Introduction
Summer Energy Holdings, Inc. (including our subsidiaries, Summer Energy, LLC (“Summer LLC”) and Summer EM Marketing, LLC (“Marketing LLC”), are referred to collectively in this Annual Report, as the “Company,” “Summer Energy,” “we,” “our” and “us”). The Company’s primary business operations are conducted through Summer LLC, our wholly-owned subsidiary. Summer LLC is a Texas limited liability company that has been licensed within the State of Texas as a Retail Electric Provider (“REP”) by the Public Utility Commission of Texas (“PUCT”). As stated above, references to the “Company,” the “Registrant,” “we,” our,” and “us” or similar terms, refer to Summer Energy Holdings, Inc. (f/k/a Castwell Precast Corporation), and its predecessors and its subsidiaries (including Summer LLC), except where the context makes clear that the reference is only to Summer LLC.
For more information on the Company and our products and services, please see the information set forth below or visit our website at
www.summerenergy.com
. The inclusion of our internet address in this Annual Report does not include or incorporate by reference into this Annual Report any information on our website. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports and other filings with the Securities and Exchange Commission (the “SEC”) are generally available through the EDGAR system maintained by the SEC at www.sec.gov.
Description of Our Company and Predecessor
The Company was incorporated in the State of Nevada under the name Castwell Precast Corporation on March 25, 2005. On March 27, 2012, the Company (f/k/a Castwell Precast Corporation), closed the transaction (the “Transaction”) contemplated by that certain Agreement and Plan of Contribution entered into on January 17, 2012 among the Company, Summer LLC, and the individual members of Summer LLC. A copy of the Contribution Agreement was filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated January 19, 2012, and the description contained herein of the terms of the Contribution Agreement is qualified in its entirety by reference to the provisions thereof. Further, a more complete description of the Transaction is set forth in the Company’s Current Report on Form 8-K dated March 30, 2012. Prior to the consummation of the Transaction, the Company’s principal business activity, carried out entirely through its wholly-owned subsidiary Castwell Precast Inc., was the manufacture and installation of decorative window wells made from precast concrete. Castwell Precast Inc. was incorporated in the State of Utah on March 24, 2005. The Company ceased the business of manufacturing and installing decorative window wells, and currently conducts the business of purchasing and reselling electric power within the State of Texas through its wholly owned subsidiary Summer LLC.
Overview
Following the Transaction, the Company now carries on, through Summer LLC, the business of an REP in the State of Texas, with head offices located at 800 Bering Drive, Suite 260, Houston, Texas 77057. The Company’s telephone number is (713) 375-2790, its fax number is (713) 375-2794, and its website is www.summerenergy.com. The information accessible through the Company’s website does not constitute part of, and is not incorporated by reference into, this Annual Report.
Summer LLC was organized as a Texas limited liability company on April 6, 2011, by the filing of a certificate of organization with the Texas Secretary of State. In September of 2011, Summer LLC was awarded a license by the Public Utility Commission of Texas (“PUCT”) to operate as an REP in 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 an REP, we sell electricity and provide the related billing, customer service, collections and remittance services to residential and commercial customers. We will offer our customers competitive electricity rates, flexible payment and pricing choices, simple offers with understandable terms, and responsive customer service.
We offer retail electricity to commercial and residential customers in designated target markets within the State of Texas. In the commercial market, the primary targets are 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, a majority of our customers are located in the Houston and Dallas-Fort Worth metropolitan areas; although, we anticipate a growing number will be located in a variety of other metropolitan and rural areas within Texas.
We rely upon established relationships and low-cost branding programs to attract commercial and residential customers. We continue to evaluate opportunities to expand our areas of operations within Texas as certain market regions elect to opt-in to deregulation. In addition, we continue to evaluate and pursue opportunities to acquire other REPs to the extent these acquisitions would provide value to us.
In most jurisdictions, we will be required to enter into agreements with local transmission and distribution service providers for use of the local distribution and transmission systems and operation of functional interfaces necessary for us to serve our customers. With respect to energy supply, we utilize wholesale purchase agreements with wholesale energy providers. We serve as our own qualified scheduling entity for open market purchases and sales of electricity, forecasting our energy demand, and conducting procurement activities through an experienced team of professionals. The forecast for electricity load requirements is based on our aggregate customer base currently served and anticipated weather conditions, as well as forecasted customer acquisition and attrition. We continuously monitor and update our supply positions based on our retail demand forecasts and market conditions. Our policy is to maintain a balanced supply/demand book to limit commodity risk exposure. At this time, we do not plan on maintaining a financial book in addition to our physical supply/demand book for risk-hedging purposes.
We began delivering electricity to customers in mid-February 2012. We have continued to experience growth in our customer base since that time.
