ITEM 1. BUSINESS
Introduction
Summer Energy Holdings, Inc. (including our subsidiaries, Summer Energy, LLC (“Summer LLC”), Summer Energy of Ohio (“Summer Ohio”), Summer EM Marketing, LLC (“Marketing LLC”) and Summer Energy Northeast, LLC (“Summer Northeast”), are referred to collectively in this Annual Report, as the “Company,” “Summer Energy,” “we,” “our” and “us”). The Company’s primary business operations are conducted through our subsidiaries Summer LLC and Summer Northeast. Summer LLC is a Texas limited liability company that is licensed within the state of Texas as a Retail Electric Provider (“REP”) by the Public Utility Commission of Texas (“PUCT”). Summer Northeast is a Texas limited liability company that is licensed as a REP in New Hampshire, Massachusetts, Connecticut and Rhode Island and currently operates in Massachusetts and Rhode Island. As stated above, references to the “Company,” the “Registrant,” “we,” our,” and “us” or similar terms, refer to Summer Energy Holdings, Inc. (f/k/a Castwell Precast Corporation), and its predecessors and its subsidiaries, except where the context makes clear that the reference is only to a specific subsidiary.
For more information on the Company and our products and services, please see the information set forth below or visit our website at www.summerenergy.com. The inclusion of our internet address in this Annual Report does not include or incorporate by reference into this Annual Report any information on our website. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports and other filings with the Securities and Exchange Commission (the “SEC”) are generally available through the EDGAR system maintained by the SEC at www.sec.gov.
Description of Our Company and Predecessor
The Company was incorporated in the state of Nevada under the name Castwell Precast Corporation on March 25, 2005. On March 27, 2012, the Company (f/k/a Castwell Precast Corporation), closed the transaction (the “Transaction”) contemplated by that certain Agreement and Plan of Contribution entered into on January 17, 2012 among the Company, Summer LLC, and the individual members of Summer LLC (the “Contribution Agreement”). A copy of the Contribution Agreement was filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated January 19, 2012, and the description contained herein of the terms of the Contribution Agreement is qualified in its entirety by reference to the provisions thereof. Further, a more complete description of the Transaction is set forth in the Company’s Current Report on Form 8-K dated March 30, 2012. Prior to the consummation of the Transaction, the Company’s principal business activity, carried out entirely through its wholly-owned subsidiary Castwell Precast Inc., was the manufacture and installation of decorative window wells made from precast concrete. Castwell Precast Inc. was incorporated in the state of Utah on March 24, 2005. The Company ceased the business of manufacturing and installing decorative window wells, and currently conducts the business of purchasing and reselling electric power within the states of Texas, Massachusetts and New Hampshire through its wholly owned subsidiaries Summer LLC and Summer Northeast.
Overview
Following the Transaction, the Company now carries on, through Summer LLC and Summer Northeast, the business of an REP in the states of Texas, Massachusetts and New Hampshire, with head offices located at 5847 San Felipe Street, Suite 3700, Houston, Texas 77057. The Company’s telephone number is (713) 375-2790, its fax number is (713) 375-2794, and its website is www.summerenergy.com. The information accessible through the Company’s website does not constitute part of, and is not incorporated by reference into, this Annual Report.
Summer LLC was organized as a Texas limited liability company on April 6, 2011, by the filing of a certificate of organization with the Texas Secretary of State. In September of 2011, Summer LLC was awarded a license by the PUCT to operate as an REP in Texas. In general, Texas regulatory structure permits REPs, such as Summer LLC, to procure and sell electricity at unregulated prices. All REPs must be certified by the Electric Reliability Council of Texas (“ERCOT”) to operate within the Texas market. In Texas, ERCOT serves as the Independent System Operator (“ISO”) of the power grid and enables REPs, generators, regulated transmission and distribution service providers (“TDSPs”), and ultimately customers, to operate in a deregulated marketplace. ERCOT is responsible for coordinating and monitoring all communications by and between the power generator, the retail electric provider and the TDSP, including customer sign up, meter reading and billing between the end user, power generator and the REP.
Summer Northeast was organized as a Texas limited liability company on December 21, 2007 and was awarded licenses to operate as a REP by the public utility commissions of New Hampshire, Massachusetts, Rhode Island and Connecticut. REPs pay the local transmission and distribution utilities a regulated tariff rate for delivering electricity to their customers. As a REP, we sell electricity and provide the related billing, customer service, collections and remittance services to residential and commercial customers. We offer our customers competitive electricity rates, flexible payment and pricing choices, simple offers with understandable terms and responsive customer service.
We offer retail electricity to commercial and residential customers in designated target markets within the states of Texas, Massachusetts and New Hampshire. In the commercial market, the primary targets are small to medium-sized customers (less than one megawatt of peak usage), but we will also selectively pursue larger commercial customers. Residential customers are a secondary target market. At this time, a majority of our customers are located in the Houston and Dallas-Fort Worth metropolitan areas, although our footprint extends to metropolitan and rural areas.
We rely upon established relationships and low-cost branding programs to attract commercial and residential customers. We continue to evaluate opportunities to expand our areas of operations as certain market regions elect to opt-in to deregulation. In addition, we continue to evaluate and pursue opportunities to acquire other REPs to the extent these acquisitions would provide value to us.
In most jurisdictions, we are required to enter into agreements with local transmission and distribution service providers for use of the local distribution and transmission systems and operation of functional interfaces necessary for us to serve our customers. With respect to energy supply, we utilize wholesale purchase agreements with wholesale energy providers. We serve as our own qualified scheduling entity for open market purchases and sales of electricity, forecasting our energy demand, and conducting procurement activities through an experienced team of professionals. The forecast for electricity load requirements is based on our aggregate customer base currently served and anticipated weather conditions, as well as forecasted customer acquisition and attrition. We continuously monitor and update our supply positions based on our retail demand forecasts and market conditions. Our policy is to maintain a balanced supply/demand book to limit commodity risk exposure. At this time, we do not plan on maintaining a financial book in addition to our physical supply/demand book for risk-hedging purposes.
We began delivering electricity to customers in mid-February 2012. We have continued to experience growth in our customer base since that time.
As of December 31, 2017, we had 74 full-time employees. Our employees are not represented by any collective bargaining agreement, and we have never experienced a work stoppage. We believe our employee relations are good.
Expansion into New Markets
If the Company enters additional deregulated markets, we will be required to operate within the specific regulatory environment of such state or region. We will evaluate the regulatory environment of each market, in addition to other operational, financial and customer considerations, before determining whether to pursue other market area opportunities.
Marketing and Sales
The Company is in the process of implementing a multi-tiered marketing and sales strategy. The short-term emphasis is on controlled growth, utilizing indirect marketing through third-party relationships. Indirect marketing efforts, including the following, allow the Company to facilitate growth while keeping expenses low by avoiding the expense associated with creating and managing a full sales team:
·Aggregators, Brokers, Consultants - often referred to as “ABC’s” in the retail power industry;
·Affinity Programs - Gift card programs; Company-branded product incentives;
·Multifamily Housing Programs - incentivizing property management companies based on referrals to their tenants;
·Referrals - reaching out to individuals connected to the community and providing incentives for sign-ups; and
·Charitable Programs - enhancing referral programs and offering customers the chance to donate referral fees to local charitable organizations.
As the Company grows, we expect to achieve long-term growth by enhancing our indirect marketing efforts as well as growing our residential customer base. These initiatives include or will include, without limitation:
·Releasing an online portal for third parties to manage their commercial pricing requests and customer data remotely with minimal intervention of sales staff;
·Further business development by strengthening existing and revisiting weakened or less active relationships;
·Improving efficiency of our sales teams through further IT development and automation;
·Increasing our pre-paid electric residential segment via online and relationship marketing; and
·Refining our multi-family marketing division through IT improvements, increased staffing, and onsite marketing support to properties promoting our product.
Direct marketing efforts continue to be a result of management’s existing relationships, direct traffic to our enrollment platform on our website, and customer referrals.
Competition and Perceived Competitive Advantages
As more fully set forth under the heading entitled “Risk Factors,” the Company faces competition from many competitors who have significantly greater financial resources, well-established brand names, and large, existing installed customer bases. We expect the level of competition to intensify in the future. There is also significant competition from incumbent, traditional, and new electricity providers which may be better capitalized than the Company.
It is understood that there is significant competition in the retail electric market; however, most established competitors target the larger customer segment such as large commercial and industrial operations. This creates a niche that we aggressively target. We focus on small to medium size commercial, residential, and select large businesses in our core marketing efforts. We believe this market segment will yield a higher per-unit-margin with improved customer loyalty.
The Company anticipates the addition of new market participants. Recent entries into the marketplace include single-client companies established for a select number of large electricity users such as refineries or industrial plants. These new participants’ strategy is to focus most of their marketing dollars on high-end users, as they assume the larger customers provide the highest return. The Company differentiates its strategy by focusing on the small to mid-size customer segment and building lasting relationships through excellent customer service, flexible terms, unique sales techniques, and competitive pricing.
The Company’s present management and staff have significant experience working in the Texas retail energy market. Management and staff also have experience with REPs who operate in Maryland, New Hampshire, the District of Columbia and Massachusetts. We believe management’s experience with these entities will contribute to management’s ability to market and grow the Company into a successful REP in the markets in which we operate.
Because of management’s prior experience, management and staff have developed and maintained strong connections with agents, brokers, property owners and others in the markets in which we operate. Through these relationships, the Company anticipates building sales momentum.
Intellectual Property
The Company has not applied for any patents or copyrights. The Company has filed a trademark application for “Summer Energy.” The Company has not spent any significant time since its inception on research and development activities.
Additional Information
As more fully set forth under the heading entitled “Risk Factors,” the Company is subject to governmental regulation and will face additional costs in complying with such regulations. At this time, the Company does not have an estimate of its annual regulatory compliance costs.
ITEM 1A.
ITEM 1A.RISK FACTORS
Before deciding to purchase, hold or sell our common stock, you should carefully consider the risks described below in addition to the other information contained in this Annual Report and in our other filings with the SEC, including subsequent reports on Forms 10-Q and 8-K. The risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business. If any of these known or unknown risks or uncertainties actually occurs with material adverse effects on the Company, our business, financial condition, results of operations and/or liquidity could be seriously harmed. In that event, the market price of our common stock will likely decline, and you may lose all or part of your investment.
Risks Factors Related to Our Business and Industry
We depend on key personnel.
For the foreseeable future, our success will depend largely on management’s industry knowledge, marketing skills and relationships with key investors, customer bases and industry leaders. The Company has employment agreements with management and other key personnel. We do not maintain key life insurance policies for our executive officers. Should any of these individuals leave the Company, it may have a material adverse effect on our future results of operations.
Recourse to the Company’s assets.
Outside of our wholesale contracts, our customer contracts and our REP certificates, the Company currently has limited assets that are available to satisfy liabilities and other obligations of the Company. If the Company becomes subject to a liability, parties seeking to have the liability satisfied may have recourse to the Company’s assets.
We will indemnify management and the members of the Board of Directors.
Members of our executive management (“Management”) and other key decision-makers will be entitled to indemnification from the Company except in certain circumstances, as more fully set forth in our Articles of Incorporation, Bylaws and separate indemnification agreements.
Stockholders will have no right to participate in management of the Company.
Stockholders in the Company will not have the right to participate in the management of the Company or in decisions made by Management on the Company’s behalf. As a result, stockholders will have almost no control over their investments in the Company or their prospects with respect thereto.
Uncertain economic conditions.
Recent economic events have created uncertainty with respect to the condition of the economy in the United States. Certain economic factors and indicators have suggested that such events have had a substantial negative effect on the economies of the United States and the states in which we operate. Furthermore, several industries have experienced financial difficulties. In addition, there have been material adverse effects on the world’s economies caused by illegal activities in the business and accounting professions resulting in significant declines in the United States equity markets. Other equity markets have been similarly affected. It is impossible to determine at this time the long-term effects of these events and conditions on the economy. Any negative change in the general economic conditions could adversely affect the financial condition and our operating results. Unforeseen incidents, such as terrorist attacks, corporate fraud or general weakness in the economy, could have a negative impact on the overall economic state of the market in which we intend to market and utilize our products and services. The Company may experience difficulty in raising additional capital necessary for expenses and growth, may experience underfunding due to the timing of payments received and due to the seasonality of the markets in which we operate and customer electricity usage.
Adequacy of funds for operations or capital expenditures.
To the extent that the Company’s expenses increase, unanticipated expenses arise, or capital expenditures are necessary, and accumulated reserves are insufficient to meet such expenses, the Company may be required to obtain cash advances and additional funds through borrowing or additional equity raises, if available. Such debt and/or equity raises may have a material negative adverse effect on the Company’s profitability.
We are substantially dependent on a single party to purchase our electricity.
Our subsidiary, Summer LLC, is party to an Energy Marketing Agreement for Electric Power with DTE Energy Trading, Inc. (“DTE”) whereby, with limited exceptions, it is required to purchase all of its electric power and associated services requirements from DTE. We therefore rely substantially on DTE in order to meet our customers’ needs. If we default in our obligations to DTE, we may be unable to purchase the required electricity supply to service our customers in Texas. If we are unable to purchase through DTE, we may be forced to purchase substantial electricity supply in the open market to meet customer demand at a time when energy prices are volatile, which could have an adverse impact on our financial condition. Our obligations to DTE are secured by a first position security interest in all of our assets, equipment and inventory. Summer Northeast purchases its electric power from a different provider.
Our business is dependent on retaining licenses in the markets in which we operate.
Our business model is dependent on continuing to be licensed in existing markets. If we have a license revoked or are not granted renewal of a license, or if our license is adversely conditioned or modified, it could materially and adversely affect our business, financial condition, cash flows and results of operations.
Volatile energy prices and regulatory risk.
Sustained high energy prices, ongoing price volatility, decreasing reserve margins, and changing environmental regulation all creates a risk of increased regulatory and/or legislative intervention, which may limit our flexibility within the deregulated market. In addition, ISOs, public utility commissions, and state legislatures possess significant regulatory control over our business operations in all markets. Factors outside of our control may cause changes to the deregulated electricity structure at any time, which may have an adverse effect upon our business.
The Company believes that competitive markets yield a broad range of innovative product and service alternatives to consumers and ultimately lead to the most efficient use of resources. We believe regulatory entities should continue to take actions that encourage competition in the industry, but no assurance can be given that this will be the case. Regulatory and/or legislative intervention could disrupt the in the market structure of electricity prices, which could impact the Company’s results of operations. The Company’s earnings and cash flows may also be adversely affected in any period in which the demand for power significantly varies from forecasted supply, which may occur due to, among other factors, weather events, competition and economic conditions.
