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 carryforwards. 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.
The Company periodically evaluates the carrying value of definite-lived intangibles when events or changes in circumstances indicate that the carrying value may not be recoverable. Factors the Company considers important which could trigger an impairment review include, but are not limited to, significant under-performance relative to historical or projected future operating results, significant changes in the manner of its use of acquired assets or its overall business strategy, and significant industry or economic trends.
When the Company determines that the carrying value of a long-lived asset may not be recoverable based upon the existence of one or more of the above indicators, the Company determines the recoverability by comparing the carrying amount of the asset to net future undiscounted cash flows that the asset is expected to generate and recognizes an impairment charge equal to the amount by which the carrying amount exceeds the fair market value of the asset.
If the Company’s revenues or other estimated operating results are not achieved at or above our forecasted level, and the Company is unable to recover such costs through price increases, the carrying value of certain of the Company’s assets may prove to be unrecoverable and we may incur impairment charges of definitive-live intangible assets. The Company recorded no impairment loss for definite-lived intangible assets during the years ended December 31, 2017 and 2016.
The Company amortizes definite-lived intangible assets on a straight-line basis over their useful lives. The Company’s capitalized intangible asset for customer relationships in the amount of $3,543,912 is amortized over the three-year life of various customer contracts acquired in the Rep Energy, LLC acquisition (See Note 19). Amortization of the capitalized customer relationships for the year ended December 31, 2017 was $196,884. The unamortized amount of capitalized customer relationships as of December 31, 2017 was $3,347,028.
Property and Equipment
Property and equipment are stated at cost and depreciated on a straight-line basis over the following estimated useful lives:
|
Estimated Lives
|
Computer software
|
3 years
|
Computer hardware
|
3 years
|
Furniture and fixtures
|
5 years
|
Leasehold improvements
|
5 years
|
Website
|
3 years
|
Other equipment
|
7 years
|
Expenditures for additions, major renewals and betterments are capitalized, and expenditures for maintenance and repairs are charged against income as incurred. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in operations.
Deferred Financing Costs
The Company’s deferred financing costs in the amount of $179,887 are amortized over the two-year life of the financing from Blue Water Capital Funding LLC (See Note 8). Amortization of deferred financing costs for the years ended December 31, 2017, and 2016 were $89,944 and $44,971, respectively. The unamortized amount of deferred financing costs as of December 31, 2017 and 2016 were $44,972 and $134,916, respectively.
Derivative Instruments
The Company’s business operations require entering into physically settled commodity contracts that meets the definition of a derivative. The Company has elected “normal purchases and normal sales” exception which is a term specific to ASC 815-10-15-22. When the contract satisfies certain criteria, including a requirement that physical delivery of the underlying commodity is probable and is expected to be used in normal course of business. Retail revenues and retail cost of revenues resulting from deliveries of commodities under normal purchase contracts and normal sales contracts are included in earnings at the time of contract settlement.
Fair Value of Financial Instruments
The carrying amounts reported in the consolidated balance sheets for cash equivalents, accounts receivable, accounts
payable and accrued expenses approximate fair value because of the immediate or short-term maturity of these financial instruments. None of these instruments are held for trading purposes.
The recorded value of notes payable approximates the fair value as the interest rate approximates market interest rates.
Recent Pronouncements
Accounting Pronouncements Issued But Not Yet Effective
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The standard permits the use of either the retrospective or cumulative effect transition method. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date to periods beginning after December 15, 2017. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016. In December 2016, the FASB further issued ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, to increase stakeholders' awareness of the proposals and to expedite improvements to ASU 2014-09. The Company plans to adopt the standard using the modified retrospective approach. After assessing the new standard, the Company expects that there will be no material impacts to our revenue recognition procedures, except for information compilation for the new required disclosures.
F-11
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"). ASU 2016-02 amends the existing accounting standards for lease accounting by requiring entities to include substantially all leases on the balance sheet by requiring the recognition of right-of-use assets and lease liabilities for all leases. Entities may elect to not recognize leases with a maximum possible term of less than 12 months. For lessees, a lease is classified as
finance or operating and the asset and liability are initially measured at the present value of the lease payments. For lessors, accounting for leases is largely unchanged from previous guidance. ASU 2016-02 also requires qualitative disclosures along with certain specific quantitative disclosures for both lessees and lessors. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, with early adoption permitted, and are effective for interim periods in the year of adoption. The ASU should be applied using a modified retrospective approach, which requires lessees and lessors to recognize and measure leases at the beginning of the earliest period presented. The Company is currently evaluating the impact of adopting this guidance on its consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash.” This ASU provides guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows. This standard is effective for interim and annual reporting periods beginning after December 15, 2017. The Company will adopt this standard effective January 1, 2018 as it is expected it to be applicable to the Company at that time.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business ("ASU 2017-01"). ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting, including acquisitions, disposals, goodwill, and consolidation. ASU 2017-01 will be effective for annual periods beginning after December 15, 2017, including interim periods within those periods, and is not expected to have a material impact on the Company's consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718) ("ASU 2017-09"). ASU 2017-09 provides guidance on when changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. An entity should account for the effects of a modification unless all of the following are met:
• The fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified
• The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified
• The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified.
The amendments in ASU 2017-09 are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The amendments should be applied prospectively to an award modified on or after the adoption date. ASU 2017-09 is not expected to have a material impact on the Company's consolidated financial statements.
F-12
N
OTE 3 - INCOME TAXES
The components of income tax expense (benefit) from continuing operations for the years ended December 31, 2017 and 2016 are as follows:
|
|
Current
|
Deferred
|
Total
|
2017
|
|
|
|
|
U.S. Federal
|
$
|
45,840
|
-
|
45,840
|
States and Local
|
|
128,000
|
-
|
128,000
|
Total
|
$
|
173,840
|
-
|
173,840
|
|
|
|
|
|
2016
|
|
|
|
|
U.S. Federal
|
$
|
-
|
-
|
-
|
States and Local
|
|
85,100
|
-
|
85,100
|
Total
|
$
|
85,100
|
-
|
85,100
|
Actual income tax expense for the years ended December 31, 2017 and 2016 is reconciled from the amount computed by applying the U.S. federal income tax rate of 34% to income before income taxes as follows:
|
|
2017
|
2016
|
Expected tax expense
|
$
|
574,250
|
(314,500)
|
Reconciling items:
|
|
|
|
Permanent Differences/Discrete Items
|
|
36,090
|
(29,500)
|
Change in Valuation Allowance
|
|
(390,750)
|
429,100
|
Change in Tax Rate
|
|
(45,750)
|
-
|
Total tax expense
|
$
|
173,840
|
85,100
|
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2017 and 2016 are presented below:
|
2017
|
2016
|
Deferred tax assets:
|
|
|
Net operating loss carryforward - Federal
|
746,500
|
2,017,500
|
Federal Minimum Tax
|
73,750
|
28,000
|
Reserve for accounts receivable
|
247,000
|
340,000
|
Intangibles
|
39,000
|
10,000
|
Accrued expenses
|
220,000
|
167,000
|
Total gross deferred tax assets
|
1,326,250
|
2,562,500
|
Valuation allowance
|
(1,321,250)
|
(2,530,000)
|
Net deferred tax assets
|
5,000
|
32,500
|
|
|
|
Deferred tax liabilities:
|
|
|
Plant and equipment
|
(5,000)
|
(32,500)
|
Net deferred tax liabilities
|
(5,000)
|
(32,500)
|
|
|
|
Net deferred tax assets
|
-
|
-
|
F-13
There was a valuation allowance of $1,321,250 and $2,530,000 as of December 31, 2017 and 2016, respectively. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income, projections for future taxable income over the periods in which the deferred tax assets are deductible, and the scheduled reversal of deferred tax liabilities, management does not believe it is more likely than not the Company will realize the full benefits of these deductible differences at December 31, 2017.
Net operating loss carryforwards attributable to federal were $3,554,500 at December 31, 2017 expires at different dates through 2037.
There is not a provision for material uncertain tax positions for the Company at December 31, 2017 or 2016.
As of December 31, 2017, with few exceptions, the Company is no longer subject to U.S. Federal income tax examinations by tax authorities for years before 2014 and for state for years before 2013.
