Attached files
| file | filename |
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| EXCEL - IDEA: XBRL DOCUMENT - SUMMER ENERGY HOLDINGS INC | Financial_Report.xls |
| EX-32.1 - EXHIBIT 32.1 - SUMMER ENERGY HOLDINGS INC | ex321.htm |
| EX-31.1 - EXHIBIT 31.1 - SUMMER ENERGY HOLDINGS INC | ex311.htm |
| EX-31.2 - EXHIBIT 31.2 - SUMMER ENERGY HOLDINGS INC | ex312.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2015
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 001-35496
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Summer Energy Holdings, Inc.
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(Exact name of registrant as specified in charter)
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Nevada
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20-2722022
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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800 Bering Drive, Suite 260, Houston, Texas
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77057
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(Address of principal executive offices)
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(Zip Code)
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(713) 375-2790
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(Issuer’s telephone number, including area code)
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N/A
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(Former name, former address, and former fiscal year, if changed since last report)
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company þ
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Indicate by check mark whether the registrant is a shell company (as defined by Section 12b-2 of the Exchange Act). Yes o No þ
The number of shares of the issuer’s common stock, $0.001 par value, outstanding as of May 12, 2015 was 15,384,119.
Summer Energy Holdings, Inc.
FORM 10-Q
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SUMMER ENERGY HOLDINGS, INC.
AND SUBSIDIARIES
MARCH 31, 2015 AND DECEMBER 31, 2014
(UNAUDITED)
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March 31, 2015
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December 31, 2014
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ASSETS
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Current Assets
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Cash
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$ | 630,131 | $ | 550,342 | ||||
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Restricted cash
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609,931 | 582,743 | ||||||
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Accounts receivable, net
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10,261,826 | 8,686,913 | ||||||
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Prepaid and other current assets
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684,190 | 856,642 | ||||||
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Total current assets
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12,186,078 | 10,676,640 | ||||||
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Property and Equipment, net
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412,638 | 473,046 | ||||||
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Certificates of Deposit – Restricted
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15,059 | 15,044 | ||||||
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Total assets
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$ | 12,613,775 | $ | 11,164,730 | ||||
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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Current Liabilities
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Accounts payable
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$ | 386,163 | $ | 302,697 | ||||
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Accrued wholesale power purchased
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3,631,968 | 6,469,098 | ||||||
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Accrued expenses
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4,232,151 | 3,757,230 | ||||||
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Advance to loan amount note
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985,000 | 1,010,000 | ||||||
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Long-term debt – current portion
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2,066,672 | - | ||||||
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Total current liabilities
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11,301,954 | 11,539,025 | ||||||
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Long-Term Liabilities
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Long-term debt, net of debt discount and current portion
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1,033,328 | - | ||||||
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Total long-term liabilities
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1,033,328 | - | ||||||
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Total liabilities
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12,335,282 | 11,539,025 | ||||||
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Stockholders' Equity
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Series B Preferred Stock - $.001 par value, 3,000,000 authorized,1,900,000 shares and 1,900,000 shares issued and outstanding at March 31, 2015 and December 31, 2014 respectively
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1,900 | 1,900 | ||||||
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Common Stock - $.001 par value, 100,000,000 shares authorized, 15,290,220 and
14,943,426 shares issued and outstanding at March 31, 2015 and December 31, 2014,
respectively
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15,290 | 14,943 | ||||||
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Subscription receivable
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(52,000 | ) | (52,000 | ) | ||||
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Additional paid in capital
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8,492,953 | 8,135,134 | ||||||
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Accumulated deficit
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(8,179,650 | ) | (8,474,272 | ) | ||||
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Total stockholders’ equity
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278,493 | (374,295 | ) | |||||
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Total liabilities and stockholders' equity
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$ | 12,613,775 | $ | 11,164,730 | ||||
See accompanying notes to the consolidated financial statements.
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SUMMER ENERGY HOLDINGS, INC.
