SUMMER ENERGY HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

SUMMER ENERGY HOLDINGS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION

Revenue and Cost Recognition

Our revenues are primarily derived from the sale of electricity to residential and small commercial customers.  Revenues for sales of electricity are recognized under the accrual method of accounting.

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”) and ISO New England through a multiple step settlement process.  Balancing costs/revenues are related to the differential between supply that we provided through our bilateral wholesale supply and the supply required to serve our customer load.  The Company endeavors to minimize the amount of balancing/ancillary costs through our load forecasting and forward purchasing programs.

 Cash and Restricted Cash 

The Company considers all short-term investments with an original maturity of three months or less to be cash equivalents. There were no such investments at September 30, 2019 or December 31, 2018.

Basic and Diluted (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, 2019 and 2018, the weighted average number of shares outstanding excludes share equivalents, because their inclusion would be anti-dilutive.  The Company had potentially dilutive securities totaling approximately 4,741,434 and 4,278,730, respectively, as of September 30, 2019 and 2018. 

 Accounting Standards Recently Adopted 

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 and ISO New England markets. Summer Midwest began flowing electricity in the state of Ohio in the PJM market in July 2019 and the anticipated customer base as this market grows will consist of residential and commercial customers. Also, the Company recognizes revenues from contract cancellation fees, disconnection fees and late fees.

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

Account receivables 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, 2019 and December 31, 2018 were estimated at $36,573,761 and $25,811,607, respectively.

In the ISO New England market, electricity services not billed by month-end are accrued based upon estimated deliveries to customers as tracked and recorded by ISO New England multiplied by our average billing rate per kilowatt hour (“kWh”) in effect at the time.  The customer billing in the ISO New England market is performed by the local utility company. Unbilled accounts in the ISO New England market as of September 30, 2019 and December 31, 2018 were estimated at $1,022,553 and $1,006,895, respectively.

The Company began serving customers in the PJM market during the month of July 2019.   As of September 30, 2019, the Company had billed customers $2,540 and the outstanding billed accounts receivable balance was $1,502.

The Company, in the Texas market, determines an allowance for doubtful accounts based upon a review of outstanding receivables, historical write-off experience and existing economic conditions. Receivables past due over 90 days are considered delinquent and reviewed individually for collectability. After all means of collection have been exhausted, delinquent receivables are written off. Billed receivables over 90 days and 2% of unbilled receivables are reserved by the Company.  Management has determined that the allowance for doubtful accounts as of September 30, 2019 and December 31, 2018 was $999,414 and $821,424, respectively.  

Bad debt expense, write-offs and recoveries were as follows:  

Within the ISO New England market, the local utility companies in the state of Massachusetts purchase the Company’s billed receivables at a statutory published discounted rate without recourse; therefore, no allowance for doubtful accounts was recorded as of September 30, 2019 or December 31, 2018.

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NOTE 4 - LETTERS OF CREDIT

As of September 30, 2019, Summer Northeast secured two irrevocable stand-by letters of credit totaling $750,000.  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 which was set to expire on May 26, 2019 and was extended to May 26, 2020; and the State of New Hampshire Public Utilities Committee in the amount of $500,000 which is set to expire on May 1, 2020.  

As of September 30, 2019, none of the letters of credit issued on behalf of the Company were drawn upon.

The amount of available credit under the Loan was $5,000,000.  The Loan was revolving in nature and is evidenced by a Revolving Promissory Note (the “Note”).  The maturity date of the Loan was June 30, 2018.

Interest was accrued by the Company for the Blue Water Capital funding as follows:

 NOTE 8 - COMERICA BANK LOAN 

On December 18, 2018, the Company signed a single payment note (the “Comerica Note”) with Comerica Bank (the “Bank”) in the amount of $2,900,000.   The Comerica Note has a maturity date of June 11, 2020, with interest thereon at a per annum rate equal to the “Prime Referenced Rate” plus the “Applicable Margin.”   The “Prime Referenced Rate” means, for any day, a per annum interest rate which is equal to the “Prime Rate” in effect on such day, but in no event and at no time shall the “Prime Referenced Rate” be less than the sum of the Daily Adjusting London InterBank Offered Rate (“LIBOR”) rate for such day plus two and one-half percent (2.5%) per annum.   “Prime Rate” means the per annum rate established by the Bank as its prime rate for its borrowers at any such time.   “Applicable Rate” means 0.25% per annum.

