SUMMER ENERGY HOLDINGS, INC. The following discussion presents information about our consolidated results of operations, financial condition, liquidity and capital resources and should be read in conjunction with our consolidated financial statements and the notes thereto beginning on page F-2 of this Annual Report.
Background
The consolidated financial statements include the accounts ofSummer Energy Holdings, Inc. (formerlyCastwell Precast Corporation ) and its wholly-owned subsidiariesSummer Energy, LLC ("Summer LLC "),Summer Energy Midwest, LLC ("Summer Midwest"),Summer EM Marketing, LLC ("Marketing LLC") andSummer 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. OnMarch 27, 2012 ,Summer LLC became a wholly-owned subsidiary ofSummer Energy Holdings, Inc. (previously known asCastwell Precast Corporation ) through a reverse acquisition transaction, which resulted in the former members ofSummer LLC owning approximately 92.3% ofSummer Energy Holdings, Inc.'s outstanding common stock. The transaction was treated as a recapitalization ofSummer LLC , andSummer LLC (and its historical financial statements) is the continuing entity for financial reporting purposes.
Summer Northeast , aTexas limited liability company (formerly known asREP Energy, LLC ), was acquired onNovember 1, 2017 and became a wholly-owned subsidiary ofSummer Energy Holdings, Inc. Summer Northeast is a REP serving electric load to both residential and commercial customers inNew Hampshire andMassachusetts and holds licenses inMassachusetts ,Rhode Island ,New Hampshire andConnecticut .
Summer Midwest (formerly
The Public Utilities Commission of Ohio issued a certificate as a Retail Electric Service Provider to Summer Midwest onJune 16, 2015 . OnMay 2, 2019 , theIllinois Commerce Commission approved Summer Midwest as aRetail Electric Service Provider in the state ofIllinois . Summer Midwest began serving customers inOhio inJuly 2019 . Overview
Our wholly-owned subsidiary,
In
general,Texas regulatory structure permits REPs, such asSummer LLC , to procure and sell electricity at unregulated prices. REPs pay the local transmission and distribution utilities a regulated tariff rate for delivering electricity to their customers. As a REP,Summer LLC sells electricity and provides the related billing, customer service, collections and remittance services to residential and commercial customers.Summer LLC offers retail electricity to commercial and residential customers in designated target markets within the state ofTexas . 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 ofSummer LLC's customers will be located in theHouston andDallas-Fort Worth metropolitan areas; although, we anticipate a growing number will be located in a variety of other metropolitan and rural areas withinTexas . We began delivering electricity to customers in theTexas marketmid-February 2012 . Our wholly-owned subsidiary,Summer Northeast , is a licensed REP in the states ofMassachusetts ,New Hampshire ,Rhode Island andConnecticut . In general, the regulatory structure in these states permits REPs, such as Summer -------------------------------------------------------------------------------- 20
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Northeast, to procure and sell electricity at unregulated prices. As a REP,
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. At this time,Summer Northeast sells electricity inMassachusetts andNew Hampshire .
There is no sales activity in the states of
Our wholly-owned subsidiary, Summer Midwest, is a licensed REP in the states ofOhio andIllinois . 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 ofOhio , which is in thePennsylvania , Jersey,Maryland Power Pool ("PJM") market inJuly 2019 but has not commenced serving customers in the state ofIllinois . During the year endedDecember 31, 2019 , we added nine full-time employees to our workforce, and we anticipate these staffing additions will enable us to effectively expand our presence throughout theTexas market and in theNortheast United States ("U.S.") market.
As of
Application of Critical Accounting Policies
TheSEC defines critical accounting policies as those that are, in management's view, most important to the portrayal of our financial condition and results of operations and most demanding of our judgment. The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which were prepared in accordance with accounting principles generally accepted in theU.S. , which is referred to as "GAAP." The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate these estimates, including those related to stock-based compensation, customer programs and incentives, bad debts, supply inventories, intangible assets, income taxes, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We consider the following accounting policies to be those most important to the portrayal of our financial condition and those that require the most subjective judgment: Revenue Recognition Our electricity revenue in theTexas market 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 uponElectric 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.