AND SUBSIDIARIES
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
(UNAUDITED)
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For the Three Months Ended March 31, 2015
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For the Three Months Ended March 31, 2014
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Electricity Revenue
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$ | 16,720,503 | $ | 7,175,580 | ||||
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Cost of Goods Sold
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Power purchases and balancing/ancillary
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6,958,126 | 3,930,906 | ||||||
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Transportation and distribution providers charge
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6,344,211 | 2,749,380 | ||||||
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Total cost of goods sold
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13,302,337 | 6,680,286 | ||||||
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Gross Profit
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3,418,166 | 495,294 | ||||||
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General and Administrative
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2,670,998 | 1,368,148 | ||||||
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Operating Income/(Loss)
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747,168 | (872,854 | ) | |||||
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Other Income (Expense)
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Financing costs
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(262,365 | ) | (88,901 | ) | ||||
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Interest expense
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(134,023 | ) | (76,207 | ) | ||||
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Interest income
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63 | 61 | ||||||
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Total other income (expense)
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(396,325 | ) | (165,047 | ) | ||||
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Net Income/(Loss) Before Income Taxes
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350,843 | (1,037,901 | ) | |||||
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Income Taxes
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- | - | ||||||
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Net Income/(Loss)
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$ | 350,843 | $ | (1,037,901 | ) | |||
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Series A Preferred shares dividend
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- | (24,440 | ) | |||||
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Series B Preferred shares dividend
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(56,221 | ) | (20,996 | ) | ||||
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Net Income/(Loss) applicable to common shareholders
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$ | 294,622 | $ | (1,083,337 | ) | |||
| Net income(Loss) per common share: | ||||||||
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Basic
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$ | 0.02 | $ | (0.08 | ) | |||
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Dilutive
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$ | 0.02 | $ | (0.08 | ) | |||
| Weighted average number of shares: | ||||||||
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Basic
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15,051,718 | 14,004,240 | ||||||
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Dilutive
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15,051,718 | 14,004,240 | ||||||
See accompanying notes to the consolidated financial statements.
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SUMMER ENERGY HOLDINGS, INC.
AND SUBSIDIARIES
FOR THE THREE MONTHS ENDED MARCH 31, 2015
AND MARCH 31, 2014
(UNAUDITED)
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For the Three Months Ended March 31, 2015
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For the Three Months Ended March 31, 2014
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Cash Flows from Operating Activities
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Net Income/(Loss)
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$ | 350,843 | $ | (1,037,901 | ) | |||
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Adjustments to reconcile net income/(loss) to net cash provided by (used) in operating activities:
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Common stock for services
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11,373 | 11,932 | ||||||
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Common stock for financing cost
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237,915 | - | ||||||
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Interest earned on restricted certificate of deposit
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(15 | ) | (19 | ) | ||||
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Depreciation of property and equipment
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70,583 | 50,885 | ||||||
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Amortization of debt discount
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24,480 | 88,901 | ||||||
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Bad debt expense
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334,410 | 143,512 | ||||||
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Changes in operating assets and liabilities:
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Accounts receivable
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(1,909,323 | ) | 426,596 | |||||
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Prepaid and other current assets
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172,422 | (186,691 | ) | |||||
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Accounts payable
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83,467 | 137,273 | ||||||
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Accrued wholesale power purchases
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(2,837,131 | ) | (1,612,829 | ) | ||||
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Accrued expenses
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474,921 | (57,510 | ) | |||||
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Advances related party
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- | 219,000 | ||||||
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Net cash used in operating activities
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(2,986,055 | ) | (1,816,851 | ) | ||||
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Cash Flows from Investing Activities
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Sale (Purchase) of restricted cash
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(27,188 | ) | 22,053 | |||||
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Purchase of property and equipment
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(10,175 | ) | (61,152 | ) | ||||
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Net cash used in investing activities
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(37,363 | ) | (39,099 | ) | ||||
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Cash Flows from Financing
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Proceeds from note payable
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3,075,550 | - | ||||||
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Repayment on note payable
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(25,000 | ) | - | |||||
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Dividends on Series A preferred stock
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- | (24,440 | ) | |||||
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Dividends on Series B preferred stock
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(47,343 | ) | (20,996 | ) | ||||
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Proceeds from issuance of Series B preferred stock
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- | 1,799,000 | ||||||
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Proceeds from issuance of common shares in a private placement
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100,000 | - | ||||||
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Net cash provided by financing activity
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3,103,207 | 1,753,564 | ||||||
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Net Change in Cash
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79,789 | (102,386 | ) | |||||
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Cash at Beginning of Period
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550,342 | 739,966 | ||||||
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Cash at End of Period
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$ | 630,131 | $ | 637,580 | ||||
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Supplemental Disclosure of Cash Flow Information:
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Income taxes paid
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$ | - | $ | - | ||||
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Interest paid
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$ | 134,023 | $ | 76,207 | ||||
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Non-Cash Transactions:
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Issuance of common stock for dividend payable on Series A preferred stock
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$ | - | $ | 45,894 | ||||
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Issuance of common stock for dividend payable on Series B preferred stock
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$ | 8,878 | $ | - | ||||
See accompanying notes to the consolidated financial statements.
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SUMMER ENERGY HOLDINGS, INC.
AND SUBSIDIARIES
THREE MONTHS ENDED MARCH 31, 2015 AND 2014
(UNAUDITED)
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NOTE 1 - ORGANIZATION
The consolidated financial statements include the accounts of Summer Energy Holdings, Inc. and its wholly-owned subsidiaries Summer Energy, LLC (“Summer LLC”), Summer EM Marketing, LLC (“Marketing LLC”) (collectively referred to as the “Company,” “we,” “us,” or “our”). All significant intercompany transactions and balances have been eliminated in these consolidated financial statements.