Reliance on TDSPs affiliated with our competitors to perform some functions for our customers.
Under our regulatory structure, we may be required to enter into agreements with local incumbent utilities for use of the local distribution systems, and for the creation and operation of functional interfaces necessary for us to serve our customers. While we are optimistic about our ability to enter into acceptable agreements in relevant markets, any delay in future negotiations for access or our inability to enter into reasonable agreements to operate could delay or negatively impact our ability to serve our customers, which could have a material negative impact on our business, results of operations, and financial condition.
In certain markets we are dependent on TDSPs for maintenance of the infrastructure through which we deliver electricity to our retail customers. Any infrastructure failure that interrupts or impairs delivery of electricity to our customers could negatively impact the satisfaction of our customers with our service and could have a material adverse effect on our results of operations, financial condition and cash flow. Additionally, in certain markets we are dependent on TDSPs for performing service initiations and changes, and for reading our customers’ energy meters. We are required to rely on the TDSPs, or, in some cases, ERCOT, to provide us with our customers’ information regarding energy usage, and we may be limited in our ability to confirm the accuracy of the information. The provision of inaccurate information or delayed provision of such information by the TDSPs or ERCOT could have a material adverse effect on our business, results of operations, financial condition and cash flow. In addition, any operational problems with our new systems and processes could similarly have a material adverse effect on our business, results of operations, financial condition and cash flow. Further, we rely on the TDSPs to properly repair and maintain electrical lines in outages caused by severe weather, which may produce a delay in providing service to the Company’s customers, which can negatively impact the Company.
We are subject to government regulation and extensive government regulation may increase our costs and slow our growth.
Significant regulations imposed at the federal, state and local levels govern the provision of utility services and affect our business and our existing and potential competitors. Delays in receiving required regulatory approvals, the enactment of adverse legislation, regulations or regulatory requirements, or the application of existing laws and regulations to certain services may have a material adverse effect on our business, financial condition, results of operations and cash flow. In addition, future legislative, judicial and regulatory agency actions could alter competitive conditions in the markets in which we intend to operate, in ways not necessarily to our advantage.
Moreover, existing regulations may be revised or reinterpreted and new laws and regulations may be adopted or become applicable to our commercial activities. These actions could have a material adverse effect on our results of operations, financial conditions and cash flows.
New legislation or regulation.
We cannot determine what effect additional state or federal governmental legislation, regulations, or administrative orders, when and if promulgated, would have on our business in the future. New legislation or regulations may require the reformulation of our business to meet new standards, require us to cease operations, impose stricter qualification and/or registration standards, impose additional record keeping, or require expanded consumer protection measures.
Reliance on information technology systems; collection of sensitive customer data.
Our business is dependent on information sharing among market participants. This information includes customer enrollment information, ERCOT transactions, meter readings, invoices for wire line charges, etc. Therefore, our success as an independent REP is impacted by our ability to handle this information, and we are dependent on third parties to provide timely and accurate information to us. We rely on a combination of internal systems including telephone, Internet, load forecasting, as well as systems operated by third parties. Failure to receive timely and accurate information could have an adverse impact on our business.
We have implemented, or intend to implement, both processes and infrastructure to provide for redundancy of core data due to business interruption associated with our billing platform; however, that is only one component of our business model. In addition, our systems and those we rely upon from third parties need continued development and investment to ensure reliability and scalability as our business grows at a rapid rate.
Despite the implementation of security measures, our networks may be vulnerable to unauthorized access, computer viruses and other disruptive problems. A party who is able to circumvent security measures could misappropriate proprietary information or cause interruptions in our Internet operations. We may be required to expend significant capital or other resources to protect against the threat of security breaches or to alleviate problems caused by such breaches. Although we intend to continue to implement industry-standard security measures, there can be no assurance that measures implemented by us will not be circumvented in the future.
Our business requires access to sensitive customer data in the ordinary course of business. Examples of sensitive customer data are names, addresses, account information, historical electricity usage, expected patterns of use, payment history, credit bureau data, credit and debit card account numbers, driver’s license numbers, social security numbers and bank account information. We may need to provide sensitive customer data to vendors and service providers who require access to this information in order to provide services. It is possible that our security controls over personal data, our training of employees and consultants on data security, and other practices we follow may not prevent the improper disclosure of personally identifiable information. If a significant breach occurred, our reputation may be adversely affected, customer confidence may be diminished, or our business may be subject to legal claims, any of which may contribute to the loss of customers and have a negative impact on the business and/or results of operations.
We depend on the accuracy of data in our information management systems, which subjects us to risks.
We depend on the accuracy and timeliness of our information management systems for billing, collections, consumption and other important data. We rely on many internal and external sources for this information, including:
·our marketing, pricing and customer operations functions; and
·various local regulated utilities and independent system operators (ISOs) for volume or meter read information, certain billing rates and billing types (e.g., budget billing) and other fees and expenses.
Inaccurate or untimely information, which may be outside of our direct control, could result in:
·inaccurate and/or untimely bills sent to customers;
·reduced effectiveness and efficiency of our operations;
·inability to adequately hedge our portfolio;
·increased overhead costs;
·inaccurate accounting and reporting of customer revenues, gross margin and accounts receivable activity;
·inaccurate measurement of usage rates, throughput and imbalances;
·customer complaints; and
·increased regulatory scrutiny.
We are also subject to disruptions in our information management systems arising out of events beyond our control, such as natural disasters, epidemics, failures in hardware or software, power fluctuations, telecommunications and other similar disruptions. In addition, our information management systems may be vulnerable to computer viruses, incursions by intruders or hackers and cyber terrorists and other similar disruptions. A successful cyber-attack on our information management systems could severely disrupt business operations, preventing us from billing and collecting revenues, and could result in significant expenses to investigate and repair security breaches or system damage, lead to litigation, fines, other remedial action, heightened regulatory scrutiny, diminished customer confidence and damage to our reputation. We do not maintain cyber-liability insurance that covers certain damage caused by cyber events.
Inaccurate data and disruptions of our information management systems to perform as anticipated for any reason could materially and adversely affect our business, financial condition, cash flows and results of operations.
Certain political and natural events may affect our Company.
Catastrophic events or geo-political conditions may disrupt our business. A disruption or failure of our systems or operations in the event of a major earthquake, weather event, cyber-attack, terrorist attack, or other catastrophic event or natural disaster could cause delays in performing critical functions. A catastrophic event that results in the destruction or disruption of any of our critical business or information technology systems could harm our ability to conduct normal business operations and our operating results. For example, in the third quarter of 2017, Hurricane Harvey caused historic flooding, extensive damage and widespread power outages across the Gulf Coast of Texas. Although we did not suffer physical damage to our Houston office, the hurricane negatively impacted our ability to serve our customers and deliver electricity in this region during the hurricane and for the following weeks.
Weather and other related commodity risks may affect our ability to manage and maintain a balanced supply/demand book.
Commitments for future purchase of electricity supply (i.e., forward power contracts) are based solely on our current customer base under contract. No speculative positions to buy or sell electricity are allowed by our internal risk policy. Long term supply positions are consistently monitored and rebalanced due to adding or removing customers, long term weather assumptions, and economic indicators. Short term supply positions are also monitored and rebalanced due to changing demand positions. Short term changes in demand are, driven primarily by the weather forecasts for the geographical areas in which we operate. We plan to continue to maximize retail earnings through efficient procurement practices, with the primary goal being to protect the earnings generated by the retail business. However, fluctuations in actual weather conditions, generation availability, transmission constraints, and generation reserve margins may all have an impact on the actual power prices and the electricity consumption of our customers on a given day. Extreme weather conditions may force us to purchase electricity in the balancing market on days when weather is unexpectedly severe, and the pricing for balancing market energy may be significantly higher on such days than the cost of electricity in our existing fixed priced contracts. Unusually mild weather conditions could leave us with excess power which may be sold in the balancing market at a loss if the balancing market price is lower than the Company’s cost of electricity in our existing fixed priced contracts.
Commodity pricing is an inherent risk component of our business operations and our financial results. The prevailing market prices for electricity and fuel may fluctuate substantially over relatively short periods of time, potentially adversely impacting our results of operations, financial condition and cash flows. Changes in market prices for electricity and fuel may result from any of the following:
·weather conditions;
·seasonality;
·demand for energy commodities and general economic conditions;
·forced or unscheduled plant outages;
·disruption of electricity or gas transmission or transportation infrastructure or other constraints or inefficiencies;
·addition or reduction of generating capacity;
·environmental and emissions regulation;
·availability of competitively priced alternative energy sources;
·availability and levels of storage and inventory for fuel stocks;
·natural gas, crude oil and refined products, and coal production levels;
·the creditworthiness or bankruptcy or other financial distress of market participants;
·changes in market liquidity;
·natural disasters, wars, embargoes, acts of terrorism and other catastrophic events; and
·Federal and state governmental regulation and legislation.
Our financial results fluctuate on a seasonal, quarterly and annual basis.
Our overall operating results fluctuate substantially on a seasonal, quarterly and annual basis depending on: (1) the geographic mix of our customer base; (2) the concentration of our product mix; (3) the impact of weather conditions on commodity pricing and demand; (4) variability in market prices for electricity; and (5) changes in the cost of delivery of commodities through energy delivery networks. These factors can have material short-term impacts on monthly and quarterly operating results, which may be misleading when considered outside of the context of our annual operating cycle. In addition, our accounts payable and accounts receivable are impacted by seasonality due to the timing differences between when we pay our suppliers for accounts payable versus when we collect from our customers on accounts receivable.
Accordingly, we may experience seasonal, quarterly and annual fluctuations, which could materially and adversely affect our business, financial condition, cash flows and results of operations.
We may have difficulty retaining our existing customers or obtaining a sufficient number of new customers, due to competition and for other reasons.
The markets in which we compete are highly competitive, and we may face difficulty retaining our existing customers or obtaining new customers due to competition. We encounter significant competition from local regulated utilities or their retail affiliates and traditional and new REPs. Many of these competitors or potential competitors are larger than us, have access to more significant capital resources, have more well-established brand names and have larger existing installed customer bases. Additionally, existing customers may switch to other REPs during their contract terms in the event of a significant decrease in the retail price of electricity in order to obtain more favorable prices. Although we generally have a right to collect a termination fee from each customer on a fixed-price contract that terminates its contract early, we may not be able to collect the termination fees in full or at all.
If we are unable to obtain new customers or maintain our existing customers, due to competition or otherwise, it could materially and adversely affect our business, financial condition, cash flows and results of operations.
We are subject to direct credit risk for certain customers who may fail to pay their bills as they become due.
We bear direct credit risk related to our customers located in markets that have not implemented purchase of accounts receivable (“POR”) programs as well as indirect credit risk in those POR markets that pass collection efforts along to us after a specified non-payment period. We generally have the ability to terminate contracts with customers in the event of non-payment, but in most states in which we operate we cannot disconnect their electricity service. In POR markets where the local regulated utility has the ability to return non-paying customers to us after specified periods, we may realize a loss for one to two billing periods until we can terminate these customers’ contracts. We may also realize a loss on fixed-price customers in this scenario due to the fact that we will have already fully hedged the customer’s expected commodity usage for the life of the contract and we also remain liable to our suppliers of electricity for the cost of our supply commodities. Furthermore, in the Texas market, we are responsible for billing the distribution charges for the local regulated utility and are at risk for these charges, in addition to the cost of the commodity, in the event customers fail to pay their bills. Changing economic factors, such as rising unemployment rates and energy prices also result in a higher risk of customers being unable to pay their bills when due.
The failure of our customers to pay their bills or our failure to maintain adequate billing and collection procedures could adversely affect our financial results.
We may not be able to manage our growth successfully.
The development of our operations will depend upon, among other things, our ability to create and expand our customer base in our existing markets and to enter new markets in a timely manner and at reasonable costs. In addition, we anticipate that our employee base will grow in order for us to accommodate our increased customer base. We may experience difficulty managing the growth of a portfolio of customers that is diverse both with respect to the types of services they will require, the market rules in their jurisdiction and the infrastructure required to deliver electricity to those customers. Expanding our operations may also require continued development of our operating and financial controls and may place additional stress on our management, finances and operational resources. If we are unable to manage our growth and development successfully, our operating results and financial condition could be materially adversely affected.
Achieving the desired benefits of acquisitions may be subject to a number of challenges and uncertainties which make it hard to predict the future success of each entity.
We acquired Summer Energy Northeast, LLC (formerly known as REP Energy, LLC) with expected benefits including, among other things, operating efficiencies, entering into new markets, procurement savings, innovation, sharing of best practices and increased market share that may allow for future growth. Achieving the anticipated benefits may be subject to a number of significant challenges and uncertainties, including, without limitation, whether unique corporate cultures will work collaboratively in an efficient and effective manner, the coordination of separate organizations, the possibility of imprecise assumptions underlying expectations regarding potential synergies and the integration process, unforeseen expenses and delays, and competitive factors in the marketplace. We could also encounter unforeseen transaction and integration-related costs or other circumstances such as unforeseen liabilities or other issues. Many of these potential circumstances are outside of our control and any of them could result in increased costs, decreased revenue, decreased synergies and the diversion of management time and attention. If we are unable to achieve our objectives within the anticipated time frame, or at all, the expected benefits may not be realized fully or at all, or may take longer to realize than expected, which could have an adverse effect on our business, financial condition and results of operations
We rely on a third party vendor for our customer billing and transactions platform that exposes us to third party performance risk.
We have outsourced our back office customer billing and transactions functions to a third party, and we rely heavily on the continued performance of that vendor under our commercial agreement. Failure of our vendor to operate in accordance with the terms of the agreement or the vendor’s bankruptcy or other event that prevents it from performing under our agreement could materially and adversely affect our business, financial condition, cash flows and results of operations.
We face strong competition from incumbent utilities and other competitors.
The market in which the Company operates is highly competitive. The Company faces competition from many competitors with significantly greater financial resources, well-established brand names and large, existing installed customer bases. We expect the level of competition to intensify in the future. We expect significant competition from incumbent, traditional, and new electricity providers, which may be better capitalized than the Company.
In some markets, our principal competitor may be the local incumbent utility’s unregulated affiliates. These affiliates have the advantage of long-standing relationships with their customers, and they may have longer operating histories, greater financial and other resources and greater name recognition in their markets than we do. In addition, incumbent utilities have been subject to regulatory oversight, in some cases for close to a century, and thus have a significant amount of experience regarding the regulators’ policy preferences as well as a critical economic interest in the outcome of proceedings concerning their revenues and terms and conditions of service.
Some of our competitors, including affiliated retailers, have formed alliances and joint ventures in order to compete in the restructured, deregulated retail electricity industry. Many customers of these incumbent utilities may decide to stay with their long-time energy provider if they have been satisfied with its service in the past.
In addition to competition from the incumbent utilities and their affiliates, we face competition from a number of other energy service providers, including start-up companies focusing on internet marketing and online services, and other energy industry participants who may develop businesses that will compete with us in both local and national markets. Many of these competitors or potential competitors are larger than the Company and have access to more significant capital resources.
Payment defaults by other REPs to ERCOT.
In the event of a default by a REP of its payment obligations to ERCOT, the portion of that obligation that is unrecoverable by ERCOT from the defaulting REP is assumed by the remaining market participants in proportion to each participant’s load ratio. As an REP and market participant in ERCOT, we may have to pay a portion of the amount owed to ERCOT should such a default occur, and ERCOT is not successful in recovering such amounts. As an early stage company, any such default of a REP in its obligations to ERCOT could have a material adverse effect on our business, results of operations, financial conditions and cash flows.
ERCOT has experienced problems with its information systems.
Problems in the flow of information between ERCOT, TDSPs and the REPs have resulted in delays and other problems in enrolling and billing customers. When customer enrollment transactions are not successfully processed by all involved parties, ownership records in the various systems supporting the market are not synchronized properly and subsequent transactions for billing and settlement are adversely affected. The impact may mean that we are not listed as the electric provider-of-record for intended or agreed upon time periods, delays in receiving customer consumption data that is necessary for billing and settlement either through ERCOT or directly with TDSPs, as well as the incorrect application of rates or prices and imbalances in our electricity supply forecast and actual sales.
Our future results of operations may be negatively impacted by settlement adjustments determined by ERCOT related to prior periods.
Settlement information for most operating activity is due from ERCOT within two months after the operating day, and true-up settlements are due from ERCOT within six months after the operating day. ERCOT has the ability to resettle any operating day at any time after the six month settlement period, usually the result of a lingering dispute, an alternative dispute resolution process, or litigated event. As a result, we are subject to settlement adjustments from ERCOT related to prior periods, which may result in charges or credits impacting our future reported results of operations.
Our results of operations and financial condition could be negatively impacted by any development or event beyond our control that causes economic weakness in the markets in which we operate.
Currently, we operate in Texas, New Hampshire and Massachusetts. As a result, regardless of the state of the economy in areas outside the markets in which we operate, economic weakness in these markets could lead to reduced demand for electricity in these markets. Such a reduction could have a material negative impact on our results of operations, liquidity and financial condition.
Risks Related to the Company
We may have contingent liabilities related to the Company’s operations prior to the Transaction of which we are not aware and for which we have not adequately provisioned.
Prior to the consummation of the Transaction, the Company was engaged in the business of manufacturing and installing decorative window wells made from precast concrete. We cannot ensure that there are no material claims outstanding, or other circumstances of which we are not aware, that would give rise to a material liability relating to these prior operations, even though we have not recorded any provisions in our financial statements related to such potential liabilities. If we are subject to past claims or material obligations relating to our operations prior to the consummation of the Transaction, such claims could materially adversely affect our business, financial condition, and results of operations.
We have a substantial amount of indebtedness, which may adversely affect our financial resources and our ability to operate our business.
Our subsidiary, Summer LLC, is party with Blue Water Capital Funding, LLC (the “Lender”), to, and we are liable with Summer LLC for, up to $5 million of outstanding debt under a revolving loan made pursuant to a loan agreement and accompanying revolving promissory note, security agreement and guaranty (collectively, the “Loan Agreement”). The maturity date of the outstanding Loan Agreement is June 30, 2018. Our resulting substantial level of indebtedness and other financial obligations increase the possibility that we may be unable to pay, when due, the principal of, interest on, or other amounts due in respect of, our indebtedness. Further, under the Loan Agreement, Summer LLC is subject to certain restrictive covenants that, among other things, may limit our ability to obtain additional financing for working capital requirements, product development activities, debt service requirements, and general corporate or other purposes. These restrictive covenants include, without limitation, restrictions on Summer LLC’s ability to: (1) incur additional indebtedness; (2) incur liens; (3) make certain dispositions of assets; (4) merge, dissolve, consolidate or sell all or substantially all of its assets; and (5) enter into certain transactions with affiliates during the term of the Loan Agreement. If Summer LLC breaches any of these restrictive covenants or is unable to pay the indebtedness under the Loan Agreement when due, this could result in a default under the Loan Agreement. In such event, the Lender may elect (after the expiration of any applicable notice or grace periods) to declare all outstanding borrowings, together with accrued and unpaid interest and other amounts payable under the Loan Agreement, to be immediately due and payable. Any such occurrence would have an immediate and materially adverse impact on our business and results of operations. The Loan Agreement is secured by a second position security interest in all assets of Summer LLC and is guaranteed by the Company.
Risks Related to the Transaction and the Ownership of the Common Stock of the Company
We face increased costs and demands upon management and accounting and finance resources as a result of complying with the laws and regulations affecting public companies; any failure to establish and maintain adequate internal controls over financial reporting or to recruit, train and retain necessary accounting and finance personnel could have an adverse effect on our ability to accurately and timely prepare our consolidated financial statements.
As a public operating company, we incur significant administrative, legal, accounting and other burdens and expenses beyond those of a private company, including those associated with corporate governance requirements and public company reporting obligations. In particular, we may need to enhance and supplement our internal accounting resources with additional accounting and finance personnel with the requisite technical and public company experience and expertise, as well as refine our quarterly and annual financial statement closing process, to enable us to satisfy such reporting obligations. However, even if we are successful in doing so, there can be no assurance that our finance and accounting organization will be able to adequately meet the increased demands that result from being a public company.
Furthermore, we are required to comply with Section 404 of the Sarbanes-Oxley Act of 2002. In order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, we are required to document and test our internal control procedures and prepare annual management assessments of the effectiveness of our internal control over financial reporting. These assessments will need to include disclosure of identified material weaknesses in our internal control over financial reporting. Testing and maintaining internal control over financial reporting will involve significant costs and could divert management’s attention from other matters that are important to our business. Additionally, we cannot provide any assurances that we will be successful in remediating any deficiencies that may be identified. If we are unable to remediate any such deficiencies or otherwise fail to establish and maintain adequate accounting systems and internal control over financial reporting, or we are unable to recruit, train and retain necessary accounting and finance personnel, we may not be able to accurately and timely prepare our consolidated financial statements and otherwise satisfy our public reporting obligations. Any inaccuracies in our financial statements or other public disclosures (in particular if resulting in the need to restate previously filed financial statements), or delays in our making required SEC filings, could have a material adverse effect on the confidence in our financial reporting, our credibility in the marketplace and the trading price of our common stock.
We devote significant resources to address these public company-associated requirements, including compliance programs and investor relations, as well as our financial reporting obligations. Complying with these rules and regulations increases our legal and financial compliance costs and makes some activities more time-consuming and costly.
An active, liquid and orderly trading market for our common stock may not develop, and the price of our stock may be volatile and may decline in value.
There currently is not an active public market for our common stock. An active trading market may not develop or, if developed, may not be sustained. The lack of an active market may impair the ability of stockholders to sell shares of common stock at the time they wish to sell them or at a price they consider reasonable. An inactive market may also impair our ability to raise capital by selling shares of common stock and may impair our ability to acquire other companies or assets by using shares of our common stock as consideration.
The stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of companies with securities traded in those markets. Broad market and industry factors may seriously affect the market price of companies’ stock, including ours, regardless of actual operating performance.
The Company may not be able to attract the attention of brokerage firms.
Because the Transaction is characterized as a “reverse acquisition,” securities analysts of brokerage firms may not provide coverage of the Company. No assurance can be given that brokerage firms will want to conduct any secondary offerings on behalf of the Company in the future, should the need arise.
Our common stock may not be eligible for listing on a national securities exchange.
Our common stock is not currently listed on a national securities exchange, and we do not currently meet the initial quantitative listing standards of a national securities exchange. We cannot assure you that we will be able to meet the initial listing standards of any national securities exchange, or, if we do meet such initial qualitative listing standards, that we will be able to maintain any such listing. Our common stock is currently quoted on the OTC Markets and, until our common stock is listed on a national securities exchange, we expect that it will continue to be eligible and quoted on the OTC Markets, another over-the-counter quotation system, or in the “pink sheets.” In these venues, an investor may find it difficult to obtain accurate quotations as to the market value of our common stock. In addition, if we fail to meet the criteria set forth in SEC regulations, various requirements would be imposed by law on broker-dealers who sell our securities to persons other than established customers and accredited investors. Consequently, such regulations may deter broker-dealers from recommending or selling our common stock, which may further affect its liquidity. This would also make it more difficult for us to raise additional capital in the future.
The Company’s common stock may be considered “a penny stock” and may be difficult to sell.
The SEC has adopted regulations that generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share, or an exercise price of less than $5.00 per share, subject to specific exemptions. The market price of our common stock is likely to be less than $5.00 per share and, therefore, may be designated as a “penny stock” according to SEC rules. This designation requires any broker or dealer selling these securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities. These rules may restrict the ability of brokers or dealers to sell our common stock and may affect the ability of investors to sell their shares.
Our stockholders may experience significant dilution if future equity offerings are used to fund operations or acquire complementary businesses.
If we engage in capital raising activities in the future, including issuances of common stock, to fund the growth of our business, our stockholders could experience significant dilution. In addition, securities issued in connection with future financing activities or potential acquisitions may have rights and preferences senior to the rights and preferences of our common stock. We have an equity incentive plan pursuant to which equity awards may be granted to eligible employees (including our executive officers), directors and consultants, if our board of directors determines that it is in the best interest of the Company and our stockholders to do so. The issuance of shares of our common stock upon the exercise of any such equity awards may result in dilution to our stockholders and adversely affect our earnings.
If securities or industry analysts do not publish, or cease publishing, research or reports about us, our business or our market, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.
The trading market for our common stock will be influenced by whether industry or securities analysts publish research and reports about us, our business, our market or our competitors and, if any analysts do publish such reports, what they publish in those reports. We may not obtain analyst coverage in the future. Any analysts that do cover us may make adverse recommendations regarding our stock, adversely change their recommendations from time to time, and/or provide more favorable relative recommendations about our competitors. If any analyst who may cover us in the future were to cease coverage of our company or fail to regularly publish reports on us, or if analysts fail to cover us or publish reports about us at all, we could lose, or never gain, visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
We do not anticipate paying any dividends in the foreseeable future.
We currently intend to retain our future earnings to support operations and to finance expansion and, therefore, we do not anticipate paying any cash dividends to holders of our common stock in the foreseeable future.
The forward looking statements contained in this Annual Report may prove incorrect.
This Annual Report contains certain forward-looking statements. These forward-looking statements are based largely on our current expectations and are subject to a number of risks and uncertainties. Actual results could differ materially from these forward-looking statements. In addition to the other risks described elsewhere in this “Risk Factors” discussion, important factors to consider in evaluating such forward-looking statements include: (i) changes to external competitive market factors or in our internal budgeting process which might impact trends in our results of operations; (ii) anticipated working capital or other cash requirements; (iii) changes in our business strategy or an inability to execute our strategy due to unanticipated changes in our industry; and (iv) various competitive factors that may prevent us from competing successfully in the marketplace. In light of these risks and uncertainties, many of which are described in greater detail elsewhere in this “Risk Factors” discussion, there can be no assurance that the events predicted in forward-looking statements contained in this Annual Report will, in fact, transpire. Any negative change in the factors listed above could adversely affect the financial condition and operating results of the Company and its products.
ITEM 1B.
ITEM 1B.UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2.
ITEM 2. PROPERTIES
Beginning December 1, 2017, we currently lease approximately 20,073 square feet of office space on the 37th floor of 5847 San Felipe, Houston, Texas, pursuant to a sublease agreement dated October 13, 2017 with ENSCO International Incorporated (“Sublandlord”) for a term beginning on December 1, 2017 and terminating on December 31, 2025. The rent payments will be $15,891.13 per month during the term of the sublease agreement. The Company is also responsible for 12.08% of the operating expenses, utilities and taxes charged to the Sublandlord.
We currently pay lease payments for the remaining terms of the lease agreement for office space located at 800 Bering Drive, Suite 260, Houston, Texas 77057. For the period of November 1, 2016 and through October 31, 2017, the base lease payments were $12,665 per month, beginning November 1, 2017 through October 31, 2018 the base payments will be increased to $12,934 and beginning November 1, 2018 through October 31, 2019 the base lease payments will increase to $13,203.
Summer Northeast entered into a sublease agreement with PDS Management Group, LLC (“PDS”) on October 31, 2017 at 800 Bering Drive, Suite 250, Houston, Texas, under a non-cancellable lease obligation which will expire on February 28, 2020. The monthly base rent is $3,726.63 for the period of November 1, 2017 to February 2018 and $3,904.08 for the remainder of the term of the sublease.
The premises are sufficient for the Company’s current needs.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4.
ITEM 4.MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the OTC Markets, OTCQB, under the symbol “SUME.” As such, the market for our common stock may be less liquid, receive less coverage by security analysts and news media, and generate lower prices than might otherwise be obtained if it were listed on a national exchange.
There is not, nor has there been, an active trading market for our common stock. The following table presents quarterly information on the high and low sales prices of our common stock during the fiscal years ended December 31, 2017 and 2016, furnished by the OTC Markets.
The high and low sales prices for our Common Stock on March 28, 2018, as quoted on the OTCQB, were $1.85 and $1.85, respectively.
Holders
On March 28, 2018, we had approximately 126 stockholders of record.
Dividends
We have never paid cash dividends on our common stock and do not anticipate paying such dividends in the foreseeable future. The future payment of dividends, if any, will be determined by our Board of Directors (the “Board”) in light of conditions then existing, including our financial condition and requirements, future prospects, restrictions in financing agreements, business conditions and other factors deemed relevant by the Board.
Repurchases
During the fiscal years ended December 31, 2017 and 2016, we did not repurchase any of our securities.
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides certain information as of December 31, 2017 with respect to our existing equity compensation plans under which shares of our common stock are authorized for issuance.
(1)This plan is the 2012 Stock Option and Stock Award Plan.
(2) This plan is the 2015 Stock Option and Stock Award Plan.
(3)From time to time and at the discretion of the Board, we may issue warrants and stock options to our key individuals or officers as performance-based compensation.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
ITEM 7.
ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion presents information about our consolidated results of operations, financial condition, liquidity and capital resources and should be read in conjunction with our consolidated financial statements and the notes thereto beginning on page of this Annual Report.
Background
The consolidated financial statements include the accounts of Summer Energy Holdings, Inc. (formerly Castwell Precast Corporation) and its wholly owned subsidiaries Summer Energy, LLC (“Summer LLC”), Summer Energy of Ohio (“Summer Ohio”), Summer EM Marketing, LLC (“Marketing LLC”) and Summer Energy Northeast, LLC (“Summer Northeast”) (collectively referred to as the “Company,” “we,” “us,” or “our”). All significant intercompany transactions and balances have been eliminated in these consolidated financial statements.
On March 27, 2012, Summer LLC became a wholly-owned subsidiary of Summer Energy Holdings, Inc. (previously known as Castwell Precast Corporation) through a reverse acquisition transaction, which resulted in the former members of Summer LLC owning approximately 92.3% of Summer Energy Holdings, Inc.’s outstanding common stock. The transaction was treated as a recapitalization of Summer LLC, and Summer LLC (and its historical financial statements) is the continuing entity for financial reporting purposes.
Summer LLC is a 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 Ohio was formed in the state of Ohio on December 16, 2013 to procure and sell electricity in the state of Ohio. The Public Utilities Commission of Ohio issued a certificate as a Retail Electric Service Provider to Summer Ohio on June 16, 2015. At December 31 2017, there was no business activity in the State of Ohio.
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 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.
Overview
Our wholly-owned subsidiary, Summer LLC, is a licensed Retail Electricity Provider (“REP”) in the state of Texas. In general, Texas regulatory structure permits REPs, such as Summer LLC, to procure and sell electricity at unregulated prices. REPs pay the local transmission and distribution utilities a regulated tariff rate for delivering electricity to their customers. As a REP, Summer LLC sells electricity and provides the related billing, customer service, collections and remittance services to residential and commercial customers. Summer LLC offers retail electricity to commercial and residential customers in designated target markets within the state of Texas. In the commercial market, the primary target is small to medium-sized customers (less than one megawatt of peak usage), but we will also selectively pursue larger commercial customers through Management’s existing, historical relationships. Residential customers are a secondary target market. We anticipate that a majority of Summer LLC’s customers will be located in the Houston and Dallas-Fort Worth metropolitan areas; although, we anticipate a growing number will be located in a variety of other metropolitan and rural areas within Texas. We began delivering electricity to customers in the Texas market mid-February 2012.
Our wholly-owned subsidiary, Summer Northeast, is a licensed REP in the states of Massachusetts, New Hampshire, Rhode Island and Connecticut. In general, the regulatory structure in these states permits REPs, such as Summer Northeast, to procure and sell electricity at unregulated prices. As a REP, Summer Northeast sells electricity to residential and commercial customers. In the commercial market, the primary target is small to medium-sized customers (less than one megawatt of peak usage), but we will also selectively pursue larger commercial customers through Management’s existing, historical relationships. Residential customers are a secondary target market. At this time, Summer Northeast sells electricity in Massachusetts and New Hampshire. There is no sales activity in the states of Connecticut and Rhode Island.
During the year ended December 31, 2017, we added 12 full-time employees to our workforce, and we anticipate these staffing additions will enable us to effectively expand our presence throughout the Texas market and in the Northeast United States (“U.S.”) market.
As of December 31, 2017, we had 74 full-time employees.
Application of Critical Accounting Policies
The SEC defines critical accounting policies as those that are, in management’s view, most important to the portrayal of our financial condition and results of operations and most demanding of our judgment. The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which were prepared in accordance with accounting principles generally accepted in the U.S., which is referred to as “GAAP.” The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate these estimates, including those related to stock-based compensation, customer programs and incentives, bad debts, supply inventories, intangible assets, income taxes, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We consider the following accounting policies to be those most important to the portrayal of our financial condition and those that require the most subjective judgment:
Revenue Recognition
Our electricity revenue in the Texas market is recognized by our Company upon delivery of electricity to a customer’s meter. This method of revenue recognition is commonly referred to as the flow method. The flow method of revenue relies upon Electric Reliability Council of Texas (“ERCOT”) settlement statements to determine the estimated revenue for a given month. Supply delivered to customers for the month, measured on a daily basis, provides the basis for revenues. Electricity revenue consists of proceeds from energy sales, including pass through charges from the Transmission and Distribution Providers (“TDSPs”) billed to the customer at cost.
The Company’s revenue in the Northeast market is recorded based on the flow method of revenue recognition for electricity delivered through the end of the calendar month to retail customers’ meters and relies upon the settlement statements from ISO New England Inc. (“ISO New England”) to determine the estimated revenue for a given month. Supply delivered to customers for the month, measured on a daily basis, provides the basis for revenues.
Unbilled Revenue and Accounts Receivable
Electric services in the Texas market not billed by month-end are accrued based upon estimated deliveries to customers as tracked and recorded by ERCOT multiplied by our average billing rate per kilowatt hour (“kWh”) in effect at the time. At the end of each calendar month, revenue is accrued to unbilled receivables based on the estimated amount of power delivered to customers using the flow technique. Unbilled revenue also includes accruals for estimated TDSP charges and monthly service charges applicable to the estimated electricity usage for the period. All charges that were physically billed in the calendar month are recorded from the unbilled account to the customer’s receivable account. Accounts receivable are customer obligations billed at the customer’s monthly meter read date for that period’s electricity usage and due within 16 days of the date of the invoice. The customers’ past due balances are subject to a late fee that is assessed on that billing.
Electric services in the ISO New England market not billed by month-end are accrued based upon estimated deliveries to customers as tracked and recorded by ISO New England multiplied by our average billing rate per kWh in effect at the time. The customer billing in the ISO New England market is performed by the local utility company.
The Company, in the Texas market, determines an allowance for doubtful accounts based upon a review of outstanding receivables, historical write-off experience and existing economic conditions. Receivables past due over 90 days are considered delinquent and reviewed individually for collectability. After all means of collection have been exhausted, delinquent receivables are written off. Billed receivables over 90 days and 2% of unbilled receivables are reserved by the Company.
Within the ISO New England market, the local utility companies in the state of Massachusetts purchase the Company’s billed receivables at a statutory published discounted rate without recourse, therefore, no allowance for doubtful accounts are recorded as of December 31, 2017.
Cost Recognition
Direct energy costs are recorded when the electricity is delivered to the customer’s meter.
Cost of goods sold (“COGS”) within the Texas market include electric power purchased and pass through charges from the 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 ISO 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.
The energy portion of our COGS is comprised of two components: bilateral wholesale costs and balancing/ancillary costs. These two cost components are incurred and recognized differently as follows:
Bilateral wholesale costs are incurred through contractual arrangements with wholesale power suppliers for firm delivery of power at a fixed volume and fixed price. We are invoiced for these wholesale volumes at the end of each calendar month for the volumes purchased for delivery during the month, with payment due 20 days after the end of the month.
Balancing/ancillary costs are based on the customer load and are determined by ERCOT and ISO New England 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.
Stock-Based Compensation
Under the fair value recognition provisions of the authoritative guidance, stock-based compensation cost granted to employees is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service or performance period, which is the vesting period. Stock options and warrants issued to consultants and other non-employees as compensation for services to be provided to us are accounted for based upon the fair value of the services provided or the estimated fair value of the option or warrant, whichever can be more clearly determined. We currently use the Black-Scholes option pricing model to determine the fair value of stock options. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the term of the awards, the expected term of the award, the risk-free interest rate and any expected dividends. Compensation cost associated with grants of restricted stock units are also measured at fair value. We evaluate the assumptions used to value restricted stock units on a quarterly basis. When factors change, including the market price of the stock, share-based compensation expense may differ significantly from what has been recorded in the past. If there are any modifications or cancellations of the underlying unvested securities, we may be required to accelerate, increase or cancel any remaining unearned share-based compensation expense.
Income Taxes
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of tax-related assets and liabilities and income tax expense. These estimates and assumptions are based on the requirements of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) relating to accounting for uncertainty in income taxes. Our policy is to classify interest and penalties related to unrecognized income tax benefits as a component of income tax expense.
We assess whether previously unrecognized tax benefits may be recognized when the tax position is (1) more likely than not of being sustained based on its technical merits, (2) effectively settled through examination, negotiation or litigation, or (3) settled through actual expiration of the relevant tax statutes. Implementation of this requirement requires the exercise of significant judgment. Recognizing deferred tax assets will increase tax benefits and increase net income.
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the period in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date.
The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest related to unrecognized tax benefits and penalties in income tax expense.
New Customer Implementation Costs
We ordinarily incur additional costs to implement our services for new customers. These costs are comprised primarily of additional labor and support. These costs are expensed as incurred and have a negative impact on our statements of operations and cash flows during the implementation phase.
Warrants
The Company’s common stock warrants are measured at fair value using the Black-Scholes valuation model which takes into account, as of the measurement date, factors including the current exercise price, the term of the instrument, the current price of the underlying stock and its expected volatility, expected dividends on the stock and the risk-free interest rate for the term of the item.
The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP, with no need for management’s judgment in its application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. Please see our audited consolidated financial statements and notes thereto which begin on page of this Annual Report on Form 10-K, which contain accounting policies and other disclosures required by GAAP and please refer to the disclosures in Note 2 of our financial statements for a summary of our significant accounting policies.
Results of Operations
Year Ended December 31, 2017 compared to the Year Ended December 31, 2016
Revenue - For the year ended December 31, 2017, the Company generated $117,683,175 in electricity revenue from commercial customers and various long and short-term residential customers. The majority of our revenue comes from the flow of electricity to customers. However, included within these revenues are revenues from contract cancellation fees, disconnection fess and late fees in the amount of $4,804,289. Electricity revenues for the year ended December 31, 2016 were $90,180,309, including $4,351,695 from contract cancellation fees, disconnection fees and late fees.
Management plans to continue to execute on its sales and marketing program to solicit individual commercial and residential customers. Management also plans to continue to acquire portfolios of commercial and residential customers when offered at reasonable prices.
Cost of Goods Sold and Gross Profit - For the year ended December 31, 2017, cost of goods sold and gross profit totaled $99,898,779 and $17,784,396, respectively. Cost of goods sold and gross profit for the year ended December 31, 2016 totaled $76,716,334 and $13,463,975, respectively.
Operating expenses - Operating expenses for the year ended December 31, 2017, totaled $15,194,672, consisting of general and administrative of $8,350,781, bank services fees of $881,585, collection fees/sales verification fees of $67,765, outside commissions’ expense of $3,836,336, professional fees of $353,060, bad debt reserve of $750,011 and $955,134 of billing fees. Billing fees are primarily costs paid to a third party Electronic Data Inter-Chain (“EDI”) providers to handle transactions between us, ERCOT and the TSDPs in order to produce customer bills.
Operating expenses for the year ended December 31, 2016 totaled $13,426,756, consisting of general and administrative expenses of $6,820,886, bank services fess of $674,502, collection fees/sales verification fees of $61,507, outside commissions’ expense of $3,124,275, professional fees of $234,054, bad debt expense of $1,543,840 and $967,692 of billing fees.
Net Income/(Loss) - Net income/(loss) for the years ended December 31, 2017 and 2016, totaled $1,266,608 and $(1,173,864), respectively. The 2017 net income compared to the 2016 net loss relates primarily to growth of the company and continued efforts to gain economies of scale.
Liquidity and Capital Resources
At December 31, 2017 and 2016, our cash totaled $313,757 and $1,523,008, respectively. Our principal cash requirements for the year ended December 31, 2017 and 2016, were for operating expenses and cost of goods sold, including power purchases, employee cost, customer acquisition and capital expenditures. During the year ended December 31, 2017, the primary source of cash was from electricity revenues and $450,000 from capital raised pursuant to a private placement of our common stock. During the year ended December 31, 2016, the primary source of cash was from electricity revenues, $2,500,000 in loan proceeds, and $4,228,450 from capital raised pursuant to a private placement of our common stock.
General - The Company’s decrease in net cash flows during the year ended December 31, 2017 is attributable to $1,907,359 cash used in operating activities, $273,108 cash provided in investing activities, including $75,897 used for the purchase of property and equipment, and net cash of $425,000 provided by financing activities primarily consisting of $450,000 received by the Company from the sale of our common stock through private placements. During the year ended 2016, the Company’s increase in net cash flows was attributable to $861,401 cash used in operating activities $1,348,792 cash used in investing activities, including $76,762 used for the purchase of property and equipment, and net cash of $3,350,711 provided from financing activities primarily from $4,228,450 received by the Company from the sale of our common stock through private placements.
The Company has no present agreements or commitments with respect to any material acquisitions of other businesses, products, product rights or technologies. However, we will continue to evaluate acquisitions of and/or investments in products, technologies, or companies that complement our business and may make such acquisitions and/or investments in the future. Accordingly, we may need to obtain additional sources of capital in the future to finance any such acquisitions and/or investments. We may not be able to obtain such financing on commercially reasonable terms, if at all. If we are able to obtain additional financing, such financing may result in restrictions on our operations, in the case of debt financing, or substantial dilution for stockholders, in the case of equity financing.
Cash Outflows for Capital Assets, Customer Acquisition and Deposits
We expect to expend funds for capital assets, customer acquisition and deposits in connection with the expansion of our business in the upcoming year ending December 31, 2018. The anticipated source of funds is electricity revenues, lending and capital raised in the upcoming year ending December 31, 2018.
Future Financing Needs
The Company commenced operations and the generation of revenue during the year ended December 31, 2012. Management believes that we have adequate liquidity to support operations, but, this belief is based upon many assumptions and is subject to numerous risks.
While we believe in the viability of our plan of operations and strategy to generate revenues and in our ability to raise additional funds, there can be no assurances that our plan of operations or ability to raise capital will be successful. The ability to grow is dependent upon our ability to further implement our business plan, generate revenues, and obtain additional financing, if and as needed.
Off-Balance Sheet Arrangements
Our existing wholesale power purchase agreement provides that we will provide additional credit support to cover mark-to-market risk in connection with the purchase of long term power. A mark-to-market credit risk occurs when the price of previously purchased long term power is greater than the current market price for power purchased for the same term. While we believe that the current environment of historically low power prices limits our exposure to risk, a collateral call, should it occur, could limit our working capital and, if we fail to meet the collateral call, could cause liquidation of power positions.
Related Party Transactions
On August 29, 2013, the Company entered into two, five-year credit facility agreements with two members of the Company’s Board of Directors, Neil Leibman and Tom O’Leary (Mr. Leibman is also an executive officer). Both parties agreed to act as surety and personal guarantors (“Guarantors”) with respect to $826,000 of the Company’s depository requirements, consisting of a line of credit from a financial institution and certain extensions of credit by critical vendors that were necessary for the Company to carry out its business. As consideration for acting as surety and personal Guarantors, the Company issued each 413,000 shares of its Series A Preferred Stock. On May 6, 2014, the Guarantors were released from such obligation by the Company when the Company exercised the Call Right reflected within the two Credit Facility Agreements. On May 13, 2014, the Company granted a five-year stock option to each Guarantor to purchase 151,115 shares of the Company’s common stock at an exercise price of $1.50 per share.
On April 18, 2014, 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 an Advance to Loan Amount Note in the amount of $1,500,000 which increased to $1,700,000. The Company agreed to issue the four Guarantors a total of 120,000 shares of the Company’s common stock per month (30,000 shares of common stock per month per Guarantor) reduced accordingly as the loan is reduced in consideration for agreeing to act as a Guarantor of the Advance to Loan Amount Note. In May 2016, the Company released the Guarantors from the obligation to guaranty the Advance to Loan Amount Note and stock payments for such guaranty were discontinued as of May 31, 2016. The balance of the Advance to Loan Amount Note was zero as of December 31, 2016.
On July 22, 2016, the Company advanced $611,424 to a related party for purposes of short-term financing. Such advances were paid back in full to the Company on August 9, 2016.
During the year ended December 31, 2016, the Company provided employee services to a related party valued at $73,078. In addition, the related party provided aviation services to the Company in the amount of $20,463. The net effect of these services to the Company was $52,615. There were no outstanding balances between the Company and such related party as of December 31, 2016.
On October 31, 2017, Summer Northeast (formerly Rep Energy, LLC) entered into a sublease agreement with PDS Management Group, LLC (“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.
On November 1, 2017, the Company entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) with REP Energy, LLC, a Texas limited liability company (“REP Energy”) and the members of REP Energy (the “Members” and the transaction contemplated by the Purchase Agreement, the “Transaction”) whereby the Company acquired 100% of the issued and outstanding units of membership interest (the “Interests”) of REP Energy from the Members. Several of the Members of REP Energy are officers and/or directors of the Company. The conflicts of interest of officers and/or directors of the Company were disclosed and known to the Board of Directors of the Company (the “Board”). The terms of the Purchase Agreement and the Transaction were negotiated, considered and approved by a majority of the disinterested members of the Board. On November 15, 2017, REP Energy filed a certificate of amendment with the Texas Secretary of State to change its name to Summer Energy Northeast, LLC.
On November 1, 2017, the Company assumed a Master Revolver Note (“Master Note”) held by REP Energy pursuant to the terms of the Purchase Agreement. Guaranty of the Master Note at origination on July 25, 2017 was made by two members of REP Energy (Neil Leibman and Tom O’Leary (the “Guarantors”) who are also members of the Company’s Board (Mr. Leibman is also an executive officer). In accordance with the provisions of Purchase Agreement, the Company, as soon as practicable, will replace the letters of credit secured by the Master Note and arrange a release of the guaranty by the Guarantors. Until such release is effective, the Company agrees to pay monthly interest to the Guarantors, at the lowest applicable federal rate published by the Internal Revenue Service, on the outstanding balance of such credit facility.
On November 1, 2017, the Company assumed $767,677 of related party debt owed by REP Energy to members Tom O’Leary and Neil Leibman pursuant to the terms of the Purchase Agreement. Messrs. O’Leary and Leibman serve on the Company’s Board and Mr. Leibman is an executive officer. In accordance with the Amended and Restated Limited Liability Company Agreement of REP Energy, the amount of any loan or advance by a member shall not be treated as a contribution to the capital of the lending member but shall be considered debt. The loan bears interest at the rate of the greater of (i) 12% per annum or (ii) the Prime Rate plus 5%, payable monthly.
Contractual Obligations, Contingent Liabilities and Commitments
We currently lease approximately 20,073 square feet of office space at 5847 San Felipe Street, Suite 3700, Houston, Texas pursuant to a sublease agreement effective December 1, 2017 and terminating on December 31, 2025. The rent payments are approximately $15,900 per month during the term of the sublease agreement. The Company is also responsible for 12.08% of the operating expenses, utilities and taxes charged to the sublandlord.
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 which expired on August 31, 2016. The Sixth Amendment to the office space lease extended the obligation to October 31, 2019. Beginning on November 1, 2016 and through October 31, 2017, the base lease payment is $12,665 per month, beginning November 1, 2017 through October 31, 2018 the base payments will be increased to $12,934 and beginning November 1, 2018 through October 31, 2019 the base lease payments will increase to $13,203.
The base lease payments under the assumed lease are $12,934 per month as of December 31, 2017.
Summer Northeast’s sublease agreement with PDS is a non-cancellable lease obligation which will expire on February 28, 2020. The monthly base rent is $3,726.63 for the period of November 1, 2017 to February 2018 and $3,904.08 for the remaining term of the sublease.
ITEM 7A.
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item are included in Part IV, Item 15 of this Annual Report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our “disclosure controls and procedures” as of the end of the period covered by this Annual Report, pursuant to Rules 13a-15(b) and 15d-15(b) under the Exchange Act. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures, as of the end of the period covered by this Annual Report, were effective.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Management conducted an assessment of the effectiveness, as of December 31, 2017, of our internal control over financial reporting, based on the 2013 framework established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on their assessment under the COSO framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2017.
This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to final rules of the Securities and Exchange Commission that permit us to provide only management’s report in this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during the most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B
ITEM 9B OTHER INFORMATION
Sublease
On October 31, 2017, Summer Northeast entered into a sublease agreement (the “Sublease”) with PDS Management Group, LLC (“PDS”), pursuant to which Summer Northeast leases approximately 4,249 square feet of space (the ”Premises”) located at 800 Bering Drive, Houston, Texas 77057, for a term beginning on November 1, 2017 and terminating on February 28, 2020 (the ”Term”). Pursuant to the Sublease, Summer Northeast is required to pay a monthly base rent of $3,726.63 for the period of November 1, 2017 to February 28, 2018 and $3,904.08 for the remainder of the Term. The Sublease also contains customary events of default. Tom O’Leary, a member of the Company’s Board of Directors, is a principal and owner of PDS.
A copy of the Sublease is filed herewith as Exhibit 10.38, and is incorporated herein by this reference. The foregoing summary description of the Sublease Agreement is not complete and is qualified in its entirety by reference to the full text of the Sublease.
Short-term Loans
On January 3, 2018, Tom O’Leary and Neil Leibman, each a member of the Company’s Board of Directors (and, in the case of Mr. Leibman, an executive officer of the Company) each loaned the Company $125,000 for purposes of short-term financing, pursuant to separate promissory notes (each a “January 3 Note”). Each of the January 3 Notes is unsecured, has a maturity date of July 3, 2018, bears interest at a rate of five percent (5%) per annum and allows for prepayment. Each of the January 3 Notes contains customary events of default and an acceleration of all principal and accrued interest upon an event of default. A form of the January 3 Notes is filed herewith as Exhibit 10.39, and is incorporated herein by this reference. The foregoing summary description of the January 3 Notes is not complete and is qualified in its entirety by reference to the full text of such notes.
On January 8, 2018, Neil Leibman, a member of the Company’s Board of Directors and an executive officer, loaned the Company $373,000 for purposes of short-term financing, pursuant to a promissory note (the “January 8 Note”). The January 8 Note is unsecured, has a maturity date of July 8, 2018, bears interest at a rate of five percent (5%) per annum and allows for prepayment. The January 8 Note contains customary events of default and an acceleration of all principal and accrued interest upon an event of default. A copy of the January 8 Note is filed herewith as Exhibit 10.40, and is incorporated herein by this reference. The foregoing summary description of the January 8 Note is not complete and is qualified in its entirety by reference to the full text of the January 8 Note.
On January 8, 2018, Pinnacle Power, LLC, a Pennsylvania limited liability company (“Pinnacle”) loaned the Company $80,000 for purposes of short-term financing, pursuant to an unsecured promissory note (the “Pinnacle Note”). The Pinnacle Note is unsecured, has a maturity date of July 8, 2018, bears interest at a rate of five percent (5%) per annum and allows for prepayment. The Pinnacle Note contains customary events of default and an acceleration of all principal and accrued interest upon an event of default. Tom O’Leary and Neil Leibman, each a member of the Company’s Board of Directors (and, in the case of Mr. Leibman, an executive officer of the Company) are owners and officers of Pinnacle. A copy of the Pinnacle Note is filed herewith as Exhibit 10.41, and is incorporated herein by this reference. The foregoing summary description of the Pinnacle Note is not complete and is qualified in its entirety by reference to the full text of the Pinnacle Note.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information with respect to our executive officers and directors appearing in our Definitive Proxy Statement which is expected to be filed with the SEC on or prior to April 25, 2018 in connection with the 2018 Annual Meeting of Stockholders (“Proxy Statement”) is hereby incorporated by reference.
ITEM 11
ITEM 11 EXECUTIVE COMPENSATION
The information with respect to compensation of our executive officers appearing in our Proxy Statement is hereby incorporated by reference.
ITEM 12
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information with respect to the security ownership of certain beneficial owners and management appearing in our Proxy Statement is hereby incorporated by reference.
ITEM 13CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information with respect to certain relationships and related transactions with management appearing in our Proxy Statement is hereby incorporated by reference.
ITEM 14PRINCIPAL ACCOUNTING FEES AND SERVICES
The information with respect to the principal accounting fees and services appearing in the Proxy Statement is hereby incorporated by reference.
PART IV
ITEM 15.
ITEM 15.EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(1)Financial Statements
The following consolidated financial statements, and related notes thereto of our independent auditor are filed as part of this Annual Report:
(2)Financial Statement Schedules
All financial statement schedules were omitted because they are not applicable, not required or the information required is shown in the financial statements or the notes thereto.
(3)Exhibits
The exhibits listed on the accompanying index to exhibits immediately following the financial statements are filed as part of, or hereby incorporated by reference into, this Annual Report.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Summer Energy Holdings, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Summer Energy Holdings, Inc. and subsidiaries (the “Company”) as of December 31, 2017, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the year then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ WHITLEY PENN LLP
We have served as the Company's auditor since 2017.
Houston, Texas
March 29, 2018
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Summer Energy Holdings, Inc.
Houston, TX
We have audited the accompanying consolidated balance sheets of Summer Energy Holdings, Inc. as of December 31, 2016 and 2015 and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2016. Summer Energy Holdings, Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Summer Energy Holdings, Inc. as of December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.
/S/ LBB & ASSOCIATES LTD., LLP
LBB & Associates Ltd., LLP
Houston, Texas
March 30, 2017
SUMMER ENERGY HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
See accompanying notes to the consolidated financial statements.
SUMMER ENERGY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes to the consolidated financial statements.
SUMMER ENERGY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Years Ended December 31, 2017 and 2016
See accompanying notes to the consolidated financial statements.
SUMMER ENERGY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to the consolidated financial statements.
SUMMER ENERGY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 1 - ORGANIZATION
The consolidated financial statements include the accounts of Summer Energy Holdings, Inc. (formerly Castwell Precast Corporation) and its wholly-owned subsidiaries Summer Energy, LLC (“Summer LLC”), Summer Energy of Ohio (“Summer Ohio”), Summer EM Marketing, LLC (“Marketing LLC”) and Summer Energy Northeast, LLC (“Summer Northeast”) (collectively referred to as the “Company,” “we,” “us,” or “our”). All significant intercompany transactions and balances have been eliminated in these consolidated financial statements.
On March 27, 2012, Summer LLC became a wholly-owned subsidiary of Summer Energy Holdings, Inc. (previously known as Castwell Precast Corporation) through a reverse acquisition transaction, which resulted in the former members of Summer LLC owning approximately 92.3% of Summer Energy Holdings, Inc.’s outstanding common stock. The transaction was treated as a recapitalization of Summer LLC, and Summer LLC (and its historical financial statements) is the continuing entity for financial reporting purposes.
Summer LLC is a retail 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.
Marketing, LLC was formed in the state of Texas on November 6, 2012 to provide marketing services to Summer LLC.
Summer Ohio was formed in the state of Ohio on December 16, 2013 to procure and sell electricity in the state of Ohio. The Public Utilities Commission of Ohio issued a certificate as a Retail Electric Service Provider to Summer Ohio on June 16, 2015. At December 31 2017, there was no business activity in the state of Ohio.
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 preparation of financial statements in conformity with accounting principles generally accepted in the United States 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.
Revenue Recognition
Our electricity revenue in the Texas market is recognized by our Company upon delivery of electricity to a customer’s meter. This method of revenue recognition is commonly referred to as the flow method. The flow method of revenue relies upon Electric Reliability Council of Texas (“ERCOT”) settlement statements to determine the estimated revenue for a given month. Supply delivered to customers for the month, measured on a daily basis, provides the basis for revenues. Electricity revenue consists of proceeds from energy sales, including pass through charges from the Transmission and Distribution Providers (“TDSPs”) billed to the customer at cost.
The Company’s revenue in the Northeast market is recorded based on the flow method of revenue recognition for electricity delivered through the end of the calendar month to retail customers’ meters and relies upon the settlement statements from ISO New England Inc. (“ISO New England”) to determine the estimated revenue for a given month. Supply delivered to customers for the month, measured on a daily basis, provides the basis for revenues.
Unbilled Revenue and Accounts Receivable
Electric services in the Texas market not billed by month-end are accrued based upon estimated deliveries to customers as tracked and recorded by ERCOT multiplied by our average billing rate per kilowatt hour (“kWh”) in effect at the time. At the end of each calendar month, revenue is accrued to unbilled receivables based on the estimated amount of power delivered to customers using the flow technique. Unbilled revenue also includes accruals for estimated TDSP charges and monthly service charges applicable to the estimated electricity usage for the period. All charges that were physically billed in the calendar month are recorded from the unbilled account to the customer’s receivable account. Accounts receivable are customer obligations billed at the customer’s monthly meter read date for that period’s electricity usage and due within 16 days of the date of the invoice. The past due customer balances are subject to a late fee that is assessed on that billing. Unbilled accounts in the Texas market as of December 31, 2017, and 2016 were estimated at $20,146,719 and $10,922,288, respectively.
Electric services in the ISO New England market not billed by month-end are accrued based upon estimated deliveries to customers as tracked and recorded by ISO New England multiplied by our average billing rate per kilowatt hour (“kWh”) in effect at the time. The customer billing in the ISO New England market is performed by the local utility company. Unbilled accounts in the ISO New England market as of December 31, 2017 were estimated at $697,810.
The Company, in the Texas market, determines an allowance for doubtful accounts based upon a review of outstanding receivables, historical write-off experience and existing economic conditions. Receivables past due over 90 days are considered delinquent and reviewed individually for collectability. After all means of collection have been exhausted, delinquent receivables are written off. Billed receivables over 90 days and 2% of unbilled receivables are reserved by the Company. Management has determined that the allowance for doubtful accounts as of December 31, 2017 and 2016 is $1,176,958 and $999,046, respectively. Bad debt expense for the years ended December 31, 2017 and 2016 is $750,011 and $1,543,840, respectively. Net write offs and recoveries for the years ended December 31, 2017 and 2016 were $572,099 and $1,226,170, respectively.
Within the ISO New England market, the local utility companies in the state of Massachusetts purchase the Company’s billed receivables at a statutory published discounted rate without recourse; therefore, no allowance for doubtful accounts is recorded as of December 31, 2017.
Cost Recognition
Direct energy costs are recorded when the electricity is delivered to the customer’s meter.
Cost of goods sold (“COGS”) within the Texas market include electric power purchased and pass through charges from the 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 ISO 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.
The energy portion of our COGS is comprised of two components: bilateral wholesale costs and balancing/ancillary costs. These two cost components are incurred and recognized differently as follows:
Bilateral wholesale costs are incurred through contractual arrangements with wholesale power suppliers for firm delivery of power at a fixed volume and fixed price. We are invoiced for these wholesale volumes at the end of each calendar month for the volumes purchased for delivery during the month, with payment due 20 days after the end of the month.
Balancing/ancillary costs are based on the customer load and are determined by ERCOT and ISO New England through a multiple step settlement process. Balancing costs/revenues are related to the differential between supply that we provided through our bilateral wholesale supply and the supply required to serve our customer load. The Company endeavors to minimize the amount of balancing/ancillary costs through our load forecasting and forward purchasing programs.
Basic and Diluted Income/(Loss) Per Share
Basic income/(loss) per share are computed by dividing net income/(loss) applicable to the weighted-average number of shares outstanding during the period. Diluted income per share is determined using the weighted-average number of shares outstanding during the period, adjusted for the dilutive effect of share equivalents, using the treasury method, consisting of shares that might be issued upon exercise of share equivalents. In periods where losses are reported, the weighted average number of shares outstanding excludes share equivalents, because their inclusion would be anti-dilutive.
At December 31, 2017, the weighted-average number of shares dilutive outstanding share equivalents were 779,630 and 640,000 anti-dilutive shares. In 2016, the weighted-average number of share equivalents of 345,889 were excluded because their inclusion would have been anti-dilutive.
Stock-Based Compensation
Stock-based awards granted to employees are measured at the grant date based on the fair value of the award and recognized as expense over the requisite service or performance period, which is the vesting period.
Stock options and warrants issued to consultants and other non-employees as compensation for services to be provided to us are accounted for based upon the fair value of the services provided or the estimated fair value of the option or warrant, whichever can be more clearly determined. We currently use the Black-Scholes option pricing model to determine the fair value of stock options. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the term of the awards, the expected term of the award, the risk-free interest rate and any expected dividends. Compensation cost associated with grants of restricted stock units are also measured at fair value. We evaluate the assumptions used to value restricted stock units on a quarterly basis. When factors change, including the market price of the stock, share-based compensation expense may differ significantly from what has been recorded in the past. The Company estimates forfeitures at the date of grant and revises the estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
If there are any modifications or cancellations of the underlying unvested securities, we may be required to accelerate, increase or cancel any remaining unearned share-based compensation expense.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the period in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date.
The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest related to unrecognized tax benefits and penalties in income tax expense.
New Customer Implementation Costs
We ordinarily incur additional costs to implement our services for new customers. These costs are comprised primarily of additional labor and support. These costs are expensed as incurred and have a negative impact on our statements of operations and cash flows during the implementation phase.
Warrants
The Company’s common stock warrants are measured at fair value using the Black-Scholes valuation model which takes into account, as of the measurement date, factors including the current exercise price, the term of the instrument, the current price of the underlying stock and its expected volatility, expected dividends on the stock and the risk-free interest rate for the term of the item.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.
Concentration of Credit Risk
The Company maintains its cash in demand deposit accounts or “noninterest-bearing transaction accounts” which, at times, may exceed federally insured limits. The Company’s management periodically assesses the financial stability of these banks. The Company has not experienced any losses on such accounts.
Intangibles or Long-lived assets
The Company periodically evaluates the carrying value of definite-lived intangibles when events or changes in circumstances indicate that the carrying value may not be recoverable. Factors the Company considers important which could trigger an impairment review include, but are not limited to, significant under-performance relative to historical or projected future operating results, significant changes in the manner of its use of acquired assets or its overall business strategy, and significant industry or economic trends.
When the Company determines that the carrying value of a long-lived asset may not be recoverable based upon the existence of one or more of the above indicators, the Company determines the recoverability by comparing the carrying amount of the asset to net future undiscounted cash flows that the asset is expected to generate and recognizes an impairment charge equal to the amount by which the carrying amount exceeds the fair market value of the asset.
If the Company’s revenues or other estimated operating results are not achieved at or above our forecasted level, and the Company is unable to recover such costs through price increases, the carrying value of certain of the Company’s assets may prove to be unrecoverable and we may incur impairment charges of definitive-live intangible assets. The Company recorded no impairment loss for definite-lived intangible assets during the years ended December 31, 2017 and 2016.
The Company amortizes definite-lived intangible assets on a straight-line basis over their useful lives. The Company’s capitalized intangible asset for customer relationships in the amount of $3,543,912 is amortized over the three-year life of various customer contracts acquired in the Rep Energy, LLC acquisition (See Note 19). Amortization of the capitalized customer relationships for the year ended December 31, 2017 was $196,884. The unamortized amount of capitalized customer relationships as of December 31, 2017 was $3,347,028.
Cash and Cash Equivalents
The Company considers all short-term investments with an original maturity of three months or less to be cash equivalents.
Restricted cash represents funds held in escrow for customer deposits and for securing irrevocable stand-by letters of credit for the benefit of the TDSPs that provide transmission services to the Company in the amount of $1,678,279 and $1,904,898 as of December 31, 2017 and 2016, respectively.
Property and Equipment
Property and equipment are stated at cost and depreciated on a straight-line basis over the following estimated useful lives:
Expenditures for additions, major renewals and betterments are capitalized, and expenditures for maintenance and repairs are charged against income as incurred. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in operations.
Deferred Financing Costs
The Company’s deferred financing costs in the amount of $179,887 are amortized over the two-year life of the financing from Blue Water Capital Funding LLC (See Note 8). Amortization of deferred financing costs for the years ended December 31, 2017, and 2016 were $89,944 and $44,971, respectively. The unamortized amount of deferred financing costs as of December 31, 2017 and 2016 were $44,972 and $134,916, respectively.
Derivative Instruments
The Company’s business operations require entering into physically settled commodity contracts that meets the definition of a derivative. The Company has elected “normal purchases and normal sales” exception which is a term specific to ASC 815-10-15-22. When the contract satisfies certain criteria, including a requirement that physical delivery of the underlying commodity is probable and is expected to be used in normal course of business. Retail revenues and retail cost of revenues resulting from deliveries of commodities under normal purchase contracts and normal sales contracts are included in earnings at the time of contract settlement.
Fair Value of Financial Instruments
The carrying amounts reported in the consolidated balance sheets for cash equivalents, accounts receivable, accounts
payable and accrued expenses approximate fair value because of the immediate or short-term maturity of these financial instruments. None of these instruments are held for trading purposes.
The recorded value of notes payable approximates the fair value as the interest rate approximates market interest rates.
Recent Pronouncements
Accounting Pronouncements Issued But Not Yet Effective
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The standard permits the use of either the retrospective or cumulative effect transition method. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date to periods beginning after December 15, 2017. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016. In December 2016, the FASB further issued ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, to increase stakeholders' awareness of the proposals and to expedite improvements to ASU 2014-09. The Company plans to adopt the standard using the modified retrospective approach. After assessing the new standard, the Company expects that there will be no material impacts to our revenue recognition procedures, except for information compilation for the new required disclosures.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"). ASU 2016-02 amends the existing accounting standards for lease accounting by requiring entities to include substantially all leases on the balance sheet by requiring the recognition of right-of-use assets and lease liabilities for all leases. Entities may elect to not recognize leases with a maximum possible term of less than 12 months. For lessees, a lease is classified as
finance or operating and the asset and liability are initially measured at the present value of the lease payments. For lessors, accounting for leases is largely unchanged from previous guidance. ASU 2016-02 also requires qualitative disclosures along with certain specific quantitative disclosures for both lessees and lessors. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, with early adoption permitted, and are effective for interim periods in the year of adoption. The ASU should be applied using a modified retrospective approach, which requires lessees and lessors to recognize and measure leases at the beginning of the earliest period presented. The Company is currently evaluating the impact of adopting this guidance on its consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash.” This ASU provides guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows. This standard is effective for interim and annual reporting periods beginning after December 15, 2017. The Company will adopt this standard effective January 1, 2018 as it is expected it to be applicable to the Company at that time.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business ("ASU 2017-01"). ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting, including acquisitions, disposals, goodwill, and consolidation. ASU 2017-01 will be effective for annual periods beginning after December 15, 2017, including interim periods within those periods, and is not expected to have a material impact on the Company's consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718) ("ASU 2017-09"). ASU 2017-09 provides guidance on when changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. An entity should account for the effects of a modification unless all of the following are met:
• The fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified
• The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified
• The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified.
The amendments in ASU 2017-09 are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The amendments should be applied prospectively to an award modified on or after the adoption date. ASU 2017-09 is not expected to have a material impact on the Company's consolidated financial statements.
NOTE 3 - INCOME TAXES
The components of income tax expense (benefit) from continuing operations for the years ended December 31, 2017 and 2016 are as follows:
Actual income tax expense for the years ended December 31, 2017 and 2016 is reconciled from the amount computed by applying the U.S. federal income tax rate of 34% to income before income taxes as follows:
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2017 and 2016 are presented below:
There was a valuation allowance of $1,321,250 and $2,530,000 as of December 31, 2017 and 2016, respectively. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income, projections for future taxable income over the periods in which the deferred tax assets are deductible, and the scheduled reversal of deferred tax liabilities, management does not believe it is more likely than not the Company will realize the full benefits of these deductible differences at December 31, 2017.
Net operating loss carryforwards attributable to federal were $3,554,500 at December 31, 2017 expires at different dates through 2037.
There is not a provision for material uncertain tax positions for the Company at December 31, 2017 or 2016.
As of December 31, 2017, with few exceptions, the Company is no longer subject to U.S. Federal income tax examinations by tax authorities for years before 2014 and for state for years before 2013.
NOTE 4 - PRIVATE PLACEMENT OF SERIES B PREFERRED SHARES
On February 19, 2014, the Company filed a Certificate of Designation of Rights, Preferences, Privileges and Restrictions (the “Series B Designation”) with respect to a class of preferred stock designated as Series B Preferred Stock (the “Series B Preferred”). The Series B Preferred entitles holders thereof to receive a dividend payable in cash or common stock, at the election of the holder, at an annual rate of 12% of the Deemed Original Issue Price. The Deemed Original Issue Price (as defined in the Series B Designation) of the Series B Preferred for purposes of calculating the Series B Preferred dividend is $1.00 per share, which the Board of Directors of the Company determined represents the estimated fair market value as of the date of grant. The Series B Preferred dividends are
payable in cash or by the issuance of common stock ten days following the end of each month, or portion thereof. The number of shares to be paid as a dividend shall be determined based on the fair market value of the shares of common stock on the record date for the dividend. On February 21, 2014, the Company entered into Series B Preferred Stock Purchase Agreements (each an “Agreement” and collectively the “Agreements”) with several investors. Pursuant to the Agreements, the Company sold an aggregate of 1,900,000 shares of the Series B Preferred, for an aggregate purchase price of $1,900,000 as of December 31, 2014. Several members of the Company’s Board of Directors directly or indirectly participated in the offering.
The foregoing is only a brief description of the material terms of the Series B Designation and the offering of the Series B Preferred and does not purport to be a complete description of the rights and obligations of the parties thereunder and such descriptions are qualified in their entirety by reference to the full text of the Certificate of Designation which was filed as Exhibit 3.1 to our Form 8-K filed on February 24, 2014.
In accordance with the Series B Designation, dividends due to holders of Series B Preferred may be paid at the option of the holder in shares of the Company’s $0.001 par value common stock valued at the fair market value of such shares of common stock as determined in good faith by the Board of Directors on the record date of the dividend.
The holders of outstanding shares of Series B Preferred are entitled to receive, out of funds legally available for the payment of dividends, cumulative monthly dividends at the annual rate of 12% of the Deemed Original Issue Price per share, in preference to and in priority over any dividends with respect to Common Stock. At the option of the holders of Series B Preferred Stock, dividends may be paid to holders of Series B Preferred Stock in shares of the Company’s common stock valued at fair market value of such shares of common stock as determined in good faith by the Board of Directors.
During the year ended December 31, 2016, the Company paid $109,940 of cumulative monthly dividends on Series B Preferred Stock. Certain shareholders elected to be paid in shares of the Company’s common stock shares valued at $23,145 and the remaining holders were paid a total of $86,795 in cash.
On June 24, 2016, the Series B Stockholders affirmatively elected to convert all outstanding shares of Series B Preferred into shares of common stock with a conversion price as of such date equal to $1.00 per Series B Share.
NOTE 5 - LETTERS OF CREDIT
As of December 31, 2017, the Company had six secured irrevocable stand-by letters of credit totaling $615,300 with a financial institution for the benefit of the TDSPs that provide transition services to the Company. The six letters of credit will expire during the second quarter of the year ended December 31, 2018 and are subject to automatic extension and renewal provisions. The Company has a secured irrevocable stand-by letter of credit in the amount of $250,000 for the benefit of the Company’s wholesale power provider (Note 11). The letter of credit was issued in February 2016 and is subject to automatic extension and renewal provisions.
As of December 31, 2017, Summer Northeast secured four irrevocable stand-by letters of credit totaling $874,965. Letters of credit were issued for the benefit of the following parties: ISO New England in the amount of $274,965 expiring on October 3, 2018, Connecticut Department of Public Utility Control in the amount of $250,000 expiring on May 26, 2018 with auto extension provisions, State of New Hampshire Public Utilities Committee in the amount of $100,000 expiring on March 28, 2019 and the wholesale power provider of Summer Northeast (Note 12) in the amount of $250,000 expiring on October 1, 2018 with auto extension provisions. The stand-by letters of credit for the benefit of ISO New England, Inc., State of New Hampshire Public Utilities Committee and the Summer Northeast wholesale power provider are backed by a Master Revolving Note (Note 20). The letter of credit for the benefit of the Connecticut Department of Public Utility Control is backed by Tom O’Leary, a member of the Company’s Board. All letters of credit are held by the financial institution who issued the irrevocable stand-by letters of credit.