As of December 31, 2013, we had twenty-eight full-time employees, one part-time employee and one independent contractor. Our employees are not represented by any collective bargaining agreement, and we have never experienced a work stoppage. We believe our employee relations are good.
Regulatory Environment and the Texas Retail Electric Market
Deregulation of the wholesale electricity market in Texas began in 1995, enabling independent power generators and/or suppliers to: (i) establish operations in Texas alongside those of the regulated utilities; and (ii) gain access to the transmission capabilities of the power grid. Additional legislation in 1999 created an integrated marketplace by linking generators, transmission and delivery companies, REPs, and the independent grid operator, which is the Electric Reliability Council of Texas (“ERCOT”). Beginning January 2002, pursuant to Senate Bill 7, Texas electricity consumers had the choice of picking their Retail Electricity Provider, or REP. As a result of these legislative developments, former integrated utilities were essentially split apart into three business segments: (1) unregulated wholesale power generators; (2) regulated transmission and distribution service providers (“TDSPs”); and (3) unregulated REPs.
In the market, REPs that were spun off from previously integrated utilities are referred to as “affiliated REPs.” When affiliated REPs operate in their incumbent markets (an incumbent market refers to those areas previously served by the integrated utility), they are sometimes referred to as “incumbent REPs.” Incumbent REPs are subject to restrictions on their ability to compete on price in their incumbent markets in order to foster competition. The two largest affiliated REPs in Texas are TXU and Reliant Energy, situated in the Dallas/Ft. Worth and Houston areas, respectively.
The primary responsibilities of an REP in Texas include customer account initiation and termination, energy supply management and scheduling, billing/remittance processing, and customer service. All REPs must be certified by ERCOT to operate within the Texas market.
ERCOT was founded in 1970, and it oversees all aspects of the Texas power grid for the deregulated market. Under deregulation, ERCOT serves as the Independent System Operator (“ISO”) of the power grid and enables REPs, generators, TDSPs, and ultimately customers, to operate in a deregulated marketplace. ERCOT is responsible for coordinating and monitoring all communications by and between the power generator, the retail electric provider and the TDSP, including customer sign up, meter reading and billing between the end user, power generator and the REP.
Subsequent Legislative Developments in Texas
Following its initial efforts at deregulation, Texas adopted subsequent legislation that: (i) allowed retail customers situated in the ERCOT region of Texas to choose an REP; (ii) permitted REPs who are not affiliated with an incumbent utility in a particular market to, with certain exceptions, directly disconnect customers who fail to pay their power bills in a timely manner; and (iii) removed pricing restrictions otherwise known as “Price to Beat” from Incumbent/affiliated REPs, creating a true deregulated competitive market.
Markets Outside of Texas
If the Company enters deregulated markets outside of Texas, we will be required to operate within the specific regulatory environment of such state or region. The rules in the other markets vary from Texas, with some aspects being more favorable and some less favorable than Texas. We will evaluate the regulatory environment of each market, in addition to other operational, financial and customer considerations, before determining whether to pursue other market area opportunities.
Marketing and Sales
The Company is in the process of implementing a multi-tiered marketing and sales strategy. The short-term emphasis is on controlled growth, utilizing indirect marketing through third-party relationships. Indirect marketing efforts, including the following, allow the Company to facilitate growth while keeping expenses low by avoiding the expense associated with creating and managing a full sales team:
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Aggregators, Brokers, Consultants - often referred to as “ABC’s” in the retail power industry;
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Affinity Programs - airline miles, credit card points, and participating gift cards;
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Multifamily Housing Programs - incentivizing property management companies based on referrals to their tenants;
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Referrals - reaching out to individuals connected to the community and providing incentives for sign-ups; and
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Charitable Programs - enhancing referral programs and offering customers the chance to donate referral fees to local charitable organizations.
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As the Company grows, we expect to achieve long-term growth by building our in-house sales team to manage our third-party, as well as our direct marketing efforts. Our direct marketing efforts will include, without limitation:
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In-house sales staff focused on small to medium sized commercial sales;
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Face-to-face marketing, including presentations, customer meetings, and business development through newly-formed relationships with consumers (a/k/a cold calling);
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Direct sales using independent sales associates;
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Responding to website inquiries from commercial businesses;
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Identifying opportunities in underserved markets (e.g. South Texas and West Texas); and
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Community Involvement - establishing our brand throughout the community by giving back and volunteering our time and assistance.
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Relationship marketing will play a key role in both channels and should facilitate growth in the marketplace.
