Strategic Environmental & Energy Resources, Inc. 10-K

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDERS MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information for Common Stock The Company’s common stock is quoted on the OTCQB marketplace, operated by OTC Markets Group, under the symbol “SENR.” The following table sets forth the range of high and low bid prices for the periods indicated. The quotations reflect inter-dealer prices without retail mark-up, mark-down or commission and may not represent actual transactions. Quarter Ended High Low December 31, 2019 $ 0.07 $ 0.05 September 30, 2019 $ 0.12 $ 0.07 June 30, 2019 $ 0.13 $ 0.07 March 31, 2019 $ 0.16 $ 0.07 December 31, 2018 $ 0.20 $ 0.06 September 30, 2018 $ 0.34 $ 0.16 June 30, 2018 $ 0.52 $ 0.26 March 31, 2018 $ 0.73 $ 0.41 Stockholders As of May 14, 2020, there were approximately 81 recordholders holding 61,703,575 common shares issued and outstanding. There are no preferred shares issued or outstanding. Dividends We have not declared or paid a cash dividend on our common stock. We currently intend to retain future earnings, if any, to finance the growth and development of our business and, therefore, do not anticipate paying cash dividends in the foreseeable future. There can be no assurance that our operations will prove profitable to the extent necessary to pay cash dividends. Moreover, even if such profits are achieved, the future dividend policy will depend upon our earnings, capital requirements, financial condition, and other factors considered relevant by our board of directors. 23 Recent Sales of Unregistered Securities From January 1, 2019 to December 31, 2019, we had the following sales and issuances of unregistered equity securities: Consideration Received and Description of Underwriting or If Option, Warrant Other Discounts to Market Price or Convertible Security Exemption from or Convertible Security, Terms of Date of Sale Title of Security Number Sold Afforded to Purchases Registration Claimed Exercise or Conversion Security Holder May 2019 Common Stock 50,000 Shares issued as penalty for not meeting short term note maturity date; no commissions paid Section 4(2); and/or Rule 506 Not applicable Clyde Berg, an individual June 2019 Common Stock 50,000 Shares issued as penalty for not meeting short term note maturity date; no commissions paid Section 4(2); and/or Rule 506 Not applicable Clyde Berg, an individual July 2019 Common Stock 50,000 Shares issued as penalty for not meeting short term note maturity date; no commissions paid Section 4(2); and/or Rule 506 Not applicable Clyde Berg, an individual August 2019 Common Stock 100,000 Shares issued as penalty for not meeting short term note maturity date; no commissions paid Section 4(2); and/or Rule 506 Not applicable Clyde Berg, an individual September 2019 Common Stock 100,000 Shares issued as penalty for not meeting short term note maturity date; no commissions paid Section 4(2); and/or Rule 506 Not applicable Clyde Berg, an individual October 2019 Common Stock 107,500 Shares issued as penalty for not meeting short term note maturity date; no commissions paid Section 4(2); and/or Rule 507 Not applicable Clyde Berg, an individual November 2019 Common Stock 115,000 Shares issued as penalty for not meeting short term note maturity date; no commissions paid Section 4(2); and/or Rule 508 Not applicable Clyde Berg, an individual December 2019 Common Stock 115,000 Shares issued as penalty for not meeting short term note maturity date; no commissions paid Section 4(2); and/or Rule 509 Not applicable Clyde Berg, an individual These transactions were conducted in reliance on the exemptions from the registration requirements of the Securities Act of 1933, as amended, based on the private sale of the securities and the Company’s relationships with the security holders. ITEM 6. SELECTED FINANCIAL DATA Not Applicable. ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion is intended to assist in understanding our business and the results of our operations. It should be read in conjunction with the Consolidated Financial Statements and the related footnotes and “Risk Factors” that appear elsewhere in this Report. Certain statements in this Report constitute “forward-looking statements.” Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Factors that might cause such a difference include, among others, uncertainties relating to general economic and business conditions; industry trends; changes in demand for our products and services; uncertainties relating to customer plans and commitments and the timing of orders received from customers; announcements or changes in our pricing policies or that of our competitors; unanticipated delays in the development, market acceptance or installation of our products and services; changes in government regulations; availability of management and other key personnel; availability, terms and deployment of capital; relationships with third-party equipment suppliers; and worldwide political stability and economic growth. The words “believe,” “expect,” “anticipate,” “intend” and “plan” and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. Unless the context requires otherwise, when we refer to “we,” “us” and “our,” we are describing SEER and its consolidated subsidiaries on a consolidated basis. 