FORM 10-Q

SUMMER ENERGY HOLDINGS, INC. AND SUBSIDIARIES

(UNAUDITED)

See accompanying notes to the condensed consolidated financial statements.

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SUMMER ENERGY HOLDINGS, INC. AND SUBSIDIARIES

(UNAUDITED)

See accompanying notes to the condensed consolidated financial statements.

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(UNAUDITED)

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SUMMER ENERGY HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

See accompanying notes to the condensed consolidated financial statements.

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SUMMER ENERGY HOLDINGS, INC. AND SUBSIDIARIES

(UNAUDITED)

See accompanying notes to the condensed consolidated financial statements.

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AND SUBSIDIARIES

(UNAUDITED)

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

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

Summer Midwest (formerly Summer Energy of Ohio, LLC) was formed in the state of Ohio on December 16, 2013 to procure and sell electricity in the state of Ohio. The Public Utilities Commission of Ohio issued a certificate as a Retail Electric Service Provider to Summer Midwest on June 16, 2015. On May 2, 2019, the Illinois Commerce Commission approved Summer Midwest as a Retail Electric Service Provider in the state of Illinois and in December 2019, the Pennsylvania Public Utilities Commission approved Summer Midwest as a Retail Electric Provider.

Marketing LLC was formed in the state of Texas on November 6, 2012 to provide marketing services to Summer LLC. Marketing LLC is currently inactive and there is no business activity.

Summer Northeast, a Texas limited liability company formerly named REP Energy, LLC, was acquired on November 1, 2017 and became a wholly-owned subsidiary of Summer Energy Holdings, Inc. Summer Northeast is a retail electric provider serving electric load to both residential and commercial customers in the Northeastern U.S. and holds licenses in Massachusetts, New Hampshire, Connecticut and Rhode Island.  

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the nine month period ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, as filed with the Securities and Exchange Commission (“SEC”) on March 27, 2020.

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

Uses and Sources of Liquidity

The condensed consolidated financial statements have been prepared assuming the Company will continue to operate as a going concern, which contemplates the realization of assets and settlement of liabilities in the normal course of business, and does not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from uncertainty related to its ability to continue as a going concern within one year from the date of issuance of these condensed consolidated financial statements.

For the nine months ended September 30, 2020 and 2019, the Company incurred net losses of $4,837,275 and $5,619,298, respectively, and used cash in continuing operations of $2,302,707 and $2,438,646, respectively. The Company’s operations have been financed principally from electricity revenues, equity financing, and net proceeds from outside debt of $4,080,000, funding from the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) totaling $2,342,300

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established pursuant to the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) as well as from capital raised under private placement offerings totaling $45,000 and $5,730,000 during the nine months ended September 30, 2020 and 2019, respectively.   The Company’s liquidity requirements are to finance current operations, meet financial commitments, fund organic growth and/or acquisitions, and service debt. The liquidity requirements fluctuate with the level of customer acquisition costs, collateral posting requirements, the effects of the timing between the settlement of payables and receivables, including the effect of weather conditions, and our general working capital needs for ongoing operations. Estimating liquidity requirements is highly dependent on then-current market conditions, including impacts of the COVID-19 pandemic, weather events, forward prices for electricity, market volatility and our then-existing capital structure and requirements.

The Company’s continuation as a going concern is dependent upon its ability to increase sales, and/or raise additional funds through the capital markets as well as outside lending. During the nine months ended September 30, 2020, the Company secured additional financing for a revolving loan in the amount of $10,000,000 with a maturity date of March 2023 and proceeds from the PPP loan. In addition, commitments for additional lending up to $2,000,000 may be provided by members of the Board of Directors of the Company, if necessary. Management has concluded that its existing capital resources and availability, proceeds from a 2020 offering and outside lending will be sufficient to fund operations through the third quarter of 2021.

Revenue and Cost Recognition

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

Cost of goods sold (“COGS”) within the Texas market include electric power purchased and pass through charges from the transmission and distribution service providers (“TDSPs”) in the areas serviced by the Company. TDSP charges are costs for metering services and maintenance of the electric grid. TDSP charges are established by regulation of the PUCT. COGS within the Independent System Operator (“ISO”) for the New England market is comprised of wholesale costs based upon the wholesale power tariff rate for volumes purchased during the delivery month and scheduling fees. Summer Midwest began flowing electricity within the Pennsylvania, New Jersey and the Maryland Power Pool (“PJM”) market in July 2019, and the COGS for the PJM market is comprised of wholesale costs based upon the wholesale power tariff for volumes purchased during the delivery month as well as scheduling fees.

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

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

Balancing/ancillary costs are based on the customer load and are determined by the Electric Reliability Council of Texas (“ERCOT”), ISO New England and PJM through a multiple-step settlement process. Balancing costs/revenues are related to the differential between supply that we provided through our bilateral wholesale supply and the supply required to serve our customer load. The Company endeavors to minimize the amount of balancing/ancillary costs through our load forecasting and forward purchasing programs.

Cash and Restricted Cash

Restricted cash in the amount of $1,974,621 as of September 30, 2020 and $3,197,708 as of December 31, 2019 represents funds held in escrow for customer deposits, funds held in a controlled account by the wholesale provider (Note 12) and funds securing irrevocable stand-by letters of credit (Note 4).

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Basic and Diluted Income (Loss) Per Share

Basic income/(loss) per share are computed by dividing net income/(loss) applicable to the weighted-average number of shares outstanding during the period. Diluted income per share is determined using the weighted-average number of shares outstanding during the period, adjusted for the dilutive effect of share equivalents, using the treasury method, consisting of shares that might be issued upon exercise of share equivalents. In periods where losses are reported, the weighted average number of shares excludes share equivalents, because their inclusion would be anti-dilutive. 

For the nine months ended September 30, 2020 and 2019, the weighted average number of outstanding shares excludes share equivalents due to dilutive stock options and stock warrants because their inclusion would be anti-dilutive. The Company had potentially dilutive securities totaling approximately 5,109,448 and 4,741,434 as of September 30, 2020 and 2019, respectively.

New Accounting Standards Recently Adopted

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

Standards Not Yet Adopted

In December 2019, the (“FASB”) issued (“ASU”) No. 2019-12, which reduces the complexity of FASB ASC Topic 740, “Income Taxes” as part of the FASB’s Simplification Initiative. The amendments in this guidance simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This guidance is effective for annual reporting periods ending after December 15, 2020, with early adoption permitted, and should be applied on either a retrospective basis for all periods presented or a modified retrospective basis. Management is still assessing the impact this might have on the Company’s consolidated financial statements.

The Company has reviewed all other recently issued, but not yet adopted, accounting standards, in order to determine their effects, if any, on its results of operations, financial position or cash flows. Based on that review, the Company believes that no other pronouncements will have a significant effect on its financial statements.

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NOTE 3 - REVENUE

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

The Company recognizes revenue from the sale of electricity to consumers and is recognized upon the performance obligation to deliver electricity to the customer’s meter. This method of revenue recognition is commonly referred to as the flow method. The Company’s customer base consists of a mix of residential and commercial customers in the ERCOT, ISO New England and PJM markets. Also, the Company recognizes revenues from contract cancellation fees, disconnection fees and late fees.