Competition and Perceived Competitive Advantages
As more fully set forth under the heading entitled “Risk Factors,” the Company faces competition from many competitors who have significantly greater financial resources, well-established brand names, and large, existing installed customer bases. We expect the level of competition to intensify in the future. There is also significant competition from incumbent, traditional, and new electricity providers which may be better capitalized than the Company.
It is understood that there is significant competition in the retail electric market; however, most established competitors target the larger customer segment such as large commercial and industrial operations. This creates a niche that we aggressively target. We focus on small to medium size commercial, residential, and select large businesses in our core marketing efforts. We believe this market segment will yield a higher per-unit-margin with improved customer loyalty.
The Company anticipates the addition of new market participants. Recent entries into the marketplace include single-client companies established for a select number of large electricity users such as refineries or industrial plants. These new participants’ strategy is to focus most of their marketing dollars on high-end users, as they assume the larger customers provide the highest return. The Company differentiates its strategy by focusing on the small to mid-size customer segment and building lasting relationships through excellent customer service, flexible terms, unique sales techniques, and competitive pricing.
The Company’s present management and staff have significant experience working in the Texas retail energy market. Management and staff also have experience with retail electric providers who operate in Maryland, the District of Columbia and Massachusetts. We believe management’s experience with these entities will contribute to management’s ability to market and grow the Company into a successful retail electricity provider in Texas.
Because of management’s prior experience, management and staff have developed and maintained strong connections with agents, brokers, property owners and others in the Texas market. Through these relationships, the Company anticipates building sales momentum.
Intellectual Property
The Company has not applied for any patents or copyrights. The Company has filed a trademark application for “Summer Energy.” The Company has not spent any significant time since its inception on research and development activities.
Additional Information
As more fully set forth under the heading entitled “Risk Factors,” the Company is subject to governmental regulation and will face additional costs in complying with such regulations. At this time, the Company does not have an estimate of its annual regulatory compliance costs.
Before deciding to purchase, hold or sell our common stock, you should carefully consider the risks described below in addition to the other information contained in this Annual Report and in our other filings with the SEC, including subsequent reports on Forms 10-Q and 8-K. The risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business. If any of these known or unknown risks or uncertainties actually occurs with material adverse effects on the Company, our business, financial condition, results of operations and/or liquidity could be seriously harmed. In that event, the market price of our common stock will likely decline, and you may lose all or part of your investment.
In General
Risks Factors Related to Our Business and Industry
We have a limited operating history and limited historical financial information upon which you may evaluate our performance.
You should consider, among other factors, our prospects for success in light of the risks and uncertainties encountered by companies that, like us, are in their early stages of development. We may not successfully address the usual and ordinary risks and uncertainties associated with being an early stage company or successfully implement our existing and new products and services. If we fail to do so, it could materially harm our business. Even if we accomplish these objectives, we may not generate the positive cash flows or profits we anticipate in the future. Unanticipated problems, expenses and delays are frequently encountered in establishing a new business and developing new products and services. These include, but are not limited to, inadequate funding, lack of consumer acceptance, competition, product development, and inadequate sales and marketing. Our failure to meet any of these conditions would have a material adverse effect upon us and may force us to reduce or curtail our operations. No assurance can be given that we will operate profitably. Even though we are being managed by individuals with significant industry experience, our limited operating history makes it difficult to predict the long-term success of our business model.
We depend on key personnel.
For the foreseeable future, our success will depend largely on management’s industry knowledge, marketing skills and relationships with key investors, customer bases, and industry leaders. The Company has employment agreements with management and other key personnel. Should any of these individuals leave the Company, it may have a material adverse effect on our future results of operations.
Recourse to the Company’s assets.
Outside of our wholesale contracts, our customer contracts, and our REP certificate, the Company currently has limited assets that are available to satisfy liabilities and other obligations of the Company. If the Company becomes subject to a liability, parties seeking to have the liability satisfied may have recourse to the Company’s assets.
We will indemnify Management and the members of the Board of Directors.
These key decision-makers will be entitled to indemnification from the Company except in certain circumstances, as more fully set forth in our Articles of Incorporation, Bylaws and separate indemnification agreements.
Stockholders shall have no right to participate in management of the Company.
Stockholders in the Company will not have the right to participate in the management of the Company or in decisions made by the Management on the Company’s behalf. As a result, stockholders will have almost no control over their investments in the Company or their prospects with respect thereto.
Uncertain economic conditions.