The Company's revenue in the Northeast market is recorded based on the flow
method of revenue recognition for electricity delivered through the end of the
calendar month to retail customers' meters and relies upon the settlement
statements from
The Company's revenue in the Midwest market is recorded based on the flow method
of revenue recognition for electricity delivered through the end of the calendar
month to retail customers' meters and relies upon the settlement
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statements from PJM 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
Unbilled Revenue and Accounts Receivable
Electric services in theTexas market not billed by month-end are accrued based upon estimated deliveries to customers as tracked and recorded byERCOT 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 customers' past due balances are subject to a late fee that is assessed on that billing. Electric services in theISO New England market not billed by month-end are accrued based upon estimated deliveries to customers as tracked and recorded byISO New England multiplied by our average billing rate per kWh in effect at the time. The customer billing in theISO New England market is performed by the local utility company.
The Company began service in the PJM market during the third quarter of 2019.
In the PJM market, electricity services not billed by month end are accrued
based upon estimated deliveries to customers as tracked and recorded by PJM
multiplied by our average billing rate per kilowatt hour ("kWh") in effect at
the time. The customer billing in the PJM market is performed by the local
utility company.
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.
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
are recorded as of December 31, 2019 .
Within the PJM market, the local utility companies in the state of
Cost Recognition
Direct energy costs are recorded when the electricity is delivered to the customer's meter.
Cost of goods sold ("COGS") within the Texas market include electric power
purchased and pass through charges from the transmission and distribution
service providers ("TDSPs") in the areas serviced by the Company. TDSP charges
are costs for metering services and maintenance of the electric grid. TDSP
charges are established by regulation of the PUCT. COGS within the Independent
System Operator ("ISO") for the New England market is comprised of wholesale
costs based upon the wholesale power tariff rate for volumes purchased during
the delivery month and scheduling fees. Summer Midwest began flowing
electricity within the PJM market in July 2019 , and the COGS for the PJM market
is comprised of wholesale costs based upon the wholesale power tariff for
volumes purchased during the delivery month as well as scheduling fees.
The energy portion of our COGS is comprised of two components: bilateral wholesale costs and balancing/ancillary costs. These two cost components are incurred and recognized differently as follows:
Bilateral wholesale costs are incurred through contractual arrangements with wholesale power suppliers for firm
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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
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. Stock-Based Compensation Under the fair value recognition provisions of the authoritative guidance, stock-based compensation cost granted to employees is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service or performance period, which is the vesting period. Stock options and warrants issued to consultants and other non-employees as compensation for services to be provided to us are accounted for based upon the fair value of the services provided or the estimated fair value of the option or warrant, whichever can be more clearly determined. We currently use the Black-Scholes option pricing model to determine the fair value of stock options. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the term of the awards, the expected term of the award, the risk-free interest rate and any expected dividends. Compensation cost associated with grants of restricted stock units are also measured at fair value. We evaluate the assumptions used to value restricted stock units on a quarterly basis. When factors change, including the market price of the stock, share-based compensation expense may differ significantly from what has been recorded in the past. If there are any modifications or cancellations of the underlying unvested securities, we may be required to accelerate, increase or cancel any remaining unearned share-based compensation expense. Income Taxes The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of tax-related assets and liabilities and income tax expense. These estimates and assumptions are based on the requirements of theFinancial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") relating to accounting for uncertainty in income taxes. Our policy is to classify interest and penalties related to unrecognized income tax benefits as a component of income tax expense. We assess whether previously unrecognized tax benefits may be recognized when the tax position is (i) more likely than not of being sustained based on its technical merits, (ii) effectively settled through examination, negotiation or litigation, or (iii) settled through actual expiration of the relevant tax statutes. Implementation of this requirement requires the exercise of significant judgment. Recognizing deferred tax assets will increase tax benefits and increase net income. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the period in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest related to unrecognized tax benefits and penalties in income tax expense. -------------------------------------------------------------------------------- 23
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New Customer Implementation Costs
We ordinarily incur additional costs to implement our services for new customers. These costs are comprised primarily of additional labor and support. These costs are expensed as incurred and have a negative impact on our statements of operations and cash flows during the implementation phase. We attempt to maintain a disciplined approach to customer implementation costs since these costs influence our profitability. We do not capitalize new customer implementation costs as such costs are typically associated with contracts that are less than one year in duration.