NOTE 4 - PRIVATE PLACEMENT OF SERIES B PREFERRED SHARES
On February 19, 2014, the Company filed a Certificate of Designation of Rights, Preferences, Privileges and Restrictions (the “Series B Designation”) with respect to a class of preferred stock designated as Series B Preferred Stock (the “Series B Preferred”). The Series B Preferred entitles holders thereof to receive a dividend payable in cash or common stock, at the election of the holder, at an annual rate of 12% of the Deemed Original Issue Price. The Deemed Original Issue Price (as defined in the Series B Designation) of the Series B Preferred for purposes of calculating the Series B Preferred dividend is $1.00 per share, which the Board of Directors of the Company determined represents the estimated fair market value as of the date of grant. The Series B Preferred dividends are
payable in cash or by the issuance of common stock ten days following the end of each month, or portion thereof. The number of shares to be paid as a dividend shall be determined based on the fair market value of the shares of common stock on the record date for the dividend. On February 21, 2014, the Company entered into Series B Preferred Stock Purchase Agreements (each an “Agreement” and collectively the “Agreements”) with several investors. Pursuant to the Agreements, the Company sold an aggregate of 1,900,000 shares of the Series B Preferred, for an aggregate purchase price of $1,900,000 as of December 31, 2014. Several members of the Company’s Board of Directors directly or indirectly participated in the offering.
The foregoing is only a brief description of the material terms of the Series B Designation and the offering of the Series B Preferred and does not purport to be a complete description of the rights and obligations of the parties thereunder and such descriptions are qualified in their entirety by reference to the full text of the Certificate of Designation which was filed as Exhibit 3.1 to our Form 8-K filed on February 24, 2014.
In accordance with the Series B Designation, dividends due to holders of Series B Preferred may be paid at the option of the holder in shares of the Company’s $0.001 par value common stock valued at the fair market value of such shares of common stock as determined in good faith by the Board of Directors on the record date of the dividend.
The holders of outstanding shares of Series B Preferred are entitled to receive, out of funds legally available for the payment of dividends, cumulative monthly dividends at the annual rate of 12% of the Deemed Original Issue Price per share, in preference to and in priority over any dividends with respect to Common Stock. At the option of the holders of Series B Preferred Stock, dividends may be paid to holders of Series B Preferred Stock in shares of the Company’s common stock valued at fair market value of such shares of common stock as determined in good faith by the Board of Directors.
During the year ended December 31, 2016, the Company paid $109,940 of cumulative monthly dividends on Series B Preferred Stock. Certain shareholders elected to be paid in shares of the Company’s common stock shares valued at $23,145 and the remaining holders were paid a total of $86,795 in cash.
F-14
On June 24, 2016, the Series B Stockholders affirmatively elected to convert all outstanding shares of Series B Preferred into shares of common stock with a conversion price as of such date equal to $1.00 per Series B Share.
NOTE 5 - LETTERS OF CREDIT
As of December 31, 2017, the Company had six secured irrevocable stand-by letters of credit totaling $615,300 with a financial institution for the benefit of the TDSPs that provide transition services to the Company. The six letters of credit will expire during the second quarter of the year ended December 31, 2018 and are subject to automatic extension and renewal provisions. The Company has a secured irrevocable stand-by letter of credit in the amount of $250,000 for the benefit of the Company’s wholesale power provider (Note 11). The letter of credit was issued in February 2016 and is subject to automatic extension and renewal provisions.
As of December 31, 2017, Summer Northeast secured four irrevocable stand-by letters of credit totaling $874,965. Letters of credit were issued for the benefit of the following parties: ISO New England in the amount of $274,965 expiring on October 3, 2018, Connecticut Department of Public Utility Control in the amount of $250,000 expiring on May 26, 2018 with auto extension provisions, State of New Hampshire Public Utilities Committee in the amount of $100,000 expiring on March 28, 2019 and the wholesale power provider of Summer Northeast (Note 12) in the amount of $250,000 expiring on October 1, 2018 with auto extension provisions. The stand-by letters of credit for the benefit of ISO New England, Inc., State of New Hampshire Public Utilities Committee and the Summer Northeast wholesale power provider are backed by a Master Revolving Note (Note 20). The letter of credit for the benefit of the Connecticut Department of Public Utility Control is backed by Tom O’Leary, a member of the Company’s Board. All letters of credit are held by the financial institution who issued the irrevocable stand-by letters of credit.
As of December 31, 2017, none of the letters of credit issued on behalf of the Company were drawn upon.
NOTE 6 - ADVANCE TO LOAN AMOUNT NOTE
On April 18, 2014, the Company signed an Advance to Loan Amount Note (the “Note”) with Comerica Bank in the amount of $1,500,000. The Note had an original maturity date of December 22, 2014, which was extended through February 22, 2015. On February 22, 2015, the Note was increased from $1,500,000 to $1,700,000 and extended again to November 4, 2016, with interest thereon at a per annum rate equal to the “Prime Referenced Rate” plus the “Applicable Margin.” The “Prime Referenced Rate” means, for any day, a per annum interest rate which is equal to
the “Prime Rate” in effect on such day, but in no event and at no time shall the “Prime Reference Rate” be less than the sum of the Daily Adjusting LIBOR Rate for such day plus two and one-half percent (2.5%) per annum. “Prime Rate” means the per annum rate established by Comerica Bank as its prime rate for its borrowers at any such time. “Applicable Margin” means 2% per annum. Accrued and unpaid interest on the unpaid principal balance outstanding shall be payable monthly, in arrears, on the first Business Day of each month.
Guaranty of the Note was made by four members of the Company’s Board of Directors (“Guarantors”). The Company agreed to issue the four Guarantors a total of 120,000 shares of the Company’s common stock per month (30,000 shares of common stock per month per Guarantor) reduced accordingly as the loan is reduced for agreeing to act as a Guarantor of the Note.
During the year ended December 31, 2015, the Company issued 1,006,171 shares of common stock to the Guarantors and recognized $1,006,173 in financing cost, and the balance of the Note was $111,057 at year end. In May 2016, the Company released the Guarantors from the obligation to guaranty the Note and stock payments for such guaranty were discontinued as of May 31, 2016.
During the year ended December 31, 2016, the Company issued 482,156 shares of common stock to the Guarantors and recognized $532,988 in financing cost.
The Advance to Loan Amount Note was paid in full on June 14, 2016 and at such time of payoff the loan terminated.
F-15
NOTE 7 - FINANCING FROM BLACK INK ENERGY LLC AND ISSUANCE OF WARRANT
On March 2, 2015, Summer LLC (the “Borrower”) entered into a Second Lien Term Loan Agreement (the “Agreement”) with Black Ink Energy, LLC (“BIE”). Pursuant to the Agreement, BIE agreed to provide a term loan (the “Term Loan”) to the Borrower, and the Borrower agreed to borrow and repay funds loaned by BIE.
The amount of the Term Loan was Three Million Dollars $3,000,000, and the loan was not revolving in nature. Pursuant to the Agreement, any amounts prepaid or repaid may not be re-borrowed by the Borrower. The maturity date of the loan was September 2, 2016. The Term Loan bore interest at a rate of 15% per annum, except in the occurrence of an event of default, at which point the default interest rate would increase to 18%. Interest is payable in arrears on the last day of each month and on the maturity date of the loan. The Term Loan was not evidenced by a promissory note.
Pursuant to the Agreement, the Borrower had the option to prepay the loan amount in whole by providing
prior notice to BIE and by paying a pre-payment premium of $300,000 minus the aggregate amount of interest paid from the effective date to the date on which the loan is prepaid.
Additionally, the Borrower agreed to pay to BIE a facility fee. The facility fee in the amount of $24,450 was expensed immediately as fees occurred to obtain financial resource
.
In connection with the Agreement and the Term Loan, the Company issued BIE a warrant (the “Warrant”) to purchase up to 800,000 shares of the Company’s common stock. The Warrant has a term of ten years, has an exercise price of $1.50 per share, and is subject to adjustment as set forth in the Warrant. The Warrant also contains a cashless or net exercise provision, pursuant to which the holder of the Warrant may elect to convert all or a portion of the Warrant without the payment of additional consideration, by receiving a net number of shares calculated pursuant to a formula set forth in the Warrant. The Company agreed to reserve 120% of the number of shares issuable upon the exercise of the Warrant so long as the Warrant is exercisable and outstanding. Additionally, the Company agreed to grant to the holder piggyback registration rights.