Recent economic events have created uncertainty with respect to the condition of the economy in the United States. Certain economic factors and indicators have suggested that such events have had a substantial negative effect on the economies of the United States and Texas. Furthermore, several industries have experienced financial difficulties. In addition, there have been material adverse effects on the world’s economies caused by illegal activities in the business and accounting professions resulting in significant declines in the United States equity markets. Other equity markets have been similarly affected. It is impossible to determine at this time the long-term effects of these events and conditions on the economy. Any negative change in the general economic conditions could adversely affect the financial condition and our operating results. Unforeseen incidents, such as terrorist attacks, corporate fraud or general weakness in the economy, could have a negative impact on the overall economic state of the market in which we intend to market and utilize our products and services. The Company may experience difficulty in raising additional capital necessary for expenses and growth, may experience underfunding due to the timing of payments received and due to the seasonality of the Texas market and customer electricity usage.
Adequacy of funds for operations or capital expenditures.
To the extent that the Company’s expenses increase, unanticipated expenses arise, or capital expenditures are necessary, and accumulated reserves are insufficient to meet such expenses, the Company may be required to obtain cash advances and additional funds through borrowing or additional equity raises, if available. Such debt and/or equity raises may have a material negative adverse effect on the Company’s profitability.
We are wholly dependent on power generators.
We rely on a limited number of suppliers of wholesale electricity in order to meet our customers’ needs. The unavailability of electricity from one or more of our suppliers at times of high demand could have an adverse impact on our financial condition if we are forced to purchase substantial electricity supply in the open market to meet customer demand at a time when energy prices are volatile.
Our REP certification is subject to PUCT review.
The PUCT (the Public Utility Commission of Texas) may at any time initiate an investigation into whether our operations comply with PUCT rules and whether we have met all of the requirements for REP certification, including financial requirements. Any revocation of our REP certification would mean that we would no longer be allowed to provide electricity to retail customers. Such decertification would undoubtedly have a material effect on our results of operations, liquidity, and financial condition.
Volatile energy prices and regulatory risk.
Sustained high energy prices and/or ongoing price volatility also creates a risk of increased regulatory and/or legislative intervention, which may limit our flexibility within the deregulated market. In addition, ERCOT possesses significant regulatory control over our business. Factors outside of our control may cause ERCOT to change its regulatory structure at any time, which may have an adverse effect upon our business. Additionally, the PUCT may impose rules and regulations that adversely affect the Company’s operations, finances and business practices.
The Company believes that competitive markets yield a broad range of innovative prices and service alternatives to consumers and ultimately lead to the most efficient use of resources. We believe regulatory entities should continue to take actions that encourage competition in the industry, but no assurance can be given that this will be the case. Regulatory and/or legislative intervention could disrupt the relationship in electricity prices, which could impact the
Company’s results of operations. The Company’s earnings and cash flows may also be adversely affected in any period in which the demand for power significantly varies from forecasted supply, which may occur due to, among other factors, weather events, competition and economic conditions.
Reliance on transmission and distribution service providers (“TDSPs”) affiliated with our competitors to perform some functions for our customers.
Under our regulatory structure, we will be required to enter into agreements with local incumbent utilities for use of the local distribution systems, and for the creation and operation of functional interfaces necessary for us to serve our customers. While we are optimistic about our ability to enter into acceptable agreements in Texas, any delay in future negotiations for access or our inability to enter into reasonable agreements to operate could delay or negatively impact our ability to serve our customers, which could have a material negative impact on our business, results of operations, and financial condition.
We are dependent on TDSPs for maintenance of the infrastructure through which we deliver electricity to our retail customers. Any infrastructure failure that interrupts or impairs delivery of electricity to our customers could negatively impact the satisfaction of our customers with our service and could have a material adverse effect on our results of operations, financial condition and cash flow. Additionally, we are dependent on TDSPs for performing service initiations and changes, and for reading our customers’ energy meters. We are required to rely on the TDSPs, or, in some cases, ERCOT, to provide us with our customers’ information regarding energy usage, and we may be limited in our ability to confirm the accuracy of the information. The provision of inaccurate information or delayed provision of such information by the TDSPs or ERCOT could have a material adverse effect on our business, results of operations, financial condition, and cash flow. In addition, any operational problems with our new systems and processes could similarly have a material adverse effect on our business, results of operations, financial condition, and cash flow. Further, we rely on the TDSPs to properly repair and maintain electrical lines in outages caused by severe weather which may produce a delay in providing service to the Company’s customers, which can negatively impact the Company.
We are subject to government regulation and extensive government regulation may increase our costs and slow our growth.
Significant regulations imposed at the federal, state, and local levels govern the provision of utility services and affect our business and our existing and potential competitors. Delays in receiving required regulatory approvals, the enactment of adverse legislation, regulations or regulatory requirements, or the application of existing laws and regulations to certain services may have a material adverse effect on our business, financial condition, results of operations and cash flow. In addition, future legislative, judicial and regulatory agency actions could alter competitive conditions in the markets in which we intend to operate, in ways not necessarily to our advantage.