The invoice practical expedient within the accounting guidance allows for the recognition of revenue from performance obligations in the amount of consideration to which there is a right to invoice the customer and when the amount for which there is a right to invoice corresponds directly to the value transferred to the customer. The purpose of the invoice practical expedient is to depict an entity’s measure of progress toward completion of the performance obligation within a contract and can only be applied to performance obligations that are satisfied over time and when the invoice is representative of services provided to date. The Company elected to apply the invoice practical expedient to recognize revenue for performance obligations satisfied over time as the invoices from the respective revenue streams are representative of services or goods provided to date to the customer.

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Performance Obligations

Residential and Commercial – The Company has performance obligations for the service to deliver electricity to its customers and it satisfies these performance obligations over time as electricity is provided continuously to the customer who simultaneously receives and consumes the benefits provided. The Company recognizes revenue at a fixed base amount and a price per kilowatt hour as it provides these services on a fixed term contract. Contracts generally have fixed terms of 3-month increments not to exceed a 24-month fixed term. For customers whose fixed contracts have expired, the Company recognizes revenue at the market price per kilowatt hour as the service is provided.  

Residential pre-paid – The Company has performance obligations for the service to deliver electricity to its customers and these performance obligations are satisfied over time as electricity is provided continuously to the customer who simultaneously receives and consumes the benefits provided. Revenues in the pre-paid market are variable at the market rate per kilowatt hour as the service is provided.

Accounts Receivable and Unbilled Revenue

Accounts receivable are comprised of trade receivables and unbilled receivables (accrued revenue). Customers are billed monthly in cycles having billing dates that do not generally coincide with the end of a calendar month. This results in customers having received electricity that they have not been billed for as of month-end. Therefore, at the end of each calendar month, revenue is accrued to unbilled receivables based on the estimated amount of power delivered to customers using the flow technique. Unbilled revenue also includes accruals for estimated TDSP charges and monthly service charges applicable to the estimated electricity usage for the period. All charges that were physically billed in the calendar month are recorded from the unbilled account to the customer’s receivable account.

In the Texas market, electricity revenues not billed by month-end are accrued based upon estimated deliveries to customers as tracked and recorded by ERCOT, multiplied by our average billing rate per 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 September 30, 2020 and December 31, 2019 were estimated at $40,254,099 and $32,916,970, respectively.

In the ISO New England market, electricity services not billed by month-end are accrued based upon estimated deliveries to customers as tracked and recorded by ISO New England, multiplied by our average billing rate per 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 September 30, 2020 and December 31, 2019 were estimated at $620,318 and $788,395, respectively.

The Company began service in the PJM market during the third quarter of 2019. In the PJM market, electricity services not billed by month end are accrued based upon estimated deliveries to customers as tracked and recorded by PJM, multiplied by our average billing rate per kWh in effect at the time. The customer billing in the PJM market is performed by the local utility company. Unbilled accounts in the PJM market as of September 30, 2020 and December 31, 2019 were estimated at $82,913 and $15,088, respectively.

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

Subsequent to January 1, 2020, the Company’s accounts receivables are recorded at cost less an allowance for credit losses. We estimate losses on receivables at the reporting date based on expected losses resulting from the inability of our customers to make required payments, including our historical experience of actual losses and the aging of such receivables. These receivables have been pooled by market including the Texas market, the ISO New England market, and PJM market, because the receivables from each market share risk characteristics. Based on known information we may also establish specific

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reserves for customers in an adverse financial condition or adjust our expectations of changes in conditions that may impact the collectability of outstanding receivables. Receivables past due over 90 days are considered delinquent and are reviewed individually for collectability. After all means of collection have been exhausted, delinquent receivables are written-off. The allowance for credit losses at September 30, 2020 was $521,488.

NOTE 4 - LETTERS OF CREDIT AND DEPOSITS

As of September 30, 2020 and December 31, 2019, Summer LLC had no outstanding secured irrevocable stand-by letters of credit. As of September 30, 2020 and December 31, 2019, deposits held by various local utilities in the ERCOT market totaled at $872,320 and $1,004,059, respectively.

As of September 30, 2020 and December 31, 2019, Summer Northeast had two secured irrevocable stand-by letters of credit totaling $750,000 with a financial institution. The letters of credit were issued for the benefit of the following parties: Connecticut Department of Public Utility Control in the amount of $250,000 and the State of New Hampshire Public Utilities Committee in the amount of $500,000. The letter of credit issued to Connecticut Department of Public Utility Control in the amount of $250,000 was automatically extended on the expiration date of May 26, 2020 to May 26, 2021. On April 24, 2020, the irrevocable standby letter of credit in the amount of $500,000 issued to the State of New Hampshire Public Utilities Commission was amended to extend the expiration date to May 1, 2021. As of September 30, 2020 and December 31, 2019, Summer Northeast had collateral posted with ISO New England in the amount of $896,750 and $1,387,181, respectively.

As of September 30, 2020 and December 31, 2019, Summer Midwest had no secured irrevocable stand-by letters of credit. As of September 30, 2020 and December 31, 2019, Summer Midwest had collateral held by various local utilities in the PJM market totaling $1,863,000 and $713,000, respectively.

As of September 30, 2020, none of the letters of credit issued on behalf of the Company were drawn upon.

As of September 30, 2020, Summer Midwest had a surety bond in the amount of $500,000 issued to the Illinois Commerce Commission and a surety bond in the amount of $250,000 issued to the Pennsylvania Public Utility Commission. Both bonds are secured with $375,000 in deposits held by the surety bond company.

NOTE 6 - FINANCING FROM FIRST INSURANCE FUNDING

In May 2020, the Company entered into a finance agreement with First Insurance Funding to finance the Company’s Director’s and Officer’s insurance policy premium for the period of May 1, 2020 through May 1, 2021. The amount for the premiums, taxes and fees totaled $141,352. A cash down payment in the amount of $34,349 was made by the Company in May 2020 leaving a remaining balance of $107,003 to be paid in 10 installments from June 1, 2020 through March 1, 2021. The annual percentage interest rate of the financing is 5.85%.

In May 2019, the Company entered into a finance agreement with First Insurance Funding to finance the Company’s Director’s and Officer’s insurance policy premium for the period of May 1, 2019 through May 1, 2020. The amount for the premiums, taxes and fees totaled $150,575. A cash down payment in the amount of $22,586 was made by the Company in May 2019 leaving a remaining balance of $127,989 to be paid in 10 installments from June 1, 2019 through March 1, 2020. The annual percentage interest rate of the financing is 6.45%. The Company paid in full the balance of the finance agreement during March 2020.

At September 30, 2020 and December 31, 2019, the outstanding balance due to First Insurance Funding was $59,093 and $38,397, respectively. Interest expense incurred to First Insurance Funding was as follows:

NOTE 7 – FINANCING FROM DIGITAL LENDING SERVICES US CORP.

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provide a revolving loan (the “Loan”) to the Borrower, and the Borrower agreed to borrow and repay funds loaned by Digital Lending.  

The amount of available credit under the Loan is $10,000,000. The Loan is revolving in nature and is evidenced by a Revolving Promissory Note (the “Note”). The maturity date of the Loan is March 11, 2023. The Loan bears interest at a rate of 12.75% per annum, with monthly installment payments of accrued interest only. The principal balance of the Loan may be prepaid at any time at the option of the Borrower, subject to certain prepayment charges.

