Company Quick10K Filing
Summer Energy
Price2.00 EPS-0
Shares32 P/E-11
MCap63 P/FCF-26
Net Debt6 EBIT-4
TEV69 TEV/EBIT-16
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-05-20
10-K 2019-12-31 Filed 2020-03-27
10-Q 2019-09-30 Filed 2019-11-14
10-Q 2019-06-30 Filed 2019-08-14
10-Q 2019-03-31 Filed 2019-05-15
10-K 2018-12-31 Filed 2019-04-11
10-Q 2018-09-30 Filed 2018-11-14
10-Q 2018-06-30 Filed 2018-08-14
10-Q 2018-03-31 Filed 2018-05-15
10-K 2017-12-31 Filed 2018-03-29
10-Q 2017-09-30 Filed 2017-11-14
10-Q 2017-06-30 Filed 2017-08-11
10-Q 2017-03-31 Filed 2017-05-15
10-K 2016-12-31 Filed 2017-03-30
10-Q 2016-09-30 Filed 2016-11-14
10-Q 2016-06-30 Filed 2016-08-11
10-Q 2016-03-31 Filed 2016-05-12
10-K 2015-12-31 Filed 2016-03-30
10-Q 2015-09-30 Filed 2015-11-12
10-Q 2015-06-30 Filed 2015-08-12
10-Q 2015-03-31 Filed 2015-05-15
10-K 2014-12-31 Filed 2015-03-31
10-Q 2014-09-30 Filed 2014-11-14
10-Q 2014-06-30 Filed 2014-08-14
10-Q 2014-03-31 Filed 2014-05-15
10-K 2013-12-31 Filed 2014-04-15
10-Q 2013-09-30 Filed 2013-11-14
10-Q 2013-06-30 Filed 2013-08-14
10-Q 2013-03-31 Filed 2013-05-15
10-K 2012-12-31 Filed 2013-03-28
10-Q 2012-09-30 Filed 2012-11-14
10-Q 2012-06-30 Filed 2012-08-14
10-Q 2012-03-31 Filed 2012-05-15
10-K 2011-12-31 Filed 2012-03-26
10-Q 2011-09-30 Filed 2011-11-14
10-Q 2011-06-30 Filed 2011-08-15
10-Q 2011-03-31 Filed 2011-05-16
10-K 2010-12-31 Filed 2011-03-31
10-Q 2010-09-30 Filed 2010-11-12
10-Q 2010-06-30 Filed 2010-08-20
10-Q 2010-03-31 Filed 2010-05-12
10-K 2009-12-31 Filed 2010-03-31
8-K 2020-06-16
8-K 2020-04-20
8-K 2020-03-12
8-K 2019-12-20
8-K 2019-09-05
8-K 2019-06-19
8-K 2019-06-19
8-K 2019-06-07
8-K 2019-02-08
8-K 2018-12-18
8-K 2018-06-27
8-K 2018-06-08
8-K 2018-05-01
8-K 2018-04-13
8-K 2018-02-20

SUME 10Q Quarterly Report

Part I - Financial Information3
Item 1. Financial Statements3
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations24
Item 3. Quantitative and Qualitative Disclosures About Market Risk29
Item 4. Controls and Procedures29
Part II - Other Information30
Item 1A. Risk Factors30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds30
Item 5. Other Information31
Item 6. Exhibits32
Part I - Financial Information
Item 1. Financial Statements
Note 1 - Organization
Note 2 - Significant Accounting Policies
Note 3 - Revenue
Note 4 - Letters of Credit and Cash Deposits
Note 5 - Surety Bonds
Note 6 - Financing From First Insurance Funding
Note 7 - Financing From Digital Lending Services Us Corp.
Note 8 - Financing From Blue Water Capital Funding Llc
Note 9 - Comerica Bank Master Revolving Note
Note 10 - Comerica Bank Single Payment Note
Note 11 - Wholesale Power Purchase Agreement with Edf
Note 12 - Lease Liabilities, Commitments and Contingencies
Note 13 - Long - Term Obligations
Note 14 - 2012 Stock Option and Stock Award Plan
Note 15 - 2015 Stock Option and Stock Award Plan
Note 16 - 2018 Stock Option and Stock Award Plan
Note 17 - Nonqualified Stock Options Granted Outside of A Stock Option or Stock Award Plan
Note 18 - Private Placement Offerings
Note 19 - Warrants
Note 20 - Related Party Lines of Credit
Note 21 - Related Party Promissory Notes
Note 22 - Related Party Guarantors
Note 23 - Other Related Party Transactions
Note 24 - Summer Energy 401(K) Plan
Note 26 - Coronavirus (Covid - 19)
Note 27 - Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 5. Other Information
Item 6. Exhibits
EX-10.1 sume_ex10z1.htm
EX-31.1 sume_ex31z1.htm
EX-31.2 sume_ex31z2.htm
EX-32.1 sume_ex32z1.htm

Summer Energy Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
655138251202012201420172020
Assets, Equity
554229163-102017201820192020
Rev, G Profit, Net Income
10.07.24.31.5-1.4-4.22012201420172020
Ops, Inv, Fin

10-Q 1 sume_10q.htm SUMMER ENERGY HOLDINGS, INC. 10-Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2020

 

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______ to _______

 

Commission file number 001-35496

 

 

 

Summer Energy Holdings, Inc.

(Exact name of registrant as specified in charter)

 

 

Nevada

20-2722022

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

 

5847 San Felipe Street, Suite 3700, Houston, Texas

77057

(Address of principal executive offices)

(Zip Code)

 

 

(713) 375-2790

(Issuer’s telephone number, including area code)

 

 

N/A

 

(Former name, former address, and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ  No o.

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes þ No o.

 

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

 

Large accelerated filer o

Accelerated filer                   o

Non-accelerated filer   þ

Smaller reporting company  þ

Emerging growth company o

 

Indicate by check mark whether the registrant is a shell company (as defined by Section 12b-2 of the Exchange Act). Yes oNo þ.  

 

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 number of shares of the issuer’s common stock, $0.001 par value, outstanding as of May 15, 2020 was 31,562,486.


1



Summer Energy Holdings, Inc.

FORM 10-Q

 

 

PART I – FINANCIAL INFORMATION3 

ITEM 1.  FINANCIAL STATEMENTS3 

CONDENSED CONSOLIDATED BALANCE SHEETS3 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS4 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY5 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS6 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS7 

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS24 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK29 

ITEM 4.  CONTROLS AND PROCEDURES29 

PART II – OTHER INFORMATION30 

ITEM 1A.  RISK FACTORS30 

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS30 

ITEM 5.   OTHER INFORMATION31 

ITEM 6.  EXHIBITS32 

SIGNATURES33 


2



 

PART I – FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

SUMMER ENERGY HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

 

 

March 31, 2020

 

December 31, 2019

ASSETS

 

 

 

 

 Current assets:

 

 

 

 

 Cash

$

872,086

$

814,360

 Restricted cash

 

2,772,823

 

3,197,708

 Accounts receivable, net

 

43,001,479

 

41,847,949

 Prepaid and other current assets

 

4,446,884

 

3,612,607

 Total current assets

 

51,093,272

 

49,472,624

 

 

 

 

 

 Property and equipment, net

 

61,532

 

58,418

 

 

 

 

 

 Deferred financing cost, net

 

507,768

 

3,125

 

 

 

 

 

 Operating lease right-of-use assets, net

 

940,339

 

979,185

 

 

 

 

 

 Intangible asset, net

 

689,094

 

984,420

 

 

 

 

 

 Total assets

$

53,292,005

$

51,497,772

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 Current liabilities:

 

 

 

 

 Accounts payable

$

1,553,242

$

1,496,461

 Accrued wholesale power purchased

 

15,043,859

 

17,538,120

 Accrued transportation and distribution charges

 

6,284,797

 

5,320,851

 Accrued expenses

 

5,477,485

 

4,809,533

 Related party loans

 

                               -   

 

1,850,000

 Current-portion operating lease obligation

 

142,570

 

144,902

 Current-portion of obligations

 

5,000,000

 

5,038,397

 Total current liabilities

 

33,501,953

 

36,198,264

 

 

 

 

 

Long-term liabilities:

 

 

 

 

 Long-term obligations, net of current portion

 

15,158,775

 

10,265,289

 

 

 

 

 

 Total liabilities

 

48,660,728

 

46,463,553

 

 

 

 

 

 Commitments and contingencies

 

 

 

 

 

 

 

 

 

 Stockholders’ equity

 

 

 

 

Common stock - $.001 par value, 100,000,000 shares authorized, 31,562,486 and 31,532,486 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively

 

31,562

 

31,531

  Subscription receivable

 

(52,000)

 

(52,000)

  Additional paid-in capital

 

31,475,796

 

30,879,055

  Accumulated deficit

 

(26,824,081)

 

(25,824,367)

  Total stockholders’ equity

 

4,631,277

 

5,034,219

 

 

 

 

 

Total liabilities and stockholders’ equity

$

53,292,005

$

51,497,772

 

 

 

 

 

 

See accompanying notes to the condensed consolidated financial statements.