In addition, ERCOT has and may continue to modify the market structure and other market mechanisms in an attempt to improve market efficiency. Moreover, existing regulations may be revised or reinterpreted and new laws and regulations may be adopted or become applicable to our commercial activities. These actions could have a material adverse effect on our results of operations, financial conditions and cash flows.
New legislation or regulation.
We cannot determine what effect additional state or federal governmental legislation, regulations, or administrative orders, when and if promulgated, would have on our business in the future. New legislation or regulations may require the reformulation of our business to meet new standards, require us to cease operations, impose stricter qualification and/or registration standards, impose additional record keeping, or require expanded consumer protection measures.
Reliance on information technology systems; Collection of sensitive customer data.
Our business is dependent on information sharing among market participants (including ERCOT, the TDSPs, and third-party service providers). This information includes customer enrollment information, ERCOT transactions, meter readings, invoices for wire line charges, etc. Therefore, our success as an independent REP is impacted by our ability to handle this information and we are dependent on third parties to provide timely and accurate information to us. We rely on a combination of internal systems including telephone, Internet, load forecasting, as well as systems operated by third parties. Failure to receive timely and accurate information could have an adverse impact on our business.
We have implemented, or intend to implement, both processes and infrastructure to provide for redundancy of core data due to business interruption associated with our billing platform; however, that is only one component of our business model. In addition, our systems and those we rely upon from third parties need continued development and investment to ensure reliability and scalability as our business grows at a rapid rate.
Despite the implementation of security measures, our networks may be vulnerable to unauthorized access, computer viruses and other disruptive problems. A party who is able to circumvent security measures could misappropriate proprietary information or cause interruptions in our Internet operations. We may be required to expend significant capital or other resources to protect against the threat of security breaches or to alleviate problems caused by such breaches. Although we intend to continue to implement industry-standard security measures, there can be no assurance that measures implemented by us will not be circumvented in the future.
Our business requires access to sensitive customer data in the ordinary course of business. Examples of sensitive customer data are names, addresses, account information, historical electricity usage, expected patterns of use, payment history, credit bureau data, credit and debit card account numbers, driver’s license numbers, social security numbers and bank account information. We may need to provide sensitive customer data to vendors and service providers who require access to this information in order to provide services. It is possible that our security controls over personal data, our training of employees and consultants on data security, and other practices we follow may not prevent the improper disclosure of personally identifiable information. If a significant breach occurred, our reputation may be adversely affected, customer confidence may be diminished, or our business may be subject to legal claims, any of which may contribute to the loss of customers and have a negative impact on the business and/or results of operations.
Certain political and natural events may affect our Company.
Catastrophic events or geo-political conditions may disrupt our business. A disruption or failure of our systems or operations in the event of a major earthquake, weather event, cyber-attack, terrorist attack, or other catastrophic event or natural disaster could cause delays in performing critical functions. A catastrophic event that results in the destruction or disruption of any of our critical business or information technology systems could harm our ability to conduct normal business operations and our operating results.
Weather and other related commodity risks may affect our ability to manage and maintain a balanced supply/demand book.
Commitments for future purchase of electricity supply (forward power contracts) are based not only on our expected customer base at a given point in time, but also weather forecasts for the geographical areas in which we operate. We plan to maintain a long position in our forward power contracts (contracted electricity supply purchases are slightly greater than forecasted demand by our customers) to minimize the need to purchase power on the balancing markets at varying market prices. However, fluctuations in actual weather conditions may have an impact on the actual power needs of customers on a given day. Extreme weather conditions may force us to purchase electricity in the balancing market on days when weather is unexpectedly severe, and the pricing for balancing market energy may be significantly higher on such days than the cost of electricity in our existing fixed priced contracts. Unusually mild weather conditions could leave us with excess power which may be sold in the balancing market at a loss if the balancing market price is lower than the Company’s cost of electricity in our existing fixed priced contracts.
Commodity pricing is an inherent component of our business operations and our financial results. The prevailing market prices for electricity and fuel may fluctuate substantially over relatively short periods of time, potentially adversely impacting our results of operations, financial condition, and cash flows. Changes in market prices for electricity and fuel may result from any of the following:
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demand for energy commodities and general economic conditions;
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forced or unscheduled plant outages;
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disruption of electricity or gas transmission or transportation infrastructure or other constraints or inefficiencies;
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addition of generating capacity;
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availability of competitively priced alternative energy sources;
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availability and levels of storage and inventory for fuel stocks;
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natural gas, crude oil and refined products, and coal production levels;
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the creditworthiness or bankruptcy or other financial distress of market participants;
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changes in market liquidity;
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natural disasters, wars, embargoes, acts of terrorism and other catastrophic events; and
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Federal and state governmental regulation and legislation.