Summer LLC is a retail electric provider in the state of Texas under a license with the Public Utility Commission of Texas (“PUCT”). Summer LLC procures wholesale energy and resells it to commercial and residential customers. Summer LLC was organized on April 6, 2011, under the laws of the state of Texas. The operations of Summer LLC are the Company’s sole line of business.
Marketing LLC was formed in the state of Texas on November 6, 2012, to provide certain marketing services to Summer LLC.
NOTE 2 - BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with generally accepted accounting principles of the United States of America (“GAAP”) for interim financial statements pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2015, are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, as filed with the Securities and Exchange Commission (“SEC”) on March 31, 2015.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amount of revenues and expenses during the reporting period. Actual results may differ from these estimates.
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Our electricity revenue is recognized by our Company upon delivery of electricity to a customer’s meter. This method of revenue recognition is commonly referred to as the flow method. The flow method of revenue relies upon 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.
Unbilled Revenue and Accounts Receivable
Electric services not billed by month-end are accrued based upon estimated deliveries to customers as tracked and recorded by ERCOT multiplied by our average billing rate per kilowatt hour (“kWh”) in effect at the time. At the end of each calendar month, revenue is accrued to unbilled receivables based on the estimated amount of power delivered to customers using the flow technique. Unbilled revenue also includes accruals for estimated TDSP charges and monthly service charges applicable to the estimated electricity usage for the period. All charges that were physically billed to customers in the calendar month are recorded from the unbilled account to the customer receivable account. Unbilled accounts as of March 31, 2015, were estimated at $4,742,463.
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Accounts receivable are customer obligations billed at the customer’s monthly meter read date for that period’s electricity usage and due within 16 days of the date of the invoice. Balances past due are subject to a late fee that is assessed on that billing.
Cost Recognition
Direct energy costs are recorded when the electricity is delivered to the customer’s meter.
Cost of Goods Sold (“COGS”) include electric power purchased and pass through charges from the TDSP’s in the areas serviced by the Company. TDSP charges are costs for metering services and maintenance of the electric grid. TDSP charges are established by regulation of the PUCT.
The energy portion of our COGS is comprised of two components: bilateral wholesale costs and balancing/ancillary costs. These two cost components are incurred and recognized differently as follows:
Bilateral wholesale costs are incurred through contractual arrangements with wholesale power suppliers for firm delivery of power at a fixed volume and fixed price. We are invoiced for these wholesale volumes at the end of each calendar month for the volumes purchased for delivery during the month, with payment due 20 days after the end of the month.
Balancing/ancillary costs are based on the customer load and are determined by ERCOT through a multiple step settlement process. Balancing costs/revenues are related to the differential between supply that we provided through our bilateral wholesale supply and the supply required to serve our customer load. The Company endeavors to minimize the amount of balancing/ancillary costs through our load forecasting and forward purchasing programs.
NOTE 4 – 2012 STOCK OPTION AND STOCK AWARD PLAN
During the three months ended March 31, 2015, the Company granted stock options to purchase up to 60,000 shares of the Company’s common stock to two key officers. The options covering a total of 60,000 shares vested at the date of grant. The stock options have an exercise price of $1.00 per share and will expire ten (10) years from the date of grant. The fair value of the options of $10,180 was determined using the Black-Scholes option-pricing model. The assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate of 0.87% (ii) estimated volatility of 17% (iii) dividend yield of 0.00% and (iv) expected life of the options of 5 years. Approximately $10,180 was expensed during the three months ended March 31, 2015 with regards to stock options granted to the two key officers.
As of March 31, 2015, 688,250 securities have been awarded, net of forfeitures, from the 2012 Stock Option and Stock Award Plan with a remaining unissued balance of 96,750 securities.
NOTE 5 – PRIVATE PLACEMENT OF SERIES B PREFERRED SHARES
On February 19, 2014, the Company filed a Certificate of Designation of Rights, Preferences, Privileges and Restrictions (the “Series B Designation”) with respect to a class of preferred stock designated as Series B Preferred Stock (the “Series B Preferred”). The Series B Preferred entitles holders thereof to receive a dividend payable in cash or common stock, at the election of the holder, at an annual rate of 12% of the Deemed Original Issue Price. The “Deemed Original Issue Price” of the Series B Preferred for purposes of calculating the Series B Preferred dividend is $1.00 per share, which the board of directors of the Company determined represents the estimated fair market value as of the date of grant. The Series B Preferred dividends are payable in cash or by the issuance of common stock ten (10) days following the end of each month, or portion thereof. The number of shares to be paid as a dividend shall be determined based on the fair market value of the shares of common stock on the record date for the dividend. On February 21, 2014, the Company entered into Series B Preferred Stock Purchase Agreements (each an “Agreement” and collectively the “Agreements”) with several investors. Pursuant to the Agreements, the Company sold an aggregate of 1,900,000 shares of the Series B Preferred, for an aggregate purchase price of $1,900,000 as of March 31, 2015. Several members of the Company’s board of directors directly or indirectly participated in the offering.