Accrued and unpaid interest on the unpaid principal balance outstanding on the Note is payable monthly on the first day of each month, commencing on February 1, 2019.

As of September 30, 2019, the interest rate was 5.5% payable to Comerica Bank, and the outstanding balance of financing from Comerica Bank was $700,000.  Interest accrued on the Comerica Bank loan was as follows:

NOTE 9 - WHOLESALE POWER PURCHASE AGREEMENT WITH EDF

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

In conjunction therewith, the Company and EDF also entered into a Security Agreement (the “Security Agreement”), a Pledge Agreement (the “Pledge Agreement”) and a Guaranty (the “Guaranty”) in favor of EDF.  The Energy Services Agreement has a term of three years, and automatically renews for successive one-year periods unless either party provides written notice of termination 180 days prior to the renewal date. In addition to the market-based commodity price charged by EDF for each underlying commodity transaction, the Company will pay a “Commodity Fee” for each megawatt hour (“MWh”) of power that the Company requests for delivery from EDF during the term of the Energy Services Agreement.  In addition, the Company is responsible for other mutually agreed upon fees incurred by EDF on its behalf.  The Company is also responsible for any reasonable transmission or transportation costs incurred in connection with power transactions.  Monthly supply obligations will accrue interest at a rate equal to three-month LIBOR plus 6% per annum.  Any additional credit support will bear interest at the per 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.

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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. On July 18, 2019, the Company repaid EDF for credit support in the amount of $588,000 related to the decreased TDSP collateral requirements of the local utility company.   As of September 30, 2019, EDF has provided credit support in the amount of $4,511,006 for cash collateral as well as to secure letters of credit (Note 4) for the benefit of the Company.

The Company accrued interest to EDF as follows:

 NOTE 10 - LEASE LIABILITY 

As of September 30, 2019, the weighted-average remaining lease term for operating leases was 5.6 years.  As of September 30, 2019, 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, 2019 are summarized as follows:

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Interest expense consists of the following components for the periods indicated:

  NOTE 12 - 2012 STOCK OPTION AND STOCK AWARD PLAN 

During the quarters ended September 30, 2019 and 2018, the Company issued no stock options under the 2015 Plan. 

During the three and nine-month periods ended September 30, 2019 and 2018, the Company recognized total stock compensation expenses for vesting options issued from the 2015 Plan as follows:

As of September 30, 2019, the unrecognized expense for vesting of options issued from the 2015 Plan is $147,899 relating to 235,000 of unvested shares expected to be recognized over a weighted average period of approximately 7.22 years.

 As of September 30, 2019, 19,000 shares remain available for issuance under the 2015 Plan. 

NOTE 14 - 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 quarter ended September 30, 2019, the Company granted under the 2018 Plan a total of 620,000 stock options with an exercise price of $2.00 to four officers of the Company as compensation.  The total 620,000 stock options granted during the quarter ended September 30, 2019 had an approximate fair value of $1,192,515 determined using the Black Scholes option pricing model. The weighted average assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate of 1.69% (ii) estimated volatility of 144.51% (iii) dividend yield of 0.00% and (iv) expected life of all options averaging eight years.

During the quarter ended June 30, 2019, the Company granted under the 2018 Plan a total of 53,750 stock options with an exercise price of $2.25 to non-employee members of the Company’s Board of Directors, and a total of 100,000 stock options with an exercise price of $1.50 to a key employee as compensation.  The options granted to the non-employee members of the Company’s Board of Directors as well as to the key employee vested immediately on the date of grant.   The total 153,750 stock options granted during the quarter ended June 30, 2019 had an approximate fair value of $249,198 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 2.16% (ii) estimated volatility of 149.76% (iii) dividend yield of 0.00% and (iv) expected life of all options averaging eight years.

During the quarter ended March 31, 2019, the Company granted under the 2018 Plan a total of 53,750 stock options with an exercise price of $2.25 to non-employee members of the Company’s Board of Directors, and a total of 2,500 stock options with an exercise price of $2.50 to a key employee as compensation.   The options granted to the non-employee members of the Company’s Board of Directors vested immediately on the date of grant, and the 2,500 options granted to the key employee vest one-year from the date of grant.   The total 56,250 stock options granted during the quarter ended March 31, 2019 had an approximate fair value of $107,960 determined using the Black Scholes option pricing model. The weighted average assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate of 2.21% (ii) estimated volatility of 147.94% (iii) dividend yield of 0.00% and (iv) expected life of all options averaging eight years.