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We may have difficulty obtaining a sufficient number of customers.
We anticipate that we will incur significant costs as we enter new markets and pursue customers by utilizing a variety of marketing methods. In order for us to recover these expenses, we must attract and retain a large number of customers. While the Company is optimistic, there can be no assurance that efforts to secure customers will provide the revenue base needed to succeed in Texas and/or expand into additional markets.
We may experience difficulty attracting customers because many customers may be reluctant to switch to a new supplier for a commodity as critical to their well-being as electric power. A major focus of our ongoing marketing efforts will be to demonstrate to potential customers that we will be a reliable provider with sufficient resources to meet our commitments. If our marketing strategy does not prove to be successful, our business, results of operations, and financial condition will be materially adversely affected.
We bear the credit risk and billing responsibility for our customers.
In Texas, the sole market in which we currently operate, we are responsible for the billing and collection functions for our customers. As we seek to expand our operations into additional markets, the billing and collection functions may also be our responsibility. In many of these markets, we may be limited in our ability to terminate service to customers who are delinquent in payment. Even if we terminate service to customers who fail to pay their electricity bill in a timely manner, we may remain liable to our suppliers and to the local utilities for services related to the transmission and distribution of the electricity. The failure of our customers to pay their bills in a timely manner or our failure to maintain adequate billing and collection programs could materially adversely affect our business.
We may not be able to manage our growth successfully.
The development of our operations will depend upon, among other things, our ability to create and expand our customer base in Texas and to enter new markets in a timely manner and at reasonable costs. In addition, we anticipate that our employee base will grow in order for us to accommodate our increased customer base. We may experience difficulty managing the growth of a portfolio of customers that is diverse both with respect to the types of services they will require, the market rules in their jurisdiction and the infrastructure required to deliver electricity to those customers. Expanding our operations may also require continued development of our operating and financial controls and may place additional stress on our management, finances and operational resources. If we are unable to manage our growth and development successfully, our operating results and financial condition could be materially adversely affected.
We will face strong competition from incumbent utilities and other competitors.
The market in which the Company operates is highly competitive. The Company faces competition from many competitors with significantly greater financial resources, well-established brand names and large, existing installed
customer bases. We expect the level of competition to intensify in the future. We expect significant competition from incumbent, traditional, and new electricity providers which may be better capitalized than the Company.
In most markets, our principal competitor may be the local incumbent utility’s unregulated affiliates. These affiliates have the advantage of long-standing relationships with their customers, and they may have longer operating histories, greater financial and other resources and greater name recognition in their markets than we do. In addition, incumbent utilities have been subject to regulatory oversight, in some cases for close to a century, and thus have a significant amount of experience regarding the regulators’ policy preferences as well as a critical economic interest in the outcome of proceedings concerning their revenues and terms and conditions of service.
Some of our competitors, including affiliated retailers, have formed alliances and joint ventures in order to compete in the restructured, deregulated retail electricity industry. Many customers of these incumbent utilities may decide to stay with their long-time energy provider if they have been satisfied with its service in the past.
In addition to competition from the incumbent utilities and their affiliates, we face competition from a number of other energy service providers, including start-up companies focusing on internet marketing and online services, and other energy industry participants who may develop businesses that will compete with us in both local and national markets. Many of these competitors or potential competitors are
larger than the Company and have access to more significant capital resources.
Payment defaults by other REPs to ERCOT.
In the event of a default by an REP of its payment obligations to ERCOT, the portion of that obligation that is unrecoverable by ERCOT from the defaulting REP is assumed by the remaining market participants in proportion to each participant’s load ratio. As an REP and market participant in ERCOT, we may have to pay a portion of the amount owed to ERCOT should such a default occur, and ERCOT is not successful in recovering such amounts. As an early stage company, any such default of an REP in its obligations to ERCOT could have a material adverse effect on our business, results of operations, financial conditions and cash flows.
ERCOT has experienced problems with its information systems.
Problems in the flow of information between ERCOT, TDSPs, and the REPs have resulted in delays and other problems in enrolling and billing customers. When customer enrollment transactions are not successfully processed by all involved parties, ownership records in the various systems supporting the market are not synchronized properly and subsequent transactions for billing and settlement are adversely affected. The impact may mean that we are not listed as the electric provider-of-record for intended or agreed upon time periods, delays in receiving customer consumption data that is necessary for billing and settlement either through ERCOT or directly with TDSPs, as well as the incorrect application of rates or prices and imbalances in our electricity supply forecast and actual sales.
Our revenues and results of operations may be adversely impacted by the ERCOT market’s transition from a zonal to a nodal wholesale market structure.