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

In connection with the Agreement, the Borrower made certain customary representations and warranties, and agreed that while the Loan amount remains outstanding, it would not take certain actions, including that it will not incur certain debts (as defined in the Agreement); create, assume, or suffer to exist any lien on any property or asset of the Borrower, except those set forth in and allowed by the Agreement; consolidate or merge with any other entity; or sell, lease, or transfer all or substantially all of the assets of the Borrower. Also, in connection with the Agreement, the Borrower made certain affirmative and negative covenants, and agreed to designate a representative of Digital Lending to attend the Company’s board of directors’ meetings in a non-voting, observer capacity. As of September 30, 2020, Summer LLC was in compliance with the covenants of the Agreement.

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

Security Agreement

Guaranty

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

Warrant

As of September 30, 2020, the outstanding balance of the Digital Lending loan was $9,000,000 and the interest expense was as follows:

The foregoing summaries of the terms and conditions of the Agreement, the Note, the Security Agreement, and the Guaranty do not purport to be complete, and are qualified in their entirety by reference to the full text of the Agreement, the Note, the Security Agreement and the Guaranty, each of which is attached as an exhibit to our Current Report on Form 8-K, filed with the SEC on March 18, 2020.

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NOTE 8 - FINANCING FROM BLUE WATER CAPITAL FUNDING LLC

The amount of available credit under the Loan was $5,000,000. The Loan was revolving in nature and was evidenced by a Revolving Promissory Note (the “Note”). The maturity date of the Loan was June 30, 2018. On June 27, 2018, Summer LLC entered into an amendment to the agreement (the “Amendment”) with Blue Water with respect to the Agreement.  

Pursuant to the Amendment, the maturity date of the Note was extended through June 30, 2020, and the interest rate on the Note was changed from 11% per annum to a variable rate equal to the Prime Rate published by the Wall Street Journal plus 475 basis points. The amount of credit available pursuant to the Agreement, as amended by the Amendment, was $5,000,000. The Note included a minimum monthly financing fee of $22,500 per month. Interest was payable on the tenth day of each month and on the maturity date of the Note. Summer LLC and Blue Water agreed that the security interest granted pursuant to the Agreement remained in effect, and the Company reaffirmed its obligations under the Guaranty. Further, under the Agreement, Summer LLC was subject to certain restrictive covenants, and Summer LLC was in compliance with such covenants during the three months ended March 31, 2020.

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

As of September 30, 2020 and December 31, 2019, the outstanding balance of financing from Blue Water Capital was $0 and $4,920,000, respectively. Interest expense to Blue Water was as follows:

On December 18, 2018, the Company signed a single payment note (the “Note”) with Comerica Bank (the “Bank”) in the amount of $2,900,000. The Note had a maturity date of June 11, 2020, with interest thereon at a per annum rate equal to the “Prime Referenced Rate” plus the “Applicable Margin.” The “Prime Referenced Rate” means, for any day, a per annum interest rate which is equal to the “Prime Rate” in effect on such day, but in no event and at no time shall the “Prime Reference Rate” be less than the sum of the Daily Adjusting LIBOR rate for such day plus 2.5% per annum. “Prime Rate” means the per annum rate established by the Bank as its prime rate for its borrowers at any such time. “Applicable Rate” means 0.25% per annum. Accrued and unpaid interest on the unpaid principal balance outstanding on the Note is payable monthly on the first day of each month, commencing on February 1, 2019.

Guaranty of the Revolver Note has been made by four members of the Company’s board of directors (“Guarantors”). The Company agreed to issue the four Guarantors shares of the Company’s common stock on a monthly basis depending on the outstanding balance due and owing under the Revolver Note for agreeing to act as a Guarantor.

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NOTE 10 – COMERICA BANK SINGLE PAYMENT NOTE

On December 20, 2019, the Company signed a Single Payment Note (the “Single Note”) with Comerica Bank in the amount of $2,100,000. The Note has a maturity date of June 20, 2020, with interest thereon at a per annum rate equal to the “Prime Referenced Rate” plus the “Applicable Margin.” The “Prime Referenced Rate” means, for any day, a per annum interest rate which is equal to the “Prime Rate” in effect on such day, but in no event and at no time shall the “Prime Referenced Rate” be less than the sum of the Daily Adjusting LIBOR Rate for such day plus 2.5% per annum. “Prime Rate” means the per annum rate established by Comerica Bank as its prime rate for its borrowers at any such time. “Applicable Margin” means 0.25% per annum. Accrued and unpaid interest on the unpaid principal balance outstanding on the Note shall be payable monthly on the twentieth day of each month, commencing on January 20, 2020.  

On June 20, 2020, the Single Note was amended to reflect a due date of June 20, 2021 and the Application Margin was amended to mean 0.35% per annum. As of September 30, 2020, the interest rate was 3.6%

Guaranty of the Single Note has been made by four members of the Company’s board of directors (“Guarantors”). The Company agreed to issue the four Guarantors shares of the Company’s common stock on a monthly basis depending on the outstanding balance due and owing under the Note for agreeing to act as a Guarantor of the Single Note.

As of September 30, 2020 and December 31, 2019, the outstanding balance of financing on the Comerica Single Note was $2,100,000. Interest expense related to the Comerica Single Note was as follows:

NOTE 11 – PAYCHECK PROTECTION PROGRAM LOAN

On April 20, 2020, Summer LLC received $2,342,300 in loan funding as part of the Paycheck Protection Program (“PPP”) from the Small Business Administration (“SBA”) established pursuant to the recently enacted the CARES Act. The unsecured loan (the “Loan”) is evidenced by a promissory note issued by Summer LLC (the “Note”) in favor of Frost Bank (the “Bank”), as lender. Summer LLC plans to use the Loan proceeds to cover payroll costs, rent and utilities in accordance with the relevant terms and conditions of the CARES Act. The CARES Act and the PPP provide a mechanism for forgiveness of up to the full amount borrowed.

On June 5, 2020, the Paycheck Protection Program Flexibility Act enacted certain changes to the SBA Paycheck Protection Program.

The PPP Loan was amended to reflect that Summer LLC’s first principal payment will be due on a date (the “First Payment date”) that is determined as follows: (i) in the event there is a “Remaining Balance” on the Loan, the date that is forty-five (45) calendar days from the date on which the “Forgivable Amount”, together with related accrued unpaid interest is remitted to the Bank; (ii) in the event the SBA determines that the Loan is ineligible for forgiveness, the date that is forty-five (45) calendar days from the date (the “Notification Date”) on which the SBA notifies Summer LLC (whichever shall first receive such notice) that the Loan is ineligible for forgiveness; or (iii) in the event Summer LLC has not submitted a loan forgiveness application to the Bank by the date (the “Expiration Date”) that is ten (10) months from the end of the Covered Period), September 17, 2021. All subsequent principal payments are due on the same day of each month after the First Payment Date.

Summer LLC will pay the Loan in substantially equal principal payments with the amount of such principal payments determined as follows: (i) if there is a Remaining Balance, (ii) if the SBA determines that the Loan is ineligible for forgiveness, then by fully amortizing the unpaid principal balance of the Loan from the Notification Date to the end of the remaining term of the Note or (iii) if Summer LLC has not submitted a loan forgiveness application to the Bank by the Expiration Date, then by fully amortizing the unpaid principal balance of the Loan from the Expiration Date to the end of the remaining term of the Loan.

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Interest accrues on the outstanding principal of the Loan at the rate of 1.0% per annum.  In addition to the monthly principal payments described above, Summer LLC is required to pay regular monthly payments of all accrued unpaid interest due as of each payment date, beginning on the First Payment Date with all subsequent interest payments to be due on the same day of each month after that. Summer LLC’s final payment will be due on April 17, 2022 and will be for all principal and all accrued interest not yet paid.

For the purposes of this paragraph, “Remaining Balance” means the sum of unpaid principal and unpaid accrued interest due under the Loan after the Forgivable Amount, if any, together with related accrued unpaid interest thereon, is remitted to the Bank by the SBA; and “Covered Period” means either (i) the 24-week period beginning on the date of disbursement of the Loan, or (i) if Summer LLC received the proceeds of the Loan on or before June 5, 2020, it may elect to use an eight-week period beginning on the date of disbursement of the Loan; provided, however, that in no event may this period extend beyond December 31, 2020.

The “Forgivable Amount” shall be such amount of the Loan proceeds that Summer LLC shall have applied for qualifying forgivable purposes listed below, on the condition that (x) Summer LLC shall have provided to the Bank documentation of such application of proceeds that meets the requirements of the CARES Act and any guidance issued by the SBA (including but not limited to any Interim Final Rules promulgated by the SBA and/or published in the Federal Register), as determined by the Bank in its sole and absolute discretion; (y) Summer LLC shall have maintained, and shall maintain, employee and compensation levels in accordance with the CARES Act and any guidance issued by the SBA (including but not limited to any Interim Final Rules promulgated by the SBA and/or published in the Federal Register) as determined by the Bank in its sole and absolute discretion; and (z) the calculation of such amount shall be further subject to the following paragraph; provided, however, that any amount that Summer LLC requests to have forgiven that is challenged, disputed, denied or deemed ineligible by the SBA shall not be a Forgivable Amount or otherwise eligible for forgiveness by the Bank.

The actual amount of loan forgiveness will depend, in part, on the total amount of payroll costs, payments of interest on mortgage obligations incurred before February 15, 2020, rent payments on leases dated before February 15, 2020, and utility payments under service agreements dated before February 15, 2020, over the Covered Period. Not more than 40% of the loan forgiveness amount may be attributable to non-payroll costs.

As of September 30, 2020 and December 31, 2019, the outstanding balance of financing on the Loan was $2,342,300 and $0, respectively.

Interest expense related to the Loan was as follows:

NOTE 12 - WHOLESALE POWER PURCHASE AGREEMENT WITH EDF

On May 1, 2018, Summer Energy Holdings, Inc. (for purposes of this Note, “SEH”), together with its subsidiaries Summer LLC and Summer Northeast (collectively the “Company”) closed a transaction with EDF Energy Services, LLC and EDF Trading North America, LLC (collectively, “EDF”). As part of the transaction, Summer LLC, Summer Northeast and EDF entered into an Energy Services Agreement (the “Energy Services Agreement”) pursuant to which Summer LLC and Summer Northeast agreed to purchase their electric power and associated services requirements from EDF, and EDF agreed to provide Summer LLC and Summer Northeast with certain credit facilities to assist Summer LLC and Summer Northeast in the purchase of their electric power and associated service requirements (such transaction with EDF, the “Original Transaction”).  The terms of the Energy Services Agreement are governed by the ISDA Master Agreement, as well as a Schedule and Power Annex thereto and the Credit Support Annex thereto.

In conjunction therewith, the Company and EDF also entered into a Security Agreement (the “Security Agreement”), a Pledge Agreement (the “Pledge Agreement”) and a Guaranty (the “Guaranty”) in favor of EDF. The Energy Services Agreement has a term of three years, and automatically renews for successive one-year periods unless either party provides written notice of termination 180 days prior to the renewal date. In addition to the market-based commodity price charged by EDF for each underlying commodity transaction, the Company will pay a “Commodity Fee” for each megawatt hour (“MWh”) of power that the Company requests for delivery from EDF during the term of the Energy Services Agreement. In addition, the Company is responsible for other mutually agreed upon fees incurred by EDF on its behalf. The Company is also responsible for any reasonable transmission or transportation costs incurred in connection with power transactions.

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Monthly supply obligations will accrue interest at a rate equal to three-month LIBOR plus 6% per annum. Any additional credit support will bear interest at the per annum rate equal to the lesser of (i) a rate per annum equal to three-month LIBOR rate plus 3% per annum, and (ii) the maximum rate of interest permitted by applicable law.  

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

Pursuant to the Pledge Agreement, SEH pledged to EDF, and granted to EDF a security interest in, all of the membership interests of Summer LLC and Summer Northeast owned by SEH as well as all additional membership interests of such subsidiaries from time to time acquired by SEH. Pursuant to the Guaranty, SEH agreed to guaranty the obligations of Summer LLC and Summer Northeast under the Energy Services Agreement.

The foregoing is only a brief description of the material terms of the transaction with EDF and does not purport to be a complete description of the rights and obligations of the parties thereunder and such descriptions are qualified in their entirety by reference to the text of the Energy Services Agreement, the ISDA Master Agreement, the Security Agreement, the Pledge Agreement and the Guaranty, which are filed as Exhibits 10.1 through 10.5, respectively, to our quarterly report on Form 10-Q filed with the SEC on August 14, 2018.

On June 19, 2019, the Company closed a transaction (the “Amendment Transaction”) with EDF Trading North America, LLC (“EDFTNA”) in order to amend and/or restate certain of the agreements with EDF entered into in the Original Transaction.

Pursuant to the Amendment Transaction, the Company and EDFTNA entered into an Amended and Restated Energy Services Agreement, which amended and restated the Energy Services Agreement (the “Amended Energy Services Agreement”), an amendment to ISDA Master Agreement which amends the ISDA Agreement (the “Amended ISDA Agreement”), an Omnibus Amendment to Pledge Agreement and Security Agreement and Joinder, which amends both the Security Agreement and the Pledge Agreement (the “Omnibus Amendment”) and an Amended and Restated Guaranty, which amends and restates the Guaranty (the “Amended Guaranty”).  In general, the Amended Energy Services Agreement, the Amended ISDA Agreement, the Omnibus Amendment and the Amended Guaranty amend and/or restate the documents from the Original Transaction to (i) remove EDF Energy Services, LLC as a party to the agreements and (ii) add an additional subsidiary of SEH, Summer Midwest, as a party to the agreements, such that Summer Midwest is able to purchase its electric power and associated services requirements from EDFTNA and also utilize EDFTNA’s credit support.   The term, pricing and interest payable under the Amended Energy Services Agreement are unchanged from the original Energy Services Agreement.  

Pursuant to the Omnibus Amendment, in consideration of the services and credit support provided by EDFTNA to the Company, Summer Midwest agreed to, among other things (i) grant a priority security interest to EDFTNA in all of its assets, equipment and inventory; and (ii) require its customers to remit monthly payments into a lockbox account over which EDFTNA has a security interest. The security interest previously granted by Summer LLC and Summer Northeast is unchanged, except that EDFTNA is now the sole secured party. Also pursuant to the Omnibus Amendment, SEH pledged to EDFTNA, and granted to EDFTNA a security interest in, all of SEH’s membership interest in Summer Midwest. The previous pledge by SEH of its membership interest in Summer LLC and Summer Northeast is unchanged, except that EDFTNA is now the sole secured party. Pursuant to the Guaranty, SEH agreed to guaranty the obligations of Summer LLC, Summer Northeast and Summer Midwest under the Amended Energy Services Agreement.      

