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MarketScreener Homepage  >  Equities  >  OTC Bulletin Board  >  Summer Energy Holdings Inc    CPXED

SUMMER ENERGY HOLDINGS INC

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SUMMER ENERGY : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

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08/14/2019 | 02:57pm EDT
The following discussion of our financial condition and results of operations
should be read in conjunction with the unaudited consolidated financial
statements and the related notes thereto included elsewhere in this Quarterly
Report on Form 10-Q. This Quarterly Report on Form 10-Q contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995, Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and Section 27A of the Securities Act, and is subject to the
safe harbors created by those sections.  Words such as "anticipates," "expects,"
"intends," "plans," "believes," "seeks," "estimates," "may," "will" and
variations of these words or similar expressions are intended to identify
forward-looking statements.  In addition, any statements that refer to
expectations, projections or other characterizations of future events or
circumstances, including any underlying assumptions, are forward-looking
statements.  These statements are not guarantees of future performance and are
subject to risks, uncertainties and assumptions that are difficult to predict.

Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors.

We

undertake no obligation to revise or publicly release the results of any revisions to these forward-looking statements.




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



Readers should carefully review the risk factors described below under the
heading "Risk Factors" and in other documents we file from time to time with the
SEC, including our Form 10-K for the fiscal year ended December 31, 2018.  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 condensed consolidated financial statements above include the accounts of
Summer Energy Holdings, Inc. (formerly Castwell Precast Corporation) and its
wholly-owned subsidiaries Summer Energy, LLC ("Summer LLC"), Summer Energy
Midwest, LLC ("Summer Midwest"), Summer EM Marketing, LLC ("Marketing LLC") and
Summer Energy Northeast, LLC ("Summer Northeast") (collectively referred to as
the "Company," "we," "us," or "our").  All significant intercompany transactions
and balances have been eliminated in these consolidated financial statements.



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



Summer LLC is a Retail Electricity Provider ("REP") in the state of Texas under a license with the Public Utility Commission of Texas ("PUCT"). Summer LLC procures wholesale energy and resells to commercial and residential customers.

Summer LLC was organized on April 6, 2011, under the laws of the state of Texas.

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

Summer Midwest (formerly Summer Energy of Ohio, LLC) was formed in the state of Ohio on December 16, 2013 to procure and sell electricity in the state of Ohio.

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



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



Plan of Operation



Our wholly-owned subsidiary, Summer LLC, is a licensed REP in the state of
Texas.  In general, Texas regulatory structure permits REPs, such as Summer LLC,
to procure and sell electricity at unregulated prices.  REPs pay the local
transmission and distribution utilities a regulated tariff rate for delivering
electricity to their customers.  As a REP, Summer LLC sells electricity and
provides the related billing, customer service, collections and remittance
services to residential and

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commercial customers. Summer LLC offers retail electricity to commercial and residential customers in designated target markets within the state of Texas.

 In the commercial market, the primary target is small to medium-sized customers
(less than one megawatt of peak usage), but we will also selectively pursue
larger commercial customers through Management's existing, historical
relationships.  Residential customers are a secondary target market.  We
anticipate that a majority of Summer LLC's customers will be located in the
Houston and Dallas-Fort Worth metropolitan areas; although, we anticipate a
growing number will be located in a variety of other metropolitan and rural
areas within Texas.  We began delivering electricity to customers in the Texas
market mid-February 2012.



Our wholly-owned subsidiary, Summer Northeast, is a licensed REP in the states
of Massachusetts, New Hampshire, Rhode Island and Connecticut.  In general, the
regulatory structure in these states permits REPs, such as Summer Northeast, to
procure and sell electricity at unregulated prices.  As a REP, Summer Northeast
sells electricity to residential and commercial customers.  In the commercial
market, the primary target is small to medium-sized customers (less than one
megawatt of peak usage), but we will also selectively pursue larger commercial
customers through Management's existing, historical relationships.  Residential
customers are a secondary target market.  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.