Additional terms, conditions, rights, and privileges of the Series B Preferred include:
Voting: Each holder of Series B Preferred is entitled to the number of votes equal to the number of shares of the Company’s common stock into which such shares of Series B Preferred held by such holder could then be converted. The initial conversion price is $1.00 per share, and the per-share purchase price was $1.00. As such, the initial conversion ratio is 1-1.
Conversion: Optional Conversion. The Series B Preferred is convertible into common stock at the election of the holder, with an initial conversion price of $1.00 per share. The Certificate of Designation provides certain adjustments to the conversion price to adjust for stock splits, adjustments, and issuance of additional shares of stock. Mandatory Conversion. Additionally, the Series B Preferred will automatically be converted upon the earlier to occur of (A) the affirmative election of the holders of fifty percent (50%) of the outstanding shares of Series B Preferred, voting as a separate class, or (B) the affirmative vote of the board of directors upon the closing of a firmly underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, which values the Company at least $50 million and in which the gross proceeds to the Company (after underwriting discounts, commissions and fees) are at least $10 million.
Liquidation. Upon the occurrence of any “Liquidation Event” (including a liquidation of the Company or a sale of the Company), before any distribution or payment will be made to the holders of common stock, the holders of Series B Preferred will be entitled to be paid out of the assets of the Company an amount equal to the amount of cash paid for the shares of Series B Preferred and accumulated but unpaid dividends. The Series B Preferred ranks pari passu with the Series A Preferred Stock with regard to liquidation payments, as well as to any subsequent series of preferred stock.
Redemption. The Company may, at any time, redeem all or a portion of the Series B Preferred upon 20 days’ notice at a price of $1.20 per share.
The foregoing is only a brief description of the material terms of the Series B Designation and the offering of the Series B Preferred, and does not purport to be a complete description of the rights and obligations of the parties thereunder and such descriptions are qualified in their entirety by reference to the full text of the Certificate of Designation.
In accordance with the Series B Designation, dividends due to holders of Series B Preferred may be paid at the option of the holder in shares of the Company’s $0.001 par value common stock valued at the fair market value of such shares of common stock as determined in good faith by the Board of Directors on the record date of the dividend.
During the quarter ended March 31, 2015, several holders of Series B Preferred opted to be paid dividends of common stock as opposed to cash, including members of the Company’s board of directors who had directly or indirectly participated in the Series B offering. Holders of Series B Preferred not electing to be paid dividends with shares of common stock were paid cash dividends.
As of March 31, 2015, the Company had paid $56,221 of cumulative monthly dividends on Series B Preferred Stock. One holder elected to be paid in shares of the Company’s common stock totaling 8,878 shares valued at $8,878 and the remaining holders were paid a total of $47,343 in cash.
NOTE 6 – MASTER MARKETING AGREEMENT AND ISSUANCE OF WARRANTS
On March 11, 2014, the Company entered into a Master Marketing Agreement with an entity which provides marketing services. The Marketer is in the business of using its multi-level marketing network to broker the services of electric providers to potential residential customers.
The Company issued a warrant to the Marketer to purchase up to 275,000 shares (“Warrant Shares”) of the Company’s common stock at an exercise price of $1.00 per share (the “Warrant”). The Warrant has a term of ten (10) years and vests as follows: (i) as to one Warrant Share for each customer introduced by the Marketer that enters into a relationship with Summer LLC in a one year contract; (ii) as to two (2) Warrant Shares for each customer introduced by the Marketer that enters into a contract with Summer LLC with a two (2) year term; and (iii) in the event that the Marketer meets certain other milestones related to the number of customers introduced to the Company by the Marketer, the Warrant becomes exercisable with respect to an additional 75,000 shares of the Company’s common stock.
The fair value of the warrants of $46,656 was determined using the Black-Scholes option-pricing model. The assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate of 0.87% (ii) estimated volatility of 17% (iii) dividend yield of 0.00% and (iv) expected life of the warrant of 10 years.
As of March 31, 2015, the number of Warrant Shares vested was 5,589.
NOTE 7 - ADVANCE TO LOAN AMOUNT NOTE
On April 18, 2014, the Company signed an Advance to Loan Amount Note with Comerica Bank in the amount of $1,500,000. The Note had an original maturity date of December 22, 2014, which was extended through February, 22, 2015. On February 22, 2015, the Advance to Loan Note was increased from $1,500,000 to $1,700,000 and extended again to August 21, 2015, 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 Advance to Loan Amount Note has been made by four members of the Company’s board of directors (“Guarantors”). The Company agreed to issue the four Guarantors a total of 120,000 shares of the Company’s common stock per month (30,000 shares of common stock per month per Guarantor) reduced accordingly as the loan is reduced for agreeing to act as a Guarantor of the Advance to Loan Amount.