The foregoing is only a brief description of the material terms of the Amendment Transaction and does not purport to be a complete description of the rights and obligations of the parties thereunder and such descriptions are qualified in their entirety by reference to the text of the Amended Energy Services Agreement, the Amended ISDA Master Agreement, the Omnibus Amendment and the Amended Guaranty, which are filed as Exhibits 10.1 through 10.4, respectively, to our Quarterly Report on Form 10-Q filed with the SEC on August 14, 2019.

As of September 30, 2020 and December 31, 2019, EDF has provided collateral credit support in the amount of $4,811,006 and $4,511,006, respectively, to secure letters of credit (Note 4) and surety bonds (Note 5) for the benefit of the Company.

The Company incurred interest expense to EDF for the three and nine months ended September 30, 2020 and 2019 as follows:

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NOTE 13 - LEASE LIABILITIES, COMMITMENTS AND CONTINGENCIES

Office Space

The Company leases office space and equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Lease expense is recognized on a straight-line basis over the term of the lease. For leases beginning in 2019 and later, the Company accounts for lease components separately from the non-lease components. Most leases include one or more options to renew. The exercise of the lease renewal options is at the sole discretion of the Company. Certain leases also include options to purchase the leased property. The depreciable life of the assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.

Summer LLC assumed an operating lease for office space on November 1, 2011 at 800 Bering Drive, Suite 260, Houston, Texas, under a non-cancellable lease obligation that expired on August 31, 2016. The Sixth Amendment to the office space lease extended the obligation to October 31, 2019.

Summer Northeast entered into a sublease agreement with PDS Management Group, LLC (“PDS”) on October 31, 2017 at 800 Bering Drive, Suite 250, Houston, Texas, under a non-cancellable lease obligation that expired on February 28, 2020. On September 1, 2018, PDS subleased 800 Bering Drive, Suite 250, Houston, Texas to an outside party, and Summer Northeast received a monthly credit in the amount of $1,698 until the end of the lease obligation on February 28, 2020. The monthly base rent, net of credit, is $2,255.

As of September 30, 2020 and December 31, 2019, the operating lease right-of-use assets and operating lease liabilities were $870,209 and $979,185, respectively. The long-term portion of the operating lease liabilities as of September 30, 2020 and December 31, 2019 in the amounts of $722,942 and $834,283, respectively, was included in long-term obligations.

As of September 30, 2020, the weighted-average remaining lease term for operating leases was 5.19 years. As of September 30, 2020, the weighted-average discount rate for operating leases was 6.5%.

Operating lease future minimum payments together with their present values as of September 30, 2020 are summarized as follows:

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Lease expense for the office space for the three and nine months ended September 30, 2020 and 2019, respectively, was included in operating expenses on the consolidated statements of operations as follows:

NOTE 14 – LONG-TERM OBLIGATIONS

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

For the three and nine months ended September 30, 2020 and 2019, respectively, interest expense consists of the following on obligations:

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NOTE 15 - 2012 STOCK OPTION AND STOCK AWARD PLAN

During 2012, the Company approved the 2012 Stock Option and Stock Award Plan (“2012 Plan”) established to advance the interest of the Company and its stockholders by providing an incentive to attract, retain and reward persons performing services for the Company and by motivating such persons to contribute to the growth and profitability of the Company.

The maximum aggregate number of (i) shares of stock that may be issued under the 2012 Plan, and (ii) shares of stock with respect to which stock appreciation rights may be granted, is 785,000 and consists of authorized but unissued or reacquired shares of stock or any combination thereof. Such number of shares of stock may be issued under the 2012 Plan pursuant to incentive stock options, nonstatutory stock options, restricted stock grants, stock appreciation right grants or any combination thereof, so long as the aggregate number of shares so issued does not exceed such number of shares, as adjusted.   

The 2012 Plan continues in effect until the earlier of its termination by the Board or the date on which all the shares of stock available for issuance under the 2012 Plan have been issued and all restrictions on such shares under the terms on the 2012 Plan and the agreement evidencing awards granted under the 2012 Plan have lapsed. However, all awards shall be granted, if at all, within ten years from the earlier of the date the 2012 Plan is adopted by the Board or the date the 2012 Plan is duly approved by the stockholders of the Company.

During the nine months ended September 30, 2020 and 2019, the Company granted no stock options under the 2012 Plan and recognized no stock compensation expense relating to the vesting of stock options issued from the 2012 Plan.

As of September 30, 2020, there are 2,000 shares that remain available for issuance under the 2012 Plan.

NOTE 16 - 2015 STOCK OPTION AND STOCK AWARD PLAN

During the year ended December 31, 2015, the Company’s stockholders approved the 2015 Stock Option and Stock Award Plan (“2015 Plan”), which was established to advance the interest of the Company and its stockholders by providing an incentive to attract, retain and reward persons performing services for the Company and by motivating such persons to contribute to the growth and profitability of the Company.

The maximum aggregate number of (i) shares of stock that may be issued under the 2015 Plan, and (ii) shares of stock with respect to which stock appreciation rights may be granted, is 1,500,000 and consists of authorized but unissued or reacquired shares of stock or any combination thereof. Such number of shares of stock may be issued under the 2015 Plan pursuant to incentive stock options, nonstatutory stock options, restricted stock grants, stock appreciation right grants or any combination thereof, so long as the aggregate number of shares so issued does not exceed such number of shares, as adjusted.

The 2015 Plan continues in effect until the earlier of its termination by the Board or the date on which all the shares of stock available for issuance under the 2015 Plan have been issued and all restrictions on such shares under the terms on the 2015 Plan and the agreements evidencing awards granted under the 2015 Plan have lapsed. However, all awards shall be granted, if at all, within ten years from the earlier of the date the 2015 Plan is adopted by the Board or the date the 2015 Plan is duly approved by the stockholders of the Company.

During the nine months ended September 30, 2020, the Company granted under the 2015 Plan a total of 3,000 stock options to a key employee. The stock options had an exercise price of $2.50, vested immediately and had an approximate fair value of $6,678 determined using the Black Scholes option pricing model. The weighted average assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate of 2.05% (ii) estimated volatility of 99.01% (iii) dividend yield of 0.00% and (iv) expected life of all options averaging eight years. The Company issued no stock options under the 2015 Plan during the nine months ended September 30, 2019.

As of September 30, 2020, there are 16,000 shares that remain available for issuance under the 2015 Plan and the number of unvested shares in the 2015 Plan is zero.

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NOTE 17 - 2018 STOCK OPTION AND STOCK AWARD PLAN

Effective February 12, 2018, the Board of Directors of the Company approved and adopted the Summer Energy Holdings, Inc. 2018 Stock Option and Stock Award Plan (“2018 Plan”), which was established to advance the interest of the Company and its stockholders by providing an incentive to attract, retain and reward persons performing services for the Company and by motivating such persons to contribute to the growth and profitability of the Company. The Company’s named executive officers are eligible for grants or awards under the 2018 Plan. The Company’s stockholders approved the 2018 Plan on June 8, 2018.