3



SUMMER ENERGY HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

 

 

For the Three Months Ended March 31,

 

 

2020

 

2019

 

 

 

 

 

Revenue

$

38,866,990

$

34,825,869

 

 

 

 

 

Cost of goods sold

 

 

 

 

Power purchases and balancing/ancillary

 

17,102,628

 

15,370,654

Transportation and distribution providers charge

 

16,185,720

 

13,649,161

   

 

 

 

 

Total cost of goods sold

 

33,288,348

 

29,019,815

   

 

 

 

 

Gross profit

 

5,578,642

 

5,806,054

   

 

 

 

 

Operating expenses

 

5,835,041

 

5,273,766

 

 

 

 

 

Operating income (loss)

 

(256,399)

 

532,288

   

 

 

 

 

Other expense

 

 

 

 

Financing costs

 

(17,633)

 

(1,562)

Interest expense, net

 

(725,682)

 

(418,472)

Total other expense

 

(743,315)

 

(420,034)

   

 

 

 

 

Net income (loss) before income taxes

 

(999,714)

 

112,254

 

 

 

 

 

Income tax expense

 

                           -   

 

                           -   

   

 

 

 

 

Net income (loss) applicable to common shareholders

$

(999,714)

$

112,254

   

 

 

 

 

Net income (loss) per common share:

 

 

 

 

Basic

$

(0.03)

$

0.00

Dilutive

$

(0.03)

$

0.00

Weighted average number of shares

 

 

 

 

Basic

 

31,544,354

 

29,221,389

Dilutive

 

31,544,354

 

30,206,867

 

 

 

 

 

 

 

See accompanying notes to the condensed consolidated financial statements.


4



SUMMER ENERGY HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

 

 

Common Stock

 

Subscription

 

Additional paid in

 

Accumulated

 

 

 

Shares

 

Amount

 

Receivable

 

capital

 

Deficit

 

Total

Balance at December 31, 2019

31,532,486

$

31,531

$

(52,000)

$

30,879,055

$

(25,824,367)

$

5,034,219

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of warrants

                   -   

 

            -   

 

                     -   

 

245,352

 

                       -   

 

$245,352

 

 

 

 

 

 

 

 

 

 

 

 

Vesting of stock options and restricted shares associated with the 2015 Stock Option and Award Plan

                   -   

 

            -   

 

                     -   

 

10,490

 

                       -   

 

10,490

 

 

 

 

 

 

 

 

 

 

 

 

Vesting of stock options and restricted shares associated with the 2018 Stock Option and Award Plan

                   -   

 

            -   

 

                     -   

 

238,170

 

                       -   

 

238,170

 

 

 

 

 

 

 

 

 

 

 

 

Vesting of stock options and restricted shares outside of stock option and award plans

                   -   

 

            -   

 

                     -   

 

57,760

 

                       -   

 

57,760

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock associated with a private placement offering

         30,000

 

            31

 

                     -   

 

44,969

 

                       -   

 

45,000

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

                   -   

 

            -   

 

                     -   

 

                              -   

 

(999,714)

 

(999,714)

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2020

31,562,486

$

31,562

$

(52,000)

$

31,475,796

$

(26,824,081)

$

4,631,277

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Subscription

 

Additional paid in

 

Accumulated

 

 

 

Shares

 

Amount

 

Receivable

 

capital

 

Deficit

 

Total

Balance at December 31, 2018

27,480,833

$

27,480

$

(52,000)

$

23,357,951

$

(15,091,278)

$

$8,242,153

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of warrants

-

 

-

 

-

 

104,947

 

-

 

104,947

 

 

 

 

 

 

 

 

 

 

 

 

Vesting of stock options and restricted shares associated with the 2015 Stock Option and Award Plan

                   -   

 

            -   

 

                     -   

 

16,433

 

                       -   

 

16,433

 

 

 

 

 

 

 

 

 

 

 

 

Vesting of stock options and restricted shares associated with the 2018 Stock Option and Award Plan

                   -   

 

            -   

 

                     -   

 

137,951

 

                       -   

 

137,951

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock associated with a private placement offering

    3,180,000

 

      3,180

 

                     -   

 

4,766,820

 

                       -   

 

4,770,000

 

 

 

 

 

 

 

 

 

 

 

 

Net income

                   -   

 

            -   

 

                     -   

 

                              -   

 

112,254

 

112,254

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2019

30,660,833

$

30,660

$

(52,000)

$

28,384,102

$

(14,979,024)

$

13,383,738

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to the condensed consolidated financial statements.


5



SUMMER ENERGY HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

 

For the Three Months Ended March 31,

 

 

2020

 

2019

Cash Flows from Operating Activities

 

 

 

 

   Net income (loss)

$

                  (999,714)

$

                    112,254

   Adjustments to reconcile net income (loss) to net cash used in operating activities:

 

 

 

 

   Non-cash deferred financing costs

 

                      17,633

 

                        1,563

   Broker warrant compensation expense

 

                             15

 

                    104,947

   Stock compensation expense

 

                    306,420

 

                    154,384

   Depreciation of property and equipment

 

                        8,302

 

                      11,110

   Non-cash lease costs

 

                      38,846

 

                      76,324

   Amortization of intangible asset

 

                    295,326

 

                    295,326

   Bad debt expense

 

                      27,129

 

                    141,778

   Changes in operating assets and liabilities:

 

 

 

 

     Accounts receivable

 

               (1,180,659)

 

                  (856,482)

     Prepaid and other current assets

 

                  (834,277)

 

                    328,708

     Accounts payable

 

                      56,781

 

               (1,981,853)

     Accrued wholesale power purchased

 

               (2,494,261)

 

               (2,234,572)

     Accrued transportation and distribution charges

 

                    963,946

 

                    160,095

     Accrued expenses and other

 

                    629,106

 

                  (428,769)

Net cash used in operating activities

 

               (3,165,407)

 

(4,115,187)

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

    Purchase of property and equipment

 

                    (11,416)

 

                             -   

Net cash used in investing activities

 

                    (11,416)

 

                             -   

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

   Deferred financing costs

 

(276,939)

 

                             -   

   Repayment of financing from Blue Water Capital Funding, LLC

 

               (4,920,000)

 

                             -   

   Advances from wholesale provider for collateral support

 

850,000

 

                    963,000

   Proceeds from financing by Digital Lending Services US Corp.

 

9,000,000

 

                             -   

   Payments on Comerica Bank Revolving Note

 

                             -   

 

               (1,300,000)

   Payments on financing of directors and officer's insurance policy

 

                    (38,397)

 

                             -   

   Proceeds from related party promissory notes

 

600,000

 

                    498,000

   Repayment of related party promissory notes

 

               (2,450,000)

 

                  (498,000)

   Proceeds from issuance of common shares in a private placement

 

                      45,000

 

                 4,770,000

               Net cash provided by financing activities

 

                 2,809,664

 

                 4,433,000

 

 

 

 

 

Net Increase (Decrease) in Cash and Restricted Cash

 

                  (367,159)

 

                    317,813

 

 

 

 

 

Cash and Restricted Cash at Beginning of Period

 

                 4,012,068

 

                 3,854,885

 

 

 

 

 

Cash and Restricted Cash at End of Period

$

                 3,644,909

$

4,172,698

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

Income taxes paid

$

                             -   

$

                             -   

Interest paid in cash

$

                    678,785

$

273,659

 

 

 

 

 

Non-Cash Investing and Financing Activities

 

 

 

 

 Operating lease right of use assumed through operating lease obligation

$

                             -   

$

                 1,265,563

 Deferred financing costs associated with issuance of warrant

$

                    245,337

$

                             -   

 

 

 

 

 

 

 

 

See accompanying notes to the condensed consolidated financial statements.


6



SUMMER ENERGY HOLDINGS, INC.

AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 1 - ORGANIZATION

 

The condensed 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.

 

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

 

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements pursuant to the rules and regulations of the Securities and Exchange Commission.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.  These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, as filed with the Securities and Exchange Commission (“SEC”) on March 27, 2020.