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

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.  There was no warrant expense associated with the cashless exercise of this warrant.

On July 19, 2019, the Company issued a warrant to purchase up to two (2) shares of the Company’s common stock under a Referral Agreement whereby the sales broker introduces the Company to potential sales leads.  The five-year warrant has an exercise price of $1.50 per share.  The fair value of the warrant is $4 determined using the Black-Scholes option pricing model and expensed during the quarter ended September 30, 2019.  The assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate of 1.76%, (ii) estimated volatility of 149.46%, (iii) dividend yield of 0.00%, and (iv) expected life of the warrant of 5 years.

Total warrant expense of the Company for the nine months ended September 30, 2019 is summarized as follows:

As of September 30, 2019, the Company had 941,204 outstanding warrants of which 675,967 are fully vested.

  NOTE 19 - DEBT TO RELATED PARTIES ASSUMED 

On November 1, 2017, the Company assumed $767,677 of related party debt owed by Summer Northeast to members Tom O’Leary and Neil Leibman pursuant to the terms of the purchase agreement relating to the acquisition of Summer Northeast during 2017. Messrs. O’Leary and Leibman are directors of the Company (Mr. Leibman is also an executive officer).

debt.   The loan bears interest at the rate of the greater of (i) 12% per annum or (ii) the Prime Rate plus 5%, payable monthly with a maturity date of October 31, 2018.

The related party debt in the amount of $767,677 was paid in full by the Company to the related parties Messrs. O’Leary and Leibman on June 1, 2018.

During the three and nine months ended September 30, 2019 and 2018, the Company paid the following interest on such related party debt assumed:

NOTE 20 - RELATED PARTY LOANS

On January 3, 2018, the Company entered into two separate promissory notes in the amount of $125,000 each for an advance of $250,000 by Tom O’Leary and Neil Leibman for purposes of short-term financing.  Messrs. Leibman and O’Leary are directors of the Company (Mr. Leibman is also an executive officer).  The promissory notes accrued interest at the rate of 5% per annum based upon 365 days a year with a maturity date of July 3, 2018.   The loans from Mr. O’Leary and Mr. Leibman were paid in full on June 1, 2018. For the three months ended September 30, 2019 and 2018, the Company paid $0 and $0 to Messrs. O’Leary and Leibman. During the nine months ended September 30, 2019 and 2018, the Company paid $0 and $5,103 to Messrs. O’Leary and Leibman.  

On January 8, 2018, the Company entered into a promissory note in the amount of $373,000 for 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 July 8, 2018.  On March 6, 2018, $200,000 was paid back to Mr. Leibman and on April 16, 2018, the remaining balance of $173,000 was paid. For the three months ended September 30, 2019 and 2018, the Company paid $0 and $0 in interest to Mr. Leibman.  During the nine months ended September 30, 2019 and 2018, the Company paid $0 and $3,884 in interest to Mr. Leibman.  

On January 8, 2018, the Company entered into a promissory note to document a loan from Pinnacle Power, LLC (“Pinnacle”), in the amount of $80,000 for purposes of short-term financing.  Mr. O’Leary and Mr. Leibman hold membership interests in Pinnacle.  The promissory note accrued interest at a rate of 5% per annum based upon 365 days a year and had a maturity date of July 8, 2019.  On February 22, 2018, $40,000 was repaid to Pinnacle and on March 6, 2018, $40,000 was repaid to Pinnacle. For the three months ended September 30, 2019 and 2018, the Company paid $0 and $0 to Messrs. O’Leary and Leibman.  During the nine months ended September 30, 2019 and 2018, the Company paid $0 and $558 to Messrs. O’Leary and Leibman.  

On January 7, 2019, the Company entered into a promissory note in the amount of $473,000 for an advance by Mr. O’Leary 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.  For the three months ended September 30, 2019 and 2018, the Company paid $0 and $0 in interest to Mr. O’Leary.  During the nine months ended September 30, 2019 and 2018, the Company paid $2,009 and $0 in interest to Mr. O’Leary.  

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.  For the three months ended September 30, 2019 and 2018, the Company paid $0 and $0 to Messrs. O’Leary and Leibman. During the nine months ended September 30, 2019 and 2018, the Company paid $106 and $0 to Messrs. O’Leary and Leibman.

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The following table summarizes interest paid to related parties for the three and nine months ended September 30, 2019 and 2018:

NOTE 21 - 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 8) in the amount of $2,900,000. 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 accrued interest expense as follows:

On September 16, 2019, the Company issued 14,312 shares of common stock to the Guarantors as payment for interest.

As of September 30, 2019, the Company has issued 95,424 shares of common stock to the Guarantors as payment for interest accrued in the amount of $143,133.

NOTE 22 - OTHER RELATED PARTY TRANSACTIONS

In January 2018, Mr. Leibman provided aviation transportation and the Company paid $4,000 in fuel costs for purposes of a company off-site management meeting.  

NOTE 24 - EMPLOYEE STOCK PURCHASE PLAN

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

NOTE 25 - EMPLOYMENT AGREEMENTS

On September 5, 2019, the Company entered into a Second Amendment to Employment Agreement with each of Jaleea George, Secretary and Chief Financial Officer (the “George Amendment”), and Neil Leibman, Chief Executive Officer (the “Leibman Amendment”; together with the George Amendment, the “Amendments”) (Ms. George and Mr. Leibman, together, the “Executives”). The Amendments amended Section 1(a) of each Executives’ respective employment agreements by extending the terms thereof for an additional term of two years, with the new two-year term commencing effective January 1, 2019. The George Amendment provides that Ms. George’s annual base salary will be increased to $200,000.  The Amendments also amended Exhibit A to each of the employment agreements pursuant to which the Executives were granted additional equity incentives in the form of options to purchase common stock of the Company. Pursuant to the Leibman Amendment, the Company agreed to grant Mr. Leibman an option to purchase 150,000 shares of the Company’s common stock at an exercise price equal to the greater of (i) $1.50 per share and (ii) the price per share of common stock as reported on the OTC Markets on the date such option is granted, with 75,000 shares vesting on January 1, 2020 and the remaining 75,000 shares vesting on January 1, 2021. Pursuant to the George Amendment, the Company agreed to grant Ms. George an option to purchase 170,000 shares of the Company’s common stock at an exercise price equal to the greater of (i) $1.50 per share and (ii) the price per share of common stock as reported on the OTC Markets on the date such option is granted, with 85,000 shares vesting on January 1, 2020 and the remaining 85,000 shares vesting on January 1, 2021. Pursuant to the Amendments, the Executives are also entitled to additional equity compensation in the form of options to purchase common stock of the Company in the event the Company achieves certain performance benchmarks.  All other material provisions of the employment agreements remain in full force and effect. 

The foregoing are summaries of the George Amendment and the Leibman Amendment and are qualified in their entirety by the actual terms of such agreements, copies of which are included as Exhibits 10.3 and 10.4, respectively, hereto.  

NOTE 26 - CONSULTING AGREEMENT

On May 20, 2019, the Company entered into a two-year consulting agreement whereby the consultant agreed to provide certain corporate and strategic business consulting services to the Company and its Board of Directors.

As compensation for these consulting services, the Company agreed to pay the consultant a fee of $200,000 and grant a five-year warrant to purchase up to 80,000 shares of the Company’s common stock at an exercise price of $1.50 per share. The fair value of the warrant to purchase 80,000 shares was $143,731 determined using the Black-Scholes option-pricing model (Note 17).  The total consulting fee of $343,731 for this agreement is included in operating expenses on the consolidated statement of operations.

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

customers are a secondary target market.  We anticipate that a majority of Summer LLC’s customers will be located in the Houston and Dallas-Fort Worth metropolitan areas; although, we anticipate a growing number will be located in a variety of other metropolitan and rural areas within Texas.   We began delivering electricity to customers in the Texas market mid-February 2012.

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

Our wholly-owned subsidiary, Summer Midwest, is a licensed REP in the states of Ohio and Illinois.  In general, the regulatory structure in these states permits REPs, such as Summer Midwest, to procure and sell electricity at unregulated prices.  As a REP, Summer Midwest sells electricity to residential and commercial customers.  In the commercial market, the primary target is small to medium-sized customers (less than one megawatt of peak usage), but we will also selectively pursue larger commercial customers through Management’s existing, historical relationships.  Residential customers are a secondary target market.  Summer Midwest began flowing electricity in the state of Ohio which is in the Pennsylvania, Jersey, Maryland Power Pool (“PJM”) market during the month of July 2019. As of the date of this Quarterly Report, there were no sales activities in the state of Illinois.

Results of Operations

Three Months Ended September 30, 2019, compared to the Three Months Ended September 30, 2018

Revenue –For the quarter ended September 30, 2019, we generated $53,666,325 in electricity revenue primarily from commercial customers, and from various long and short-term residential customers.  The majority of our revenue comes from the flow of electricity to customers and includes revenues from contract cancellation fees, disconnection fees and late fees of $1,030,436.  

Total revenues for the quarter ended September 30, 2019 compared to September 30, 2018 increased by approximately 18.30%.  In the ERCOT Pre-Paid Market, the revenue increased by 17.43% due to customer growth.  The Northeast market had a 38.58% decrease in revenue related to the decrease in the customer base in 2019 compared to 2018. The Company began flowing electricity in the PJM market in July 2019 and the anticipated customer base as this market grows will consist of residential and commercial customers. 

Cost of Goods Sold and Gross Margin – For the three months ended September 30, 2019, cost of goods sold and gross profit totaled $51,970,064 and $2,726,697, respectively. Cost of goods sold and gross profit recorded in the three months ended September 30, 2018 were $44,919,469 and $1,316,637, respectively.

Cost of goods sold for the quarter ended September 30, 2019, compared to September 30, 2018, increased in total by approximately 15.70% due to the increased volumes delivered during the summer months as well as an increase in the electricity unit cost per MWh.  The gross profit margin increased for the quarter ended September 30, 2019 compared to September 30, 2018 primarily due to a 16.42% increase in the volume of Mwh’s of electricity delivered in the ERCOT market. The Northeast market decreased by 34.19% due to the compression of the customer base during 2019 compared to 2018.

Cost of power purchases increased during the third quarter September 2019 compared to the third quarter ended September 2018 due to declining reserve margins in the ERCOT marketplace.  Furthermore, due to extreme unpredictable weather during July 2018, the Company experienced higher than normal power costs for the quarter ended September 2018 resulting in a larger than anticipated gross margin loss for the quarter ended September 2018 compared to the quarter ended September 2019.   Although the 2019 summer months in the ERCOT market proved to be one of the hottest in recent years, the Company had positioned itself so that the weather did not significantly impact the earnings for the quarter ended September 2019.

Operating Expenses – Operating expenses for the quarter ended September 30, 2019, totaled $5,634,108, consisting primarily of general and administrative expenses of $3,225,323, stock compensation of $227,237, bank service fees of $374,742, professional fees of $109,853, outside commissions of $1,445,530, collection fees/sales verification fees $23,070 and $228,353 of billing fees.  Billing fees are primarily costs paid to a third-party Electronic Data Inter-Chain (EDI) provider to handle transactions between us, ERCOT and the TDSPs in order to produce customer bills.

Operating expenses for the three months ended September 30, 2019 reflects an increase of approximately $372,018, or 7.07%, as compared to the three months ended September 30, 2018.  This increase was primarily attributable to increase in stock compensation in the second quarter of 2019 related to the issuance of stock options under employment agreements.

Net Loss – Net loss for the three months ended September, 2019 and 2018, totaled ($3,364,081) and ($5,351,082), respectively.

Nine Months Ended September 30, 2019, compared to the Nine Months Ended September 30, 2018

Revenue – For the nine months ended September 30, 2019, we generated $127,196,034 in electricity revenue primarily from commercial customers, and from the addition of various long and short-term residential customers.   The majority of our revenue comes from the flow of electricity to customers.  However, we also generated revenues from contract cancellation fees, disconnection fees and late fees of $2,825,183.  For the nine months ended September 30, 2018, the Company generated $117,120,262 in electricity revenue and $2,384,693 from contract cancellation, disconnection fees and late fees.

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Total revenues for the nine months ended September 30, 2019 compared to September 30, 2018, increased by approximately 8.80%.  In the ERCOT Pre-Paid Market, revenues increased by 24.08% due to customer growth.  The Northeast Market had a 33.42% decrease in revenue related to the decrease in the customer base in 2019 compared to 2018.

Cost of Goods Sold and Gross Margin – For the nine months ended September 30, 2019, cost of goods sold and gross profit totaled $118,133,591 and $11,887,626, respectively. Cost of goods sold and gross profit in the nine months ended September 30, 2018 totaled $109,346,184 and $10,158,771.