Results of Operations


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




Revenue -For the quarter ended June 30, 2019, we generated $39,588,810 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 $909,777.

Revenues for the quarter ended June 30, 2018, were $38,457,526 from electricity
revenue and includes $761,192 from cancellation and disconnection and late fees.


                      For the Three Months Ended June 30,
                        2019                      2018                    Variance
               Delivered                 Delivered
                 Volume                    Volume                                  $$
               after Line                after Line                             Variance
               Loss (Mwh)       $$       Loss (Mwh)       $$            $$     Percentage
 Electricity
 Revenues from
 Contracts
 with
 Customers

 ERCOT Market     423,881 $ 36,294,807      405,993 $ 34,705,118$ 1,589,689       4.58%
 ERCOT
 Pre-Paid
 Market            12,027    1,387,147       10,713    1,189,553       197,594      16.61%
 Northeast
 Market            16,414    1,906,856       25,438    2,562,855     (655,999)     -25.60%
 Total            452,322   39,588,810      442,144   38,457,526   $ 1,131,284       2.94%

 Other
 Revenues:
 Fees Revenue                  909,777                   761,192       148,585      19.52%

 Total
 Revenues:                $ 40,498,587$ 39,218,718     1,279,869       3.26%





Total revenues for the quarter ended June 30, 2019 compared to June 30, 2018
increased by approximately 3.26%. In the ERCOT Pre-Paid Market, the revenue
increased by 16.61% due to customer growth.  The Northeast Market had a 25.60%
decrease in revenue related to the decrease in the customer base in 2019
compared to 2018.



Management plans to continue to execute on its sales and marketing program to
solicit individual commercial and residential customers and to realign key sales
personnel to focus on building the customer base in the Northeast Market.  In
addition, management also plans to continue to acquire portfolios of commercial
and residential customers when offered at reasonable prices.



Cost of Goods Sold and Gross Margin - For the three months ended June 30, 2019,
cost of goods sold and gross profit totaled $37,143,712 and $3,354,875,
respectively. Cost of goods sold and gross profit recorded in the three months
ended June 30, 2018 were $34,511,695 and $4,707,053, respectively.

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                                           For the Three Months Ended June 30,
                                                                                                       Percentage
                                                2019                 2018          Increase in Costs    Increase

Power Purchases and balancing/ancillary

 ERCOT Market                           $        34,814,204 $         

32,435,584 $ 2,378,620 7.33%

 Northeast Market                                 2,329,508            2,076,111             253,397       12.21%
                                        $        37,143,712 $         34,511,695 $         2,632,017        7.63%





Cost of goods sold for the quarter ended June 30, 2019, compared to June 30,
2018, increased by approximately 7.63% primarily due increased volumes
delivered.  The three months ended June 30, 2019 compared to the three months
ended June 30, 2018 reflects a lower profit margin, which is a result of
compressed unit margin caused by the competitive pressures in the marketplace, a
customer base for the Company that has shifted towards a greater number of
commercial accounts as opposed to residential accounts, which yield lower unit
margins as well as a lower delivered volume in the Northeast market.



Operating Expenses - Operating expenses for the quarter ended June 30, 2019,
totaled $5,359,717, consisting primarily of general and administrative expenses
of $2,782,975, stock compensation of $301,210, bank service fees of $305,662,
professional fees of $576,247, outside commissions of $1,102,748, collection
fees/sales verification fees $21,625 and $269,250 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 quarter ended June 30, 2018, totaled $5,207,096,
consisting primarily of general and administrative expenses of $2,915,267, stock
compensation of $244,765, bank service fees of $270,403, professional fees of
$207,487, outside commissions of $1,370,788, collection fees/sales verification
fees $15,833 and $182,553 of billing fees.