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amount of revenues and expenses during the reporting period.  Actual results may differ from these estimates.

 

Uses and Sources of Liquidity

 

The condensed 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 condensed consolidated financial statements.

 

For the three months ended March 31, 2020, the Company incurred a net loss of $999,714 compared to net income in the amount of $112,254 during the three months ended March 31, 2019.   For the three months ended March 31, 2020 and 2019, the Company used cash in continuing operations of $3.2 million and $4.1 million, respectively.  The Company’s operations have been financed principally from electricity revenues, net proceeds of $4,080,000 from outside debt and equity financing during the three months ended March 31, 2020 as well as from capital raised under private placement offerings totaling $45,000 and $4,770,000 during the quarters ended March 31, 2020 and 2019, respectively. 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.


7



Estimating liquidity requirements is highly dependent on then-current market conditions, including impacts of the COVID-19 pandemic, weather events, forward prices for electricity, market volatility and our then existing capital structure and requirements.

 

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.  On April 20, 2020, the Company received $2,342,300 in loan funding from the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”), established pursuant to the recently enacted Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) operating as an essential business throughout the pandemic.  Management has concluded that its existing capital resources and availability, proceeds from a 2020 offering and outside lending (including the PPP loan) will be sufficient to fund operations through the third 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, New 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.

 

 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 March 31, 2020 or December 31, 2019.

 

Restricted cash in the amount of $2,772,823 as of March 31, 2020 and $3,197,708 as of December 31, 2019 represents funds held in escrow for customer deposits, funds held in a controlled account by the wholesale provider (Note 11) and funds securing irrevocable stand-by letters of credit (Note 4).  

 

 

 

March 31, 2020

 

December 31, 2019

Cash

$

872,086

$

814,360

Restricted cash:

 

 

 

 

 Escrow for customer deposits

 

518,731

 

511,461

 Funds securing letters of credit

 

750,000

 

750,000

 Funds controlled by wholesale provider

 

1,504,092

 

1,936,247

 Total restricted cash

 

2,772,823

 

3,197,708

 

 

 

 

 

Total cash and restricted cash

$

3,644,909

$

4,012,068


8



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 excludes share equivalents, because their inclusion would be anti-dilutive. 

 

For the three months ended March 31, 2020, the Company had potentially dilutive securities totaling approximately 307,783 and

the weighted average number of shares outstanding for the three months ended March 31, 2020 excludes share equivalents, because their inclusion would be anti-dilutive.   For the three months ended March 31, 2019, the net income amount used to calculate both basic and diluted net income per share was the same. The 985,478 weighted average share difference between basic and diluted was due to dilutive stock options and stock warrants.

 

 Recent Pronouncements 

 

New Accounting Standards Recently Adopted 

 

In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). ASU 2016-13 requires entities to use a current expected credit loss ("CECL") model, which is a new impairment model based on expected losses rather than incurred losses on financial assets, including trade accounts receivables. The model requires financial assets measured at amortized cost to be presented at the net amount expected to be collected. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We adopted ASU 2016-13 and the related amendments effective January 1, 2020, and there was no material impact to our condensed consolidated financial statements.

 

Standards Not Yet Adopted 

 

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.

 

NOTE 3 - REVENUE

 

The table below represents the Company’s reportable revenues for the three months ended March 31, 2020 and 2019, respectively, from customers, net of respective provisions for refund:

 

 

 

For the Three Months Ended March 31,

 

 

2020

 

2019

Electricity Revenues from Contracts with Customers

 

 

 

 

ERCOT Market

$

35,261,243

$

30,802,698

ERCOT Pre-paid Market

 

1,446,777

 

1,213,790

ISO New England Market

 

1,107,278

 

1,924,411

PJM Market

 

189,435

 

                             -   

Total Electricity Revenues from Contracts with Customers

 

38,004,733

 

33,940,899

Other Revenues:

 

 

 

 

Fees Revenue

 

862,257

 

884,970

 

 

 

 

 

Total Revenues:

$

38,866,990

$

34,825,869

 

 

 

 

 


9



Presented in the following table are the components of accounts receivable and accrued revenue:

 

 

 

March 31, 2020

 

December 31, 2019

Accounts receivable from customers

 

 

 

 

ERCOT Market

$

9,200,916

$

9,041,871

ISO New England Market

 

179,900

 

257,942

PJM Market

 

69,351

 

11,244

Total accounts receivable from customers

 

9,450,167

 

9,311,057

 

 

 

 

 

Accrued revenue from customers

 

 

 

 

ERCOT Market

 

33,716,508

 

32,916,970

ISO New England Market

 

675,784

 

788,395

PJM Market

 

41,568

 

15,088

Total accrued revenue with customers

 

34,433,860

 

33,720,453

 

 

 

 

 

Allowance for doubtful accounts

 

(882,548)

 

(1,183,561)

 

 

 

 

 

Total accounts receivable and accrued revenue

$

43,001,479

$

41,847,949

 

 

 

 

 

 

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.

 

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

 

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.

 

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 kWh in effect at the time.  At the end of each calendar


10



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 March 31, 2020 and December 31, 2019 were estimated at $33,716,508 and $32,916,970, 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 March 31, 2020 and December 31, 2019 were estimated at $675,784 and $788,395, 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 March 31, 2020 and December 31, 2019 were estimated at $41,568 and $15,088, respectively.

 

Prior to January 1, 2020, accounts receivable were recorded at cost less an allowance for doubtful accounts.  The Company, in the Texas market, maintained an allowance for uncollectible accounts receivable for estimated losses resulting from the failure or inability of our customers to make required payments.  Within the ISO New England and the PJM markets, the local utility companies within the state of operation, purchase the Company’s billed receivables at a statutory published discount rate without recourse; therefore no allowance for doubtful accounts was recorded for these markets.  The allowance for doubtful accounts was $1,183,561 at December 31, 2019.

 

Subsequent to January 1, 2020, the Company’s accounts receivable are recorded at cost less an allowance for credit losses.  We estimate losses on receivables at the reporting date based on expected losses resulting from the inability of our customers to make required payments, including our historical experience of actual losses and the aging of such receivables. These receivables have been pooled by market including the Texas market, the ISO New England market, and PJM market, because the receivables from each market share risk characteristics.  Based on known information we may also establish specific reserves for customers in an adverse financial condition or adjust our expectations of changes in conditions that may impact the collectability of outstanding receivables.  Receivables past due over 90 days are considered delinquent and are reviewed individually for collectability.  After all means of collection have been exhausted, delinquent receivables are written-off.  The allowance for credit losses at March 31, 2020 was $882,548.

 

NOTE 4 - LETTERS OF CREDIT AND CASH DEPOSITS

 

As of March 31, 2020 and December 31, 2019, Summer LLC had no outstanding secured irrevocable stand-by letters of credit.  As of March 31, 2020 and December 31, 2019, the cash deposits held by various local utilities in the ERCOT market totaled at $1,025,525 and $1,004,059, respectively.

 

As of March 31, 2020 and December 31, 2019, 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 March 31, 2020 and December 31, 2019, Summer Northeast had cash collateral posted with ISO New England in the amount of $1,392,066 and $1,387,181, respectively.

 

As of March 31, 2020 and December 31, 2019, Summer Midwest had no secured irrevocable stand-by letters of credit.  As of March 31, 2020 and December 31, 2019, Summer Midwest had cash collateral held by various local utilities in the PJM market totaling $1,863,000 and $713,000, respectively.

 

As of March 31, 2020, none of the letters of credit issued on behalf of the Company were drawn upon.

 

NOTE 5 - SURETY BONDS

 

As of March 31, 2020, 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.   Both bonds are secured with $375,000 in cash held by the surety bond company.


11



NOTE 6 - 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 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 6.450%.

 

At March 31, 2020 and December 31, 2019, the outstanding balance was $0 and $38,397, respectively.   Interest expense for the three months ended March 31, 2020 was as follows:

 

 

 

For the Three Months Ended March 31,

 

 

2020

 

2019

First Insurance Funding interest expense

$

1,365

$

                                -   

 

NOTE 7 – FINANCING FROM DIGITAL LENDING SERVICES US CORP.

 

On March 12, 2020, Summer LLC (the “Borrower”) 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 the Borrower, and the Borrower agreed to borrow and repay funds loaned by Digital Lending.  

 

The amount of available credit under the Loan is $10,000,000.  The Loan is revolving in nature and is evidenced by a Revolving Promissory Note (the “Note”).  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 Borrower, subject to certain prepayment charges.

