SUMMER ENERGY HOLDINGS INC - Quarter Report: 2013 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2013
[ ] 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.
Large accelerated filer o Accelerated filer o
Non-accelerated filer o Smaller reporting company þ
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, $0.001 par value, outstanding as of November 13, 2013 was 13,963,445.
FORM 10-Q
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INDEX
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PART I – FINANCIAL INFORMATION
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Page
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| 13 | ||
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PART II – OTHER INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
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SUMMER ENERGY HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2013 AND DECEMBER 31, 2012
(UNAUDITED)
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September 30, 2013
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December 31, 2012
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ASSETS
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Current Assets
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Cash
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$ | 891,668 | $ | 281,269 | ||||
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Restricted cash
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349,102 | 76,219 | ||||||
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Accounts receivable, net
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5,007,194 | 1,539,555 | ||||||
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Prepaid and other current assets
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605,867 | 201,235 | ||||||
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Total current assets
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6,853,831 | 2,098,278 | ||||||
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Property and Equipment, net
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477,898 | 215,527 | ||||||
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Certificates of Deposit – Restricted
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15,025 | 517,701 | ||||||
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Deferred Financing Costs, net
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890,000 | 127,772 | ||||||
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Total assets
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$ | 8,236,754 | $ | 2,959,278 | ||||
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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Current Liabilities
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Accounts payable
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$ | 116,813 | $ | 104,881 | ||||
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Accrued wholesale power purchased
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4,119,778 | 417,085 | ||||||
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Accrued expenses
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2,663,065 | 576,823 | ||||||
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Total current liabilities
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6,899,656 | 1,098,789 | ||||||
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Commitments
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Stockholders’ Equity
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Preferred Stock - $.001 par value, 10,000,000 shares authorized, 826,000 shares
and 0 shares issued and outstanding at September 30, 2013 and December 31,
2012, respectively
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826 | - | ||||||
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Common Stock - $.001 par value, 100,000,000 shares authorized, 13,963,445 shares
and 12,954,863 issued and outstanding at September 30, 2013 and
December 31, 2012, respectively
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13,963 | 12,955 | ||||||
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Subscription receivable
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(52,000 | ) | (52,000 | ) | ||||
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Additional paid in capital
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5,209,655 | 3,844,592 | ||||||
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Accumulated deficit
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(3,835,346 | ) | (1,945,058 | ) | ||||
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Total stockholders’ equity
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1,337,098 | 1,860,489 | ||||||
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Total liabilities and stockholders’ equity
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$ | 8,236,754 | $ | 2,959,278 | ||||
See accompanying notes to the consolidated financial statements.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012
(UNAUDITED)
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For the Three Months Ended September 30, 2013
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For the Three Months Ended September 30, 2012
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For the Nine Months Ended September 30, 2013
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For the Nine Months Ended September 30, 2012
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Electricity Revenue
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$ | 10,476,187 | $ | 2,625,373 | $ | 18,893,140 | $ | 3,817,559 | ||||||||
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Cost of Goods Sold
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Power purchases and balancing/ancillary
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6,030,695 | 1,165,594 | 10,162,319 | 1,661,275 | ||||||||||||
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Transportation and distribution providers charge
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3,968,392 | 911,234 | 7,238,894 | 1,305,148 | ||||||||||||
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Total cost of goods sold
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9,999,087 | 2,076,828 | 17,401,213 | 2,966,423 | ||||||||||||
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Gross Profit
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477,100 | 548,545 | 1,491,927 | 851,136 | ||||||||||||
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General and Administrative
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1,403,945 | 646,475 | 3,319,091 | 1,875,089 | ||||||||||||
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Operating Loss
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(926,845 | ) | (97,930 | ) | (1,827,164 | ) | (1,023,953 | ) | ||||||||
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Other Income (Expense)
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Financing costs
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(30,435 | ) | (16,668 | ) | (63,772 | ) | (50,004 | ) | ||||||||
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Interest income
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44 | 509 | 648 | 1,514 | ||||||||||||
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Total other income (expense)
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(30,391 | ) | (16,159 | ) | (63,124 | ) | (48,490 | ) | ||||||||
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Net Loss Before Income Taxes
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(957,236 | ) | (114,089 | ) | (1,890,288 | ) | (1,072,443 | ) | ||||||||
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Income Taxes
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- | - | - | - | ||||||||||||
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Net Loss
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$ | (957,236 | ) | $ | (114,089 | ) | $ | (1,890,288 | ) | $ | (1,072,443 | ) | ||||
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Basic and diluted loss per common share
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$ | (0.07 | ) | $ | (0.01 | ) | $ | (0.14 | ) | $ | (0.10 | ) | ||||
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Weighted average number of common shares
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13,185,211 | 10,759,276 | 13,115,368 | 10,335,226 | ||||||||||||
See accompanying notes to the consolidated financial statements.