Warrants
The Company's common stock warrants are measured at fair value using the Black-Scholes valuation model which takes into account, as of the measurement date, factors including the current exercise price, the term of the instrument, the current price of the underlying stock and its expected volatility, expected dividends on the stock and the risk-free interest rate for the term of the item. The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP, with no need for management's judgment in its application. There are also areas in which management's judgment in selecting any available alternative would not produce a materially different result. Please see our audited consolidated financial statements and notes thereto which begin on page F-2 of this Annual Report on Form 10-K, which contain accounting policies and other disclosures required by GAAP and please refer to the disclosures in Note 2 of our financial statements for a summary of our significant accounting policies.
Results of Operations
Year Ended
The success of our business and our profitability is impacted by a number of drivers with customer growth and weather conditions being at the forefront.
Customer Growth Customer growth is a key driver of our operations as well as our ability to acquire customers organically, by acquisition or through customer attrition. Our organic sales strategies are designed to offer competitive pricing and price certainty to residential and commercial customers. We manage growth on a market-by-market basis by developing price curves in each of the markets we serve and comparing the market prices to the price offered by the local regulated utility. We then determine if there is an opportunity in a particular market based on our ability to create a competitive product on economic terms that provides customer value and satisfies our profitability objectives. We develop marketing campaigns using a combination of sales channels. Our marketing team continuously evaluates the effectiveness of each customer acquisition channel and makes adjustments in order to achieve desired targets. Customer attrition occurs primarily as a result of: (i) customer-initiated switches; (ii) residential moves and (iii) disconnection resulting from customer payment defaults. Our customer growth strategy includes growing organically through traditional sales channels complemented by customer portfolio and business acquisitions as well as our expansion into new markets. For the year endedDecember 31, 2019 compared to 2018, the Company's overall delivered volumes of electricity increased by 8.12% attributed primarily to the increase in theERCOT market and theERCOT pre-paid market. In 2020, the Company's growth strategy is to continue to focus on the expansion of the PJM market within the states ofOhio andIllinois and to continue to expand within theERCOT pre-paid market. Management plans to continue to execute on its current sales and marketing program to solicit individual commercial and residential customers and to evaluate and acquire portfolios of commercial and residential customers where they make sense economically or strategically.
Weather Conditions
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Weather conditions is a key driver to our success and weather directly influences the demand for electricity and affects the prices of energy commodities. We are particularly sensitive to this variability with our residential customers in which energy is highly sensitive to weather conditions that impart heating and cooling demand. Our hedging strategy is based on forecasted customer energy usage, which can vary substantially as a result of weather patterns deviating from historical norms. Our risk management policies direct that we hedge substantially all of our forecasted demand, which is typically hedged to long-term weather patterns. We also attempt to add additional contracts from time to time to protect us from volatility in markets where we have historically experienced higher exposure to extreme weather conditions. Because we attempt to match commodity purchases to anticipated demand, unanticipated changes in weather patterns can have a significant impact on our operating results and cash flows from period to period.
During the summer of 2019, we experienced warmer than normal weather across many of our markets which increased demand for electricity from our customers.