During the quarter ended March 31, 2015, the Company issued 237,915 shares of common stock to the Guarantors and recognized $237,915 in financing cost, and the balance of the Advance to Loan Amount was $985,000 at March 31, 2015.
NOTE 8 – PRIVATE PLACEMENT OFFERING AND PROMISSORY NOTE
On March 12, 2015, pursuant to a securities purchase agreement (the “Purchase Agreement”), the Company accepted a subscription from an accredited investor to purchase 100,000 Investment Units (“Units”), comprised of common stock and warrants for a purchase price of $1.00 per Unit, resulting in gross proceeds to the Company of $100,000. Each Unit consists of (i) one (1) share of the Company’s common stock, par value $0.001 per share, and (ii) a warrant to purchase one (1) share of common stock at an exercise price of $1.50 per share. The Company granted piggyback registration rights to the investor in connection with this investment. The Company intends to use the proceeds from this investment for general corporate and working capital purposes.
NOTE 8 – PRIVATE PLACEMENT OFFERING AND PROMISSORY NOTE (CONTINUED)
Pursuant to the Purchase Agreement, the Company also issued an unsecured promissory note in the principal amount of $100,000 in favor of said investor (the “Note”). Interest accrues on the Note at a rate of 15% per annum. The Company agreed to make quarterly interest-only payments throughout the term of the Note. The entire unpaid principal balance of the Note, together with any accrued interest and other unpaid charges or fees, is due and payable on or before September 12, 2016. The Company may prepay the Note, in whole or in part, at any time without penalty.
As of March 31, 2015, the accrued interest on the promissory note is $667.
NOTE 9 - FINANCING FROM BLACK INK ENERGY LLC
On March 2, 2015, Summer Energy, LLC (the “Borrower”), a wholly owned subsidiary of Summer Energy Holdings, Inc. (“SEH”), entered into a Second Lien Term Loan Agreement (the “Agreement”) with Black Ink Energy, LLC (“BIE”). Pursuant to the Agreement, BIE agreed to provide a term loan (the “Term Loan”) to the Borrower, and the Borrower agreed to borrow and repay funds loaned by BIE.
The amount of the Term Loan is Three Million Dollars $3,000,000, and the loan is not revolving in nature. Pursuant to the Agreement, any amounts prepaid or repaid may not be re-borrowed by the Borrower. The maturity date of the loan is September 2, 2016. The Term Loan bears interest at a rate of 15% per annum, except in the occurrence of an event of default, at which point the default interest rate will be 18%. Interest is payable in arrears on the last day of each month and on the maturity date of the loan. The Term Loan was not evidenced by a promissory note.
Pursuant to the Agreement, the Borrower has the option to prepay the loan amount in whole by providing prior notice to BIE and by paying a pre-payment premium of $300,000.
Additionally, the Borrower agreed to pay to BIE a facility fee. The facility fee in the amount of $24,450 was expensed immediately as fees occurred to obtain financial resource.
During the quarter ended March 31, 2015, the Company paid interest expense in the amount of $37,500 to BIE.
NOTE 10 - WHOLESALE POWER PURCHASE AGREEMENT
On April 25, 2014, the Company closed a transaction with DTE Energy Trading, Inc. (“DTE”), with an effective date of April 1, 2014. As part of the transaction, the Company and DTE entered into an Energy Marketing Agreement for Electric Power (the “Energy Marketing Agreement”). Pursuant to the terms of the Energy Marketing Agreement, the Company agreed to purchase its electric power and associated services requirements from DTE, and DTE agreed to provide the Company with certain credit facilities to assist the Company in the purchase of its electric power and associated service requirements. The Company also agreed to pay DTE a fixed monthly fee, as well as certain fees based on megawatt hours purchased. The terms of the Energy Marketing Agreement are governed by the ISDA 2002 Master Agreement, as well as a Schedule and Power Annex thereto (the “2002 Master Agreement”). In conjunction therewith, the Company and DTE also entered into a Credit Agreement, a Security Agreement and a Membership Interest Pledge Agreement.
Pursuant to the Credit Agreement, among other things DTE agreed to (i) provide a guaranty (a “Credit Guaranty”) to the Electric Reliability Council of Texas (“ERCOT”) for the benefit of the Company, and (ii) provide commodity loans for the purchase of electricity (“Commodity Loans”). Each Commodity Loan and any Credit Guaranty shall bear interest on the outstanding principal amount thereof, from the date such Commodity Loan or Credit Guaranty is issued until it becomes due or is revoked, respectively, at a rate per annum equal to the Prime Rate (as reported by the Wall Street Journal) plus two percent (2%). The Company covenanted not to, among other things, (a) merge or consolidate with any other person, (b) acquire all or substantially all of the capital stock or property of another person, (c) create, assume or suffer to exist any lien on any property now owned or hereafter acquired by the Company except for permitted liens (as set forth in the Credit Agreement) or (d) become liable for any indebtedness (other than permitted indebtedness, as set forth in the Credit Agreement).