 

The Loan was used by the Company to repay indebtedness owed to Blue Water (Note 8) and additional indebtedness, as well as for working capital and other general corporate purposes

 

In connection with the Agreement, the Borrower made certain customary representations and warranties, and agreed that while the Loan amount remains outstanding, it would not take certain actions, including that it will not incur certain debts (as defined in the Agreement); create, assume, or suffer to exist any lien on any property or asset of the Borrower, except those set forth in and allowed by the Agreement; consolidate or merge with any other entity; or sell, lease, or transfer all or substantially all of the assets of the Borrower. Also, in connection with the Agreement, the Borrower made certain affirmative and negative covenants, and agreed to designate a representative of Digital Lending to attend the Company’s board of directors’ meetings in a non-voting, observer capacity. As of March 31, 2020, Summer LLC was in compliance with the covenants of the Agreement.

 

In connection with the Agreement, the Borrower and Digital Lending also entered into a Security Agreement (the “Security Agreement”), and Summer Energy Holdings, Inc. executed a Guaranty (the “Guaranty”) and issued a Common Stock Purchase Warrant (“Warrant”) in favor of Digital Lending.

 

Security Agreement

 

Pursuant to the Security Agreement, the Borrower granted to Digital Lending a second position security interest in and to the Borrower’s collateral, as more fully defined in the Security Agreement, and which includes receivables, equipment, inventory, personal property, other intangibles, and proceeds from any of these, to secure the Borrower’s payment of its obligations under the Loan.  The security interest granted to Digital Lending is subordinate to a security interest granted to EDF Energy Services, LLC (“EDF”) pursuant to an Amended and Restated Energy Services Agreement dated June 19, 2019, as amended (Note 11).

 

Guaranty

 

Pursuant to the Guaranty, the Company agreed to guaranty the Borrower’s obligations under the Agreement and Note.   

 

Warrant

 

In connection with the Agreement and the Loan, the Company agreed to issue to Digital Lending a Warrant (Note 19).  Pursuant to the Warrant, Digital Lending may purchase up to 250,000 shares of the Company’s common stock.  The Warrant has a term of five (5) years, has an exercise price of $1.50 per share, and is subject to adjustment as set forth in the Warrant.  The Warrant also contains a cashless or net exercise provision, pursuant to which the holder of the Warrant may elect to convert all or a portion of the Warrant without the payment of additional consideration, by receiving a net number of shares calculated pursuant to a formula set forth in the Warrant.

 


12



As of March 31, 2020, the outstanding balance of the Digital Lending loan was $9,000,000 and the accrued interest for the periods ended March 31, 2020 and 2019 was as follows:

 

 

 

For the Three Months Ended March 31,

 

 

2020

 

2019

Digital Lending interest expense

$

63,750

$

                                -   

 

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, each of which is attached as an exhibit to our Current Report on Form 8-K, filed on March 18, 2020.

 

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. The amount of credit available pursuant to the Agreement, as amended by the Amendment, was $5,000,000.  The Note included a minimum monthly financing fee of $22,500 per month.  Interest was 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 remained in effect, and the Company reaffirmed its obligations under the Guaranty. Further, under the Agreement, Summer LLC is subject to certain restrictive covenants, and Summer LLC was in compliance with such covenants during the three months ended March 31, 2020.

 

On March 12, 2020, simultaneous with the closing of the loan from Digital Lending (Note 7), the outstanding debt due and owing to Blue Water was paid in full.

 

As of March 31, 2020 and December 31, 2019, the outstanding balance of financing from Blue Water Capital was $0 and $4,920,000, respectively.  

 

Interest expense for the three months ended March 31, 2020 and 2019 was:

 

 

 

For the Three Months Ended March 31,

 

 

2020

 

2019

Blue Water interest expense

$

167,900

$

126,075

 

 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 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.  Accrued and unpaid interest on the unpaid principal balance outstanding on the Note is 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


13



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. 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.  As of March 31, 2020, the interest rate was 3.77%.  

 

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 March 31, 2020 and December 31, 2019, the outstanding balance of financing on the Comerica Revolver Note was $2,900,000.  Interest expense incurred for the three months ended March 31, 2020 and 2019 was as follows:

 

 

 

For the Three Months Ended March 31,

 

 

2020

 

2019

Comerica Revolver Note interest expense

$

                        34,236

$

                        36,497

 

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.   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.  As of March 31, 2020, the interest rate was 3.50%.  

 

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.

 

As of March 31, 2020 and December 31, 2019, the outstanding balance of financing on the Comerica Single Note was $2,100,000. Interest expense for the three months ended March 31, 2020 and 2019 was as follows:

 

 

 

For the Three Months Ended March 31,

 

 

2020

 

2019

Comerica Single Note interest expense

$

                        24,792

$

                                -   

 

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 (collectively the “Company”) 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


14



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 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.

 

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.

 

As of March 31, 2020 and December 31, 2019, EDF has provided credit support in the amount of $5,361,006 and $4,511,006, respectively, for cash collateral as well as to secure letters of credit (Note 4) and surety bonds (Note 5) for the benefit of the Company.

 

The Company incurred interest expense to EDF for the three months ended March 31, 2020 and 2019 as follows:

 

 

 

For the Three Months Ended March 31,

 

 

2020

 

2019

EDF interest

$

264,264

$

192,765


15



 NOTE 12 - 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 expired 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 February 28, 2020, the monthly rent, net of credit, is $2,255.

 

As of March 31, 2020 and December 31, 2019, the operating lease right-of-use assets and operating lease liabilities were $940,339 and $979,185, respectively. The long-term portion of the operating lease liabilities as of March 31, 2020 and December 31, 2019 in the amounts of $797,769 and $834,283, respectively, was included in long-term obligations.

 

As of March 31,2020, the weighted-average remaining lease term for operating leases was 5.68 years.  As of March 31, 2020, the weighted-average discount rate for operating leases was 6.5%.

 

Operating lease future minimum payments together with their present values as of March 31, 2020 are summarized as follows:

 

 

 

Operating Leases

2020

$

149,622

2021

 

199,494

2022

 

199,494

2023

 

197,294

2024

 

190,694

Thereafter

 

190,693

Total future minimum lease payments

 

1,127,291

Less amounts representing interest

 

(186,952)

Present value of lease liability

$

940,339

 

 

 

Current-portion operating lease liability

 

(142,570)

 

 

 

Long-term portion operating lease liability

$

797,769

 

Lease expense for the office space for the three months ended March 31, 2020 and 2019, respectively, was included in operating expenses on the consolidated statements of operations as follows:

 

 

 

For the Three Months Ended March 31,

 

 

2020

 

2019

Operating Lease expense

$

38,846

$

76,323


16



NOTE 13 – LONG-TERM OBLIGATIONS

 

Long-term obligations of the Company are comprised as follows:

 

 

 

March 31, 2020

 

December 31, 2019

Financing from First Insurance Funding (Note 6)

$

                                  -

$

                       38,397

Financing from Digital Lending Services US Corp. (Note 7)

 

            9,000,000

 

                                -

Financing from Blue Water Capital Funding, LLC (Note 8)

 

-

 

               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

 

                2,100,000

Wholesale Power Purchase Agreement with EDF collateral credit support (Note 11)

             5,361,006

 

                 4,511,006

Operating lease obligations (Note 12)

 

                 940,339

 

                    979,185

Total obligations

$

          20,301,345

$

             15,448,588

 

 

 

 

 

Less current portion of obligations

 

          (5,000,000)

 

             (5,038,397)

Less current portion operating lease obligations (Note 12)

 

(142,570)

 

                 (144,902)

Long-term portion of obligations

$

           15,158,775

$

             10,265,289

 

For the three months ended March 31, 2020 and 2019, respectively, interest expense consists of the following on obligations:

 

 

 

For the Three Months Ended March 31,

 

 

2020

 

2019

Financing from First Insurance Funding (Note 6)

$

                     1,365

$

                           -   

Financing from Digital Lending Services US Corp. (Note 7)

 

                   63,750

 

                           -   

Financing from Blue Water Capital Funding, LLC (Note 8)

 

                 167,900

 

                 126,075

Comerica Master Revolving Note (Note 9)

 

                   34,236

 

                   36,497

Comerica Bank Single Payment Note (Note 10)

 

                   24,792

 

                           -   

Wholesale Power Purchase Agreement with EDF (Note 11)

 

                 264,264

 

                 192,765

Related Party Promissory Loans (Note 21)

 

                   23,233

 

                     2,115

Related Party Guarantors (Note 22)

 

                 151,667

 

                   76,167

Other interest

 

                        312

 

                          84

Total interest expense

$

                 731,519

$

                 433,703

 

 

 

 

 

Interest income

 

5,837

 

15,231

 

 

 

 

 

Interest expense, net

$

725,682

$

418,472

 

  NOTE 14 - 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 unissued or reacquired shares of stock or any combination thereof.  Such number of shares of stock 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.