Specifically, the summer months in theERCOT market proved to be one of the hottest in recent years. In anticipation of the increased demand, the Company positioned itself so that weather did not significantly impact the earnings and purchased additional power to mitigate the volatility risk observed in late August and early September of 2019. For the years endedDecember 31, 2019 compared to 2018, the Company's unit gross margin remained stable. For the Years Ended December 31, Percentage 2019 2018 $$ Variance Variance Revenue$ 166,315,793 $ 151,903,328 $ 14,412,465 9.49 % Cost of goods sold Power purchases and balancing/ancillary 90,407,407 81,273,173 9,134,234 Transportation and distribution providers charge 62,276,104 57,054,879 5,221,225 Total cost of goods sold 152,683,511 138,328,052 14,355,459 10.38 % Gross Margin$ 13,632,282 $ 13,575,276 $ 57,006 0.42 % In 2020, the Company anticipates unit gross margin to improve, and the Company is evaluating temperature contingent options to mitigate the impact of weather events on its earnings and manage its exposure. Such instruments will be implanted if a suitable solution is determined. Revenue - For the year endedDecember 31, 2019 , the Company generated$166,315,793 in electricity revenue from commercial customers and various long and short-term residential customers. The majority of our revenue comes from the flow of electricity to customers. However, included within these revenues are revenues from contract cancellation fees, disconnection fees and late fees in the amount of$3,867,088 . Electricity revenues for the year endedDecember 31, 2018 were$151,903,328 , including$3,320,374 from contract cancellation fees, disconnection fees and late fees. -------------------------------------------------------------------------------- 25
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2019 2018 Variances
Change in
Delivered Delivered Volume Delivered Volume
Volume after after Line Loss Volume Percentage $$ Percentage
Line Loss (Mwh) $$ (Mwh) $$ (Mwh) Change Change in $$ Change
Electricity
Revenues
from
Contracts
with
Customers
ERCOT
Market 1,749,285 $ 149,140,983 1,587,329 $ 133,379,103 161,956 10.20% $ 15,761,880 11.82%
ERCOT
Pre-Paid
Market 50,802 5,993,295 41,775 4,829,172 9,027 21.61% 1,164,123 24.11% Northeast Market
67,603 7,258,467 99,296 10,374,679 (31,693) -31.92% (3,116,212) -30.04%
Midwest
Market 1,102 55,960 - - 1,102 100.00% 55,960 100.00%
Total 1,868,792 162,448,705 1,728,400 148,582,954 140,392 8.12% 13,865,751 9.33%
Other
Revenues:
Fees
Revenue 3,867,088 3,320,374 546,714 16.47%
Total
Revenues: $ 166,315,793 $ 151,903,328 $ 14,412,465 9.49%
Electricity revenues from contracts with customers for the year ended December
31, 2019 increased approximately 9% from the year ended December 31, 2018 . This
increase was primarily due to an increase of 12% in electricity volumes
delivered in the ERCOT market and 24% increase in the ERCOT pre-paid market.
Fee revenue increased by approximately 16% in 2019 from 2018.
Cost of Goods Sold and Gross Profit - For the year endedDecember 31, 2019 , cost of goods sold and gross profit totaled$152,683,511 and$13,632,282 , respectively. Cost of goods sold and gross profit for the year endedDecember 31, 2018 totaled$138,328,052 and$13,575,276 , respectively. For the Years Ended December 31, Percentage $$ Increase 2019 2018 Increase in Costs (Decrease) Cost of Goods Sold ERCOT Market$ 144,577,770 $ 128,266,903 $ 16,310,867 12.72% Northeast Market 8,041,836 10,050,628 (2,008,792) -19.99% Midwest Market 63,905 10,521 53,384 507.40%$ 152,683,511 $ 138,328,052 $ 14,355,459 10.38% Total wholesale cost of power increased approximately 10% for the year endedDecember 31, 2019 fromDecember 31, 2018 . The increase in costs is primarily due to the increased volumes delivered in 2019 compared to 2018 as well as the increase in the unit cost per MWh in theERCOT market during the summer months. Although the 2019 summer months in theERCOT 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 The Northeast market decreased by approximately 20% due to the compression of the customer base from 2019 compared to 2018. Operating expenses - Operating expenses for the year endedDecember 31, 2019 , totaled$22,441,190 , consisting of general and administrative of$12,951,090 , bank services fees of$1,359,506 , collection fees/sales verification fees of$89,021 , outside commissions' expense of$5,012,685 , professional fees of$1,050,849 , bad debt reserve of$1,010,549 and$967,490 of billing fees.