Substantially all of our business is located in the ERCOT market, which has transitioned from a zonal market structure with four congestion management zones to a nodal market structure that directly manages congestion on a localized basis. In a nodal market, the prices received and paid for electric power are based on pricing determined at specific interconnection points on the transmission grid (i.e., Locational Marginal Pricing), which could result in lower revenues or higher costs. This market structure change could have a significant impact on the profitability and value of our business depending on how the Locational Marginal Pricing develops, particularly if such development ultimately results in lower revenue due to lower wholesale electricity prices, increased costs to service end-user electricity demand, or increased collateral posting requirements with ERCOT.
Our future results of operations may be negatively impacted by settlement adjustments determined by ERCOT related to prior periods.
Settlement information for most operating activity is due from ERCOT within two months after the operating day, and true-up settlements are due from ERCOT within six months after the operating day. ERCOT has the ability to resettle any operating day at any time after the six month settlement period, usually the result of a lingering dispute, an alternative dispute resolution process, or litigated event. As a result, we are subject to settlement adjustments from ERCOT related to prior periods, which may result in charges or credits impacting our future reported results of operations.
Our results of operations and financial condition could be negatively impacted by any development or event beyond our control that causes economic weakness in the ERCOT market.
We are not geographically diversified. We derive substantially all of our revenues from operations in the ERCOT market, which covers approximately 75% of the geographical area in the State of Texas. As a result, regardless of the state of the economy in areas outside the ERCOT market, economic weakness in the ERCOT market could lead to reduced demand for electricity in the ERCOT market. Such a reduction could have a material negative impact on our results of operations, liquidity, and financial condition.
Risks Related to the Company
We may have contingent liabilities related to the Company’s operations prior to the Transaction of which we are not aware and for which we have not adequately provisioned.
Prior to the consummation of the Transaction, the Company was engaged in the business of manufacturing and installing decorative window wells made from precast concrete. We cannot ensure that there are no material claims outstanding, or other circumstances of which we are not aware, that would give rise to a material liability relating to these prior operations, even though we have not recorded any provisions in our financial statements related to such potential liabilities. If we are subject to past claims or material obligations relating to our operations prior to the consummation of the Transaction, such claims could materially adversely affect our business, financial condition, and results of operations.
Risks Related to the Transaction and the Ownership of the Common Stock of the Company
We face increased costs and demands upon management and accounting and finance resources as a result of complying with the laws and regulations affecting public companies; any failure to establish and maintain adequate internal controls over financial reporting or to recruit, train and retain necessary accounting and finance personnel could have an adverse effect on our ability to accurately and timely prepare our consolidated financial statements.
As a public operating company, we incur significant administrative, legal, accounting and other burdens and expenses beyond those of a private company, including those associated with corporate governance requirements and public company reporting obligations. In particular, we may need to enhance and supplement our internal accounting resources with additional accounting and finance personnel with the requisite technical and public company experience and expertise, as well as refine our quarterly and annual financial statement closing process, to enable us to satisfy such reporting obligations. However, even if we are successful in doing so, there can be no assurance that our finance and accounting organization will be able to adequately meet the increased demands that result from being a public company.
Furthermore, we will be required to comply with Section 404 of the Sarbanes-Oxley Act of 2002. In order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, we will be required to document and test our internal control procedures and prepare annual management assessments of the effectiveness of our internal control over financial reporting. These assessments will need to include disclosure of identified material weaknesses in our internal control over financial reporting. Testing and maintaining internal control over financial reporting will involve significant costs and could divert management’s attention from other matters that are important to our business. Additionally, we cannot provide any assurances that we will be successful in remediating any deficiencies that may be identified. If we are unable to remediate any such deficiencies or otherwise fail to establish and maintain adequate accounting systems and internal control over financial reporting, or we are unable to recruit, train and retain necessary accounting and finance personnel, we may not be able to accurately and timely prepare our consolidated financial statements and otherwise satisfy our public reporting obligations. Any inaccuracies in our financial statements or other public disclosures (in particular if resulting in the need to restate previously filed financial statements), or delays in our making required SEC filings, could have a material adverse effect on the confidence in our financial reporting, our credibility in the marketplace and the trading price of our common stock.
We devote significant resources to address these public company-associated requirements, including compliance programs and investor relations, as well as our financial reporting obligations. Complying with these rules and regulations increases our legal and financial compliance costs and makes some activities more time-consuming and costly.
An active, liquid and orderly trading market for our common stock may not develop, and the price of our stock may be volatile and may decline in value.
There currently is not an active public market for our common stock. An active trading market may not develop or, if developed, may not be sustained. The lack of an active market may impair the ability of stockholders to sell shares of common stock at the time they wish to sell them or at a price they consider reasonable. An inactive market may also impair our ability to raise capital by selling shares of common stock and may impair our ability to acquire other companies or assets by using shares of our common stock as consideration.
The stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of companies with securities traded in those markets. Broad market and industry factors may seriously affect the market price of companies’ stock, including ours, regardless of actual operating performance.
The Company may not be able to attract the attention of brokerage firms.
Because the Transaction is characterized as a “reverse acquisition,” securities analysts of brokerage firms may not provide coverage of the Company. No assurance can be given that brokerage firms will want to conduct any secondary offerings on behalf of the Company in the future, should the need arise.
Our common stock may not be eligible for listing on a national securities exchange.
Our common stock is not currently listed on a national securities exchange, and we do not currently meet the initial quantitative listing standards of a national securities exchange. We cannot assure you that we will be able to meet the initial listing standards of any national securities exchange, or, if we do meet such initial qualitative listing standards, that we will be able to maintain any such listing. Our common stock is currently quoted on the OTC Markets and, until our common stock is listed on a national securities exchange, we expect that it will continue to be eligible and quoted on the OTC Markets, another over-the-counter quotation system, or in the “pink sheets.” In these venues, an investor may find it difficult to obtain accurate quotations as to the market value of our common stock. In addition, if we fail to meet the criteria set forth in SEC regulations, various requirements would be imposed by law on broker-dealers who sell our securities to persons other than established customers and accredited investors. Consequently, such regulations may deter broker-dealers from recommending or selling our common stock, which may further affect its liquidity. This would also make it more difficult for us to raise additional capital in the future.
The Company’s common stock may be considered “a penny stock” and may be difficult to sell.
The SEC has adopted regulations which generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share, or an exercise price of less than $5.00 per share, subject to specific exemptions. The market price of our common stock is likely to be less than $5.00 per share and, therefore, may be designated as a “penny stock” according to SEC rules. This designation requires any broker or dealer selling these securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities. These rules may restrict the ability of brokers or dealers to sell our common stock and may affect the ability of investors to sell their shares.
Our stockholders may experience significant dilution if future equity offerings are used to fund operations or acquire complementary businesses.
If we engage in capital raising activities in the future, including issuances of common stock, to fund the growth of our business, our stockholders could experience significant dilution. In addition, securities issued in connection with future financing activities or potential acquisitions may have rights and preferences senior to the rights and preferences of our common stock. We have an equity incentive plan pursuant to which equity awards may be granted to eligible employees (including our executive officers), directors and consultants, if our board of directors determines that it is in the best interest of the Company and our stockholders to do so. The issuance of shares of our common stock upon the exercise of any such equity awards may result in dilution to our stockholders and adversely affect our earnings.
If securities or industry analysts do not publish, or cease publishing, research or reports about us, our business or our market, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.
The trading market for our common stock will be influenced by whether industry or securities analysts publish research and reports about us, our business, our market or our competitors and, if any analysts do publish such reports, what they publish in those reports. We may not obtain analyst coverage in the future. Any analysts that do cover us may make adverse recommendations regarding our stock, adversely change their recommendations from time to time, and/or provide more favorable relative recommendations about our competitors. If any analyst who may cover us in the future were to cease coverage of our company or fail to regularly publish reports on us, or if analysts fail to cover us or publish reports about us at all, we could lose, or never gain, visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
We do not anticipate paying any dividends on our common stock in the foreseeable future.
We currently intend to retain our future earnings to support operations and to finance expansion and, therefore, we do not anticipate paying any cash dividends to holders of our common stock in the foreseeable future.
On April 10, 2014, the Company paid $16,853 cash dividends to Holders of Series B Preferred Shareholders. Several Holders of Series B Preferred Shares opted to be paid dividends in common stock as opposed to cash.
The forward looking statements contained in this Annual Report may prove incorrect.
This Annual Report contains certain forward-looking statements. These forward-looking statements are based largely on our current expectations and are subject to a number of risks and uncertainties. Actual results could differ materially from these forward-looking statements. In addition to the other risks described elsewhere in this “Risk Factors” discussion, important factors to consider in evaluating such forward-looking statements include: (i) changes to external competitive market factors or in our internal budgeting process which might impact trends in our results of operations; (ii) anticipated working capital or other cash requirements; (iii) changes in our business strategy or an inability to execute our strategy due to unanticipated changes in our industry; and (iv) various competitive factors that may prevent us from competing successfully in the marketplace. In light of these risks and uncertainties, many of which are described in greater detail elsewhere in this “Risk Factors” discussion, there can be no assurance that the events predicted in forward-looking statements contained in this Annual Report will, in fact, transpire. Any negative change in the factors listed above could adversely affect the financial condition and operating results of the Company and its products.