The maximum aggregate number of (i) shares of stock that may be issued under the 2018 Plan and (ii) shares of stock with respect to which stock appreciation rights may be granted, is 1,500,000 and consists of authorized but unissued or reacquired shares of stock or any combination thereof. Such number of shares of stock may be issued under the 2018 Plan pursuant to incentive stock options, non-statutory stock options, restricted stock grants, restricted stock units, stock appreciation right grants or any combination thereof, so long as the aggregate number of shares so issued does not exceed such number of shares, as adjusted. The 2018 Plan or any increase in the maximum aggregate number of shares of stock issuable thereunder shall be approved by the stockholders of the Company within twelve months of the date of adoption by the Board. Awards granted prior to stockholder approval of the 2018 Plan shall become exercisable no earlier than the date of stockholder approval of the 2018 Plan. 

The 2018 Plan continues in effect until the earlier of its termination by the Board or the date on which all shares of stock available for issuance under the 2018 Plan have been issued and all restrictions on such shares under the terms on the 2018 Plan and the agreement evidencing awards granted under the 2018 Plan have lapsed. However, all awards shall be granted, if at all, within ten years from the earlier of the date the 2018 Plan is adopted by the Board or the date the 2018 Plan is duly approved by the stockholders of the Company. 

During the three and nine month periods ended September 30, 2020 and 2019, respectively, the Company recognized total stock compensation expense for the vesting of options issued from the 2018 Plan as follows:

As of September 30, 2020, the Company had outstanding granted stock options under the 2018 Plan, net of forfeitures to purchase 1,446,250 and 53,750 shares remaining available for issuance.

NOTE 18 - NONQUALIFIED STOCK OPTIONS GRANTED OUTSIDE OF A STOCK OPTION OR STOCK AWARD PLAN

In September 2020, the Company entered into stock option grant agreements with six non-employee members of the Company’s Board of Directors whereby the Company agreed to grant non-qualified stock options outside of a stock option or a stock award plan during the months of September 2020, December 2020, March 2021 and June 2021 as compensation for services. The stock options granted pursuant to these agreements and the shares issuable upon the exercise thereof have not been registered under the Securities Act of 1933, as amended.

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During the nine months ended September 30, 2020, pursuant to the aforementioned grant agreements, the Company granted a total of 161,250 nonqualified stock options with a weighted exercise price of $2.08 to six non-employee board members of the Company as compensation. The stock options granted had an approximate fair value of $177,986 determined using the Black Scholes option pricing model. The weighted average assumptions used to calculate the fair market value are as follows: (a) risk-free interest rate of 0.41% (ii) estimated volatility of 110.49% (iii) dividend yield of 0.00% and (iv) expected life of all options averaging eight years.

For the three and nine months ended September 30, 2020 and 2019, the stock compensation expense associated with the non-qualified stock options issued outside of a stock option or stock award plan is as follows:

NOTE 19 - PRIVATE PLACEMENT OFFERINGS

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

During the nine months ended September 30, 2019, the Company commenced a private placement offering (the “2019 Offering”) to certain investors with whom the Company, its management and/or agents have a pre-existing relationship during the year ended December 31, 2019. The 2019 Offering was to accredited investors to purchase shares of the Company’s common stock at a purchase price of $1.50 per share. The 2019 Offering resulted in the issuance of 3,820,000 shares of common stock in exchange for cash proceeds in the amount of $5,730,000.

NOTE 20 - WARRANTS

The Company has issued warrants to purchase shares of the Company’s common stock associated with various agreements and has vested warrants from a previously terminated Master Marketing Agreement.

On July 20, 2020, the Company issued a warrant for six shares of the Company’s common stock under a Referral

Agreement whereby the sales broker introduces the Company potential electricity sales leads. The five-year warrant has an exercise price of $1.50 per share. The fair value of the six warrants was $7 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 0.29%, (ii)

estimated volatility of 100.79%, (iii) dividend yield of 0.00%, and (iv) expected life of the warrant of 5 years.

On March 12, 2020, the Company issued a warrant for 250,000 shares of the Company’s common stock under the agreement with Digital Lending (Note 7). The five-year warrant has an exercise price of $1.50 per share and is subject to adjustment as set for in the Warrant. The fair value of warrant was $245,337 determined using the Black-Scholes option-pricing model and was expensed during the quarter ended March 31, 2020. The assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate of 0.66%, (ii) estimated volatility of 123.91%, (iii) dividend yield of 0.00%, and (iv) expected life of the warrant of 5 years.  

On June 11, 2019, the Company issued 106,053 shares of common stock to Black Ink Energy, LLC (“Black Ink”) pursuant to

the cashless exercise of a warrant dated March 2, 2015 issued by the Company to Black Ink to purchase up to 536,000 shares

of common stock of the Company at $1.50 per share. The Black Ink warrant was terminated and cancelled upon the issuance

of the 106,053 shares of common stock.

On May 22, 2019, the Company issued a warrant for 80,000 shares of common stock under a Consulting Agreement (Note

25). The five-year warrant has an exercise price of $1.50 per share. The fair value of the 80,000 warrant was $143,731

determined using the Black-Scholes option-pricing model. The assumptions used to calculate the fair market value are as

follows: (i) risk-free interest rate of 2.19%, (ii) estimated volatility of 149.28%, (iii) dividend yield of 0.00%, and (iv)

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expected life of the warrant of 5 years.

On January 25, 2019, the Company issued a warrant for 43,772 shares of the Company’s common stock under a Referral

Agreement whereby the sales broker introduces the Company potential sales leads. The five-year warrant has an exercise

price of $1.50 per share. The fair value of the 43,772 warrants was $80,307 determined using the Black-Scholes option pricing

model. The assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate of 2.58%, (ii)

estimated volatility of 148.70%, (iii) dividend yield of 0.00%, and (iv) expected life of the warrant of 5 years.

On January 25, 2019, the Company issued two warrants, each for 6,715 shares, of the Company’s common stock under a

Referral Agreement whereby the sales broker introduces the Company potential sales leads. The five-year warrants have an

exercise price of $1.50 per share. The fair value of the 13,430 warrants was $24,640 determined using the Black-Scholes

option-pricing model. The assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate of

2.58%, (ii) estimated volatility of 148.70%, (iii) dividend yield of 0.00%, and (iv) expected life of the warrant of 5 years.

As of September 30, 2020, the Company had outstanding warrants to purchase up to 976,218 shares of the Company’s common stock, of which 710,981 are fully vested.

NOTE 21 - RELATED PARTY LINES OF CREDIT 

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

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

On April 8, 2020, the Company was advanced $1,000,000 by Mr. Leibman under the terms and conditions of the Leibman Line to be utilized as short-term working capital for the Company. On April 28, 2020, the Company paid in full the $1,000,000 of principal advanced from the Leibman Line and paid Mr. Leibman $2,877 of accrued interest.

For the three and nine months ended September 30, 2020 and 2019, the interest incurred on related party lines of credit is as follows:

As of September 30, 2020, the outstanding balances of the Leibman Line and the LaRose Line were both $0.

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NOTE 22 - RELATED PARTY PROMISSORY NOTES

On January 15, 2020, the Company executed a promissory note in the amount of $600,000 to evidence an advance by Mr. Leibman for purposes of short-term financing. The promissory note accrued interest at a rate of 5% per annum based upon 365 days in a year and had a maturity date of April 14, 2020. On March 13, 2020, the Company paid in full the outstanding balance of the loan from Mr. Leibman with interest in the amount of $4,849. As of September 30, 2020, the balance of the loan from Mr. Leibman was $0.

On November 8, 2019, the Company executed a promissory note in the amount of $850,000 to evidence an advance by Mr. Leibman for purposes of short-term financing. The promissory note accrued interest at a rate of 5% per annum based upon 365 days in a year and had a maturity date of February 6, 2020. On February 6, 2020, the Company amended such promissory note to extend the maturity date of such note to May 7, 2020 with all other provisions of the original note remaining in full force and effect. On March 13, 2020, the Company paid Mr. Leibman in full the outstanding balance of the loan with interest in the amount of $8,384. As of September 30, 2020, the balance of the loan from Mr. Leibman was $0.

On November 8, 2019, the Company executed a promissory note in the amount of $1,000,000 to evidence an advance by LaRose Holdings LLLP, an entity controlled by Al LaRose, for purposes of short-term financing. Mr. LaRose is a director of the Company. The promissory note accrued interest at a rate of 5% per annum based upon 365 days in a year and had a maturity date of February 6, 2020. On February 6, 2020, the Company amended such promissory note to extend the maturity date of such note to May 7, 2020 with all other provisions of the original note remain in full force and effect. On March 13, 2020, the Company paid LaRose Holdings in full the outstanding balance of the loan with interest in the amount of $10,000. As of September 30, 2020, the balance of the loan from LaRose Holdings LLLP was $0.

On January 7, 2019, the Company entered into a promissory note in the amount of $473,000 for an advance by Tom O’Leary, a member of the Company’s board of directors, for purposes of short-term financing. The promissory note accrued interest at a rate of 5% per annum based upon 365 days in a year and had a maturity date of July 7, 2019. On February 7, 2019, the Company paid back in full the loan from Mr. O’Leary with interest in the amount of $2,009. As of September 30, 2020 and 2019, the balance of the loan from Mr. O’Leary was $0, respectively.

On January 7, 2019, the Company entered into a promissory note in the amount of $25,000 for an advance by Messrs. O’Leary and Leibman for purposes of short-term financing. The promissory note accrued interest at a rate of 5% per annum based upon 365 days in a year and had a maturity date of July 7, 2019. On February 7, 2019, the Company paid back in full the loan from Messrs. O’Leary and Leibman with interest in the amount of $106. As of September 30, 2020 and 2019, the balance of the loan from Messrs. O’Leary and Leibman was $0, respectively.

The following table summarizes interest paid to related parties on promissory notes for the three and nine months ended September 30, 2020 and 2019 is as follows:

NOTE 23 - RELATED PARTY GUARANTORS

On December 18, 2018, four members of the Company’s Board of Directors, Stuart Gaylor, Andrew Bursten, Tom O’Leary and Neil Leibman (Mr. Leibman is also an executive officer) (collectively, the “Guarantors”) guaranteed a single payment note with Comerica Bank (See Note 9) in the amount of $2,900,000 which was converted to a master revolving note on December 9, 2019. The Company agreed to pay interest at a rate of 12% for the guarantee and such interest is to be paid with the issuance of the Company’s common stock.

On December 20, 2019, four members of the Company’s Board of Directors, Stuart Gaylor, Andrew Bursten, Tom O’Leary and Neil Leibman (Mr. Leibman is also an executive officer) (collectively, the “Guarantors”) guaranteed a single payment

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note with Comerica Bank (See Note 10) in the amount of $2,100,000. The Company agreed to pay interest at a rate of 12% for the guarantee and such interest is to be paid with the issuance of the Company’s common stock.

The Company incurred interest expense to the Guarantors during the three and nine months ended September 30, 2020 and 2019 as follows:

The Company paid interest by the issuance of the Company’s common stock for the three and nine months ended September 30, 2020 and 2019 as follows:

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

On October 31, 2017, Summer Northeast entered into a sublease agreement with PDS Management Group, 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. The Company paid for lease expense related to the agreement with PDS for the three and nine months ended September 30, 2020 and 2019 as follows:

NOTE 25 - SUMMER ENERGY 401(K) PLAN

In January 2017, the Company adopted a qualified 401(K) Retirement Plan (the “Plan”) whereby eligible employees may elect to save for retirement on a tax-advantaged basis. There are two types of salary deferrals: pre-tax 401(K) deferrals and Roth 401(K) deferrals. Eligible employee participants are automatically enrolled at 3% of compensation unless a participant elects an alternative deferral percentage limited to dollar amount of $19,500 in 2020 or elects not to defer under the Plan. There is no Company match to the Plan.

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NOTE 26 - EMPLOYEE STOCK PURCHASE PLAN

Effective May 2017, the Company began offering an Employee Stock Purchase Plan (the “ESPP”) whereby eligible employees may elect to purchase common stock of the Company through a registered broker/dealer. Eligible employees who so elect may authorize payroll deductions for contributions to the ESPP up to a maximum of $25,000 each calendar year. The Company will match 10% of eligible employee contributions up to an aggregate maximum of $24,000 for all ESPP participants (not each individual ESPP participant). The employer match for the three and nine months ended September 30, 2020 and 2019 is follows:

On March 11, 2020, the World Health Organization declared the novel strain of coronavirus (COVID-19) a global pandemic and recommended containment and mitigation measures worldwide. This outbreak created a dynamic and rapidly changing environment in which companies must conduct business. Operations of the Company are ongoing as the delivery of electricity to customers is considered an essential business. The Company’s business operations have not been significantly impacted by the global pandemic to date. However, the Company is unable to estimate the impact of the prolonged nature of this global pandemic on its operations.

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

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

Readers should carefully review the risk factors described below under the heading “Risk Factors” and in other documents we file from time to time with the SEC, including our Form 10-K for the fiscal year ended December 31, 2019, and our Form 10-Qs for the fiscal quarters ended March 31, 2020 and June 30, 2020. You should interpret many of the risks identified in these reports as being heightened as a result of the ongoing and numerous adverse impacts of the COVID-19 pandemic. Our filings with the SEC, including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those filings, pursuant to Sections 13(a) and 15(d) of the Exchange Act, are available free of charge at www.summerenergy.com, when such reports are available via the EDGAR system maintained by the SEC at www.sec.gov.

Recent Developments

COVID-19

In response to the COVID-19 pandemic, the Company deployed a remote working strategy for the Company’s call center that enabled certain employees of the Company to work from home, provided timely communication to team members and customers, implemented protocols for team members' safety, and initiated strategies for monitoring and responding to local COVID-19 impacts. The Company's preparedness efforts, coupled with quick and decisive plan implementation, resulted in minimal impacts to operations. The Company is closely monitoring bad debt as a result of the COVID-19 pandemic.

Organization 

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

On March 27, 2012, Summer LLC became a wholly-owned subsidiary of Summer Energy Holdings, Inc. (previously known as Castwell Precast Corporation) through a reverse acquisition transaction, which resulted in the former members of Summer LLC owning approximately 92.3% of Summer Energy Holdings, Inc.’s outstanding common stock. The transaction was treated as a recapitalization of Summer LLC, and Summer LLC (and its historical financial statements) is the continuing

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entity for financial reporting purposes.

Summer LLC is a Retail Electricity Provider (“REP”) in the state of Texas under a license with the Public Utility Commission of Texas (“PUCT”). Summer LLC procures wholesale energy and resells to commercial and residential customers. Summer LLC was organized on April 6, 2011, under the laws of the state of Texas.

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

Summer Midwest was formed in the state of Ohio on December 16, 2013 to procure and sell electricity in the state of Ohio. The Public Utilities Commission of Ohio issued a certificate as a Retail Electric Service Provider to Summer Midwest on June 16, 2015. On May 2, 2019, the Illinois Commerce Commission approved Summer Midwest as a Retail Electric Service Provider in the state of Illinois.

Summer Northeast, a Texas limited liability company, was acquired on November 1, 2017 and became a wholly-owned subsidiary of Summer Energy Holdings, Inc. Summer Northeast is a REP serving electric load to both residential and commercial customers in New Hampshire and Massachusetts and holds licenses in Massachusetts, Rhode Island, New Hampshire and Connecticut.

Plan of Operation

Our wholly-owned subsidiary, Summer LLC, is a licensed REP in the state of Texas. In general, Texas regulatory structure permits REPs, such as Summer LLC, to procure and sell electricity at unregulated prices. REPs pay the local transmission and distribution utilities a regulated tariff rate for delivering electricity to their customers. As a REP, Summer LLC sells electricity and provides the related billing, customer service, collections and remittance services to residential and commercial customers. Summer LLC offers retail electricity to commercial and residential customers in designated target markets within the state of Texas. In the commercial market, the primary target is small to medium-sized customers (less than one megawatt of peak usage), but we also selectively pursue larger commercial customers through Management’s existing, historical relationships. Residential customers are a secondary target market. We anticipate that a majority of Summer LLC’s customers are located in the Houston and Dallas-Fort Worth metropolitan areas; although, we anticipate a growing number will be located in a variety of other metropolitan and rural areas within Texas. We began delivering electricity to customers in the Texas market mid-February 2012.

Our wholly-owned subsidiary, Summer Northeast, is a licensed REP in the states of Massachusetts, New Hampshire, Rhode Island and Connecticut. In general, the regulatory structure in these states permits REPs, such as Summer Northeast, to procure and sell electricity at unregulated prices. As a REP, Summer Northeast sells electricity to residential and commercial customers. In the commercial market, the primary target is small to medium-sized customers (less than one megawatt of peak usage), but we will also selectively pursue larger commercial customers through Management’s existing, historical relationships. Residential customers are a secondary target market. As of the date of this Report, Summer Northeast sold electricity in Massachusetts and New Hampshire. There were no sales activity in the states of Connecticut and Rhode Island.

Our wholly-owned subsidiary, Summer Midwest, is a licensed REP in the states of Ohio, Illinois and Pennsylvania. In general, the regulatory structure in these states permits REPs, such as Summer Midwest, to procure and sell electricity at unregulated prices. As a REP, Summer Midwest sells electricity to residential and commercial customers. In the commercial market, the primary target is small to medium-sized customers (less than one megawatt of peak usage), but we will also selectively pursue larger commercial customers through Management’s existing, historical relationships. Residential customers are a secondary target market. Summer Midwest began flowing electricity in the state of Ohio, which is in the Pennsylvania, Jersey, Maryland Power Pool (“PJM”) market, during the month of July 2019, in the state of Illinois during the month of January 2020, and in the state of Pennsylvania during the month of August 2020.

Results of Operations

Three Months Ended September 30, 2020, compared to the Three Months Ended September 30, 2019

The success of our business and our profitability is impacted by a number of drivers with customer growth and weather conditions being at the forefront.

Customer Growth

Customer growth is a key driver of our operations as well as our ability to acquire customers organically, by acquisition or through customer attrition. Our organic sales strategies are designed to offer competitive pricing and price certainty to

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residential and commercial customers. We manage growth on a market-by-market basis by developing price curves in each of the markets we serve and comparing the market prices to the price offered by the local regulated utility. We then determine if there is an opportunity in a particular market based on our ability to create a competitive product on economic terms that provides customer value and satisfies our profitability objectives. We develop marketing campaigns using a combination of sales channels. Our marketing team continuously evaluates the effectiveness of each customer acquisition channel and makes adjustments in order to achieve desired targets. Customer attrition occurs primarily as a result of: (i) customer-initiated switches; (ii) residential moves and (iii) disconnection resulting from customer payment defaults. Our customer growth strategy includes growing organically through traditional sales channels complemented by customer portfolio and business acquisitions as well as our expansion into new markets.

In 2020, the Company’s growth strategy is to continue to focus on the expansion of the PJM market within the states of Ohio, Illinois and Pennsylvania as well as to continue to expand within the ERCOT pre-paid market. Management plans to continue to execute on its current sales and marketing program to solicit individual commercial and residential customers and to evaluate and acquire portfolios of commercial and residential customers where they make sense economically or strategically. Due to the COVID-19 pandemic, certain Public Utilities Commissions, regulatory agencies and other governmental authorities in certain markets continue to maintain orders prohibiting energy services companies from door-to-door marketing and in some cases telemarketing during the pandemic, which has restricted some of the manners used by the Company to market for organic sales especially within the Northeast and PJM markets.

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

For the quarter ended September 30, 2020 compared to 2019, the Company’s overall delivered volumes of electricity increased by 5.79% attributed primarily to the increase in the ERCOT market and the ERCOT pre-paid market. The delivered volumes in the Northeast market continues to decline as the customer base declines. Delivered volumes for the Northeast market declined 41% during the quarter ended September 2020 compared to the quarter ended September 2019.

Weather Conditions 

Weather conditions are a key driver to our success and weather directly influences the demand for electricity and affects the prices of energy commodities. We are particularly sensitive to this variability with our residential customers in which energy is highly sensitive to weather conditions that impart heating and cooling demand. Our hedging strategy is based on forecasted customer energy usage, which can vary substantially as a result of weather patterns deviating from historical norms. Our risk management policies direct that we hedge substantially all of our forecasted demand, which is typically hedged to long-term weather patterns. We also attempt to add additional contracts from time to time to protect us from volatility in markets where we have historically experienced higher exposure to extreme weather conditions. Because we attempt to match commodity purchases to anticipated demand, unanticipated changes in weather patterns can have a significant impact on our operating results and cash flows from period to period.

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

Delivered volumes were higher during the third quarter ended September 2020 compared to September 2019, although slightly below expectations due to the COVID-19 pandemic. Weather adjusted volumes indicate the impact of the COVID-19 pandemic will likely result in a 10% to 15% decline in volumes for the ERCOT market and a 15% to 18% decline in volumes for the PJM and ISO-NE markets. Despite the decline in the anticipated delivered volumes for the third quarter 2020, profit margins for the quarter ended September 30, 2020 were 11.58% higher than the quarter ended September 30, 2019.

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For the quarter ended September 30, 2020 compared to 2019, the Company’s unit gross margin is as follows:

Revenues for the quarter ended September 30, 2019 were $53,666,325 from electricity revenue and includes $1,030,436 from cancellation and disconnection and late fees.