 

During the three months ended March 31, 2020 and 2019, the Company granted no stock options under the 2012 Plan and recognized no stock compensation expense relating to the vesting of stock options issued from the 2012 Plan.

 

As of March 31, 2020, there are 2,000 shares that remain available for issuance under the 2012 Plan.


17



NOTE 15 - 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.

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.

 

During the three months ended March 31, 2020 and 2019, the Company issued no stock options under the 2015 Plan. 

 

During the three months ended March 31, 2020 and 2019, respectively, the Company recognized total stock compensation expenses for vesting options issued from the 2015 Plan as follows:

 

 

 

For the Three Months Ended March 31,

 

 

2020

 

2019

2015 Stock Plan

$

10,490

$

16,433

 

As of March 31, 2020, the unrecognized expense for vesting of options issued from the 2015 Plan is $76,922 relating to 150,000 of unvested shares expected to be recognized over a weighted average period of approximately 6.71 years.

 

 As of March 31, 2020, there are 19,000 shares that remain available for issuance under the 2015 Plan. 

 

NOTE 16 - 2018 STOCK OPTION AND STOCK AWARD PLAN

 

Effective February 12, 2018, the Board of Directors of the Company approved and adopted the Summer Energy Holdings, Inc. 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 or any increase in the maximum aggregate number of shares of stock issuable thereunder shall be approved by the stockholders of the Company within twelve months of the date of adoption by the Board.  Awards granted prior to stockholder approval of the 2018 Plan shall become exercisable no earlier than the date of stockholder approval of the 2018 Plan. 

 

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. 

 

During the three months ended March 31, 2020, the Company granted under the 2018 Plan a total of 40,000 stock options to key employees.   The stock options had an exercise price of $2.00, a one-year vest period and an approximate fair value of $29,742 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 0.70% (ii) estimated volatility of 124.16% (iii) dividend yield of 0.00% and (iv) expected life of all options averaging eight years.

 

During the three months ended March 31, 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


18



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 during the quarter ended March 31, 2019 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.

 

During the three-month periods ended March 31, 2020 and 2019, respectively, the Company recognized total stock compensation expense for the vesting of options issued from the 2018 Plan as follows:

 

 

 

For the Three Months Ended March 31,

 

 

2020

 

2019

2018 Stock Plan

$

238,170

$

137,951

 

As of March 31, 2020, the unrecognized expense for vesting of options issued from the 2018 Plan is $761,193 relating to 735,000 of unvested shares expected to be recognized over a weighted average period of approximately 6.97 years.

  

As of March 31, 2020, the Company had outstanding granted stock options under the 2018 Plan, net of forfeitures to purchase 1,371,250, and 128,750 shares remaining available for issuance.

 

NOTE 17 - NONQUALIFIED STOCK OPTIONS GRANTED OUTSIDE OF A STOCK OPTION OR STOCK AWARD PLAN

 

In September 2019, the Company entered into stock option grant agreements with six non-employee members of the Company’s Board of Directors whereby the Company agreed to grant non-qualified stock options outside of a stock option or a stock award plan 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 March 18, 2020, 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 during the quarter ended March 31, 2020 had an approximate fair value of $57,760 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 0.66% (ii) estimated volatility of 124.16% (iii) dividend yield of 0.00% and (iv) expected life of all options averaging eight years.

 

As of March 31, 2020, the stock compensation expense associated with the non-qualified stock options issued outside of a stock option or stock award plan was $57,760.

 

NOTE 18 - PRIVATE PLACEMENT OFFERINGS

 

During the three months ended March 31, 2020, the Company accepted a subscription from an accredited investor to purchase 30,000 shares of common stock in exchange for cash proceeds in the amount of $45,000.

 

During the three months ended March 31, 2019, the Company commenced a private placement offering (the “2019 Offering”) to certain investors with whom the Company, its management and/or agents have a pre-existing relationship during the year ended December 31, 2019.   The 2019 Offering was to accredited investors to purchase shares of the Company’s common stock at a purchase price of $1.50 per share. The 2019 Offering resulted in the issuance of 3,180,000 shares of common stock in exchange for cash proceeds in the amount of $4,770,000.

 

 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 31, 2020, the Company issued a warrant to purchase up to eight (8) shares of the Company’s common stock under a Referral Agreement whereby the sales broker introduces the Company to potential electricity sales leads.  The five-year warrant has an exercise price of $1.50 per share.   The fair value of the warrant is $15 determined using the Black-Scholes option-pricing model.  The assumptions used to calculate the fair value are as follows: (i) risk-free interest rate of 1.62% (ii) estimated volatility of 136.59% (iii) dividend yield of 0.00%, and (iv) expected life of the warrant of 5 years.

 

On March 12, 2020, the Company issued a warrant for 250,000 shares of the Company’s common stock under the agreement with Digital Lending (Note 7).  The five-year warrant has an exercise price of $1.50 per share and is subject to adjustment as set for in


19



the Warrant. The fair value of warrant was $245,337 determined using the Black-Scholes option-pricing model and was expensed during the quarter ended March 31, 2020.  The assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate of 0.66%, (ii) estimated volatility of 123.91%, (iii) dividend yield of 0.00%, and (iv) expected life of the warrant of 5 years.  

 

As of March 31, 2020, the Company had outstanding warrants to purchase up to 991,212 shares of the Company’s common stock, of which 725,975 are fully vested.

 

NOTE 20 - RELATED PARTY LINES OF CREDIT

 

Effective March 12, 2020, the Company entered into two separate lines of credit agreements with related parties, Mr. Neil Leibman and LaRose Holdings LLLP.   Mr. Leibman is an officer of the Company and serves on the Company’s board of directors. LaRose Holdings LLLP is an entity controlled by Al LaRose, Jr. who serves on the Company’s board of directors.

 

The Company entered into a line of credit agreement (the “Leibman Line”) with Mr. Leibman (“Lender Leibman”).   The line of credit allows the Company to borrow a maximum principal amount of $1,000,000 to be used by the Company for working capital and other purposes determined by the board of directors of the Company.    During the term of the Leibman Line, Lender Leibman may make periodic loans as requested by the Company so long as the aggregate principal amount outstanding at any time does not exceed the maximum amount of the Leibman Line.   Simple interest shall accrue on the unpaid principal balance outstanding under the Leibman Lines at the rate of 5% per annum and interest will be calculated on the basis of a 365-day year.  Any unpaid principal and all accrued but unpaid interest shall be due and payable in full by the Company no later than May 15, 2023.  

 

The Company entered into a line of credit agreement (the “LaRose Line”) with LaRose Holdings, LLLP (“Lender LaRose”).   The line of credit allows the Company to borrow a maximum principal amount of $1,000,000 to be used by the Company for working capital and other purposes determined by the board of directors of the Company.    During the term of the LaRose Line, Lender LaRose may make periodic loans as requested by the Company so long as the aggregate principal amount outstanding at any time does not exceed the maximum amount of the LaRose Line.   Simple interest shall accrue on the unpaid principal balance outstanding under the LaRose Line at the rate of 5% per annum and interest will be calculated on the basis of a 365-day year.  Any unpaid principal and all accrued but unpaid interest shall be due and payable in full by the Company no later than May 15, 2023.  

 

The form of line of credit agreement, upon which the Leibman Line and LaRose line are based, is included as Exhibit 10.1 to this Quarterly Report on Form 10-Q.

 

NOTE 21 - RELATED PARTY PROMISSORY NOTES

 

On January 15, 2020, the Company executed a promissory note in the amount of $600,000 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 April 14, 2020. On March 13, 2020, the Company paid in full the outstanding balance of the loan from Mr. Leibman with interest in the amount of $4,849.  As of March 31, 2020, the balance of the loan from Mr. Leibman was $0.

 

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 in full the outstanding balance of the loan from Mr. Leibman with interest in the amount of $242.  As of March 31, 2020, 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.  On February 6, 2020, the Company amended such promissory note to extend the maturity date of such note to May 7, 2020 with all other provisions of the original note remaining in full force and effect.  On March 13, 2020, the Company paid Mr. Leibman in full the outstanding balance of the loan with interest in the amount of $8,384.   As of March 31, 2020, the balance of the loan from Mr. Leibman was $0.

