exhibits 10.3 and 10.4, respectively, to our Quarterly Report on Form 10-Q filed with the SEC on November 14, 2019.
NOTE 30 - CONSULTING AGREEMENT
On May 20, 2019, the Company entered into a two-year consulting agreement whereby the consultant agreed to provide certain corporate and strategic business consulting services to the Company and its Board of Directors.
As compensation for these consulting services, the Company agreed to pay the consultant a fee of $200,000 and grant a five-year warrant to purchase up to 80,000 shares of the Company’s common stock at an exercise price of $1.50 per share. The fair value of the warrant to purchase 80,000 shares was $143,731 determined using the Black-Scholes option-pricing model (See Note 19). The total consulting fee of $343,731 for this agreement is included in operating expenses on the consolidated statement of operations.
NOTE 31 - SUBSEQUENT EVENTS
On March 11, 2020, the World Health Organization declared the novel strain of coronavirus (COVID-19) a global pandemic and recommended containment and mitigation measures worldwide. The Company is monitoring this closely, and although operations have not been materially affected by the coronavirus outbreak to date, the ultimate severity of the outbreak is uncertain. Operations of the Company are ongoing as the delivery of electricity to customers is considered an essential business. Further the uncertain nature of its spread globally may impact our business operations resulting from quarantines of employees, customers, and third-party service providers. At this time, the Company is unable to estimate the impact of this event on its operations.
On March 12, 2020, Summer LLC entered into a Loan Agreement (the “Agreement”) with Digital Lending Services US Corp., a Delaware corporation (“Digital Lending”). Pursuant to the Agreement, Digital Lending agreed to provide a revolving loan (the “Loan”) to Summer LLC, and Summer LLC agreed to borrow and repay funds loaned by Digital Lending. The amount of available credit under the Loan is Ten Million Dollars ($10,000,000). The Loan is revolving in nature and is evidenced by a Revolving Promissory Note (the “Note”) and is guaranteed by a Guaranty (the “Guaranty”) by the Company. The maturity date of the Loan is March 11, 2023. The Loan bears interest at a rate of 12.75% per annum, with monthly installment payments of accrued interest only. The principal balance of the Loan may be prepaid at any time at the option of the Company, subject to certain prepayment charges. Simultaneous with the closing of the Loan, the Company paid off all outstanding debt due and owing to Blue Water (Note 8). As a result, the loan agreement and related credit facility with Blue Water was terminated, along with Blue Water’s security interest in and to the assets of the Borrower. In connection with the Agreement, Summer LLC and Digital Lending also entered into a Security Agreement (the “Security Agreement”) and the Company issued a Common Stock Purchase Warrant in favor of Digital Lending. The foregoing summaries of the terms and conditions of the Agreement, the Note, the Security Agreement, and the Guaranty do not purport to be complete, and are qualified in their entirety by reference to the full text of the Agreement, the Note, the Security Agreement and the Guaranty, copies of which are filed as Exhibits 10.1 through 10.4, respectively, to our Current Report on Form 8-K filed with the SEC on March 18, 2020.
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EXHIBIT INDEX
Exhibit No. | Description
| |
2.1 | ||
3.1 | ||
3.2 | ||
3.3 | ||
4.1 | ||
10.1 | ||
10.2 | ||
10.3 | ||
10.4 | ||
10.5 | ||
10.6 | ||
10.7 | ||
10.8 | ||
10.9 | ||
10.10 | ||
10.11 | ||
10.12 | |
10.13 | First Amendment to Executive Employment Agreement between Summer Energy Holdings, Inc. and Neil Leibman, dated October 20, 2017. |
10.14 | First Amendment to Executive Employment Agreement between Summer Energy Holdings, Inc. and Jaleea George, dated October 20, 2017. |
10.15 | Sublease Agreement between Summer Energy Northeast, LLC (formerly REP Energy, LLC) and PDS Management Group, LLC dated October 31, 2017. |
10.16 | |
10.17 | |
10.18 | |
10.19 | |
10.20 | |
10.21 | |
10.22 | |
10.23 | |
10.24 |
10.25 | |
10.26 | |
10.27 | |
10.28 | |
10.29 | |
14.1 | |
16.1 | |
16.2 | |
21.1 | Schedule of Subsidiaries. † |
23.1 | Consent of Whitley Penn LLP |
24 | |
31.1 | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a). |
31.2 | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a). |
32.1 | |
99.1 | |
99.2 | |
99.3 | |
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** |
* Each of these Exhibits constitutes a management contract, compensatory plan or arrangement.
**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.
†Filed herewith.
+Portions of this exhibit have been omitted and filed separately with the SEC pursuant to an order granting confidential treatment.
ITEM 16.FORM 10-K SUMMARY
Registrants may voluntarily include a summary of information required by Form 10-K under this Item 16. The Company has elected not to include such summary information.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) with the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.
President, Chief Executive Officer and
By:/s/ Jaleea P. George
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned directors and officers of Summer Energy Holdings, Inc., do hereby constitute and appoint each of Neil M. Leibman and Jaleea P. George as our true and lawful attorneys-in-fact and agents with power of substitution, to do any and all acts and things in our name and behalf in our capacities as directors and officers and to execute any and all instruments for us and in our names in the capacities indicated below, which said attorneys-in-fact and agents, or either of them, may deem necessary or advisable to enable said corporation to comply with the Securities and Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Annual Report on Form 10-K, including specifically but without limitation, power and authority to sign for us or any of us in our names in the capacities indicated below, any and all amendments (including post-effective amendments) hereto; and we do hereby ratify and confirm all that said attorney-in-fact and agent, shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signature | Title | Date |
/s/ Neil M. Leibman Neil M. Leibman | Chief Executive Officer
| March 27, 2020 |
/s/ Jaleea P. George Jaleea P. George
| Secretary, Treasurer, Chief Financial Officer
| March 27, 2020 |
/s/ Stuart C. Gaylor Stuart C. Gaylor
|
Director (Non-executive Chairman of the Board)
| March 27, 2020 |
/s/ Tom D. O’Leary Tom D. O’Leary |
Director
| March 27, 2020
|
/s/ Jefferey Mace Meeks Jefferey Mace Meeks |
| March 27, 2020 |
/s/ Albert LaRose, Jr. Albert LaRose, Jr.
|
Director | March 27, 2020
|
/s/ Andrew Bursten Andrew Bursten
|
| March 27, 2020
|
/s/ James P. Stapleton James P. Stapleton |
| March 27, 2020 |