                                           For the Three Months Ended June 30,
                                                                                             Percentage
                                                2019                 2018           Change     Change
General and Administrative              $         2,782,975 $         
2,915,267 $ (132,292)     -4.54%
Stock Compensation                                  301,210              244,765      56,445     23.06%
Bank service fees                                   305,662              270,403      35,259     13.04%
Commission expense                                1,102,748            1,370,788   (268,040)    -19.55%
Collection fees/sales verification fees              21,625               15,833       5,792     36.58%
Professional fees                                   576,247              207,487     368,760    177.73%
Billing fees                                        269,250              182,553      86,697     47.49%
                                        $         5,359,717 $          5,207,096 $   152,621      2.93%





Operating expenses for the three months ended June 30, 2019 reflects an increase
of approximately $152,621, or 2.93%, as compared to the three months ended June
30, 2018. This increase was primarily attributable to increased professional
fees in the second quarter of 2019.



Net Loss - Net loss for the three months ended June 30, 2019 and 2018, totaled ($2,367,471) and ($835,076), respectively.

Six Months Ended June 30, 2019, compared to the Six Months Ended June 30, 2018




Revenue - For the six months ended June 30, 2019, we generated $73,529,709 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 $1,794,747.  For the six months ended June 30, 2018, the Company
generated $71,750,642 in electricity revenue and $1,518,206 from contract
cancellation, disconnection fees and late fees.

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                      For the Six Months Ended June 30,
                       2019                      2018                     Variance
              Delivered                 Delivered
                Volume                    Volume                                    $$
              after Line                after Line                               Variance
              Loss (Mwh)       $$       Loss (Mwh)       $$             $$      Percentage
 Electricity
 Revenues
 from
 Contracts
 with
 Customers

ERCOT Market 781,693 $ 67,097,505 748,535 $ 64,241,951$ 2,855,554 4.44%

ERCOT

Pre-Paid

 Market           22,259    2,600,937       18,885    2,006,787         

594,150 29.61%

 Northeast
 Market           34,049    3,831,267       48,071    5,501,904     (1,670,637)    -30.36%
 Total           838,001   73,529,709      815,491   71,750,642   $   1,779,067      2.48%

 Other
 Revenues:
 Fees Revenue               1,794,747                 1,518,206        
276,541     18.21%

 Total
 Revenues:               $ 75,324,456$ 73,268,848       2,055,608      2.81%





Total revenues for the six months ended June 30, 2019 compared to June 30, 2018,
increased by approximately 2.81%.  In the ERCOT Pre-Paid Market, revenues
increased by 29.61% due to customer growth.  The Northeast Market had a 30.36%
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 six months ended June 30, 2019,
cost of goods sold and gross profit totaled $66,163,527 and $9,160,929,
respectively. Cost of goods sold and gross profit in the six months ended June
30, 2018 totaled $64,426,715 and $8,842,133.

                                             For the Six Months Ended June 30,
                                                                                                       Percentage
                                                  2019                2018         Increase in Costs    Increase

Power Purchases and balancing/ancillary

 ERCOT Market                             $       61,800,939$       59,769,078 $         2,031,861        3.40%
 Northeast Market                                  4,362,588           4,657,637           (295,049)       -6.33%
                                          $       66,163,527$       64,426,715 $         1,736,812        2.70%



The six months ended June 30, 2019 compared to the six months ended June 30,
2018 reflects a lower profit margin which is the result of compressed unit
margin caused by the competitive pressures in the marketplace; and the customer
base for the Company has also shifted towards a greater number of commercial
accounts than residential accounts which yield lower unit margins.



Operating Expenses - Operating expenses for the six months ended June 30, 2019
totaled $10,633,483, consisting primarily of general and administrative expenses
of $5,958,041, stock compensation expense of $455,594, bank service fees of
$591,948, commission expense of $2,292,552, collection fees/sales and
verification fees of $37,574, professional fees of $791,553, and $506,221 of
billing fees.  Billing fees are primarily costs paid to third party Electronic
Data Inter-Chain (EDI) provider to handle transactions between us, ERCOT and the
TDSPs in order to produce customer bills.