 

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.  On February 6, 2020, the Company amended such promissory note to extend the maturity date of such note to May 7, 2020 with all other provisions of the original note remain in full force and effect.   On March 13, 2020, the Company paid LaRose Holdings in full the outstanding balance of the loan with interest in the amount of $10,000.   As of March 31, 2020, the balance of the loan from LaRose Holdings LLLP was $0.

 

On January 7, 2019, the Company entered into a promissory note in the amount of $473,000 for an advance by Mr. O’Leary, a member of the Company’s board of directors, for purposes of short-term financing.    The promissory note accrued interest at a rate


20



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 with interest in the amount of $2,009.  As of March 31, 2020 and 2019, the balance of the loan from Mr. O’Leary was $0, respectively.

 

On January 7, 2019, the Company entered into a promissory note in the amount of $25,000 for 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 with interest in the amount of $106.   As of March 31, 2020 and 2019, the balance of the loan from Messrs. O’Leary and Leibman was $0, respectively.

 

The following table summarizes interest paid to related parties on promissory notes for the three months ended March 31, 2020 and 2019 is as follows:

 

 

 

 

For the Three Months Ended March 31,

 

Original Date of Note

 

2020

 

2019

Related party interest expense for $600,000 note

1/15/2020

$

                          4,849

$

                                -   

Related party interest expense for $590,000 note

11/8/2019

 

                                -   

 

                                -   

Related party interest expense for $850,000 note

11/8/2019

 

                          8,384

 

                                -   

Related party interest expense for $1,000,000 note

11/8/2019

 

                        10,000

 

                                -   

Related party interest expense for $473,000 note

1/7/2019

 

                                -   

 

                          2,009

Related party interest expense for $25,000 note

1/7/2019

 

                                -   

 

                             106

Total

 

$

23,233

$

2,115

 

NOTE 22 - 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 which was converted to a master revolving note on December 9, 2019. 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 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 incurred interest expense to the Guarantors during the three months ended March 31, 2020 and 2019 as follows:

 

 

 

For the Three Months Ended March 31,

 

 

2020

 

2019

Guarantor interest expense on Comerica Revolver Note

$

87,967

$

76,167

Guarantor interest expense on Comerica Single Payment Note

 

63,700

 

                              -

 

$

151,667

$

76,167

 

NOTE 23 - OTHER RELATED PARTY TRANSACTIONS

 

In February 2019, Mr. Leibman provided aviation transportation for business purposes, and the Company paid $23,469 in fuel costs.

 

On October 31, 2017, Summer Northeast entered into a sublease agreement with PDS Management Group, LLL (“PDS”) for office space located at 800 Bering Drive, Suite 250, Houston, Texas.   PDS is 100% owned by Tom O’Leary who is a member of the Company’s Board of Directors.  The Company paid for lease expense related to the agreement with PDS for the three months ended March 31, 2020 and 2019 as follows:  

 

 

 

For the Three Months Ended March 31,

 

 

2020

 

2019

Summer Northeast sublease payments

$

4,662

$

6,993


21



NOTE 24 - 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 $19,500 in 2020 or elects not to defer under the Plan. There is no Company match to the Plan.

 

NOTE 25 - 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 three months ended March 31, 2020 and 2019 is follows:

 

 

 

For the Three Months Ended March 31,

 

 

2020

 

2019

Employee Stock Purchase Plan

$

690

$

927


NOTE 26 - CORONAVIRUS (COVID-19)

 

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 were not materially affected by the coronavirus outbreak during the first quarter of 2020, 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.

 

NOTE 27 - SUBSEQUENT EVENTS

 

On April 8, 2020, the Company was advanced $1,000,000 by Mr. Leibman under the terms and conditions of the Leibman Line (Note 20) to be utilized as short-term working capital for the Company.

 

On April 9, 2020, the Company issued 101,112 shares of the Company’s common stock as payment for the accrued interest for the personal guarantees of the Comerica Bank Master Revolver Note (Note 9) and the Comerica Bank Single Payment Note (Note 10).

 

On April 20, 2020, the Company received $2,342,300 in loan funding from the SBA PPP, established pursuant to the recently enacted CARES Act. The unsecured loan (the “Loan”) is evidenced by a promissory note issued by the Company (the “Note”) in favor of Frost Bank (the “Bank”), as lender. The CARES Act and the PPP provide a mechanism for forgiveness of up to the full amount borrowed.  No assurance is provided that the Company will obtain forgiveness of the Loan in whole or in part.

 

On April 24, 2020, the irrevocable standby letter of credit in the amount of $500,000 issued to the State of New Hampshire Public Utilities Commission (Note 4) was amended to reflect and expiration date of May 1, 2021.

 

On April 28, 2020, the Company paid in full the $1,000,000 of the principal advanced from the Leibman Line (Note 20) on April 8, 2020 and paid Mr. Leibman $2,877 of accrued interest.


22



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

 

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

 

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

 

Readers should carefully review the risk factors described below under the heading “Risk Factors” and in other documents we file from time to time with the SEC, including our Form 10-K for the fiscal year ended December 31, 2019.  You should interpret many of the risks identified in these reports as being heightened as a result of the ongoing and numerous adverse impacts of the COVID-19 pandemic. Our filings with the SEC, including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those filings, pursuant to Sections 13(a) and 15(d) of the Exchange Act, are available free of charge at www.summerenergy.com, when such reports are available via the EDGAR system maintained by the SEC at www.sec.gov.

 

Recent Developments

 

COVID-19

 

The recent outbreak of the novel Coronavirus (“COVID-19”) is a rapidly developing situation around the globe that has adversely impacted economic activity and conditions worldwide. Some industries have been impacted more severely than others.

 

In response to the COVID-19 pandemic, the Company deployed a remote working strategy for the Company’s call center that enabled certain employees of the Company to work from home, provided timely communication to team members and customers, implemented protocols for team members' safety, and initiated strategies for monitoring and responding to local COVID-19 impacts. The Company's preparedness efforts, coupled with quick and decisive plan implementation, resulted in minimal impacts to operations. The Company is closely monitoring bad debt as a result of the COVID-19 pandemic, for the first quarter of 2020, the Company had no material impact to its business, financial condition or results of operations.

 

We are continuing to monitor developments involving our workforce, customers and suppliers and cannot predict at this time the extent of the impact that COVID-19 will have on our operations, business, financial condition, liquidity or results of operations going forward. Please see “Item 1A - Risk Factors” in this Report.

 

Appointment of President

 

Effective April 1, 2020, Neil Leibman was appointed by the Company’s Board of Directors to serve as President of the Company, in addition to his current role of Chief Executive Officer.

 

Organization

 

The condensed consolidated financial statements above 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.

 

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.


23



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.

 

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.

 

Summer Northeast, a Texas limited liability company, 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.

 

Plan of Operation

 

Our wholly-owned subsidiary, Summer LLC, is a licensed REP in the state of Texas.  In general, Texas regulatory structure permits REPs, such as Summer LLC, to procure and sell electricity at unregulated prices.  REPs pay the local transmission and distribution utilities a regulated tariff rate for delivering electricity to their customers.  As a REP, 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 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 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.  As of the date of this Report, Summer Northeast sold electricity in Massachusetts and New Hampshire.   There were 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 during the month of July 2019 and in the state of Illinois during the month of January 2020.

 

Results of Operations

 

Three Months Ended March 31, 2020, compared to the Three Months Ended March 31, 2019

 

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.


24



In 2020, the Company’s growth strategy is to continue to focus on the expansion of the PJM market within the states of Ohio, Illinois and Pennsylvania as well as 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.

 

The current COVID-19 pandemic has caused regulatory agencies and other governmental authorities to take, and potentially continue to take, emergency or other actions in light of the pandemic that may impact our overall customer attrition, including prohibiting the termination of service for non-payment during the current COVID-19 pandemic.  Those orders may cause our attrition to be lower than what it would be otherwise.   We are unable to predict the ultimate impact of these actions on overall customer attrition at this time. Please see “Item 1A—Risk Factors” in this Report.

 

For the quarter ended March 31, 2020 compared to 2019, the Company’s overall delivered volumes of electricity increased by 15.99% attributed primarily to the increase in the ERCOT market, the ERCOT pre-paid market and the start-up of operations in the PJM market.

 

Weather Conditions

 

Weather conditions are 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.

 

Due to the COVID-19 pandemic, we are experiencing changes in customer demand that we cannot fully anticipate. While not weather related, these changes in demand may lead us to experience financial gains and/or losses in much the same fashion as a weather event as the current circumstances make it more difficult to accurately predict demand. While we continue to conduct analytics on our customer base to anticipate these changes in demand, we cannot predict how the COVID-19 pandemic will ultimately impact our hedging strategy with regard to our load forecasts. Please see “Item 1A—Risk Factors” in this Report.