Billing fees are primarily costs paid to a third-party Electronic Data
Inter-Chain ("EDI") providers to handle transactions between us,
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Operating expenses for the year endedDecember 31, 2018 , totaled$19,913,508 , consisting of general and administrative of$11,309,711 , bank services fees of$1,220,786 , collection fees/sales verification fees of$77,293 , outside commissions' expense of$5,039,347 , professional fees of$609,530 , bad debt reserve of$1,121,396 and$535,445 of billing fees. For the year ended December 31, Percentage 2019 2018 Variance Change General and administrative$ 12,951,090 $ 11,309,711 $ 1,641,379 14.51% Bank service fees 1,359,506 1,220,786 138,720 11.36% Collection fees/sales verification fees 89,021 77,293 11,728 15.17% Professional fees 1,050,849 609,530 441,319 72.40% Outside commission expense 5,012,685 5,039,347 (26,662) -0.53% Bad debt reserve 1,010,549 1,121,396 (110,847) -9.88% Billing fees 967,490 535,445 432,045 80.69%$ 22,441,190 $ 19,913,508 $ 2,527,682 12.69% Total operating expenses for the year endedDecember 31, 2019 compared toDecember 31, 2018 increased by approximately 13%. This increase is primarily due to an increase of professional fees associated with entering new markets, increases in payroll costs with the net addition of nine full-time employees during 2019 and other variable costs associated with increased growth and increased general and administrative expenses. Net Loss - Net loss for the years endedDecember 31, 2019 and 2018, totaled$(10,733,089) and$(7,753,870) , respectively. The 2019 net loss compared to the 2018 net loss relates primarily to higher cost of goods sold, especially during the summer months of 2019 as well as the increase of operating expenses related to growth into new markets.
Liquidity and Capital Resources
AtDecember 31, 2019 and 2018, our cash totaled$814,360 and$451,995 , respectively. Our principal cash requirements for the year endedDecember 31, 2019 and 2018, were for operating expenses and cost of goods sold, including power purchases, employee cost, customer acquisition and capital expenditures. During the year endedDecember 31, 2019 , the primary source of cash was from electricity revenues,$5,730,000 from capital raised pursuant to a private placement of our common stock,$2,938,000 from related party lending and$4,300,000 from outside loan proceeds. In 2018, the primary source of cash was from electricity revenues,$3,637,500 from capital raised pursuant to a private placement of our common stock and from$9,456,006 in loan proceeds. General - The Company's increase in net cash flows during the year endedDecember 31, 2019 is attributable to$9,795,278 cash used in operating activities,$12,947 cash used in investing activities for the purchase of property and equipment, and net cash of$9,965,408 provided by financing activities primarily consisting of$5,730,000 received by the Company from the sale of our common stock through private placements. During the year endedDecember 31, 2018 , the Company's increase in net cash flow was attributable to$10,377,919 cash used in operating activities$32,561 for the purchase of property and equipment, and net cash of$12,273,329 provided by financing activities primarily consisting of$3,637,500 received by the Company from the sale of our common stock through private placements. 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. -------------------------------------------------------------------------------- 27
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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 in the upcoming year endingDecember 31, 2020 . The anticipated source of funds is electricity revenues, lending and capital raised in the upcoming year endingDecember 31, 2020 . Future Financing Needs The Company commenced operations and the generation of revenue during the year endedDecember 31, 2012 . Management believes that we have adequate liquidity to support operations, but this belief is based upon many assumptions and is subject to numerous risks. While we believe in the viability of our plan of operations and strategy to generate revenues and in our ability to raise additional funds, there can be no assurances that our plan of operations or ability to raise capital will be successful. The ability to grow is dependent upon our ability to further implement our business plan, generate revenues, and obtain additional financing, if and as needed.