Operating expenses for the six months ended June 30, 2018 totaled $9,703,220,
consisting primarily of general and administrative expenses of $5,400,069, stock
compensation expense of $516,166, bank service fees of $533,948 commission
expense of $2,434,062, collection fees/sales and verification fees of $31,616,
professional fees of $401,483, and $385,876 of billing fees.

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                                           For the Six Months Ended June 30,
                                                                                           Percentage
                                                2019                2018          Change     Change
General and Administrative              $         5,958,041         
5,400,069 $   557,972     10.33%
Stock Compensation                                  455,594            516,166    (60,572)    -11.73%
Bank service fees                                   591,948            533,948      58,000     10.86%
Professional fees                                   791,553            401,483     390,070     97.16%
Outside commission expense                        2,292,552          2,434,062   (141,510)     -5.81%
Collection fees/sales verification fees              37,574             31,616       5,958     18.84%
Billing fees                                        506,221            

385,876 120,345 31.19%

                                        $        10,633,483$       9,703,220$   930,263      9.59%





Operating expenses for the six months ended June 30, 2019 reflects an increase
of approximately $930,263, or 9.59%, as compared to the six months ended June
30, 2018. This increase was primarily attributable to an increase in
professional fees as well as billing fees from the Company's EDI provider.



Net loss - Net loss for the six months ended June 30, 2019 and 2018, totaled ($2,255,217) and ($1,472,231), respectively.

Liquidity and Capital Resources




At June 30, 2019 and December 31, 2018, our cash totaled $1,296,435 and
$451,995, respectively.  Our principal cash requirements for the quarter ended
June 30, 2019, were for operating expenses and cost of goods sold (including
power purchases, employee cost, and customer acquisition), collateral for TDSPs
and capital expenditures.  During the six months ended June 30, 2019, the
primary source of cash was from electricity revenues and from the proceeds of a
private placement offering in the amount of $5,730,000. During the six months
ended June 30, 2018, the primary source of cash was from electricity revenues
and proceeds in a private placement offering in the amount of $3,637,500.



General - The Company's increase in net cash flow during the first six months of
2019 is attributable to $3,261,342 cash used in operating activities, $0 cash
used in investing activities, and $4,608,190 provided by financing activities,
which includes $5,730,000 from proceeds received in private placement. The
Company's increase in net cash flow during the six months ended June 30, 2018 is
attributable to $4,383,990 cash used in operating activities, $21,442 used in
investing activities for the purchase of property and equipment, and $8,545,829
provided by financing activities of which $3,637,500 were from private placement
proceeds.



The Company has no present agreements or commitments with respect to any
material acquisitions of other businesses, products, product rights or
technologies. However, we will continue to evaluate acquisitions of and/or
investments in products, technologies, or companies that complement our business
and may make such acquisitions and/or investments in the future. Accordingly, we
may need to obtain additional sources of capital in the future to finance any
such acquisitions and/or investments. We may not be able to obtain such
financing on commercially reasonable terms, if at all.  If we are able to obtain
additional financing, such financing may result in restrictions on our
operations, in the case of debt financing, or substantial dilution for
stockholders, in the case of equity financing.



Cash Outflows for Capital Assets, Customer Acquisition and Deposits




We expect to expend funds for capital assets, customer acquisition and deposits
in connection with the expansion of our business during the remainder of the
current fiscal year.  The anticipated source of funds will be cash on hand and
the capital raised through the year ended December 31, 2019.



Future Financing Needs



The Company did not commence operations and the generation of revenue until the
middle of the three-month period ended March 31, 2012.  Management believes that
we have adequate liquidity to support operations, but this belief is based upon
many assumptions and is subject to numerous risks.



While we believe in the viability of our plan of operations and strategy to
generate revenues and in our ability to raise additional funds, there can be no
assurances that our plan of operations or ability to raise capital will be
successful.  The ability to grow is dependent upon our ability to further
implement our business plan, generate revenues, and obtain additional financing,
if and as needed.


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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.

© Edgar Online, source Glimpses

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