 

During the first quarter of 2020, we experienced a milder than anticipated winter season (particularly in January 2020) across many of our markets, which impacted overall customer usage and led to higher than anticipated balancing costs for energy.  Delivered volumes were higher during the first quarter ended March 2020 compared to March 2019, however, the overall revenue rate declined.    The reduction in the revenue rate coupled with the increased costs of goods sold resulted in a decline in the gross margin.   Despite the decline in gross margin, earnings for the first quarter ended March 31, 2020 were consistent with the Company’s expectation and pace for 2020 earnings targets.

 

For the quarter ended March 31, 2020 compared to 2019, the Company’s unit gross margin is as follows:

 

 

 

For the Three Months Ended March

 

 

 

 

 

 

2020

 

2019

 

Variance

 

Percentage Variance

 

 

 

 

 

 

 

 

 

Revenue

$

38,866,990

$

34,825,869

 

4,041,121

 

11.60%

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

 

 

 

 

 

 

Power purchases and balancing/ancillary

 

17,102,628

 

15,370,654

 

1,731,974

 

 

Transportation and distribution providers charge

 

16,185,720

 

13,649,161

 

2,536,559

 

 

   

 

 

 

 

 

 

 

 

Total cost of goods sold

 

33,288,348

 

29,019,815

 

4,268,533

 

14.71%

   

 

 

 

 

 

 

 

 

Gross Margin

$

5,578,642

$

5,806,054

 

(227,412)

 

-3.92%

 

Revenue For the quarter ended March 31, 2020, we generated $38,866,990 in electricity revenue primarily from commercial customers, and from various long and short-term residential customers.  The majority of our revenue comes from the flow of electricity to customers and includes revenues from contract cancellation fees, disconnection fees and late fees of $862,257.  


25



Revenues for the quarter ended March 31, 2019 were $34,825,869 from electricity revenue and includes $884,970 from cancellation and disconnection and late fees.

 

 

For the Three Months Ended March 31,

 

 

 

 

 

 

 

2020

 

2019

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ERCOT Market

              417,725

$

   35,261,243

 

              357,812

$

  30,802,698

 

59,913

16.74%

$

 4,458,545

14.47%

ERCOT Pre-Paid Market

                  11,898

 

     1,446,777

 

                  10,231

 

      1,213,790

 

1,667

16.29%

 

    232,987

19.20%

Northeast Market

                  9,349

 

      1,107,278

 

                 14,098

 

       1,924,411

 

(4,749)

-33.69%

 

    (817,133)

-42.46%

Midwest Market

                  4,255

 

         189,435

 

                          -   

 

                    -   

 

4,255

100.00%

 

     189,435

100.00%

Total

             443,227

 

  38,004,733

 

               382,141

 

  33,940,899

 

61,086

15.99%

 

 4,063,834

11.97%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Fees Revenue

 

 

        862,257

 

 

 

        884,970

 

 

 

 

      (22,713)

-2.57%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Revenues:

 

$

  38,866,990

 

 

$

  34,825,869

 

 

 

$

    4,041,121

11.60%

 

Total revenues for the quarter ended March 31, 2020 compared to March 31, 2019 increased by approximately 11.60%.  In the ERCOT Pre-Paid Market, the revenue increased by 19.20% due to customer growth.  The Northeast market had a 42.46% decrease in revenue related to the continuing decrease in the customer base in 2020 compared to 2019.  The Company began flowing electricity in the PJM market in July 2019 and the anticipated customer base as this market grows will consist of residential and commercial customers. 

 

Management plans to continue to execute on its sales and marketing program to solicit individual commercial and residential customers and to realign key sales personnel to focus on rebuilding the customer base in the Northeast market.  In addition, management also plans to continue to acquire portfolios of commercial and residential customers when offered at reasonable prices.

 

Cost of Goods Sold and Gross Margin – For the three months ended March 31, 2020, cost of goods sold and gross profit totaled $33,288,348 and $5,578,642, respectively. Cost of goods sold and gross margin for the three months ended March 31, 2019 was $29,019,815 and $5,806,054, respectively.

 

 

 

For the Three Months Ended March 31,

 

 

 

 

 

 

2020

 

2019

 

Increase in Costs ($$)

 

Percentage Increase (Decrease)

Power Purchases and balancing/ancillary

 

 

 

 

 

 

 

 

  ERCOT Market

$

32,051,976

$

26,986,735

$

5,065,241

 

18.77%

  Northeast Market

 

1,096,434

 

2,033,080

 

(936,646)

 

-46.07%

  Midwest Market

 

139,938

 

-

 

139,938

 

100.00%

 

$

33,288,348

$

29,019,815

$

4,268,533

 

14.71%

 

 

 

 

 

 

 

 

 

 

Cost of goods sold for the quarter ended March 31, 2020 compared to March 31, 2019, increased in total by approximately 14.71% due to the increased volumes delivered.  The gross profit margin decreased for the quarter ended March 31, 2020 compared to March 31, 2019 by 3.92%.  The delivered volumes were higher during the first quarter ended March 2020 compared to March 2019, however, the overall revenue rate declined.   The reduction in the revenue rate coupled with the increased costs of goods sold resulted in a decline in the gross margin.    The Northeast market decreased by 33.69% due to continued compression of the customer base during 2020 compared to 2019.

 

Operating Expenses Operating expenses for the quarter ended March 31, 2020, totaled $5,835,041, consisting primarily of general and administrative expenses of $3,507,507, stock compensation of $306,420, bank service fees of $345,246, professional fees of $185,594, outside commissions of $1,189,337, collection fees/sales verification fees $19,525 and $281,412 of billing fees. Billing fees are primarily costs paid to a third-party Electronic Data Inter-Chain (EDI) provider to handle transactions between us, ERCOT and the TDSPs in order to produce customer bills.


26



Operating expenses for the quarter ended March 31, 2019, totaled $5,273,766 consisting primarily of general and administrative expenses of $3,175,067, stock compensation of $154,384, bank service fees of $286,286, professional fees of $215,305, outside commissions of $1,189,804, collection fees/sales verification fees $15,949 and $236,971 of billing fees.

 

 

 

For the Three Months Ended March 31,

 

 

 

 

 

2020

 

2019

 

Variance

Percentage Change

General and administrative

$

3,507,507

$

3,175,067

$

332,440

10.47%

Stock compensation

 

306,420

 

154,384

 

152,036

98.48%

Bank service fees

 

345,246

 

286,286

 

58,960

20.59%

Professional fees

 

185,594

 

215,305

 

(29,711)

-13.80%

Outside commission expense

 

1,189,337

 

1,189,804

 

(467)

-0.04%

Collection fees/sales verification fees

 

19,525

 

15,949

 

3,576

22.42%

Billing fees

 

281,412

 

236,971

 

44,441

18.75%

 

$

5,835,041

$

5,273,766

$

561,275

10.64%

 

Operating expenses for the three months ended March 31, 2020 reflects an increase of approximately $561,274, or 10.64%, as compared to the three months ended March 31, 2019.  This increase was primarily attributable to increase in stock compensation related to the issuance of stock options to key employees and to the Company’s board of directors as well as expenses related to increased volume of customers specifically bank fees, collection fees and billing fees. We are taking actions to reduce expenses to restore operating margins and better position the Company for the current challenging economic environment and uncertainties related to COVID-19.

 

 

Net Income (Loss) – Net income (loss) for the three months ended March 31, 2020 and 2019, totaled ($999,714) and $112,254, respectively.

 

Liquidity and Capital Resources

 

At March 31, 2020 and December 31, 2019, our cash totaled $872,086 and $814,360, respectively.  Our principal cash requirements for the quarter ended March 31, 2020 were for operating expenses and cost of goods sold (including power purchases, employee cost, and customer acquisition), collateral for TDSPs and capital expenditures.  During the three months ended March 31, 2020, the primary source of cash was from electricity revenues, proceeds of a private placement offering in the amount of $45,000 and net loan proceeds of $4,080,000.  During the three months ended March 31, 2019, the primary source of cash was from electricity revenues and proceeds in a private placement offering in the amount of $4,770,000.

 

General – The Company’s decrease in net cash flow during the first three months of 2020 is attributable to $3,165,407 cash used in operating activities, $11,416 cash used in investing activities, and $2,809,664 provided by financing activities, which includes $45,000 from proceeds received in private placement and net loan proceeds of $4,080,000. The Company’s increase in net cash flow during the three months ended March 31, 2019 is attributable to $4,115,187 cash used in operating activities, $0 used in investing activities for the purchase of property and equipment, and $4,433,000 provided by financing activities of which $4,770,000 were from private placement proceeds.