24 Overview SEER was formed as a publicly traded company in early 2008 through a reverse merger. SEER is dedicated to assembling complementary service and environmental, clean-technology businesses that provide safe, innovative, cost effective, and profitable solutions in the oil & gas, environmental, waste management and renewable energy industries. SEER currently operates five companies with four offices in the western and mid-western U.S. Through these operating companies, SEER provides products and services throughout the U.S. and has licensed and owned technologies with many customer installations throughout the U.S. Each of the five operating companies is discussed in more detail below. The Company also has non-controlling interests in joint ventures, some of which have no or minimal operations. The Company’s domestic strategy is to grow internally through SEER’s subsidiaries that have well established revenue streams and, simultaneously, establish long-term alliances with and/or acquire complementary domestic businesses in rapidly growing markets for renewable energy, waste and water treatment, and industrial services. The focus of the SEER family of companies, however, is to increase margins by securing or developing proprietary, patented and patent-pending technologies, and then leveraging its 20 plus-year service experience to place these innovations and solutions into the growing markets of emission capture and control, renewable “green gas” capture and sale, compressed natural gas fuel generation, as well as general solid waste and medical/pharmaceutical waste destruction. Many of SEER’s current operating companies share customer bases and each provides truly synergistic services, technologies and products as well as annuity type revenue streams. Financial Condition At December 31, 2019, we had approximately $7.0 million in negative working capital, which represents a decrease of approximately $1.7 million from $5.4 million in negative working capital at December 31, 2018. The decrease in our working capital, results primarily from the net loss, before non-controlling interest, of $2.7 million for 2018 offset by proceeds of $0.6 million from notes receivable, non-cash adjustments to net income of $0.3 million during 2019 and proceeds from outside minority investors of $0.2 million during 2019. In May 2013, REGS filed an Offer in Compromise with the IRS. REGS received a letter from the IRS, dated March 27, 2014, rejecting its Offer in Compromise and in accordance with the rejection letter REGS has submitted a written appeal. As a result of the IRS rejection of the Offer in Compromise, the Installment Plan, mentioned in Part 1, Item 1, was terminated. In June 2014, REGS received notices of intent to levy property or rights to property from the IRS for the amounts owed for the past due payroll taxes, penalty and interest. The appeal submitted by REGS was denied by the IRS, however, the IRS has not taken any current action. As of December 31, 2019, the outstanding balance due to the IRS was $1,052,200 and REGS continues to be represented by tax counsel specializing in federal tax matters. As shown in the accompanying consolidated financial statements, the Company has experienced recurring losses, and has accumulated a deficit of approximately $27.0 million as of December 31, 2019, and $24.4 million as of December 31, 2018. For the years ended December 31, 2019, and 2018, we incurred net losses of approximately $2.6 million and $2.9 million, respectively. Realization of a major portion of our assets as of December 31, 2019, is dependent upon our continued operations. The Company is dependent on generating additional revenue or obtaining adequate capital to fund operating losses until it becomes profitable. In addition, we have undertaken a number of specific steps to continue to operate as a going concern. We continue to focus on developing organic growth in our operating companies, diversifying our service customer base and market concentrations and improving gross and net margins through increased attention to pricing, aggressive cost management and overhead reductions, including discontinuing a line of business with insufficient margins. Critical to achieving profitability will be our ability to license and or sell, permit and operate through our joint ventures and licensees our CoronaLux™ waste destruction units. We have increased our business development efforts to address opportunities identified in expanding domestic markets attributable to increased federal and state emission control regulations (particularly in the nation’s oil and gas fields) and a growing demand for energy conservation and renewable energies. In addition, the Company is evaluating various forms of financing that may be available to it. There can be no assurance that the Company will secure additional financing for working capital on favorable terms or at all, increase revenues and achieve the desired result of net income and positive cash flow from operations in future years. These financial statements do not give any effect to any adjustments that would be necessary should the Company be unable to report on a going concern basis. 