NOTE 10 - WHOLESALE POWER PURCHASE AGREEMENT (CONTINUED)
In consideration of the services and credit support provided by DTE to the Company, and pursuant to the Security Agreement, the Company is required to, among other things (i) grant a priority security interest to DTE in all of its assets, equipment and inventory; (ii) require its customers to remit monthly payments into a lockbox account over which DTE has a security interest; and (iii) deliver monthly and annual forecasted and audited statements to DTE.
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 11 – EMPLOYMENT AGREEMENTS
On January 21, 2015, the Company entered into employment agreements with certain key employees. The agreements require total annual base compensation of $290,000 and provide the ability for the key employees to receive certain option or stock grants based on the achievement of performance goals. The agreements provide an average of six months of severance for Termination Without Cause or Change of Control (each as defined in the employment agreements) totaling $145,000 along with the acceleration and immediate vesting of all unvested stock options, warrants and/or restricted stock granted.
NOTE 12 – CONTINGENCIES
Rod Danielson, a former employee and current shareholder of the Company has initiated an arbitration proceeding with the American Arbitration Association in Houston, Texas seeking payment of $156,000 in contractual severance, plus incidental and consequential damages and attorneys’ fees. The Company disputes the allegations in the arbitration proceedings made by Mr. Danielson. The parties are engaged in settlement negotiations.
NOTE 13 – SUBSEQUENT EVENTS
Dividends of Series B Preferred Shares
On April 28, 2015, the Company issued 2,959 shares of common stock and paid $15,781 in cash as dividend payments on Series B Preferred Shares relating to the month of April, 2015 (See Footnote 5).
Commons Shares Issued as Interest on Personal Guaranty
On April 28, 2015, the Company issued 60,940 shares of common stock to the Guarantors of the Advance to Loan Amount (See Footnote 7) as interest due relating to the month of April 2015.
Promissory Note
The Company accrued $1,250 interest expense relating to the month of April 2015 and had an accrued balance of $1,917 (See Footnote 8).
Financing From Black Ink Energy, LLC
On April 28, 2015, the Company paid $37,500 of interest relating to the month of April 2015 bringing total interest paid for the calendar year 2015 to $75,000 (See Footnote 9).
Private Placement Offering
On May 7, 2015, the Company accepted a subscription from an accredited investor to purchase a total of one (1) Investment Unit (“Unit”) comprised of common stock and warrants for a purchase price of $30,000 per Unit, for gross proceeds to the Company of $30,000. Each Unit consists of (i) 30,000 shares of the Company’s common stock (the “Common Stock”) and (ii) a five (5) year warrant (each a “Warrant” and collectively “Warrants”) to purchase 15,000 shares of Common Stock for an exercise price of $1.50 per share
The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 27A of the Securities Act, and is subject to the safe harbors created by those sections. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “will” and variations of these words or similar expressions are intended to identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors. We undertake no obligation to revise or publicly release the results of any revisions to these forward-looking statements.
Due to possible uncertainties and risks, readers are cautioned not to place undue reliance on the forward-looking statements contained in this Quarterly Report, which speak only as of the date of this Quarterly Report, or to make predictions about future performance based solely on historical financial performance. We disclaim any obligation to update forward-looking statements contained in this Quarterly Report.
Readers should carefully review the risk factors described below under the heading “Risk Factors” and in other documents we file from time to time with the SEC, including our Form 10-K for the fiscal year ended December 31, 2014. Our filings with the SEC, including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those filings, pursuant to Sections 13(a) and 15(d) of the Exchange Act, are available free of charge at www.summerenergy.com, when such reports are available via the EDGAR system maintained by the SEC at www.sec.gov.
Recent Developments
The consolidated financial statements include the accounts of Summer Energy Holdings, Inc., a Nevada corporation and its wholly-owned subsidiaries Summer Energy, LLC, a Texas limited liability company (“Summer LLC”) and Summer EM Marketing (“Marketing LLC”) (collectively referred to as the “Company,” “we,” “our,” or “us”).
On March 27, 2012, Summer LLC became a wholly-owned subsidiary of Summer Energy Holdings, Inc. (formerly known as Castwell Precast Corporation) through a reverse acquisition transaction, which resulted in the former members of Summer LLC owning approximately 92.3% of the Summer Energy Holdings, Inc. outstanding common stock. Our sole operations are conducted through Summer LLC.
Marketing, LLC was formed in the state of Texas on November 6, 2012 to provide marketing services to Summer LLC.