The term loan had a relative fair value of $2,967,535 and the Warrant had a relative fair value of $32,465 at the date of issuance determined using the Black-Scholes option-pricing model. The assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate of 0.87% (ii) estimated volatility of 17% (iii) dividend yield of 0.00% and (iv) expected life of the options of five years.
During the year ended December 31, 2016, the Company paid interest expense in the amount of $227,500 to BIE.
On June 30, 2016, the Term Loan to BIE was paid in full and the Agreement between Summer LLC and BIE was terminated.
As of December 31, 2017 and 2016, the warrants in the amount of 800,000 shares issued in this transaction are outstanding.
NOTE 8 - FINANCING FROM BLUE WATER CAPITAL FUNDING LLC
On June 29, 2016, Summer LLC (the “Borrower”) entered into a Loan Agreement (the “Agreement”) with Blue Water Capital Funding, LLC (“Blue Water”). Pursuant to the Agreement, Blue Water agreed to provide a revolving loan (the “Loan”) to the Borrower, and the Borrower agreed to borrow and repay funds loaned by Blue Water.
The amount of available credit under the Loan is $5,000,000. The Loan is revolving in nature and is evidenced by a Revolving Promissory Note (the “Note”). The maturity date of the Loan is June 30, 2018. The Loan bears interest at a rate of 11% per annum, with a minimum monthly financing fee of $22,500 per month. Interest is payable on the tenth day of each month and on the maturity date of the Note.
The proceeds of the Loan may be used by the Borrower to repay indebtedness owed to BIE, and for other corporate purposes. Simultaneous with the closing of the Loan, Borrower paid off all outstanding debt due and owing to BIE and BIE’s security interest in and to the assets of the Borrower and to the Company’s ownership interest in Borrower were terminated.
F-16
In connection with the Agreement, the Borrower made certain customary representations and warranties, and agreed that while the Loan amount remains outstanding, it would not take certain actions, including that it will not incur certain debts (as defined in the Agreement); create, assume, or suffer to exist any lien on any property or asset of the
Borrower, except those set forth in and allowed by the Agreement; consolidate or merge with any other entity; or sell, lease, or transfer all or substantially all of the assets of the Borrower.
In connection with the Agreement, the Borrower and Blue Water also entered into a Security Agreement (the “Security Agreement”), and the Company executed a Guaranty (the “Guaranty”) in favor of Blue Water.
Security Agreement
Pursuant to the Security Agreement, the Borrower granted to Blue Water a second position security interest in and to the Borrower’s collateral, as more fully defined in the Security Agreement, which includes receivables, equipment, inventory, personal property, other intangibles, and proceeds from any of these, to secure the Borrower’s payment of its obligations under the Loan. The security interest granted to Blue Water is subordinate to a security interest granted to DTE Energy Trading, Inc. (“DTE”) pursuant to a credit agreement between the Borrower and DTE dated April 1, 2014 (Note 11).
At December 31, 2017 and 2016, the outstanding balance of financing from Blue Water Capital was $2,500,000, and interest paid during the years then ended was $278,820 and $142,084, respectively.
NOTE 9 - PRIVATE PLACEMENT OFFERINGS
During the year ended December 31, 2016, the Company accepted subscription agreements from various accredited investors and entered into Securities Purchase Agreements with such investors to purchase from the Company 3,844,854 shares of the Company’s common stock at a price of $1.10 per share totaling $4,228,450. No warrants were issued in connection with the 2016 Securities Purchase Agreements.
During the year ended December 31, 2017, the Company accepted subscription agreements from various accredited investors and entered into Securities Purchase Agreements with such investors to purchase from the Company 409,091 shares of the Company’s common stock at a price of $1.10 per share totaling $450,000. No warrants were issued in connection with the 2017 Securities Purchase Agreements.
F-17
NOTE 10 - WARRANTS
The Company issued no warrants during the calendar years ended December 31, 2017 or 2016.
Warrant activity for the years ended December 31, 2017 and 2016, was as follows:
|
|
Shares
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining Contractual Life (in Years)
|
|
Grant Date Fair Value
|
Outstanding at December 31, 2015
|
|
1,891,000
|
$
|
1.44
|
|
3.47
|
$
|
113,826
|
Warrants granted
|
|
-
|
|
-
|
|
-
|
|
-
|
Warrants exercised
|
|
-
|
|
-
|
|
-
|
|
-
|
Warrants cancelled/forfeited/expired
|
|
-
|
|
-
|
|
-
|
|
-
|
Outstanding at December 31, 2016
|
|
1,891,000
|
$
|
1.44
|
|
3.47
|
$
|
113,826
|
Warrants granted
|
|
-
|
|
-
|
|
-
|
|
-
|
Warrants exercised
|
|
(21,000)
|
$
|
1.50
|
|
-
|
|
(862)
|
Warrants cancelled/forfeited/expired
|
|
(250,000)
|
$
|
1.50
|
|
-
|
|
(10,256)
|
Outstanding at December 31, 2017
|
|
1,620,000
|
$
|
1.43
|
|
1.73
|
$
|
102,708
|
|
|
|
$
|
|
|
|
|
|
Vested at December 31, 2017
|
|
1,354,763
|
$
|
1.51
|
|
1.84
|
$
|
57,708
|
|
|
|
$
|
|
|
|
|
|
Exercisable at December 31, 2017
|
|
1,354,763
|
$
|
1.51
|
|
1.84
|
$
|
57,708
|
NOTE 11
-
WHOLESALE POWER PURCHASE AGREEMENT SUMMER LLC
On April 25, 2014, Summer LLC closed a transaction with DTE Energy Trading, Inc. (“DTE”), with an effective date of April 1, 2014. As part of the transaction, Summer LLC and DTE entered into an Energy Marketing Agreement for Electric Power (the “Energy Marketing Agreement”). Pursuant to the terms of the Energy Marketing Agreement, Summer LLC agreed to purchase its electric power and associated services requirements from DTE, and DTE agreed to provide Summer LLC with certain credit facilities to assist Summer LLC in the purchase of its electric power and associated service requirements. Summer LLC also agreed to pay DTE a fixed monthly fee, as well as certain fees based on megawatt hours purchased. The terms of the Energy Marketing Agreement are governed by the ISDA 2002 Master Agreement, as well as a Schedule and Power Annex thereto (the “2002 Master Agreement”). In conjunction, therewith, Summer LLC and DTE also entered into a Credit Agreement, a Security Agreement and a Membership Interest Pledge Agreement.
Pursuant to the Credit Agreement, among other things DTE agreed to (i) provide a guaranty (a “Credit Guaranty”) to ERCOT for the benefit of Summer LLC, and (ii) provide commodity loans for the purchase of electricity (“Commodity Loans”). Each Commodity Loan and any Credit Guaranty shall bear interest on the outstanding principal amount thereof, from the date such Commodity Loan or Credit Guaranty is issued until it becomes due or is revoked, respectively, at a rate per annum equal to the Prime Rate (as reported by the Wall Street Journal) plus two percent. Summer LLC covenanted not to, among other things, (a) merge or consolidate with any other person, (b) acquire all or substantially all of the capital stock or property of another person, (c) create, assume or suffer to exist any lien on any property now owned or hereafter acquired by Summer LLC except for permitted liens (as set forth in the Credit Agreement) or (d) become liable for any indebtedness (other than permitted indebtedness, as set forth in the Credit Agreement).
F-18
In consideration of the services and credit support provided by DTE to Summer LLC, and pursuant to the Security Agreement, Summer LLC is required to, among other things (i) grant a priority security interest to DTE in all of its assets, equipment and inventory; (ii) require its customers to remit monthly payments into a lockbox account over
which DTE has a security interest; and (iii) deliver monthly and annual forecasted and audited statements to DTE.
Pursuant to the Membership Interest Pledge Agreement, the Company pledged to DTE, and granted to DTE a security interest in all of the membership interests of Summer Energy, LLC owned by the Company, as well as all additional membership interests of Summer Energy, LLC from time to time acquired by the Company.