Off-Balance Sheet Arrangements
Our existing wholesale power purchase agreement provides that we will provide additional credit support to cover mark-to-market risk in connection with the purchase of long-term power. A mark-to-market credit risk occurs when the price of previously purchased long term power is greater than the current market price for power purchased for the same term. While we believe that the current environment of historically low power prices limits our exposure to risk, a collateral call, should it occur, could limit our working capital and, if we fail to meet the collateral call, could cause liquidation of power positions. Related Party Transactions OnDecember 18, 2018 , four members of the Company's Board of Directors,Stuart Gaylor ,Andrew Bursten ,Tom O'Leary andNeil Leibman (Mr. Leibman is also an executive officer) (collectively, the "Guarantors") guaranteed a single payment note withComerica Bank in the amount of$2,900,000 . OnDecember 9, 2019 , the single payment note was converted to a master revolving note, which is payable in full on demand from the Bank. 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. OnJanuary 7, 2019 , the Company executed a promissory note in the amount of$473,000 to evidence an advance byMr. 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 ofJuly 7, 2019 . OnFebruary 7, 2019 , the Company paid back in full the loan fromMr. O'Leary . As ofDecember 31, 2019 , the balance of the loan toMr. O'Leary was$0 and the loan was paid in full. OnJanuary 7, 2019 , the Company executed a promissory note in the amount of$25,000 to evidence 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 ofJuly 7, 2019 . OnFebruary 7, 2019 , the Company paid back in full the loan from Messrs. O'Leary and Leibman. As ofDecember 31, 2019 , the balance of the loan to Messrs. O'Leary and Leibman was$0 and the loan was paid in full. OnNovember 8, 2019 , the Company executed a promissory note in the amount of$850,000 to evidence an advance byMr. 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 ofFebruary 6, 2020 . As ofDecember 31, 2019 , the balance of the loan fromMr. Leibman was$850,000 . OnFebruary 6, 2020 , the Company amended such promissory note to extend the maturity date of such note toMay 7, 2020 . All other provisions of the original note remain in full force and effect. -------------------------------------------------------------------------------- 28
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OnNovember 8, 2019 , the Company executed a promissory note in the amount of$1,000,000 to evidence an advance by LaRose Holdings LLLP, an entity controlled byAl LaRose for purposes of short-term financing.Mr. LaRose is a director of the Company. The promissory note accrued interest at a rate of 5% per annum based upon 365 days in a year and had a maturity date ofFebruary 6, 2020 . As ofDecember 31, 2019 , the balance of the loan fromMr. LaRose was$1,000,000 . OnFebruary 6, 2020 , the Company amended such promissory note to extend the maturity date of such note toMay 7, 2020 . All other provisions of the original note remain in full force and effect. OnDecember 18, 2019 , the Company executed a promissory note in the amount of$590,000 to evidence an advance byMr. 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 ofMarch 18 2020 . OnDecember 20, 2019 , the Company paid back in full the loan fromMr. Leibman . As ofDecember 31, 2019 , the balance of the loan fromMr. Leibman was$0 . OnDecember 20, 2019 , four members of the Company's Board of Directors,Stuart Gaylor ,Andrew Bursten ,Tom O'Leary andNeil Leibman (Mr. Leibman is also an executive officer) (collectively, the "Guarantors") guaranteed a single payment note withComerica Bank in the amount of$2,100,000 . The Company agreed to pay interest at a rate of 12% for the guarantee and such interest is to be paid with the issuance of the Company's common stock.
Contractual Obligations, Contingent Liabilities and Commitments
We currently lease approximately 20,073 square feet of office space at5847 San Felipe Street , Suite 3700,Houston, Texas pursuant to a sublease agreement effectiveDecember 1, 2017 and terminating onDecember 31, 2025 . The rent payments are approximately$15,900 per month during the term of the sublease agreement. The Company is also responsible for 12.08% of the operating expenses, utilities and taxes charged to the sublandlord. The base lease payments under the assumed lease are$13,203 per month and the lease payments were paid in full as ofDecember 31, 2019 according to the schedule below. Rent Period Monthly Base Rent09/01/2014 - 08/31/2015 $ 11,18209/01/2015 - 08/31/2016 $ 11,45109/01/2016 - 10/31/2016 $ -11/01/2016 - 10/31/2017 $ 12,66511/01/2017 - 10/31/2018 $ 12,93411/01/2018 - 10/31/2019 $ 13,203Summer Northeast entered into a sublease agreement withPDS Management Group, LLC ("PDS") onOctober 31, 2017 at800 Bering Drive , Suite 250,Houston, Texas , under a non-cancellable lease obligation which will expire onFebruary 28, 2020 .
On
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