25 Results of Continuing Operations for the Years Ended December 31, 2019 and 2018 Total revenues were $4.3 million and $5.3 million for the years ended December 31, 2019 and 2018, respectively. The decrease of approximately $1.0 million or 18% in revenues comparing the year ended December 31, 2019 to the year ended December 31, 2018 is primarily attributable to the decreases in revenues from our products segment revenue, which includes our environmental solutions segment, which decreased from $4.9 million for the year ended December 31, 2018 to $4.1 million for the year ended December 31, 2019, a decrease of approximately $0.9 million or approximately 17%. Environmental solutions segment generated less revenue as the volume of media sales decreased, primarily due to a shortage of capital to produce the media internally. The solid waste disposal segment also generated licensing and placement fees of $49,900 in 2019 compared to $134,800 in 2018, a decrease of $84,900 or 63%, primarily due to having fewer active units operative in the field, of which generating fees. In addition, the solid waste disposal segment generated approximately $200,000 in management fees and $0 in joint operating income for 2019 compared to $200,000 in management fees and $34,400 in joint operating income for 2018, due to an overall reduction in activity in our Paragon Waste subsidiary. Operating expenses, which include cost of products, cost of solid waste and general and administrative (G&A) expenses, salaries and related expenses, and fixed asset and other asset impairment, were approximately $5.1 million for the year ended December 31, 2019 compared to $5.9 million for the year ended December 31, 2018. The changes which consist of 1) A decrease of product cost of $0.7 million, or 22%, which corresponds with the decrease in product revenue compared to 2018, 2) an increase in general and administrative expenses of approximately $0.2 million in 2019, primarily a result of an increase in bad debt expense of $0.2 million, 3) a decrease in salaries and related expenses of approximately $0.3 million in 2019, this was primarily a result of less employees 2019, and a reduction in stock-based compensation of $0.1 million in 2019, and 4) a decrease of approximately $0.1 million in asset impairment, which was incurred in 2018. We incurred impairment charge in 2019, although it is classified in discontinued operations below. Product costs as a percentage of product revenues was 57% in 2019 compared to 61% in 2018. The increase in margin is primarily due to an increase in recurring product sales, the commencement of PelleChar activity in 2019, with additional contributions from one-time sales, services and equipment rentals. Solid waste costs remained consistent at $0.1 million in 2019 and 2018. Total non-operating other expense, net was $0.1 million for the year ended December 31, 2019 compared to $1.3 for the year ended December 31, 2018. The decrease in 2019 compared to 2018 is primarily due to a decrease in interest expense of $0.8 million as a result of a decrease penalty shares related to the short-term debt and negotiated extensions of debt. Other income also increased, reducing other expense, as a result of a note receivable, previously 100% allowed for, being collected in 2019. There is no provision for income taxes for both the year ended December 31, 2019 and 2018, due to our net losses for both periods and we continue to maintain full allowances covering our net deferred tax benefits as of December 31, 2019 and 2018. Net loss, before non-controlling interest, for the year ended December 31, 2019 was $2.7 million compared to a net loss, before non-controlling interest, of $3.1 million for the year ended December 31, 2018. The net loss attributable to SEER after deducting $151,200 for the non-controlling interest, and $1.8 million for discontinued operations was $2.6 million for the year ended December 31, 2019 as compared to $2.9 million, after deducting $160,300 in non-controlling interest, and $1.1 million for discontinued operations for the year ended December 31, 2018. As noted above, the 18% decrease in revenue in 2019 compared to 2018 offset with a reduction of operating expenses of 15% and offset by non-operating expenses during 2019 of 89% was the primary reason for the decrease in the net loss. Results of Discontinued Operations for the Years Ended December 31, 2019 and 2018 During the fourth quarter of 2019, the Company ceased bidding on, and accepting contracts for the services division of its REGS subsidiary. All revenue and expenses of our REGS subsidiary are now classified as discontinued operations, and 2018 was reclassified for the presentation of the consolidated financial statements for the year ended December 31, 2019. 