NOTE 12
-
WHOLESALE POWER PURCHASE AGREEMENT SUMMER NORTHEAST
Summer Northeast purchases electric power from Calpine Energy Solutions, LLC (formerly Noble Americas Energy Solutions LLC). Summer Northeast is invoiced for the volumes at the end of each calendar month for the volumes purchased for delivery during said month at a wholesale power tariff rate plus scheduling fees. The invoice is payable on the 20
th
of the following month from delivery. Summer Northeast has provided Calpine with a $250,000 letter of credit (See Note 5).
NOTE 13 – 2012 STOCK OPTION AND STOCK AWARD PLAN
During 2012, the Company approved the 2012 Stock Option and Stock Award Plan (“2012 Plan”) established to advance the interest of the Company and its shareholders by providing an incentive to attract, retain and reward persons performing services for the Company and by motivating such persons to contribute to the growth and profitability of the Company.
The maximum aggregate number of (i) shares of stock that may be issued under the 2012 Plan, and (ii) shares of stock with respect to which stock appreciation rights may be granted, is 785,000 and consists of authorized but unissued or reacquired shares of stock or any combination thereof. Such number of shares of stock may be may be issued under the 2012 Plan pursuant to incentive stock options, nonstatutory stock options, restricted stock rants, stock appreciation right grants or any combination thereof, so long as the aggregate number of shares so issued does not exceed such number of shares, as adjusted.
The 2012 Plan continues in effect until the earlier of its termination by the Board or the date on which all the shares of stock available for issuance under the 2012 Plan have been issued and all restrictions on such shares under the terms on the 2012 Plan and the agreement evidencing awards granted under the 2012 Plan have lapsed. However, all awards shall be granted, if at all, within ten (10) years from the earlier of the date the 2012 Plan is adopted by the Board or the date the 2012 Plan is duly approved by the shareholders of the Company.
On December 6, 2012, a Form S-8 Registration Statement was filed with the United States Securities and Exchange Commission regarding shares under the 2012 Plan.
During the year ended December 31, 2016, the Company granted stock options from the 2012 Plan to purchase up to 2,500 shares of the Company’s common stock. The options covering a total of 2,500 shares vested one year after the date of grant. The stock options have an exercise price of $2.00 per share and will expire ten years from the date of grant. The fair value of the options of $5,344 was determined using the Black-Scholes option-pricing model. The assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate of 1.07% (ii) estimated volatility of 172% (iii) dividend yield of 0.00% and (iv) expected life of the options of ten years.
During the years ended December 31, 2017 and 2016, the Company recognized total stock compensation expenses of $3,115 and $2,259, respectively, relating to the vesting of stock options issued from the 2012 Plan.
There were no stock options granted for the year ended December 31, 2017.
As of December 31, 2017, 2,000 shares remain available for issuance.
As of December 31, 2017, the Company had outstanding granted stock options from the 2012 Plan, net of forfeitures to purchase 632,000 shares summarized as follows:
F-19
|
|
Shares
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining Contractual Life (in Years)
|
|
Grant Date Fair Value
|
Outstanding at December 31, 2015
|
|
631,000
|
$
|
1.25
|
|
7.93
|
$
|
62,507
|
Options granted
|
|
2,500
|
|
2.00
|
|
10.00
|
|
5,344
|
Options exercised
|
|
-
|
|
-
|
|
|
|
-
|
Options cancelled/forfeited/expired
|
|
(1,500)
|
|
1.50
|
|
|
|
(62)
|
Outstanding at December 31, 2016
|
|
632,000
|
|
1.24
|
|
6.86
|
|
67,789
|
Options granted
|
|
-
|
|
-
|
|
-
|
|
-
|
Options exercised
|
|
-
|
|
-
|
|
-
|
|
-
|
Options cancelled/forfeited/expired
|
|
-
|
|
-
|
|
-
|
|
-
|
Outstanding at December 31, 2017
|
|
632,000
|
$
|
1.24
|
|
5.88
|
$
|
67,789
|
|
|
|
|
|
|
|
|
|
Vested at December 31, 2017
|
|
632,000
|
$
|
1.24
|
|
5.88
|
$
|
67,789
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2017
|
|
632,000
|
$
|
1.24
|
|
5.88
|
$
|
67,789
|
NOTE 14 – 2015 STOCK OPTION AND STOCK AWARD PLAN
During the year ended December 31, 2015, the Company’s stockholders approved the 2015 Stock Option and Stock Award Plan (“2015 Plan”), which was established to advance the interest of the Company and its stockholders by providing an incentive to attract, retain and reward persons performing services for the Company and by motivating such persons to contribute to the growth and profitability of the Company.
The maximum aggregate number of (i) shares of stock that may be issued under the 2015 Plan, and (ii) shares of stock with respect to which stock appreciation rights may be granted, is 1,500,000 and consists of authorized but unissued or reacquired shares of stock or any combination thereof. Such number of shares of stock may be issued under the 2015 Plan pursuant to incentive stock options, nonstatutory stock options, restricted stock grants, stock appreciation right grants or any combination thereof, so long as the aggregate number of shares so issued does not exceed such number of shares, as adjusted.
The 2015 Plan continues in effect until the earlier of its termination by the Board or the date on which all the shares of stock available for issuance under the 2015 Plan have been issued and all restrictions on such shares under the terms on the 2015 Plan and the agreement evidencing awards granted under the 2015 Plan have lapsed. However, all awards shall be granted, if at all, within ten years from the earlier of the date the 2015 Plan is adopted by the Board or the date the 2015 Plan is duly approved by the Shareholders of the Company.
On July 2, 2015, a Form S-8 Registration Statement was filed with the United States Securities and Exchange Commission regarding the 2015 Plan.
During the year ended December 31, 2016, the Company granted a total of 263,500 stock options from the 2015 Plan with a fair value of
approximately $349,181 on the date of grant. The fair value of the options in the amount of $349,181 was determined using the Black-Scholes option-pricing model. The weighted average assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate of 1.25% (ii) estimated volatility of 132.67% (iii) dividend yield of 0.00% and (iv) expected life of all options averaging 10 years.
F-20
During the year ended December 31, 2017, the Company granted a total of 534,500 stock options from the 2015 Plan with a fair value of approximately $836,107 on the date of grant. The fair value of the options in the amount of $836,107 was determined using the Black-Scholes option-pricing model. The weighted average assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate of 1.97% (ii) estimated volatility of 131.57% (iii) dividend yield of 0.00% and (iv) expected life of all options averaging 10 years.
During the years ended December 31, 2017 and 2016, the Company recognized total stock compensation expenses of $558,306 and $340,606, respectively, for vesting options issued from the 2015 Plan.
As of the year ended December 31, 2017, the unrecognized expense for vesting of options issued from the 2015 Plan is $292,037 relating to 266,500 of unvested shares expected to be recognized over a weighted average period of approximately 3.53 years, and the unrecognized expense for vesting of options from the 2015 Plan at the year ended December 31, 2016 was $8,906 relating to 147,000 of unvested shares expected to be recognized over a weighted average period of years of approximately .53 years.
As of December 31, 2017, 70,000 shares remain available for issuance.
As of December 31, 2017, the Company had outstanding granted stock options from the 2015 Stock Option and Stock Award Plan, net of forfeitures to purchase 1,430,000 shares summarized as follows:
|
|
Shares
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining Contractual Life (in Years)
|
|
Grant Date Fair Value
|
Outstanding at December 31, 2015
|
|
643,500
|
$
|
1.27
|
|
9.57
|
$
|
78,574
|
Options granted
|
|
263,500
|
|
1.51
|
|
9.95
|
|
349,181
|
Options exercised
|
|
-
|
|
-
|
|
-
|
|
-
|
Options cancelled/forfeited/expired
|
|
(7,500)
|
|
1.83
|
|
-
|
|
(810)
|
Outstanding at December 31, 2016
|
|
899,500
|
$
|
1.33
|
|
8.75
|
$
|
426,945
|
Options granted
|
|
534,500
|
$
|
2.37
|
|
9.36
|
$
|
836,107
|
Options exercised
|
|
-
|
|
-
|
|
-
|
|
-
|
Options cancelled/forfeited/expired
|
|
(4,000)
|
$
|
2.50
|
|
-
|
$
|
(5,748)
|
Outstanding at December 31, 2017
|
|
1,430,000
|
$
|
1.74
|
|
8.42
|
$
|
1,257,304
|
|
|
|
|
|
|
|
|
|
Vested at December 31, 2017
|
|
1,163,500
|
$
|
1.57
|
|
8.28
|
$
|
871,257
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2017
|
|
1,163,500
|
$
|
1.57
|
|
8.28
|
$
|
871,257
|
NOTE 15 – PROPERTY AND EQUIPMENT
Property and equipment are carried at cost and are depreciated over their estimated useful lives (3 to 7 years) using the straight-line method. Costs of assets include those capital expenditures which improve the efficiency of the assets or lengthen their useful lives. Expenditures for maintenance and repairs are charged against income as incurred. Costs and related accumulated depreciation of assets sold or otherwise retired are removed from accounts, and any resulting gain or loss is reflected in income. Depreciation expense charged to operations totaled $158,324 for the year ended December 31, 2017 and $210,481 for the year ended December 31, 2016.
F-21
As of
December 31, 2017
and 2016, property and equipment consisted of the following:
|
2017
|
|
2016
|
Computer software
|
$ 122,445
|
|
$ 113,451
|
Computer hardware
|
188,605
|
|
155,182
|
Furniture and fixtures
|
49,723
|
|
49,723
|
Leasehold improvements
|
120,194
|
|
86,714
|
Website
|
775,881
|
|
775,881
|
Total property and equipment
|
1,256,848
|
|
1,180,951
|
Less: Accumulated depreciation
|
(1,100,482)
|
|
(942,158)
|
Property and equipment, net
|
$ 156,366
|
|
$ 238,793
|
NOTE 16
-
OPERATING LEASES, COMMITMENTS AND CONTINGENCIES
Office Space
Beginning December 1, 2017, Summer LLC procured approximately 20,073 square feet of office space on the 37
th
floor of 5847 San Felipe, Houston, Texas, pursuant to a sublease agreement dated October 13, 2017 with ENSCO International Incorporated (“Sublandlord”) for a term beginning on December 1, 2017 and terminating on December 31, 2025.
The rent payments will be 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.
Summer LLC assumed an operating lease for office space on November 1, 2011 at 800 Bering Drive, Suite 260, Houston, Texas, under a non-cancellable lease obligation which expired on August 31, 2016. The Sixth Amendment to the office space lease extended the obligation to October 31, 2019.
Summer Northeast entered into a sublease agreement with PDS Management Group, LLC (“PDS”) on October 31, 2017 at 800 Bering Drive, Suite 250, Houston, Texas, under a non-cancellable lease obligation which will expire on February 28, 2020. The monthly base rent is $3,726.63 for the period of November 1, 2017 to February 2018 and $3,904.08 for the remaining of the term of the sublease.
Future minimum commitments including extension options under all non-cancellable operating lease obligations are as follows:
Contractual Obligations
|
2018
|
2019
|
2020
|
2021
|
2022
|
Thereafter
|
Total
|
Operating Leases
|
$347,307
|
$369,676
|
$198,502
|
$190,694
|
$190,694
|
$572,081
|
$1,868,954
|
Lease expense for the years ended December 31, 2017 and 2016 totaled $152,149 and $116,945, respectively.
Vendors
The Company has contractual commitments as of December 31, 2017 to purchase its wholesale electric power from DTE (Note 11) and contracts for billing services with three vendors (Energy Services Group, DYNAMO Programs International, LLC and EC Infosystems, Inc.) totaling $955,134.
F-22
NOTE 17
–
EXECUTIVE
EMPLOYMENT AGREEMENTS
Effective October 20, 2017, the employment agreements of our executive officers: Neil Leibman, Chief Executive Officer, Angela Hanley, President, and Jaleea P. George, Chief Financial Officer, were amended to adjust the performance metrics which must be met by the Company in order for the executives to receive additional equity compensation. Pursuant to the amendments, in the event the Company meets certain performance milestones, each of the executives will be granted an option to purchase 15,000 shares of the Company’s common stock at an exercise price to the greater of: (i) the fair market value of a share of stock on the date of grand and (ii) $2.50 per share. All other provisions of the executives’ employment agreements remain in full force and effect. The foregoing description of the amendments is not complete, and is qualified in its entirety the terms of the amendments, which are filed as Exhibits 10.35, 10.36 and 10.37 to this Annual Report.
NOTE 18 - TEXAS SALES AND USE TAX AUDIT
Summer LLC is currently under audit for Texas sales and use tax by the Comptroller of Public Accounts (“Comptroller”) for the period from February 2013 through July 2016. On February 20, 2018, the Comptroller reported its assessment for additional Texas sales and use tax to be paid by the Company. As of December 31, 2017, the Company has accrued $375,000 relating to the assessment, which is included in other expenses on the consolidated statement of operations.
NOTE 19
-
ACQUISTION OF SUMMER ENERGY NORTHEAST, LLC (FORMERLY REP ENERGY, LLC)
On November 1, 2017, Summer Energy Holdings, Inc. entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) with REP Energy, LLC, a Texas limited liability company (“REP Energy”) and the members of REP Energy (the “Members” and the transaction contemplated by the Purchase Agreement, the “REP Transaction”) whereby the Company acquired 100% of the issued and outstanding units of membership interest (the “Interests”) of REP Energy from the Members. Several of the Members of REP Energy are officers and/or directors of the Company. The conflicts of interest of officers and/or directors of the Company were disclosed and known to the Board of Directors of the Company.
The terms of the Purchase Agreement and the REP Transaction were negotiated, considered and approved by a
majority of the disinterested members of the Board.
The purchase price paid for the Interests consisted of 2,177,912 unregistered and restricted shares of the Company’s common stock (the “Summer Energy Stock”), which was the number of shares having an aggregate value of $3,266,868, with the price per share equal to $1.50 per share of Summer Energy Stock, rounded up to the nearest whole number of shares, on the acquisition date. Such amount was determined by the Board in good faith as the fair market value of a share of Summer Energy Stock. Pursuant to the Purchase Agreement, REP Energy and the Members agreed to deliver to the Company assignments of the Interests and the corporate record books of REP Energy. The Company agreed to deliver the Summer Energy Stock.
The estimated fair values of the assets acquired and liabilities assumed are based on management’s internal valuations and historical experience. The following table is the estimated fair value of the assets acquired and liabilities assumed in the REP Transaction:
Cash
|
$ 31,200
|
Restricted cash
|
91,186
|
Accounts receivable
|
1,014,465
|
Intangible asset - customer relationships
|
3,543,912
|
Accounts payable
|
(16,297)
|
Accrued liabilities
|
(564,921)
|
Debt
|
(832,677)
|
Total net assets acquired
|
$ 3,266,868
|
The amount of net sales and net loss included in the Company’s consolidated statement of operations for the period from November 1, 2017 through December 31, 2017, totaled $928,360 and $(338,281), respectively.
Pro forma net sales and net income of the combined operations had the acquisition date been January 1, 2017, would have totaled $3,913,093 and $429,173, respectively, with basic and fully dilutive earnings per share at $.017 and $.017. The pro forma net sales and net loss of the combined operations had the acquisition been January 1, 2016,
F-23
would have been $4,221,307 and $(3,897,698) with basic and fully dilutive earnings per share at $(0.18) and $(0.18).
The estimated useful life of the intangible asset acquired in the transaction is three years. At the year ended December 31, 2017, the unamortized amount of capitalized customer relationships was $3,347,028 and the future amortization expense
is as follows:
2018
|
2019
|
2020
|
Total
|
$1,181,304
|
$1,181,304
|
$984,420
|
$3,347,028
|
NOTE 20 – MASTER REVOLVER NOTE
The Company assumed a Master Revolver Note (“Master Note”) held by Summer Northeast (formerly REP Energy) pursuant to the terms of the Purchase Agreement (Note 19).
The amount of available credit under the Master Note is $800,000 issued by Comerica Bank. The Master Note is dated July 25, 2017 and has a maturity date of July 25, 2018. Each advance under the Master Note shall bear interest thereon at a per annum rate equal to the “Prime Referenced Rate” plus the “Applicable Margin.” The “Prime Referenced Rate” means, for any day, a per annum interest rate which is equal to the “Prime Rate” in effect on such day, but in no event and at no time shall the “Prime Reference Rate” be less than the sum of the Daily Adjusting LIBOR Rate for such day plus two and one-half percent (2.5%) per annum. “Prime Rate” means the per annum rate established by Comerica Bank as its prime rate for its borrowers at any such time. “Applicable Margin” means 1 percent per annum. Accrued and unpaid interest on the unpaid principal balance outstanding shall be payable monthly, in arrears, on the first Business Day of each month.
As of December 31, 2017, the outstanding advances on the Master Note was $40,000 and the Master Note secured letter of credits totaling $624,965 (Note 5). Interest paid to Comerica Bank subsequent to the acquisition in November and December 2017 totaled $255.
Guaranty of the Master Note at origination on July 25, 2017 was made by two members of Summer Northeast (Neil Leibman and Tom O’Leary) who are also members of the Company’s Board (Mr. Leibman is also an executive officer). In accordance with the provisions of Purchase Agreement (Note 19), the Company, as soon as practicable, is required to replace the credit facilities (Note 5) secured by the Master Note and arrange a release of the guaranty by the Guarantors. Until such release is effective, the Company agrees to pay monthly interest to the guarantors, at the lowest applicable federal rate published by the Internal Revenue Service, on the outstanding balance of such credit facility.
NOTE 21 – DEBT TO RELATED PARTIES ASSUMED
On November 1, 2017, the Company assumed $767,677 of related party debt owed by Summer Northeast to members Tom O’Leary and Neil Leibman pursuant to the terms of the Purchase Agreement (Note 19). Messrs. O’Leary and Leibman serve on the Company’s Board (Mr. Leibman is also an executive officer).
In accordance with the Amended and Restated Limited Liability Company Agreement of Summer Northeast the amount of any loan or advance by a member shall not be treated as a contribution to the capital of the lending member but shall be considered a debt. The loan shall bear interest at the rate of the greater of (i) 12% per annum or (ii) the Prime Rate plus 5%, payable monthly with a maturity date of October 31, 2018.
As of December 31, 2017, the outstanding debt to related parties was $767,677, and during the months of November and December 2017, interest paid on such related party debt was $15,609.
F-24
NOTE 22 – OTHER RELATED PARTY TRANSACTIONS
On August 29, 2013, the Company entered into two, five-year credit facility agreements with two members of the Company’s Board of Directors. Both individuals agreed to act as surety and personal guarantors with respect to $826,000 of the Company’s depository requirements, consisting of a line of credit from a financial institution and certain extensions of credit by critical vendors that were necessary for the Company to carry out its business. As consideration for acting as surety and personal guarantors, the Company issued guarantor member 413,000 shares of its Series A Preferred Stock. On May 6, 2014, the two individuals were released from such obligation by the Company when the Company exercised the Call Right reflected within the two Credit Facility Agreements. On May 13, 2014, the Company granted a five-year stock option to each individual to purchase 151,115 shares of the Company’s common stock at an exercise price of $1.50 per share.
On April 18, 2014, four members of the Company’s Board of Directors (the “Guarantors”), guaranteed an Advance to Loan Amount Note in the amount of $1,500,000 which increased to $1,700,000 (Note 6). The Company agreed to issue the four Guarantors a total of 120,000 shares of the Company’s common stock per month (30,000 shares of common stock per month per Guarantor) reduced accordingly as the loan is reduced in consideration for agreeing to act as a Guarantor of the Note. In May 2016, the Company released the Guarantors from the obligation to guaranty the Note and stock payments for such guaranty were discontinued as of May 31, 2016. The balance of the Note was zero as of December 31, 2016.
On July 22, 2016, the Company advanced $611,424 to a related party for purposes of short-term financing. Such advances were paid back in full to the Company on August 9, 2016. As of December 31, 2016, there were no outstanding balances due between the Company and such related party.
During the year ended December 31, 2016, the Company provided employee services to a related party valued at $73,078. In addition, the related party provided aviation services to the Company in the amount of $20,463. The net effect of these services to the Company was $52,615. There were no outstanding balances between the Company and such related party as of December 31, 2016.
On October 31, 2017, Summer Northeast entered into a sublease agreement with PDS for office space located at 800 Bering Drive, Suite 250, Houston, Texas (Note 16). PDS is 100% owned by Tom O’Leary who is a member of the Company’s Board of Directors.
NOTE 23 - SUMMER ENERGY 401(K) PLAN
In January 2017, the Company adopted a qualified 401(K) Retirement Plan (the “Plan”) whereby eligible employees may elect to save for retirement on a tax-advantaged basis. There are two types of salary deferrals: pre-tax 401(K) deferrals and Roth 401(K) deferrals. Eligible employee participants are automatically enrolled at 3% of compensation unless a participant elects an alternative deferral percentage limited to dollar amount of $18,000 in 2017 or elects not to defer under the Plan. There is no Company match to the Plan.
NOTE 24 - EMPLOYEE STOCK PURCHASE PLAN
Effective May 2017, the Company began offering an Employee Stock Purchase Plan (the “ESPP”) whereby eligible employees may elect to purchase common stock of the Company through a registered broker/dealer. Eligible employees who so elect may authorize payroll deductions for contributions to the ESPP up to a maximum of $25,000 each calendar year. The Company will match 10% of eligible employee contributions up to an aggregate maximum of $24,000 for all ESPP participants (not each individual ESPP participant). The employer match for the year ended December 31, 2017 was $3,704.
F-25
NOTE 25
-
SUBSEQUENT EVENTS
Stock Options Issued from 2015 Stock Award Plan
On January 2, 2018, the Company granted a total of 45,000 stock options to non-employee members of the Company’s Board of Directors under the 2015 Stock Option and Stock Award Plan as compensation for service on the Company’s Board. The director stock options were fully vested on the date of grant, have an exercise price of $2.50 per share, will expire ten years from the date of the grant and are estimated to have a fair value of approximately $104,481 on the date of grant determined using the Black-Scholes option-pricing model. The assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate of 2.25% (ii) estimated volatility of 110.77% (iii) dividend yield of 0.00% and (iv) expected life of the options of ten years.
On January 8, 2018, the Company granted stock options to purchase up to 6,000 shares of the Company’s common stock to two key employees. The options covering a total of 6,000 shares vest one-year after the date of grant. The stock options have an exercise price of $2.50 per share and will expire ten (10) years from the date of grant. The fair value of the options of $11,953 was determined using the Black-Scholes option-pricing model. The assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate of 2.25% (ii) estimated volatility of 110.41% (iii) dividend yield of 0.00% and (iv) expected life of the options of ten years.
2018 Stock Option and Stock Award Plan Approved by Board
Effective February 12, 2018, the Board of Directors of the Company approved and adopted the Summer Energy Holdings, Inc. 2018 Stock Option and Stock Award Plan (“2018 Plan”), which was established to advance the interest of the Company and its stockholders by providing an incentive to attract, retain and reward persons performing services for the Company and by motivating such persons to contribute to the growth and profitability of the Company. The Company’s named executive officers are eligible for grants or awards under the 2018 Plan. The 2018 Plan will be presented to the Company’s shareholders at the 2018 annual meeting of shareholders.
The maximum aggregate number of (i) shares of stock that may be issued under the 2018 Plan and (ii) shares of stock with respect to which stock appreciation rights may be granted, is 1,500,000 and consists of authorized but unissued or reacquired shares of stock or any combination thereof. Such number of shares of stock may be issued under the 2018 Plan pursuant to incentive stock options, non-statutory stock options, restricted stock grants, restricted stock units, stock appreciation right grants or any combination thereof, so long as the aggregate number of shares so issued does not exceed such number of shares, as adjusted. The 2018 Plan or any increase in the maximum aggregate number of shares of stock issuable thereunder shall be approved by the stockholders of the Company within twelve months of the date of adoption by the Board. Awards granted prior to stockholder approval of the 2018 Plan shall become exercisable no earlier than the date of stockholder approval of the 2018 Plan.