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AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013
AND SEPTEMBER 30, 2012
(UNAUDITED)
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For the Nine Months Ended September30, 2013
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For the Nine Months Ended September30, 2012
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Cash Flows from Operating Activities
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Net loss
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$ | (1,890,288 | ) | $ | (1,072,443 | ) | ||
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Adjustments to reconcile net loss to net cash provided (used) in operating
activities:
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Common stock for services
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29,587 | 150,000 | ||||||
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Interest earned
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(605 | ) | (1,511 | ) | ||||
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Depreciation of property and equipment
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118,422 | 12,794 | ||||||
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Amortization of deferred financing costs
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63,772 | 50,004 | ||||||
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Bad debt expense
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495,318 | 47,756 | ||||||
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Changes in operating assets and liabilities:
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Accounts receivable
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(3,962,957 | ) | (1,173,395 | ) | ||||
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Prepaid and other current assets
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(404,632 | ) | (111,329 | ) | ||||
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Accounts payable
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11,932 | 65,045 | ||||||
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Accrued wholesale power purchases
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3,702,693 | (434,014 | ) | |||||
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Accrued expenses
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2,086,242 | 912,418 | ||||||
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Net cash provided (used) in operating activities
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249,484 | (1,554,675 | ) | |||||
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Cash Flows from Investing Activities
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Purchase of restricted cash
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(272,883 | ) | (50,056 | ) | ||||
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Proceeds (purchase) of certificate of deposit – restricted
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503,281 | (15,000 | ) | |||||
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Recapitalization
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- | 565 | ||||||
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Purchase of property and equipment
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(380,793 | ) | (118,443 | ) | ||||
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Net cash used in investing activities
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(150,395 | ) | (182,934 | ) | ||||
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Cash Flows from Financing Activity
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Dividends on preferred stock
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(8,690 | ) | - | |||||
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Proceeds from issuance of common shares in a private placement offering
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520,000 | 277,700 | ||||||
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Net cash provided in financing activities
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511,310 | 277,700 | ||||||
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Net Change in Cash
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610,399 | (1,459,909 | ) | |||||
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Cash at Beginning of Period
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281,269 | 1,751,911 | ||||||
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Cash at End of Period
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$ | 891,668 | $ | 292,002 | ||||
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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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$ | 1,544 | $ | 848 | ||||
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Non-cash Transactions:
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Preferred stock issued for deferred financing costs
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$ | 826,000 | $ | - | ||||
See accompanying notes to the consolidated financial statements.
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AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012
(UNAUDITED)
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NOTE 1 - ORGANIZATION
The consolidated financial statements include the accounts of Summer Energy Holdings, Inc. (formerly Castwell Precast Corporation) (“Castwell”) and its wholly owned subsidiaries Summer Energy, LLC (“Summer LLC”), and 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.
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 operations of Summer LLC are the Company’s sole line of business. The transaction was treated as a recapitalization of Summer LLC, and Summer LLC (and its historical financial statements) is the continuing entity for financial reporting purposes.
Summer LLC is a retail electric provider in the state of Texas under a license with the Public Utility Commission of Texas (“PUCT”). Summer LLC procures wholesale energy and resells it 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.
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 nine-month period ended September 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. 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, 2012, as filed with the Securities and Exchange Commission (“SEC”) on March 28, 2013.
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.
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 September 30, 2013 were estimated at $2,257,821. 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 nine months ended September 30, 2013, the Company granted a stock option to purchase 250,000 shares of the Company’s common stock to a certain key officer. The options covering a total of 125,000 shares will vest one year from the date of grant and options covering a total of 125,000 shares will vest two years from the date of grant and have an estimated fair value of $35,942. 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 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 0.77% (ii) estimated volatility of 17% (iii) dividend yield of 0.00% and (iv) expected life of the options of 5 years. The options vest ratably over the vesting period of two years and stock compensation expense of approximately $12,824 was expensed during the nine months ended September 30, 2013.
During the nine months ended September 30, 2013, the Company granted additional stock options to purchase a total of 65,000 shares of common stock at an exercise price of $1.50 per share. The options will vest over two years from the date of grant, and will expire ten (10) years from the date of grant and have an estimated fair value of $2,500. The fair value of the options 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. The options vest ratably over the vesting period of two years and stock compensation expense of $480 was expensed during the nine months ended September 30, 2013.
Also during the nine months ended September 30, 2013, the Company issued 25,000 shares of restricted common stock to an officer of the company. These shares vest one year from the date of grant. The 25,000 restricted shares are estimated to have had a value of $24,000 on the date of grant. The restricted shares vest ratably over the vesting period of one year and stock compensation expense of approximately $15,000 was expensed during the nine months ended September 30, 2013.
Also, during the nine months ended September 30, 2013, the Company granted 31,250 stock options to non-employee members of the Company’s Board of Directors under the Plan. The director stock options were fully vested on the date of grant, have an exercise price of $1.50 per share, will expire ten (10) years from the date of grant and are estimated to have a fair value of approximately $1,282 on the date of grant. The fair value of the options 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. Stock compensation expense of $1,283 was expensed during the nine months ended September 30, 2013.
As of September 30, 2013, per the 785,000 shares of common stock allocated to the Plan, options covering 496,250 shares of common stock had been awarded from the Plan and options covering 20,000 shares of common stock had been forfeited with a remaining balance of 308,750 shares of common stock allocated to the Plan.
NOTE 5 - 2013 CREDIT FACILITY AGREEMENTS AND PREFERRED SHARES
On August 29, 2013, the Company entered into two separate but identical Agreements to Assist with Credit Facility (each an “Agreement” and collectively the “Agreements”) with two directors of the Company, one of whom is also an officer of the Company, whereby these two individuals (each individual is referred to as an “Assisting Party” and, together as the “Assisting Parties”) agreed to act as sureties and personal guarantors with respect to $826,000 ($413,000 each) of the Company’s depository requirements, consisting of a line of credit from a financial institution and certain extensions of credit by critical vendors that are necessary for the Company to carry out its business (the “2013 Credit Facility Agreements”). The 2013 Credit Facility Agreements each have a term of five (5) years. Given that each of the Assisting Parties entering into the 2013 Credit Facility Agreements is a member of the Company’s board of directors, the transaction was approved by the disinterested members of the board of directors.
As consideration for each Assisting Party agreeing to act as surety and personal guarantor of $413,000 of the Company’s critical depository requirements, the Company agreed that each Assisting Party would be issued 413,000 shares of a newly authorized Series A Preferred Stock (the “Series A Preferred”).
On August 28, 2013, the Company filed a Certificate of Designation of Rights with respect to the Series A Preferred. The Series A Preferred entitles holders thereof to receive a dividend payable in cash or common stock at an annual rate of 12% of the Deemed Original Issue Price. The “Deemed Original Issue Price” of the Series A Preferred for purposes of calculating the Series A Preferred dividend is $1.00 per share, which the board of directors of the Company has determined represents the estimated fair market value as of the date of grant. The Series A Preferred dividend shall be payable, at the Company’s option, in cash or by the issuance of common stock ten (10) days following the end of each calendar quarter, or portion thereof. As of September 30, 2013, the Company has accrued $8,690 in dividends payable.
Unless the Company has received the approval of the holders of a majority of the Series A Preferred then outstanding, the Company shall not: (i) increase or decrease the authorized number of shares of Series A Preferred; (ii) authorize or designate any new class or series of stock or any other securities convertible into equity securities of the Company ranking on a parity with or senior to the Series A Preferred in right of redemption, liquidation preference, voting, dividends or with respect to any other rights or privileges, or any increase in the authorized or designated number of any such new class or series; (iii) alter or change the rights, preferences or privileges of Series A Preferred; or (iv) liquidate or wind-up the business and affairs of the Company or effect any Liquidation Event, as defined in the Certificate of Designation.
Upon the occurrence of any Liquidation Event (as defined in the Certificate of Designation), before any distribution or payment will be made to the holders of Common Stock, the holders of Series A 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 A Preferred plus the amount, if any, of debt of the Company paid or discharged by the holders of Series A Preferred on behalf of the Company pursuant to guaranties by the holders of Series A Preferred (the “Series A Liquidation Preference”). After payment of the full Series A Liquidation Preference, the holders of shares of Series A Preferred will participate with holders of shares of Common Stock as though each share of Series A Preferred was one share of Common Stock.
The Series A Preferred shares are not convertible into Common Stock or any other security. Pursuant to each of the Agreements, upon the earliest to occur of the following: (i) five (5) years from the date of the Agreements, or (ii) at such time as the Assisting Party is fully released from its obligations under any credit facility obtained by the Company pursuant to the Assisting Party’s guarantee, the Company shall have the right to purchase all outstanding shares of Series A Preferred held by such Assisting Party in exchange for the granting of a five (5) year option to purchase shares of the Company’s common stock at an exercise price of $1.50 per share. The number of shares of common stock covered by such option shall be calculated on the basis of an option to purchase one (1) share of common stock for each 2.7533 shares of Series A Preferred purchased by the Company.
The 2013 Credit Facility Agreements have been recorded as of September 30, 2013 as a deferred financing asset in the amount of $826,000 to be amortized monthly through August 31, 2018. As of September 30, 2013, $13,707 has been amortized.
NOTE 6 – LETTER OF CREDIT
Pursuant to the 2013 Agreement to Assist with Credit Facility (Note 5), the Company secured an irrevocable stand-by letter of credit with a financial institution for the benefit of a wholesale energy provider. The stand-by letter of credit was initially in the amount of $277,000, and was subsequently increased to $826,000. The stand-by letter of credit expires on July 15, 2014.
NOTE 7 – PRIVATE PLACEMENT OF COMMON SHARES AND RELATED WARRANTS
Beginning in October 2012, the Company commenced a private offering (the “October 2012 Offering”) to certain investors with whom the Company, its management and/or agents have a pre-existing relationship. The October 2012 Offering consisted of an offering of “Investment Units” to accredited investors for a purchase price of $20,000 per Investment Unit. Each Investment Unit consists of (i) 20,000 shares of common stock priced at $1.00 per share and (ii) a five year warrant to purchase up to 10,000 shares of common stock at an exercise price of $1.50 per share. The investor warrants have a 5 year term and include piggy-back registration rights.
During the nine months ended September 30, 2013, the October 2012 Offering resulted in the issuance of 520,000 shares of common stock and 260,000 investor warrants in exchange for cash proceeds of $520,000. The approximate relative fair value of the warrants is $2,000. The Black Scholes pricing model was used to estimate the fair value of the 260,000 warrants issued during the period, using the assumptions of a risk free interest rate of 0.87%, dividend yield of 0.00%, volatility of 17%, and an expected life of 5 years. No placement fees were paid in connection with these investments.
NOTE 8 – CASHLESS EXERCISES OF WARRANTS
On July 22, 2013, the Company issued a total of 123,577 shares of common stock to certain accredited investors who had acquired warrants to purchase a total of 150,000 shares of common stock for $1.50 per share in connection with a private placement which was conducted between May 2012 and September 2012. The 123,577 shares of common stock were issued pursuant to a cashless exercise of the warrants. The warrants held by such investors were terminated and cancelled upon the issuance of the 123,577 shares of common stock.
Effective July 31, 2013, the Company issued 340,000 shares of common stock to Cambria Capital, LLC (“Cambria”) pursuant to the cashless exercise of a warrant dated January 17, 2012, issued by the Company to Cambria to purchase 400,000 shares of common stock of the Company at $0.60 per share. The Cambria warrant was terminated and cancelled upon the issuance of the 340,000 shares of common stock.
NOTE 9 – REGULATORY COMMITMENT
On February 6, 2012, an application for an amendment to our Retail Electric Provider Certification was submitted to the PUCT which sought prior approval of a transaction by and between us and Castwell. The application for amendment was requested to reflect a change in ownership in contemplation of a merger with Castwell. On February 27, 2012, the application to amend our Retail Electric Provider Certification was approved.
We are required to maintain stockholders’ equity, determined in accordance with GAAP, of not less than $1,000,000 for the purpose of obtaining certification and we or our guarantor must provide and maintain an irrevocable stand-by letter of credit with a face value of $500,000 for the purpose of maintaining certification. We will remain subject to these minimum capital standards until February 2014. We are in compliance with this requirement as of September 30, 2013, and 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.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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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, 2012. 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, the 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.
As of September 30, 2013, we had 27 full-time employees, 1 part-time employee and 3 independent contractors.
Results of Operations
Three Months Ended September 30, 2013, compared to the Three Months Ended September 30, 2012
Revenue – For the three months ended September 30, 2013, we generated $10,476,187 in electricity revenue from one large commercial customer, several small 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, included within these revenues are revenues from contract cancellation fees, disconnection fees and late fees of $366,375. Electricity revenues for the three months ended September 30, 2012 were $2,625,373, including $54,213 from contract cancellation fees, disconnection fees and late fees. Management plans to continue to acquire portfolios of commercial and residential customers when offered at reasonable prices. Management also plans to continue to execute on its sales and marketing program to solicit individual commercial and residential customers.
Cost of Goods Sold and Gross Profit – For the three months ended September 30, 2013, cost of goods sold and gross profit totaled $9,999,087 and $477,100, respectively. Cost of goods sold and gross margin recorded in the three months ended September 30, 2012 were $2,076,828 and $548,545, respectively. Management expects to experience economies of scale once it achieves a certain customer volume resulting in an increase in the gross margin percentage as electricity revenue ramps up.
Operating expenses – Operating expenses for the three months ended September 30, 2013 totaled $1,403,945 consisting primarily of general and administrative expenses of $863,426, bank service fees of $93,719, collection fees/sales verification fees of $3,531, outside commission expense of $20,527, professional fees of $89,207, bad debt reserve of $242,810 and $90,725 of billing fees. Billing fees are primarily costs paid to third party Electronic Data Inter-Chain (EDI) providers to handle transactions between us, ERCOT and the TDSPs in order to produce customer bills.
Operating expenses for the three months ended September 30, 2012 totaled $646,475, consisting of general and administrative expenses of $567,955, acquisition of residential customers of $190, bank service fees of $24,785, collection fees of $16,429 and billing fees of $37,116.
Net loss – Net loss for the three months ended September 30, 2013 and 2012 totaled $957,236 and $114,089, respectively, relating primarily to operating expenses and cost of goods sold incurred in excess of revenue as we attempt to obtain economies of scale.
For the Nine Months Ended September 30, 2013 compared to the Nine Months Ended September 30, 2012
Revenue – For the nine months ended September 30, 2013, the Company generated $18,893,140 in electricity revenue primarily from one large commercial customer, several small 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, included within these revenues are revenues from contract cancellation fees, disconnection fees and late fees of $758,291. For the nine months ended September 30, 2012, the Company generated $3,817,559 in electricity revenue. Management also plans to continue to execute on its sales and marketing program to solicit individual commercial and residential customers.
Cost of Goods Sold and Gross Margin – For the nine months ended September 30, 2013, cost of goods sold and gross margin totaled $17,401,213 and $1,491,927, respectively. Cost of goods sold and gross margin recorded in the nine months ended September 30, 2012 were $2,966,423 and $851,136, respectively. Management expects to experience economies of scale once it achieves a certain customer volume resulting in an increase in the gross margin percentage as electricity revenue ramps up.
Operating expenses – Operating expenses for the nine months ended September 30, 2013 totaled $3,319,091, consisting primarily of general and administrative expenses of $2,020,134, bank service fees of $185,406, collection fees/sales verification fees of $63,985, outside commission expense of $128,879, professional fees of $228,242, bad debt reserve of $495,318 and $197,127 of billing fees. Operating expenses for the nine months ended September 30, 2012 totaled $1,875,089, consisting of general and administrative of $1,458,959, professional fees associated with the reverse merger of $218,700, acquisition of residential customers of $44,509, bank fees of $42,729, collection fees of $24,277 and billing fees of $85,915. Billing fees are primarily costs paid to third party Electronic Data Inter-Chain (EDI) providers to handle transactions between us, ERCOT and the TDSPs in order to produce customer bills.
Net loss – Net loss for the nine months ended September 30, 2013 and 2012 totaled $1,890,288 and $1,072,443, 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 September 30, 2013 and 2012, our cash totaled $891,668 and $292,002, respectively. Our principal cash requirements for the quarter ended September 30, 2013 were for operating expenses and cost of goods sold (including power purchases, employee cost, and customer acquisition) and capital expenditures. Our principal cash requirements for the quarter ended September 30, 2012 were for startup activities. Our primary source of cash during the quarter ended September 30, 2012 was from the capital received pursuant to a private placement of our common stock and warrants which raised net proceeds of $277,700. During the quarter ended September 30, 2013, the primary source of cash was from electricity revenues and capital raised in the amount of $420,000 pursuant to private placements of common stock and warrants.
General – The Company’s increase in net cash flow during the first nine months of 2013 is attributable to $249,484 net cash provided in operating activities, $150,395 net cash used in investing activities which includes $380,793 used for the purchase of property and equipment, and net cash provided in financing activities of $511,310. In 2012, the net cash decrease was a result of net cash used in operating activities of $1,554,675, $182,934 net cash used in investing activities, and net cash provided in financing activities of $277,700.
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 electricity revenues generated through ongoing operations.
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. Our cash position may not be significant enough to support daily operations. Management believes that we have adequate liquidity to support operations during the short-term, but this belief is based upon many assumptions and is subject to numerous risks. However, we will require additional capital in order to meet minimum capital standards imposed by licensing authorities. Those capital standards require us to maintain stockholders’ equity, determined in accordance with generally accepted accounting principles in the United States, of not less than $1,000,000 and to maintain an irrevocable stand-by letter of credit with a face value of $500,000. We will remain subject to these minimum capital standards until February 2014.
While we believe in the viability of our plan of operations and strategy to generate revenues and in our ability to raise additional funds, if necessary, 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, 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 “smaller 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 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Our process for evaluating controls and procedures is continuous and encompasses constant improvement of the design and effectiveness of established controls and procedures and the remediation of any deficiencies which may be identified during this process.
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, 2012, filed with the SEC on March 28, 2013 (the “2012 Form 10-K”). The Risk Factors set forth in the 2012 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 2012 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.
As part of an offering which commenced in October 2012, during the quarter ended September 30, 2013, the Company accepted three subscriptions from accredited investors to purchase a total of twenty-one (21) Investment Units (“Units”) comprised of common stock and warrants for a purchase price of $20,000 per Unit, for gross proceeds to the Company of $420,000. Each Unit consists of (i) 20,000 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 10,000 shares of Common Stock for an exercise price of $1.50 per share. The Company granted piggyback registration rights to the investors in connection with these investments. The Company intends to use the proceeds from these investments for general corporate and working capital purposes.
The Common Stock and Warrants were offered to the accredited investors in reliance upon an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended, and Regulation D promulgated thereunder.
Our reliance on Regulation D under the Securities Act of 1933 was based in part upon written representations made by each of the investors that: (a) such investor is acquiring the securities for his, her or its own account for investment and not for the account of any other person and not with a view to or for distribution, assignment or resale in connection with any distribution within the meaning of the Securities Act of 1933, (b) such investor agrees not to sell or otherwise transfer the securities unless they are registered under the Securities Act of 1933 and any applicable state securities laws, or an exemption from such registration is available, (c) such investor has knowledge and experience in financial and business matters such that he, she or it is capable of evaluating the merits and risks of an investment in the Company, (d) such investor had access to all of our documents, records, and books pertaining to the investment and was provided the opportunity to ask questions and receive answers regarding the terms and conditions of the offering or issuance and to obtain any additional information which we possessed or were able to acquire without unreasonable effort and expense, and (e) such investor has no need for liquidity in its investment and could afford the complete loss of such investment. In our reliance upon Rule 506 of Regulation D promulgated under the Securities Act of 1933, management made the determination, based upon written representations, that such investor was an “accredited investor” as defined in Rule 501 of Regulation D. In addition, there was no general solicitation or advertising for securities issued in reliance upon Regulation D.
Our reliance upon Section 4(a)(2) of the Securities Act of 1933 was based in part upon the following factors: (a) the issuance of the securities was in connection with isolated private transactions which did not involve any public offering or general solicitation; (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.
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No.
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Item
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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: November 14, 2013
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By:
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/s/ Neil M. Leibman | |
| Neil M. Leibman | |||
| Chief Executive Officer | |||
| (Principal Executive Officer) | |||
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Date: November 14, 2013
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By:
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/s/ Jaleea P. George | |
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Jaleea P. George
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| Chief Financial Officer | |||
| (Principal Accounting Officer) |
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