As of December 31, 2017, none of the letters of credit issued on behalf of the Company were drawn upon.
NOTE 6 - ADVANCE TO LOAN AMOUNT NOTE
On April 18, 2014, the Company signed an Advance to Loan Amount Note (the “Note”) with Comerica Bank in the amount of $1,500,000. The Note had an original maturity date of December 22, 2014, which was extended through February 22, 2015. On February 22, 2015, the Note was increased from $1,500,000 to $1,700,000 and extended again to November 4, 2016, with interest thereon at a per annum rate equal to the “Prime Referenced Rate” plus the “Applicable Margin.” The “Prime Referenced Rate” means, for any day, a per annum interest rate which is equal to
the “Prime Rate” in effect on such day, but in no event and at no time shall the “Prime Reference Rate” be less than the sum of the Daily Adjusting LIBOR Rate for such day plus two and one-half percent (2.5%) per annum. “Prime Rate” means the per annum rate established by Comerica Bank as its prime rate for its borrowers at any such time. “Applicable Margin” means 2% per annum. Accrued and unpaid interest on the unpaid principal balance outstanding shall be payable monthly, in arrears, on the first Business Day of each month.
Guaranty of the Note was made by four members of the Company’s Board of Directors (“Guarantors”). The Company agreed to issue the four Guarantors a total of 120,000 shares of the Company’s common stock per month (30,000 shares of common stock per month per Guarantor) reduced accordingly as the loan is reduced for agreeing to act as a Guarantor of the Note.
During the year ended December 31, 2015, the Company issued 1,006,171 shares of common stock to the Guarantors and recognized $1,006,173 in financing cost, and the balance of the Note was $111,057 at year end. In May 2016, the Company released the Guarantors from the obligation to guaranty the Note and stock payments for such guaranty were discontinued as of May 31, 2016.
During the year ended December 31, 2016, the Company issued 482,156 shares of common stock to the Guarantors and recognized $532,988 in financing cost.
The Advance to Loan Amount Note was paid in full on June 14, 2016 and at such time of payoff the loan terminated.
NOTE 7 - FINANCING FROM BLACK INK ENERGY LLC AND ISSUANCE OF WARRANT
On March 2, 2015, Summer LLC (the “Borrower”) entered into a Second Lien Term Loan Agreement (the “Agreement”) with Black Ink Energy, LLC (“BIE”). Pursuant to the Agreement, BIE agreed to provide a term loan (the “Term Loan”) to the Borrower, and the Borrower agreed to borrow and repay funds loaned by BIE.
The amount of the Term Loan was Three Million Dollars $3,000,000, and the loan was not revolving in nature. Pursuant to the Agreement, any amounts prepaid or repaid may not be re-borrowed by the Borrower. The maturity date of the loan was September 2, 2016. The Term Loan bore interest at a rate of 15% per annum, except in the occurrence of an event of default, at which point the default interest rate would increase to 18%. Interest is payable in arrears on the last day of each month and on the maturity date of the loan. The Term Loan was not evidenced by a promissory note.
Pursuant to the Agreement, the Borrower had the option to prepay the loan amount in whole by providing
prior notice to BIE and by paying a pre-payment premium of $300,000 minus the aggregate amount of interest paid from the effective date to the date on which the loan is prepaid.
Additionally, the Borrower agreed to pay to BIE a facility fee. The facility fee in the amount of $24,450 was expensed immediately as fees occurred to obtain financial resource.
In connection with the Agreement and the Term Loan, the Company issued BIE a warrant (the “Warrant”) to purchase up to 800,000 shares of the Company’s common stock. The Warrant has a term of ten years, has an exercise price of $1.50 per share, and is subject to adjustment as set forth in the Warrant. The Warrant also contains a cashless or net exercise provision, pursuant to which the holder of the Warrant may elect to convert all or a portion of the Warrant without the payment of additional consideration, by receiving a net number of shares calculated pursuant to a formula set forth in the Warrant. The Company agreed to reserve 120% of the number of shares issuable upon the exercise of the Warrant so long as the Warrant is exercisable and outstanding. Additionally, the Company agreed to grant to the holder piggyback registration rights.
The term loan had a relative fair value of $2,967,535 and the Warrant had a relative fair value of $32,465 at the date of issuance determined using the Black-Scholes option-pricing model. The assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate of 0.87% (ii) estimated volatility of 17% (iii) dividend yield of 0.00% and (iv) expected life of the options of five years.
During the year ended December 31, 2016, the Company paid interest expense in the amount of $227,500 to BIE.
On June 30, 2016, the Term Loan to BIE was paid in full and the Agreement between Summer LLC and BIE was terminated.
As of December 31, 2017 and 2016, the warrants in the amount of 800,000 shares issued in this transaction are outstanding.
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”). 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.
The amount of available credit under the Loan is $5,000,000. The Loan is revolving in nature and is evidenced by a Revolving Promissory Note (the “Note”). The maturity date of the Loan is June 30, 2018. The Loan bears interest at a rate of 11% per annum, with a minimum monthly financing fee of $22,500 per month. Interest is payable on the tenth day of each month and on the maturity date of the Note.
The proceeds of the Loan may be used by the Borrower to repay indebtedness owed to BIE, and for other corporate purposes. Simultaneous with the closing of the Loan, Borrower paid off all outstanding debt due and owing to BIE and BIE’s security interest in and to the assets of the Borrower and to the Company’s ownership interest in Borrower were terminated.
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.
In connection with the Agreement, the Borrower and Blue Water also entered into a Security Agreement (the “Security Agreement”), and the Company executed a Guaranty (the “Guaranty”) in favor of Blue Water.
Security Agreement
Pursuant to the Security Agreement, the Borrower granted to Blue Water a second position security interest in and to the Borrower’s collateral, as more fully defined in the Security Agreement, 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 Blue Water is subordinate to a security interest granted to DTE Energy Trading, Inc. (“DTE”) pursuant to a credit agreement between the Borrower and DTE dated April 1, 2014 (Note 11).
At December 31, 2017 and 2016, the outstanding balance of financing from Blue Water Capital was $2,500,000, and interest paid during the years then ended was $278,820 and $142,084, respectively.
NOTE 9 - PRIVATE PLACEMENT OFFERINGS
During the year ended December 31, 2016, the Company accepted subscription agreements from various accredited investors and entered into Securities Purchase Agreements with such investors to purchase from the Company 3,844,854 shares of the Company’s common stock at a price of $1.10 per share totaling $4,228,450. No warrants were issued in connection with the 2016 Securities Purchase Agreements.
During the year ended December 31, 2017, the Company accepted subscription agreements from various accredited investors and entered into Securities Purchase Agreements with such investors to purchase from the Company 409,091 shares of the Company’s common stock at a price of $1.10 per share totaling $450,000. No warrants were issued in connection with the 2017 Securities Purchase Agreements.
NOTE 10 - WARRANTS
The Company issued no warrants during the calendar years ended December 31, 2017 or 2016.
Warrant activity for the years ended December 31, 2017 and 2016, was as follows:
NOTE 11 - WHOLESALE POWER PURCHASE AGREEMENT SUMMER LLC
On April 25, 2014, Summer LLC closed a transaction with DTE Energy Trading, Inc. (“DTE”), with an effective date of April 1, 2014. As part of the transaction, Summer LLC and DTE entered into an Energy Marketing Agreement for Electric Power (the “Energy Marketing Agreement”). Pursuant to the terms of the Energy Marketing Agreement, Summer LLC agreed to purchase its electric power and associated services requirements from DTE, and DTE agreed to provide Summer LLC with certain credit facilities to assist Summer LLC in the purchase of its electric power and associated service requirements. Summer LLC also agreed to pay DTE a fixed monthly fee, as well as certain fees based on megawatt hours purchased. The terms of the Energy Marketing Agreement are governed by the ISDA 2002 Master Agreement, as well as a Schedule and Power Annex thereto (the “2002 Master Agreement”). In conjunction, therewith, Summer LLC and DTE also entered into a Credit Agreement, a Security Agreement and a Membership Interest Pledge Agreement.
Pursuant to the Credit Agreement, among other things DTE agreed to (i) provide a guaranty (a “Credit Guaranty”) to ERCOT for the benefit of Summer LLC, and (ii) provide commodity loans for the purchase of electricity (“Commodity Loans”). Each Commodity Loan and any Credit Guaranty shall bear interest on the outstanding principal amount thereof, from the date such Commodity Loan or Credit Guaranty is issued until it becomes due or is revoked, respectively, at a rate per annum equal to the Prime Rate (as reported by the Wall Street Journal) plus two percent. Summer LLC covenanted not to, among other things, (a) merge or consolidate with any other person, (b) acquire all or substantially all of the capital stock or property of another person, (c) create, assume or suffer to exist any lien on any property now owned or hereafter acquired by Summer LLC except for permitted liens (as set forth in the Credit Agreement) or (d) become liable for any indebtedness (other than permitted indebtedness, as set forth in the Credit Agreement).
In consideration of the services and credit support provided by DTE to Summer LLC, and pursuant to the Security Agreement, Summer LLC is required to, among other things (i) grant a priority security interest to DTE in all of its assets, equipment and inventory; (ii) require its customers to remit monthly payments into a lockbox account over
which DTE has a security interest; and (iii) deliver monthly and annual forecasted and audited statements to DTE.
Pursuant to the Membership Interest Pledge Agreement, the Company pledged to DTE, and granted to DTE a security interest in all of the membership interests of Summer Energy, LLC owned by the Company, as well as all additional membership interests of Summer Energy, LLC from time to time acquired by the Company.
NOTE 12 - WHOLESALE POWER PURCHASE AGREEMENT SUMMER NORTHEAST
Summer Northeast purchases electric power from Calpine Energy Solutions, LLC (formerly Noble Americas Energy Solutions LLC). Summer Northeast is invoiced for the volumes at the end of each calendar month for the volumes purchased for delivery during said month at a wholesale power tariff rate plus scheduling fees. The invoice is payable on the 20th of the following month from delivery. Summer Northeast has provided Calpine with a $250,000 letter of credit (See Note 5).
NOTE 13 - 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 shareholders 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 may be issued under the 2012 Plan pursuant to incentive stock options, nonstatutory stock options, restricted stock rants, 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 shareholders of the Company.
On December 6, 2012, a Form S-8 Registration Statement was filed with the United States Securities and Exchange Commission regarding shares under the 2012 Plan.
During the year ended December 31, 2016, the Company granted stock options from the 2012 Plan to purchase up to 2,500 shares of the Company’s common stock. The options covering a total of 2,500 shares vested one year after the date of grant. The stock options have an exercise price of $2.00 per share and will expire ten years from the date of grant. The fair value of the options of $5,344 was determined using the Black-Scholes option-pricing model. The assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate of 1.07% (ii) estimated volatility of 172% (iii) dividend yield of 0.00% and (iv) expected life of the options of ten years.
During the years ended December 31, 2017 and 2016, the Company recognized total stock compensation expenses of $3,115 and $2,259, respectively, relating to the vesting of stock options issued from the 2012 Plan.
There were no stock options granted for the year ended December 31, 2017.
As of December 31, 2017, 2,000 shares remain available for issuance.
As of December 31, 2017, the Company had outstanding granted stock options from the 2012 Plan, net of forfeitures to purchase 632,000 shares summarized as follows:
NOTE 14 - 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 agreement 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 Shareholders of the Company.
On July 2, 2015, a Form S-8 Registration Statement was filed with the United States Securities and Exchange Commission regarding the 2015 Plan.
During the year ended December 31, 2016, the Company granted a total of 263,500 stock options from the 2015 Plan with a fair value of approximately $349,181 on the date of grant. The fair value of the options in the amount of $349,181 was determined using the Black-Scholes option-pricing model. The weighted average assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate of 1.25% (ii) estimated volatility of 132.67% (iii) dividend yield of 0.00% and (iv) expected life of all options averaging 10 years.
During the year ended December 31, 2017, the Company granted a total of 534,500 stock options from the 2015 Plan with a fair value of approximately $836,107 on the date of grant. The fair value of the options in the amount of $836,107 was determined using the Black-Scholes option-pricing model. The weighted average assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate of 1.97% (ii) estimated volatility of 131.57% (iii) dividend yield of 0.00% and (iv) expected life of all options averaging 10 years.
During the years ended December 31, 2017 and 2016, the Company recognized total stock compensation expenses of $558,306 and $340,606, respectively, for vesting options issued from the 2015 Plan.
As of the year ended December 31, 2017, the unrecognized expense for vesting of options issued from the 2015 Plan is $292,037 relating to 266,500 of unvested shares expected to be recognized over a weighted average period of approximately 3.53 years, and the unrecognized expense for vesting of options from the 2015 Plan at the year ended December 31, 2016 was $8,906 relating to 147,000 of unvested shares expected to be recognized over a weighted average period of years of approximately .53 years.
As of December 31, 2017, 70,000 shares remain available for issuance.
As of December 31, 2017, the Company had outstanding granted stock options from the 2015 Stock Option and Stock Award Plan, net of forfeitures to purchase 1,430,000 shares summarized as follows:
NOTE 15 - PROPERTY AND EQUIPMENT
Property and equipment are carried at cost and are depreciated over their estimated useful lives (3 to 7 years) using the straight-line method. Costs of assets include those capital expenditures which improve the efficiency of the assets or lengthen their useful lives. Expenditures for maintenance and repairs are charged against income as incurred. Costs and related accumulated depreciation of assets sold or otherwise retired are removed from accounts, and any resulting gain or loss is reflected in income. Depreciation expense charged to operations totaled $158,324 for the year ended December 31, 2017 and $210,481 for the year ended December 31, 2016.
As of December 31, 2017 and 2016, property and equipment consisted of the following:
NOTE 16 - OPERATING LEASES, COMMITMENTS AND CONTINGENCIES
Office Space
Beginning December 1, 2017, Summer LLC 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 rent payments will be 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 which 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 which will expire on February 28, 2020. The monthly base rent is $3,726.63 for the period of November 1, 2017 to February 2018 and $3,904.08 for the remaining of the term of the sublease.
Future minimum commitments including extension options under all non-cancellable operating lease obligations are as follows:
Lease expense for the years ended December 31, 2017 and 2016 totaled $152,149 and $116,945, respectively.
Vendors
The Company has contractual commitments as of December 31, 2017 to purchase its wholesale electric power from DTE (Note 11) and contracts for billing services with three vendors (Energy Services Group, DYNAMO Programs International, LLC and EC Infosystems, Inc.) totaling $955,134.