Plan of Operation
Our wholly owned subsidiary, Summer LLC, is a licensed Retail Electricity Provider (REP) in the State of Texas. In general, Texas regulatory structure permits REPs, such as Summer LLC, to procure and sell electricity at unregulated prices. REPs pay the local transmission and distribution utilities a regulated tariff rate for delivering electricity to their customers. As a REP, we sell electricity and provide the related billing, customer service, collections and remittance services to residential and commercial customers. We offer retail electricity to commercial and residential customers in designated target markets within the State of Texas. In the commercial market, the primary target is small to medium-sized customers (less than one megawatt of peak usage), but we will also selectively pursue larger commercial customers through management’s existing, historical relationships. Residential customers are a secondary target market. We anticipate that a majority of our customers will be located in the Houston and Dallas-Fort Worth metropolitan areas; although, we anticipate a growing number will be located in a variety of other metropolitan and rural areas within Texas.
We began delivering electricity to customers in mid-February 2012.
Results of Operations
Quarter Ended March 31, 2015, compared to the Quarter ended March 31, 2014
Revenue – For the quarter ended March 31, 2015, we generated $16,045,008 in electricity revenue primarily from commercial customers, and from the addition of various long and short-term residential customers. The majority of our revenue comes from the flow of electricity to customers. However, we also generated revenues from contract cancellation fees, disconnection fees and late fees of $675,495. Revenues for the quarter ended March 31, 2014 were $7,007,513 from electricity revenue and $168,067 from disconnection and late fees.
Management plans to continue to execute on its sales and marketing program to solicit individual commercial and residential customers. Management also plans to continue to acquire portfolios of commercial and residential customers when offered at reasonable prices.
Cost of Goods Sold and Gross Margin – For the quarter ended March 31, 2015, cost of goods sold and gross profit totaled $13,302,337 and $3,418,166, respectively. Cost of goods sold and gross profit recorded in the quarter ended March 31, 2014 were $6,680,286 and $495,294, respectively.
Gross Profit – Gross profit for the quarter ended March 31, 2015 totaled $3,418,166 compared to $495,294 for the quarter ended March 31, 2014. The Company’s increase in gross profit is a result of strategic marketing partnerships and third party sales to both residential and commercial customers.
Operating expenses – Operating expenses for the quarter ended March 31, 2015 totaled $2,670,998, consisting primarily of general and administrative expenses of $1,556,073, stock compensation of $11,373, bank service fees of $132,779, commission expense of $575,200, collection fees/sales and verification fees of $21,307, professional fees of $165,884, and $208,382 of billing fees. Billing fees are primarily costs paid to third party Electronic Data Inter-Chain (EDI) provider to handle transactions between us, ERCOT and the TDSPs in order to produce customer bills.
Operating expenses for the quarter ended March 31, 2014 totaled $1,368,148, consisting of general and administrative expenses of $1,094,496, stock compensation expense of $11,932, bank service fees of $99,372, collection fees/sales and verification fees of $1,591, professional fees of $73,846 and $86,911 of billing fees.
Net Income/(Loss) – Net income/(loss) for the quarter ended March 31, 2015 and 2014, totaled $350,843 and ($1,037,901), respectively, relating primarily to operating expenses and cost of goods sold incurred in excess of revenue as we attempt to obtain economies of scale.
Liquidity and Capital Resources
At March 31, 2015 and December 31, 2014, our cash totaled $630,131 and $550,342, respectively. Our principal cash requirements for the quarter ended March 31, 2015, were for operating expenses and cost of goods sold (including power purchases, employee cost, and customer acquisition) and capital expenditures. During the quarter ended March 31, 2015, the primary source of cash was from electricity revenues, $100,000 of funds received in a private placement and $3,075,550 from notes payable. During the quarter ended March 31, 2014, the primary source of cash was from electricity revenues and $1,799,000 from the issuance of Series B Preferred Shares.
General – The Company’s increase in net cash flow during the first three months of 2015 is attributable to $2,986,055 cash used in operating activities, $37,363 cash used in investing activities which includes $10,175 for the purchase of property and equipment and $3,103,207 provided by financing activity. In 2014, the net cash decrease was a result in net cash used by operations of $1,816,851, $39,099 cash used in investing in investing activities which includes $61,152 for the purchase of property and equipment and $1,753,564 provided by financing activity.
The Company has no present agreements or commitments with respect to any material acquisitions of other businesses, products, product rights or technologies. However, we will continue to evaluate acquisitions of and/or investments in products, technologies, or companies that complement our business and may make such acquisitions and/or investments in the future. Accordingly, we may need to obtain additional sources of capital in the future to finance any such acquisitions and/or investments. We may not be able to obtain such financing on commercially reasonable terms, if at all. If we are able to obtain additional financing, such financing may result in restrictions on our operations, in the case of debt financing, or substantial dilution for stockholders, in the case of equity financing.