 

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

 

Cash Outflows for Capital Assets, Customer Acquisition and Deposits

 

We expect to expend funds for capital assets, customer acquisition and deposits in connection with the expansion of our business during the remainder of the current fiscal year.  The anticipated source of funds will be cash on hand and the capital raised or borrowed during the year ended December 31, 2020.

 

Future Financing Needs

 

With the proceeds received from equity investments and loans (including the PPP Loan), management believes that we have adequate liquidity to support operations, but this belief is based upon many assumptions and is subject to numerous risks.


27



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.

 

As stated above, in late 2019, a novel strain of coronavirus (COVID-19) was first detected in Wuhan, China. Following the outbreak of this virus, governments throughout the world, including in the United States of America, have quarantined certain affected regions, restricted travel and imposed significant limitations on other economic activities. The Company’s operations team is closely monitoring the potential impact to the Company’s business, including its cash flows, customers and employees. If the situation continues to impact our customers, our cash flows, financial position and operating results for fiscal year 2020 and beyond will be negatively impacted. Neither the length of time nor the magnitude of the negative impacts can be presently determined.

 

Our financial results for the first quarter of 2020 were not materially impacted by COVID-19, primarily since many of the initial economic effects of the early stages of the COVID-19 pandemic resulting from the various shelter-in-place and other social distancing orders occurred towards the end of our first quarter. The severity and duration of the COVID-19 pandemic is uncertain and such uncertainty will likely continue in the near term and we will continue to actively monitor the situation taking into account the impact to our employees, customers, suppliers and partners.  

 

The impact of the COVID-19 pandemic on the economy and our operations is fluid and constantly evolving, we will continue to assess a variety of measures to improve our financial performance and liquidity.

 

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.

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As a “small reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide this information.

 

ITEM 4.  CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

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

 

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

 

Changes in Internal Control over Financial Reporting

 

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


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PART II – OTHER INFORMATION

 

ITEM 1A.  RISK FACTORS

 

Security holders and potential investors in our securities should carefully consider the Risk Factors (“Item 1A – Risk Factors”) included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on March 27, 2020 (the “2019 Form 10-K”).  The following is an update to the risk factors set forth in the 2019 Form 10-K.  Other than the following update, as of the date of this filing, there have been no material changes to the Risk Factors included in our 2019 Form 10-K. The Risk Factors set forth in the 2019 Form 10-K should be read carefully in connection with evaluating our business and in connection with the forward-looking statements contained in this Quarterly Report on Form 10-Q.  Any of the risks described in the 2019 Form 10-K could materially adversely affect our business, financial condition or future results and the actual outcome of matters as to which forward-looking statements are made.  These are not the only risks we face.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

 

We face risks related to health epidemics, pandemics and other outbreaks, including COVID-19.

 

The recent outbreak of COVID-19 is a rapidly developing situation around the globe that has adversely impacted economic activity and conditions worldwide. In particular, efforts to control the spread of COVID-19 have led to shutdowns of various facilities as well as disrupted supply chains around the world. The extent of such impact on our operations is unknown at this time. We are continuing to monitor developments involving our workforce, customers and suppliers and cannot predict whether COVID-19 will have a material impact on our business, financial condition or results of operations. However, an extended slowdown of the United States’ economic growth, demand for commodities and/or material changes in governmental policy could result in lower economic growth and lower demand for natural gas and electricity in our key markets as well as the ability of various employees, customers, contractors, suppliers and other business partners to fulfill their obligations, which could have a material adverse effect on our business, financial condition or 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 customers located in markets that have not implemented 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 several 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.

 

In addition, the current COVID-19 pandemic has caused regulatory agencies and other governmental authorities to take, and potentially continue to take, emergency or other actions in light of the pandemic that may impact us, including prohibiting the termination of service for non-payment during the current COVID-19 pandemic, requiring deferred payment plans for certain customers unable to pay their bill, and utilities increasing POR fees they charge us in an effort to recoup their bad debts losses. Because of the time lag between the delivery of electricity and natural gas, the issuance of an invoice, and the customer’s payment due date, there may be a substantial lag in time before we are able to determine specific trends in bad debt expense as a result of COVID-19. These actions taken by regulatory agencies and governmental authorities may impact our financial results, cash flow and liquidity and the duration of these changes are unknown. At this time, we are unable to predict the impact that this or other related events may have on our collection efforts due to non-payment.

 

Our financial results may be adversely impacted by weather conditions; changes in consumer demand.

 

Due to the COVID-19 pandemic, we are experiencing changes in customer demand that we cannot fully anticipate. While not weather related, these changes in demand may lead us to experience financial gains and/or losses in much the same fashion as a weather event as the current circumstances make it more difficult to accurately predict demand. While we continue to conduct analytics on our customer base to anticipate these changes in demand, we cannot predict how the COVID-19 pandemic will ultimately impact our hedging strategy with regard to our load forecasts.

 

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

On February 21, 2020, the Company issued shares of its restricted common stock in a private offering to an accredited investor with whom the Company and its management and affiliates had prior relationships.  The Company issued an aggregate of 30,000


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shares of its restricted common stock for aggregate proceeds to the Company of $45,000.  The shares of common stock were issued in reliance upon an exemption from registration under Section 4(a)(2) of the Securities Act.

 

On March 18, 2020, 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 April 9, 2020, the Company issued 101,112 shares of the Company’s common stock in lieu of cash to four individuals 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.

 

During the quarter ended March 31, 2020, the Company issued one warrant to purchase eight shares of the Company’s common stock, to a sales broker pursuant to separate referral agreements whereby the sales brokers introduce potential sales leads to the Company for electricity services.  The warrant has a strike price of $1.50 per share and a term of five (5) years.  The warrant was 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.

 

ITEM 5.   OTHER INFORMATION

 

On March 12, 2020, the Company entered into a line of credit agreement (the “Leibman Line”) with Mr. Leibman (“Lender Leibman”).   The line of credit allows the Company to borrow a maximum principal amount of $1,000,000 to be used by the Company for working capital and other purposes determined by the board of directors of the Company.    During the term of the Leibman Line, Lender Leibman may make periodic loans as requested by the Company so long as the aggregate principal amount outstanding at any time does not exceed the maximum amount of the Leibman Line.   Simple interest shall accrue on the unpaid principal balance outstanding under the Leibman Lines at the rate of 5% per annum and interest will be calculated on the basis of a 365-day year.  Any unpaid principal and all accrued but unpaid interest shall be due and payable in full by the Company no later than May 15, 2023.  

 

On March 12, 2020, the Company entered into a line of credit agreement (the “LaRose Line”) with LaRose Holdings, LLLP (“Lender LaRose”).   The line of credit allows the Company to borrow a maximum principal amount of $1,000,000 to be used by the Company for working capital and other purposes determined by the board of directors of the Company.    During the term of the LaRose Line, Lender LaRose may make periodic loans as requested by the Company so long as the aggregate principal amount outstanding at any time does not exceed the maximum amount of the LaRose Line.   Simple interest shall accrue on the unpaid principal balance outstanding under the LaRose Line at the rate of 5% per annum and interest will be calculated on the basis of a 365-day year.  Any unpaid principal and all accrued but unpaid interest shall be due and payable in full by the Company no later than May 15, 2023.  

 

The form of line of credit agreement, upon which the Leibman Line and LaRose Line are based, is included as Exhibit 10.1 to this Quarterly Report on Form 10-Q.


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ITEM 6.  EXHIBITS

 

10.1

Form of Line of Credit Agreement.

31.1

Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.

31.2

Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.

32.1*

Certification of the CEO and CFO pursuant to Rule 13a-14(b) and Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.

101.INS**

XBRL Instance Document

101.SCH**

XBRL Taxonomy Extension Schema Document

101.CAL**

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF**

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB**

XBRL Taxonomy Extension Label Linkbase Document

101.PRE**

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

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

 

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


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SIGNATURES

 

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this Quarterly Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

SUMMER ENERGY HOLDINGS, INC.

 

 

Date:  

May 20, 2020

By:    

/s/ Neil Leibman    

 

 

 

Neil Leibman

 

 

 

Chief Executive Officer

 

 

   

(Principal Executive Officer)

 

 

 

 

Date:  

May 20, 2020

 

/s/ Jaleea P. George

 

 

 

Jaleea P. George

 

 

 

Chief Financial Officer

 

 

 

(Principal Accounting Officer)


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