NOTE 17 - EXECUTIVE EMPLOYMENT AGREEMENTS
Effective October 20, 2017, the employment agreements of our executive officers: Neil Leibman, Chief Executive Officer, Angela Hanley, President, and Jaleea P. George, Chief Financial Officer, were amended to adjust the performance metrics which must be met by the Company in order for the executives to receive additional equity compensation. Pursuant to the amendments, in the event the Company meets certain performance milestones, each of the executives will be granted an option to purchase 15,000 shares of the Company’s common stock at an exercise price to the greater of: (i) the fair market value of a share of stock on the date of grand and (ii) $2.50 per share. All other provisions of the executives’ employment agreements remain in full force and effect. The foregoing description of the amendments is not complete, and is qualified in its entirety the terms of the amendments, which are filed as Exhibits 10.35, 10.36 and 10.37 to this Annual Report.
NOTE 18 - TEXAS SALES AND USE TAX AUDIT
Summer LLC is currently under audit for Texas sales and use tax by the Comptroller of Public Accounts (“Comptroller”) for the period from February 2013 through July 2016. On February 20, 2018, the Comptroller reported its assessment for additional Texas sales and use tax to be paid by the Company. As of December 31, 2017, the Company has accrued $375,000 relating to the assessment, which is included in other expenses on the consolidated statement of operations.
NOTE 19 - ACQUISTION OF SUMMER ENERGY NORTHEAST, LLC (FORMERLY REP ENERGY, LLC)
On November 1, 2017, Summer Energy Holdings, Inc. entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) with REP Energy, LLC, a Texas limited liability company (“REP Energy”) and the members of REP Energy (the “Members” and the transaction contemplated by the Purchase Agreement, the “REP Transaction”) whereby the Company acquired 100% of the issued and outstanding units of membership interest (the “Interests”) of REP Energy from the Members. Several of the Members of REP Energy are officers and/or directors of the Company. The conflicts of interest of officers and/or directors of the Company were disclosed and known to the Board of Directors of the Company. The terms of the Purchase Agreement and the REP Transaction were negotiated, considered and approved by a majority of the disinterested members of the Board.
The purchase price paid for the Interests consisted of 2,177,912 unregistered and restricted shares of the Company’s common stock (the “Summer Energy Stock”), which was the number of shares having an aggregate value of $3,266,868, with the price per share equal to $1.50 per share of Summer Energy Stock, rounded up to the nearest whole number of shares, on the acquisition date. Such amount was determined by the Board in good faith as the fair market value of a share of Summer Energy Stock. Pursuant to the Purchase Agreement, REP Energy and the Members agreed to deliver to the Company assignments of the Interests and the corporate record books of REP Energy. The Company agreed to deliver the Summer Energy Stock.
The estimated fair values of the assets acquired and liabilities assumed are based on management’s internal valuations and historical experience. The following table is the estimated fair value of the assets acquired and liabilities assumed in the REP Transaction:
The amount of net sales and net loss included in the Company’s consolidated statement of operations for the period from November 1, 2017 through December 31, 2017, totaled $928,360 and $(338,281), respectively.
Pro forma net sales and net income of the combined operations had the acquisition date been January 1, 2017, would have totaled $3,913,093 and $429,173, respectively, with basic and fully dilutive earnings per share at $.017 and
$.017. The pro forma net sales and net loss of the combined operations had the acquisition been January 1, 2016, would have been $4,221,307 and $(3,897,698) with basic and fully dilutive earnings per share at $(0.18) and $(0.18).
The estimated useful life of the intangible asset acquired in the transaction is three years. At the year ended December 31, 2017, the unamortized amount of capitalized customer relationships was $3,347,028 and the future amortization expense is as follows:
NOTE 20 - MASTER REVOLVER NOTE
The Company assumed a Master Revolver Note (“Master Note”) held by Summer Northeast (formerly REP Energy) pursuant to the terms of the Purchase Agreement (Note 19).
The amount of available credit under the Master Note is $800,000 issued by Comerica Bank. The Master Note is dated July 25, 2017 and has a maturity date of July 25, 2018. Each advance under the Master Note shall bear 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 Comerica Bank as its prime rate for its borrowers at any such time. “Applicable Margin” means 1 percent per annum. Accrued and unpaid interest on the unpaid principal balance outstanding shall be payable monthly, in arrears, on the first Business Day of each month.
As of December 31, 2017, the outstanding advances on the Master Note was $40,000 and the Master Note secured letter of credits totaling $624,965 (Note 5). Interest paid to Comerica Bank subsequent to the acquisition in November and December 2017 totaled $255.
Guaranty of the Master Note at origination on July 25, 2017 was made by two members of Summer Northeast (Neil Leibman and Tom O’Leary) who are also members of the Company’s Board (Mr. Leibman is also an executive officer). In accordance with the provisions of Purchase Agreement (Note 19), the Company, as soon as practicable, is required to replace the credit facilities (Note 5) secured by the Master Note and arrange a release of the guaranty by the Guarantors. Until such release is effective, the Company agrees to pay monthly interest to the guarantors, at the lowest applicable federal rate published by the Internal Revenue Service, on the outstanding balance of such credit facility.
NOTE 21 - DEBT TO RELATED PARTIES ASSUMED
On November 1, 2017, the Company assumed $767,677 of related party debt owed by Summer Northeast to members Tom O’Leary and Neil Leibman pursuant to the terms of the Purchase Agreement (Note 19). Messrs. O’Leary and Leibman serve on the Company’s Board (Mr. Leibman is also an executive officer).
In accordance with the Amended and Restated Limited Liability Company Agreement of Summer Northeast the amount of any loan or advance by a member shall not be treated as a contribution to the capital of the lending member but shall be considered a debt. The loan shall bear interest at the rate of the greater of (i) 12% per annum or (ii) the Prime Rate plus 5%, payable monthly with a maturity date of October 31, 2018.
As of December 31, 2017, the outstanding debt to related parties was $767,677, and during the months of November and December 2017, interest paid on such related party debt was $15,609.
NOTE 22 - OTHER RELATED PARTY TRANSACTIONS
On August 29, 2013, the Company entered into two, five-year credit facility agreements with two members of the Company’s Board of Directors. Both individuals agreed to act as surety and personal guarantors with respect to $826,000 of the Company’s depository requirements, consisting of a line of credit from a financial institution and certain extensions of credit by critical vendors that were necessary for the Company to carry out its business. As consideration for acting as surety and personal guarantors, the Company issued guarantor member 413,000 shares of its Series A Preferred Stock. On May 6, 2014, the two individuals were released from such obligation by the Company when the Company exercised the Call Right reflected within the two Credit Facility Agreements. On May 13, 2014, the Company granted a five-year stock option to each individual to purchase 151,115 shares of the Company’s common stock at an exercise price of $1.50 per share.
On April 18, 2014, four members of the Company’s Board of Directors (the “Guarantors”), guaranteed an Advance to Loan Amount Note in the amount of $1,500,000 which increased to $1,700,000 (Note 6). The Company agreed to issue the four Guarantors a total of 120,000 shares of the Company’s common stock per month (30,000 shares of common stock per month per Guarantor) reduced accordingly as the loan is reduced in consideration for agreeing to act as a Guarantor of the Note. In May 2016, the Company released the Guarantors from the obligation to guaranty the Note and stock payments for such guaranty were discontinued as of May 31, 2016. The balance of the Note was zero as of December 31, 2016.
On July 22, 2016, the Company advanced $611,424 to a related party for purposes of short-term financing. Such advances were paid back in full to the Company on August 9, 2016. As of December 31, 2016, there were no outstanding balances due between the Company and such related party.
During the year ended December 31, 2016, the Company provided employee services to a related party valued at $73,078. In addition, the related party provided aviation services to the Company in the amount of $20,463. The net effect of these services to the Company was $52,615. There were no outstanding balances between the Company and such related party as of December 31, 2016.
On October 31, 2017, Summer Northeast entered into a sublease agreement with PDS for office space located at 800 Bering Drive, Suite 250, Houston, Texas (Note 16). PDS is 100% owned by Tom O’Leary who is a member of the Company’s Board of Directors.
NOTE 23 - 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 $18,000 in 2017 or elects not to defer under the Plan. There is no Company match to the Plan.
NOTE 24 - 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 year ended December 31, 2017 was $3,704.
NOTE 25 - SUBSEQUENT EVENTS
Stock Options Issued from 2015 Stock Award Plan
On January 2, 2018, the Company granted a total of 45,000 stock options to non-employee members of the Company’s Board of Directors under the 2015 Stock Option and Stock Award Plan as compensation for service on the Company’s Board. The director stock options were fully vested on the date of grant, have an exercise price of $2.50 per share, will expire ten years from the date of the grant and are estimated to have a fair value of approximately $104,481 on the date of grant determined using the Black-Scholes option-pricing model. The assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate of 2.25% (ii) estimated volatility of 110.77% (iii) dividend yield of 0.00% and (iv) expected life of the options of ten years.
On January 8, 2018, the Company granted stock options to purchase up to 6,000 shares of the Company’s common stock to two key employees. The options covering a total of 6,000 shares vest one-year after the date of grant. The stock options have an exercise price of $2.50 per share and will expire ten (10) years from the date of grant. The fair value of the options of $11,953 was determined using the Black-Scholes option-pricing model. The assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate of 2.25% (ii) estimated volatility of 110.41% (iii) dividend yield of 0.00% and (iv) expected life of the options of ten years.
2018 Stock Option and Stock Award Plan Approved by Board
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 2018 Plan will be presented to the Company’s shareholders at the 2018 annual meeting of shareholders.
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.
Stock Options Issued from 2018 Stock Award Plan
On February 20, 2018, the Company granted the following options to purchase common stock under the 2018 Plan:
The options covering a total of 235,000 shares vest five years after the date of grant. The stock options have an exercise price of $2.50 per share and will expire ten years from the date of grant. The fair value of the options of $557,028 was determined using the Black-Scholes option-pricing model. The assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate of 2.65% (ii) estimated volatility of 119.27% (iii) dividend yield of 0.00% and (iv) expected life of the options of ten years.
The options covering a total of 45,000 shares will vest on July 1, 2018. The stock options have an exercise price of $2.50 per share and will expire ten years from the date of grant. The fair value of the options of $106,665 was determined using the Black-Scholes option-pricing model. The assumptions used to calculate the fair market value
are as follows: (i) risk-free interest rate of 2.65% (ii) estimated volatility of 119.27% (iii) dividend yield of 0.00% and (iv) expected life of the options of ten years.
EDF ISDA Transaction
On February 21, 2018, Summer Northeast entered into a transaction with EDF Energy Services, LLC, a Delaware limited liability company (“EDF”), whereby EDF becomes Summer Northeast’s primary provider for the purchase and sale of electricity and would, subject to certain limitations, provide supply finance and third-party credit support on behalf of Northeast (the “EDF Transaction”).
The EDF Transaction is governed by the 1992 ISDA Master Agreement, as well as a Schedule and Credit Support Annex thereto (the “ISDA Documents”). In conjunction therewith, Northeast and EDF also entered into a Security Agreement securing Summer Northeast’s obligations under the ISDA Documents and whereby Summer Northeast grants EDF a continuing security interest in all of the assets of Summer Northeast, including but not limited to its accounts receivable. Also, in conjunction with the EDF Transaction, the Company entered into a Guaranty in favor of EDF whereby the Company acts as guarantor for Summer Northeast’s obligations under the ISDA Documents.
FINANCING FROM BLUE WATER CAPITAL FUNDING LLC
On January 31, 2018, the Company was advanced $420,000 from the Blue Water Capital revolving loan in order to fund required collateral deposits with the utility companies (Note 8).
MASTER REVOLVER NOTE
On February 22, 2018, the Company paid $40,000 to Comerica Bank to pay off the balance of the Master Revolver assumed by the Company on November 1, 2017 (Note 20).
OTHER RELATED PARTY TRANSACTIONS
In January 2018, a related party provided aviation services to the Company in the amount of $4,000 for purposes of a company off-site management meeting.
On January 3, 2018, the Company was advanced $250,000 by Tom O’Leary and Neil Leibman, Board members (Mr. Leibman is also an executive officer) for purposes of short-term financing.
On January 8, 2018, the Company was advanced $373,000 by Neil Leibman (an executive officer and director) for purposes of short-term financing. On March 6, 2018, $200,000 was paid back to Mr. Leibman with a remaining balance of $173,000 owed by the Company.
On January 8, 2018, the Company was advanced $80,000 from a related party for purposes of short-term financing. On February 22, 2018, $40,000 was repaid to the related party and on March 6, 2018, $40,000 was repaid to the related party. The obligation was satisfied in full with two $40,000 payments made on February 22, 2018 and March 6, 2018, respectively.
EHIBIT INDEX
*Each of these Exhibits constitutes a management contract, compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) with the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.
SUMMER ENERGY HOLDINGS, INC.
By:/s/ Neil M. Leibman
Neil M. Leibman
President, Chief Executive Officer and
Principal Executive Officer
March 29, 2018
By:/s/ Jaleea P. George
Jaleea P. George
Chief Financial Officer and
Principal Financial Officer
March 29, 2018
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned directors and officers of Summer Energy Holdings, Inc., do hereby constitute and appoint each of Neil M. Leibman and Jaleea P. George as our true and lawful attorneys-in-fact and agents with power of substitution, to do any and all acts and things in our name and behalf in our capacities as directors and officers and to execute any and all instruments for us and in our names in the capacities indicated below, which said attorneys-in-fact and agents, or either of them, may deem necessary or advisable to enable said corporation to comply with the Securities and Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Annual Report on Form 10-K, including specifically but without limitation, power and authority to sign for us or any of us in our names in the capacities indicated below, any and all amendments (including post-effective amendments) hereto; and we do hereby ratify and confirm all that said attorney-in-fact and agent, shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signature
Title
Date
/s/ Neil M. Leibman
Neil M. Leibman
Chief Executive Officer
(Principal Executive Officer and Director)
March 29, 2018
/s/ Jaleea P. George
Jaleea P. George
Secretary, Treasurer, Chief Financial Officer
(Principal Financial Officer and Accounting Officer)
March 29, 2018
/s/ Stuart C. Gaylor
Stuart C. Gaylor
Director
(Non-executive Chairman of the Board)
March 29, 2018
/s/ Tom D. O’Leary
Tom D. O’Leary
Director
March 29, 2018
/s/ Jefferey Mace Meeks
Jefferey Mace Meeks
Director
March 29, 2018
/s/ Andrew Bursten
Andrew Bursten
Director
March 29, 2018
/s/ James P. Stapleton
James P. Stapleton
Director
March 29, 2018