26 Total revenues were approximately $1.7 million and $2.9 million for the years ended December 31, 2019 and 2018, respectively. Operating costs, which include cost of services, general and administrative (G&A) expenses, and salaries and related expenses, were $3.4 million for the year ended December 31, 2019 compared to $4.1 million for the year ended December 31, 2018. The decrease in operating costs is due to the cost cutting measures taken during the year, as utilization of the REGS assets, and REGS margins had decreased. Total net loss from discontinued operations was $1.8 million for the year ended December 31, 2019 compared to $1.1 million for the year ended December 31, 2018. There is no provision for income taxes for the year ended December 31, 2018 due to prior year consolidated losses and for the year ended December 31, 2017, due to year-to-date consolidated net loss. Liquidity and Capital Resources The following table summarizes the net cash provided by (used in) operating, investing and financing activities for the periods indicated: Years Ended December 31, 2019 2018 Operating activities $ (2,100,800 ) $ (1,003,600 ) Investing activities 482,700 163,600 Financing activities $ 1,857,100 $ 901,600 Operating Activities Net cash used in operating activities during the year ended December 31, 2019 was $2.1 million compared to $1.0 million during the year ended December 31, 2018. Cash used in operating activities is driven by our net loss and adjusted by non-cash items and changes in operating assets and liabilities. Non-cash adjustments primarily include depreciation and amortization of property & equipment and intangible assets, stock-based compensation expense, asset impairment expense, non-cash interest expense related to the issuance of common stock for short-term debt penalty, a change in the provision for doubtful accounts. In 2019, net non-cash adjustments totaled approximately $0.3 million and in 2018, net non-cash adjustments totaled $1.7 million. In 2019, the net effect of changes in operating assets and liabilities was an increase in cash by $0.3 million, primarily due to an increase of $0.6 million in collections of accounts receivable, offset by a decrease in cash due to decrease in deferred revenue of $0.2 million. The increase in accounts payable and accrued liabilities is based on timing and paying vendors on a slower basis due to the intent to conserve cash at year end. The decrease in accounts receivable is primarily due to the timing of invoicing on client contracts and the increase in accounts payable and accrued liabilities is primarily due to the timing of payments of invoices from vendors. Investing activities Net cash provided by investing activities is primarily attributable to the purchase of property and equipment, and the proceeds from notes receivable. Our net cash flow provided by investing activities was $0.6 million for the year ended December 31, 2019 and $0.2 million for the year ended December 31, 2018. During 2019, we had additions to property and equipment of $70,100, and proceeds of $552,800 from a notes receivable that includes a previously impaired note. During 2018, we had additions to property and equipment of $60,300, increases in intangible assets of $100, and proceeds of $224,000 from a note receivable. 27 Financing Activities Net cash provided by financing activities was approximately $1.9 million for 2019 and net cash used in financing activities was approximately $0.9 million for 2018. Proceeds from the issuance of convertible and short-term debt was $2.0 million and $0.9 million in 2019 and 2018, respectively. Payments on notes payable and capital lease obligations was $0.4 million in 2019 and $0.8 million in 2018. Proceeds from the outside investment of new subsidiaries was $0.2 million in 2019 and $0.5 million in 2018. Proceeds from the sale of common stock was was $0 in 2019 and $0.4 million in 2018. Overall, our cash increased from 2018 to 2019 primarily due to the proceeds from the issuance of short term and convertible debt, collections on notes receivable in 2019 that provided some working capital to offset our operating losses. Critical Accounting Policies, Judgments and Estimates Use of Estimates The preparation of these consolidated financial statements in conformity with accounting principles generally accepted in the United States (U.S. GAAP) requires management to make a number of estimates and assumptions related to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Significant items subject to such estimates and assumptions include the carrying amount of intangible assets; valuation allowances and reserves for receivables, inventory and deferred income taxes; revenue recognition related to contracts accounted for under the percentage of completion method; share-based compensation; and loss contingencies, including those related to litigation. Actual results could