The 2018 Plan continues in effect until the earlier of its termination by the Board or the date on which all shares of stock available for issuance under the 2018 Plan have been issued and all restrictions on such shares under the terms on the 2018 Plan and the agreement evidencing awards granted under the 2018 Plan have lapsed. However, all awards shall be granted, if at all, within ten years from the earlier of the date the 2018 Plan is adopted by the Board or the date the 2018 Plan is duly approved by the stockholders of the Company.
Stock Options Issued from 2018 Stock Award Plan
On February 20, 2018, the Company granted the following options to purchase common stock under the 2018 Plan:
Name
|
No. of Options
|
|
Exercise Price
|
|
Date of Vest
|
Angela Hanley
|
|
150,000
|
|
$
|
2.50
|
|
February 20, 2023
|
Jaleea George
|
|
85,000
|
|
$
|
2.50
|
|
February 20, 2023
|
Angela Hanley
|
|
15,000
|
|
$
|
2.50
|
|
July 1, 2018
|
Jaleea George
|
|
15,000
|
|
$
|
2.50
|
|
July 1, 2018
|
Neil Leibman
|
|
15,000
|
|
$
|
2.50
|
|
July 1, 2018
|
Total
|
|
280,000
|
|
|
|
|
|
F-26
The options covering a total of 235,000 shares vest five years after the date of grant. The stock options have an exercise price of $2.50 per share and will expire ten years from the date of grant. The fair value of the options of $557,028 was determined using the Black-Scholes option-pricing model. The assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate of 2.65% (ii) estimated volatility of 119.27% (iii) dividend yield of 0.00% and (iv) expected life of the options of ten years.
The options covering a total of 45,000 shares will vest on July 1, 2018. The stock options have an exercise price of $2.50 per share and will expire ten years from the date of grant. The fair value of the options of $106,665 was determined using the Black-Scholes option-pricing model. The assumptions used to calculate the fair market value
are as follows: (i) risk-free interest rate of 2.65% (ii) estimated volatility of 119.27% (iii) dividend yield of 0.00% and (iv) expected life of the options of ten years.
EDF ISDA Transaction
On February 21, 2018, Summer Northeast entered into a transaction with EDF Energy Services, LLC, a Delaware limited liability company (“EDF”), whereby EDF becomes Summer Northeast’s primary provider for the purchase and sale of electricity and would, subject to certain limitations, provide supply finance and third-party credit support on behalf of Northeast (the “EDF Transaction”).
The EDF Transaction is governed by the 1992 ISDA Master Agreement, as well as a Schedule and Credit Support Annex thereto (the “ISDA Documents”). In conjunction therewith, Northeast and EDF also entered into a Security Agreement securing Summer Northeast’s obligations under the ISDA Documents and whereby Summer Northeast grants EDF a continuing security interest in all of the assets of Summer Northeast, including but not limited to its accounts receivable. Also, in conjunction with the EDF Transaction, the Company entered into a Guaranty in favor of EDF whereby the Company acts as guarantor for Summer Northeast’s obligations under the ISDA Documents.
FINANCING FROM BLUE WATER CAPITAL FUNDING LLC
On January 31, 2018, the Company was advanced $420,000 from the Blue Water Capital revolving loan in order to fund required collateral deposits with the utility companies (Note 8).
MASTER REVOLVER NOTE
On February 22, 2018, the Company paid $40,000 to Comerica Bank to pay off the balance of the Master Revolver assumed by the Company on November 1, 2017 (Note 20).
OTHER RELATED PARTY TRANSACTIONS
In January 2018, a related party provided aviation services to the Company in the amount of $4,000 for purposes of a company off-site management meeting.
On January 3, 2018, the Company was advanced $250,000 by Tom O’Leary and Neil Leibman, Board members (
Mr. Leibman is also an executive officer)
for purposes of short-term financing.
On January 8, 2018, the Company was advanced $373,000 by Neil Leibman (an executive officer and director) for purposes of short-term financing. On March 6, 2018, $200,000 was paid back to Mr. Leibman with a remaining balance of $173,000 owed by the Company.
On January 8, 2018, the Company was advanced $80,000 from a related party for purposes of short-term financing. On February 22, 2018, $40,000 was repaid to the related party and on March 6, 2018, $40,000 was repaid to the related party. The obligation was satisfied in full with two $40,000 payments made on February 22, 2018 and March 6, 2018, respectively.
F-27
EHIBIT INDEX
Exhibit No.
|
Description
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2.1
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Agreement and Plan of Contribution, by and among Castwell Precast Corporation, Summer Energy, LLC and the members of Summer Energy, LLC, incorporated by reference to Exhibit 10.1 to our Form 8-K filed on January 19, 2012.
|
3.1
|
Articles of Incorporation of the Company dated March 25, 2005, incorporated by reference to Exhibit 3.1 to our Registration Statement on Form SB-2 filed on July 16, 2007.
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3.2
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Certificate of Amendment to Articles of Incorporation filed with the Nevada Secretary of State effective March 27, 2012, incorporated by reference to Exhibit 3.1 to our Form 8-K filed on March 30, 2012.
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3.3
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Amended and Restated Bylaws of the Company, incorporated by reference to Exhibit 3.2 to our Form 8-K filed on March 30, 2012.
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3.4
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Certificate of Designation of Rights, Preferences, Privileges and Restrictions for Series A Preferred Stock, filed with the Nevada Secretary of State on August 28, 2013, incorporated by reference to Exhibit 3.1 to our Form 8-K filed on September 4, 2013.
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3.5
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Certificate of Designation of Rights, Preferences, Privileges and Restrictions for Series B Preferred Stock, filed with the Nevada Secretary of State on February 19, 2014, incorporated by reference to Exhibit 3.1 to our Form 8-K filed on February 24, 2014.
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10.1
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Warrant to Purchase Units of Membership Interest dated January 17, 2012, incorporated by reference to Exhibit 10.3 to our Form 8-K filed on March 30, 2012.
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10.2
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Form of Agreement to Assist with Credit Facility dated November 30, 2011, incorporated by reference to Exhibit 10.4 to our Form 8-K filed on March 30, 2012.
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10.3
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Agreement to Assist with Credit Facility – Rod Danielson, dated December 16, 2011, incorporated by reference to Exhibit 10.5 to our Form 8-K filed on March 30, 2012.
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10.4
|
2012 Stock Option and Stock Award Plan, incorporated by reference to Exhibit 10.6 to our Form 8-K filed on March 30, 2012.*
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10.5
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Form of Lock Up Agreement, incorporated by reference to Exhibit 10.7 to our Form 8-K filed on March 30, 2012.
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10.6
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Form of Indemnification Agreement for Officers and Directors, incorporated by reference to Exhibit 10.1 to our Form S-8 filed on December 6, 2012
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10.7
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Form of 2013 Agreement to Assist with Credit Facility, incorporated by reference to Exhibit 10.1 to our Form 8-K filed on September 4, 2013.
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10.8
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Form of Series B Preferred Stock Purchase Agreement, incorporated by reference to Exhibit 10.1 to our Form 8-K filed on February 24, 2014
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10.9
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Energy Marketing Agreement by and between Summer Energy, LLC and DTE Energy Trading, Inc., dated as of April 1, 2014, incorporated by reference to Exhibit 10.1 to our Form 10-Q filed on May 15, 2014. Portions of this exhibit were redacted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission.
|
10.10
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ISDA Master Agreement, Part 7 Power Annex to ISDA Master Agreement and Schedule to ISDA Master Agreement, by and between Summer Energy, LLC and DTE Energy Trading, Inc., dated as of April 1, 2014, incorporated by reference to Exhibit 10.2 to our Form 10-Q filed on May 15, 2014.
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10.11
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Credit Agreement by and between Summer Energy, LLC and DTE Energy Trading, Inc., dated as of April 1, 2014, incorporated by reference to Exhibit 10.3 to our Form 10-Q filed on May 15, 2014. Portions of this exhibit were redacted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission.
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10.12
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Security Agreement by and between Summer Energy, LLC and DTE Energy Trading, Inc., dated as of April 1, 2014, incorporated by reference to Exhibit 10.4 to our Form 10-Q filed on May 15, 2014.
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10.13
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Membership Interest Pledge Agreement made by Summer Energy Holdings, Inc. in favor of DTE Energy Trading, Inc., dated as of April 1, 2014, incorporated by reference to Exhibit 10.5 to our Form 10-Q filed on May 15, 2014.
|
2
10.14
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Novation Agreement by and among BP Energy Company, Summer Energy, LLC and DTE Energy Trading, Inc., dated as of April 24, 2014, incorporated by reference to Exhibit 10.6 to our Form 10-Q filed on May 15, 2014
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10.15
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Advance to Loan Amount Note by Summer Energy, LLC in favor of Comerica Bank, dated as of April 18, 2014, incorporated by reference to Exhibit 10.7 to our Form 10-Q filed on May 15, 2014.
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10.16
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Executive Employment Agreement, effective January 1, 2015, by and between Summer Energy Holdings, Inc. and Jaleea P. George, incorporated by reference to Exhibit 10.1 to our Form 8-K filed on January 27, 2015.
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10.17
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Executive Employment Agreement, effective January 1, 2015, by and between Summer Energy Holdings, Inc. and Neil Leibman, incorporated by reference to Exhibit 10.2 to our Form 8-K filed on January 27, 2015.
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10.18
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Second Lien Term Loan Agreement by and between Summer Energy, LLC and Black Ink Energy, LLC, dated as of March 2, 2015, incorporated by reference to Exhibit 10.1 to our Form 8-K filed on March 5, 2015
.
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10.19
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Second Lien Security Agreement by and between Summer Energy, LLC and Black Ink Energy, LLC, dated as of March 2, 2015, incorporated by reference to Exhibit 10.2 to our Form 8-K filed on March 5, 2015.
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10.20
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Second Lien Membership Interest Pledge Agreement by and between Summer Energy Holdings, Inc. and Black Ink Energy, LLC, dated as of March 2, 2015, incorporated by reference to Exhibit 10.3 to our Form 8-K filed on March 5, 2015.
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10.21
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Form of Warrant issued to Black Ink Energy, LLC, dated as of March 2, 2015, incorporated by reference to Exhibit 10.4 to our Form 8-K filed on March 5, 2015.
|
10.22
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Loan Agreement by and between Summer Energy, LLC and Blue Water Capital Funding, LLC, dated as of June 29, 2016, incorporated by reference to Exhibit 10.1 to our Form 8-K filed on July 6, 2016.
|
10.23
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Security Agreement by and between Summer Energy, LLC and Blue Water Capital Funding, LLC, dated as of June 29, 2016, incorporated by reference to Exhibit 10.2 to our Form 8-K filed on July 6, 2016.
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10.24
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Guaranty by and between Summer Energy Holdings, Inc. and Blue Water Capital Funding, LLC, dated as of June 29, 2016, incorporated by reference to Exhibit 10.3 to our Form 8-K filed on July 6, 2016.
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10.25
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Revolving Promissory Note made by Summer Energy, LLC for the benefit of Blue Water Capital Funding, LLC, dated as of June 29, 2016, incorporated by reference to Exhibit 10.1 to our Form 8-K filed on July 6, 2016.
|
10.26
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Executive Employment Agreement, effective January 1, 2017, by and between Summer Energy Holdings, Inc. and Jaleea P. George, incorporated by reference to Exhibit 10.1 to our Form 8-K filed on January 4, 2017.
|
10.27
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Executive Employment Agreement, effective January 1, 2017, by and between Summer Energy Holdings, Inc. and Neil M. Leibman, incorporated by reference to Exhibit 10.2 to our Form 8-K filed on January 4, 2017.
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10.28
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Executive Employment Agreement, effective January 1, 2017, by and between Summer Energy Holdings, Inc. and Angela Hanley, incorporated by reference to Exhibit 10.3 to our Form 8-K filed on January 4, 2017.
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10.29
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Sublease Agreement, dated October 13, 2017, by and between Summer Energy Holdings, Inc. and ENSCO International Incorporated, incorporated by reference to Exhibit 10.1 to our Form 8-K filed on November 7, 2017.
|
10.30
|
Membership interest Purchase Agreement, dated November 1, 2017 by and among Summer Energy Holdings, Inc., REP Energy, LLC and the members of REP Energy, LLC, incorporated by reference to Exhibit 10.2 to our Form 8-K filed on November 7, 2017.
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10.31
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ISDA Master Agreement and Schedule thereto between Summer Energy Northeast, LLC and EDF Energy Services, LLC, dated as of February 21, 2018, incorporated by reference to Exhibit 10.2 to our Form 8-K filed on February 23, 2018.
|
3
10.32
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ISDA Credit Support Annex between Summer Energy Northeast, LLC and EDF Energy Services, LLC, dated as of February 21, 2018, incorporated by reference to Exhibit 10.3 to our Form 8-K filed on February 23, 2018.
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10.33
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Security Agreement between Summer Energy Northeast, LLC and EDF Energy Services, LLC, dated as of February 21, 2018, incorporated by reference to Exhibit 10.4 to our Form 8-K filed on February 23, 2018.
|
10.34
|
Guaranty of Summer Energy Holdings, Inc. in favor of EDF Energy Services, LLC dated as of February 21, 2018, incorporated by reference to Exhibit 10.5 to our Form 8-K filed on February 23, 2018
|
10.35
|
First Amendment to Executive Employment Agreement between Summer Energy Holdings, Inc. and Angela Hanley, dated October 20, 2017, filed with the Annual Report.
|
10.36
|
First Amendment to Executive Employment Agreement between Summer Energy Holdings, Inc. and Neil Leibman, dated October 20, 2017
, filed with the Annual Report.
.
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10.37
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First Amendment to Executive Employment Agreement between Summer Energy Holdings, Inc. and Jaleea George, dated October 20, 2017
, filed with the Annual Report.
.
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10.38
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Sublease Agreement between Summer Energy Northeast, LLC (formerly REP Energy, LLC) and PDS Management Group, LLC dated October 31, 2017
, filed with the Annual Report.
.
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10.39
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Form of Promissory Note by Summer Energy Holdings, Inc. in favor of Neil Leibman and Tom O’Leary, dated January 3, 2018
, filed with the Annual Report.
.
|
10.40
|
Promissory Note by Summer Energy Holdings, Inc. in favor of Neil Leibman dated January 8, 2018
, filed with the Annual Report.
.
|
10.41
|
Form of Promissory Note by Summer Energy Holdings, Inc. in favor of Pinnacle Power, LLC dated January 8, 2018
, filed with the Annual Report.
.
|
14.1
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Code of Business Conduct and Ethics, incorporated by reference to Exhibit 14.1 to our Form 10-Q filed on May 15, 2012.
|
16.1
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Letter regarding change in certifying accountants, dated April 18, 2012, incorporated by reference to Exhibit 16.1 to our Form 8-K/A filed on April 20, 2012.
|
16.2
|
Letter regarding change in certifying accountants, dated August 21, 2017, incorporated by reference to Exhibit 99.1 to our Form 8-K filed on August 23, 2017.
|
21.1
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Schedule of Subsidiaries
, filed with the Annual Report.
.
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23.1
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Consent of Whitley Penn LLP
, filed with the Annual Report
|
23.2
|
Consent of LBB & Associates Ltd., LLP, filed herewith
|
24
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Power of Attorney, filed with the Annual Report.
|
31.1
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Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a), filed herewith.
|
31.2
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Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a), filed herewith.
|
32.1
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Certification of CEO and CFO pursuant to 18 U.S.C. Sec.1350 as adopted pursuant to Sec.906 of the Sarbanes-Oxley Act of 2002, filed herewith.
|
99.1
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Audit Committee Charter, incorporated by reference to Exhibit 99.1 to our Form 10-Q filed on May 15, 2013.
|
99.2
|
Compensation Committee Charter, incorporated by reference to Exhibit 99.2 to our Form 10-Q filed on May 15, 2013.
|
99.3
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Nominating and Corporate Governance Committee Charter, incorporated by reference to Exhibit 99.3 to our Form 10-K filed on March 28, 2013
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*Each of these Exhibits constitutes a management contract, compensatory plan or arrangement.
4