Cash Outflows for Capital Assets, Customer Acquisition and Deposits
We expect to expend funds for capital assets, customer acquisition and deposits in connection with the expansion of our business during the remainder of the current fiscal year. The anticipated source of funds will be cash on hand and the capital raised through the year ended December 31, 2015.
Future Financing Needs
The Company did not commence operations and the generation of revenue until the middle of the three month period ended March 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.
As a “small reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide this information.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures, as of the end of the period covered by this Quarterly Report, were effective at the reasonable assurance level to ensure that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
Changes in Internal Control over Financial Reporting
There have been no changes in internal control over financial reporting during the period of time covered by this Quarterly Report has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Our process for evaluating controls and procedures is continuous and encompasses constant improvement of the design and effectiveness of established controls and procedures and the remediation of any deficiencies which may be identified during this process.
As of the date of this filing, there have been no material changes to the Risk Factors included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, filed with the SEC on March 31, 2015 (the “2014 Form 10-K”). The Risk Factors set forth in the 2014 Form 10-K should be read carefully in connection with evaluating our business and in connection with the forward-looking statements contained in this Quarterly Report on Form 10-Q. Any of the risks described in the 2014 Form 10-K could materially adversely affect our business, financial condition or future results and the actual outcome of matters as to which forward-looking statements are made. These are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
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On May 7, 2015, the Company accepted a subscription from an accredited investor to purchase a total of one (1) Investment Unit (“Unit”) comprised of common stock and warrants for a purchase price of $30,000 per Unit, for gross proceeds to the Company of $30,000. Each Unit consists of (i) 30,000 shares of the Company’s common stock (the “Common Stock”) and (ii) a five (5) year warrant (each a “Warrant” and collectively “Warrants”) to purchase 15,000 shares of Common Stock for an exercise price of $1.50 per share. The Company granted piggyback registration rights to the investor in connection with this investment. The Company intends to use the proceeds from this investment for general corporate and working capital purposes.
The common and stock and warrants underlying the Unit was issued and sold in reliance upon exemptions from registration pursuant to Section 4(a)(2) under the Securities Act of 1933, as amended (the “Securities Act”).
The Company’s reliance upon Section 4(a)(2) of the Securities Act was based in part upon the following factors: (a) the issuance of the securities was in connection with an isolated private transaction which did not involve any public offering; (b) there were a limited number of offerees; (c) there were no subsequent or contemporaneous public offerings of the securities by us; (d) the securities were not broken down into smaller denominations; and (e) the negotiations for the sale of the securities took place directly between the offeree and the Company.
On February 22, 2015, Summer LLC entered into an amendment (the “Note Amendment”) with Comerica Bank to that certain Advance-to-Loan Amount Note originally dated as of April 18, 2014 (the “Note”) in order to increase the principal amount of the Note from $1,500,000 to $1,700,000, and to extend the maturity date of the Note from February 22, 2015 to August 21, 2015. Pursuant to the Note Amendment, accrued but unpaid interest, which is accrued at the Prime Rate (as defined in the Note) plus 2.0%, is payable monthly, with all accrued but unpaid interest, together with issued but unpaid principal, being due on or before August 21, 2015. Four members of the Company’s Board of Directors provided personal guaranties for the loan.
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31.1
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Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
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31.2
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Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
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32.1*
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Certification of the CEO and CFO pursuant to Rule 13a-14(b) and Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
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101.INS**
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XBRL Instance Document
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101.SCH**
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XBRL Taxonomy Extension Schema Document
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101.CAL**
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XBRL Taxonomy Extension Calculation Linkbase Document
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101.DEF**
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XBRL Taxonomy Extension Definition Linkbase Document
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101.LAB**
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XBRL Taxonomy Extension Label Linkbase Document
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101.PRE**
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XBRL Taxonomy Extension Presentation Linkbase Document
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* In accordance with Item 601(b)(32)(ii) of Regulation S-K, this exhibit shall not be deemed “filed” for the purposes of Section 18 of the Securities and Exchange Act of 1934 or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.
** Pursuant to Rule 406T of Regulation S-T, this XBRL information will not be deemed “filed” for the purpose of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liability of that section, nor will it be deemed filed or made a part of a registration statement or prospectus for purposes of Sections 11 and 12 of the Securities Act of 1933, or otherwise subject to liability under those sections.
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this Quarterly Report to be signed on its behalf by the undersigned, thereunto duly authorized.
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SUMMER ENERGY HOLDINGS, INC.
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Date: May 15, 2015
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By: /s/ Neil Leibman
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Neil Leibman
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Chief Executive Officer
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(Principal Executive Officer)
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Date: May 15, 2015
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/s/ Jaleea P. George
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Jaleea P. George
Chief Financial Officer
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(Principal Accounting Officer)
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