differ from those estimates. Accounts Receivable and Concentration of Credit Risk Accounts receivable are recorded at the invoiced amounts less an allowance for doubtful accounts and do not bear interest. The allowance for doubtful accounts is based on our estimate of the amount of probable credit losses in our accounts receivable. We determine the allowance for doubtful accounts based upon an aging of accounts receivable, historical experience and management judgment. Accounts receivable balances are reviewed individually for collectability, and balances are charged off against the allowance when we determine that the potential for recovery is remote. An allowance for doubtful accounts of approximately $11,800 and $227,500 had been reserved as of December 31, 2019 and 2018, respectively. We are exposed to credit risk in the normal course of business, primarily related to accounts receivable. Our customers operate primarily in the oil production and refining, rail transport, biogas generating and wastewater treatment industries in the United States. Accordingly, we are affected by the economic conditions in these industries as well as general economic conditions in the United States. To limit credit risk, management periodically reviews and evaluates the financial condition of its customers and maintains an allowance for doubtful accounts. As of December 31, 2019, and 2018, we do not believe that we have significant credit risk. Fair Value of Financial Instruments The carrying amounts of our financial instruments, including accounts receivable and accounts payable, are carried at cost, which approximates their fair value due to their short-term maturities. We believe that the carrying value of notes payable with third parties, including their current portion, approximate their fair value, as those instruments carry market interest rates based on our current financial condition and liquidity. We believe the amounts due to related parties also approximate their fair value, as their carried interest rates are consistent with those of our notes payable with third parties. Long-lived Assets We evaluate the carrying value of long-lived assets for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. An asset is considered to be impaired when the anticipated undiscounted future cash flows of an asset group are estimated to be less than the carrying value. The amount of impairment recognized is the difference between the carrying value of the asset group and its fair value. Fair value estimates are based on assumptions concerning the amount and timing of estimated future cash flows. For the year ended December 31, 2018, the Company recognized an impairment to one CoronaLux ™ unit of $70,700. For the year ended December 31, 2019, the Company did not have any impairment charges. 28 Revenue Recognition In May 2014, the FASB issued guidance on revenue from contracts with customers that superseded most current revenue recognition guidance, including industry-specific guidance. The underlying principle of the guidance is to recognize revenue to depict the transfer of goods or services to customers at an amount to which the company expects to be entitled in exchange for those goods or services. The new guidance requires an evaluation of revenue arrangements with customers following a five-step approach: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations; and (5) recognize revenue when (or as) the company satisfies each performance obligation. Revenues are recognized when control of the promised services are transferred to the customers in an amount that reflects the expected consideration in exchange for those services. A customer obtains control when it has the ability to direct the use of and obtain the benefits from the services. Other major provisions of the guidance include capitalization of certain contract costs, consideration of the time value of money in the transaction price and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company adopted the provisions of this guidance effective January 1, 2018 as required under the guidance. The adoption of this guidance did not have any material impact on the Company’s consolidated financial statements. Stock-based Compensation We account for stock-based awards at fair value on the date of grant and recognize compensation over the service period that they are expected to vest. We estimate the fair value of stock options and stock purchase warrants using the Black-Scholes option pricing model. The estimated value of the portion of a stock-based award that is ultimately expected to vest, taking into consideration estimated forfeitures, is recognized as expense over the requisite service periods. The estimate of stock awards that will ultimately vest requires judgment, and to the extent that actual forfeitures differ from estimated forfeitures, such differences are accounted for as a cumulative adjustment to compensation expenses and recorded in the period that estimates are revised. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable