Strategic Environmental & Energy Resources, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion is intended to assist you in understanding our business and the results of our operations. It should be read in conjunction with the Condensed Consolidated Financial Statements and the related notes that appear elsewhere in this report as well as our Report on Form 10-K filed with the Securities and Exchange Commission on April 15, 2021. Certain statements made in our discussion may be forward looking. Forward-looking statements involve risks and uncertainties and a number of factors could cause actual results or outcomes to differ materially from our expectations. These risks, uncertainties, and other factors include, among others, the risks described in our Annual Report on Form 10-K filed with the Securities and Exchange Commission, as well as other risks described in this Quarterly Report. Unless the context requires otherwise, when we refer to “we,” “us” and “our,” we are describing Strategic Environmental & Energy Resources, Inc. and its consolidated subsidiaries on a consolidated basis. SEER BUSINESS OVERVIEW Strategic Environmental & Energy Resources, Inc. (“the Company” or “SEER”) was originally organized under the laws of the State of Nevada on February 13, 2002 for the purpose of acquiring one or more businesses, under the name of Satellite Organizing Solutions, Inc. (“SOZG”). In January 2008, SOZG changed its name to Strategic Environmental & Energy Resources, Inc., reduced its number of outstanding shares through a reverse stock split and consummated the acquisition of both, REGS, LLC and Tactical Cleaning Company, LLC. SEER is dedicated to assembling complementary service and environmental, clean-technology businesses that provide safe, innovative, cost effective, and profitable solutions in the 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, which includes our majority owned entities, is discussed in more detail below. 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 synergistic services, technologies and products. The Company now owns and manages three operating entities and two entities that have no significant operations to date, as REGS has been abandoned during the fiscal quarter. References in this report to abandoned or abandonment refer to the Company’s determination not to provide financial support to, or conduct operations in or through, REGS. Subsidiaries Wholly owned MV, LLC (d/b/a MV Technologies), (“MV”) : (operating since 2003) MV designs and sells patented and/or proprietary, dry scrubber solutions for management of Hydrogen Sulfide (H 2 S) in biogas, landfill gas, and petroleum processing operations. These system solutions are marketed under the product names H2SPlus™ and OdorFilter™. The markets for these products include land fill operations, agricultural and food product processors, wastewater treatment facilities, and petroleum product refiners. MV also develops and designs proprietary technologies and systems used to condition biogas for use as renewable natural gas (“RNG”), for a number of applications, such as transportation fuel and natural gas pipeline injection. SEER Environmental Materials, LLC (“SEM”): (formed September 2015) is a wholly owned subsidiary established as a materials technology business with the purpose of developing advanced chemical absorbents and catalysts that enhance the capability of biogas produced from, landfill, wastewater treatment operations and agricultural digester operations. 21 REGS, LLC d/b/a Resource Environmental Group Services (“REGS”): (operating from 1994 to September 2021) previously designed and manufactured environmental systems and provided general industrial cleaning services and waste management consulting to many industry sectors. During the fourth quarter of 2019, the Company ceased bidding on, and accepting contracts for the services division of its REGS subsidiary. The results from the subsidiary are included in discontinued operations for the years ended 2019 and 2018. No contracts have been uncompleted relating to the services division; therefore, the services division did not have any performance obligations as of December 31, 2019, nor thereafter. Fifteen employees in the division were terminated as of December 31, 2019. After the industrial cleaning services division was discontinued as of 2019, REGS continued with its manufacturing and assembly operations during 2020 and into 2021. These operations consisted primarily of building kilns and related equipment. As of September 2021, the Company wound down REGS, ceased all operations, and abandoned the entity as a subsidiary. REGS operations for the periods reported were included in discontinued operations. Assets and liabilities were stranded and written off in accordance with GAAP; however, the Company cannot provide any assurance as to the treatment of such assets or liabilities or the abandonment by third parties, including governmental authorities. Majority owned Paragon Waste Solutions, LLC (“PWS”): (formed late 2010) PWS is an operating company that has developed a patented waste destruction technology using a pyrolytic heating process combined with “non-thermal plasma” assisted oxidation. This technique involves gasification of solid waste by heating the waste in a low-oxygen environment, followed by complete oxidation at higher temperatures in the presence of plasma. The term “non-thermal plasma” refers to a low energy ionized gas that is generated by electrical discharges between two electrodes. This technology, commercially referred to as CoronaLux™, is designed and intended for the “clean” destruction of hazardous chemical and biological waste (i.e ., hospital “red bag” waste) thereby eliminating the need for costly segregation, transportation, incineration or landfill (with their associated legacy liabilities). PWS is a 54% owned subsidiary. PelleChar, LLC (“PelleChar”): (formed September 2018) owned 51% by SEER. PelleChar has secured third-party pellet manufacturing capabilities from one of the nation’s premier pellet manufacturers. Working closely with Biochar Now, LLC, PelleChar commenced sales in 2019 of its proprietary pellets containing the proven and superior Biochar Now product starting with the landscaping and big agriculture markets. At this time, PelleChar is the only company able to offer a soil amendment pellet containing the Biochar Now product that is produced using the patented pyrolytic process. PelleChar activity to date relates to startup of operations, and an increasing sales effort. Revenue and expenses of PelleChar were not material for the nine months ended September 30, 2021. Joint Ventures PWS MWS Joint Venture : In October 2014, PWS and Medical Waste Services, LLC (“MWS”) formed a contractual joint venture to exploit the PWS medical waste destruction technology. In 2015, MWS licensed and installed a CoronaLux™ unit at an MWS facility, and subsequently received a limited permit to operate from the South Coast Air Quality Management District (“SCAQMD”) and the California Department of Public Health. In November 2017, PWS received final air quality permit approval from SCAQMD allowing for full operations of the CoronaLux™ unit at the MWS facility. Paragon Southwest Joint Venture : In December 2017, PWS and GulfWest Waste Solutions, LLC (“GWWS”) formed Paragon Southwest Medical Waste, LLC (“PSMW”) to exploit the PWS medical waste destruction technology. PSMW has an exclusive license to the CoronaLux™ technology in a six-state area of the Southern United States. In addition to the equity position, PWS is the operating partner for the business and intends to sell a number of additional systems to the joint venture. In 2017, PSMW purchased and installed three CoronaLux™ units at an PSMW facility. 22 SEER’s Financial Condition and Liquidity As shown in the accompanying consolidated financial statements, the Company has experienced recurring operating losses, and has accumulated a deficit of approximately $28.9 million as of September 30, 2021, and $29.7 million as of December 31, 2020. For the nine months ended September 30, 2021, and 2020 we had net losses from operations before adjustment for losses attributable to non-controlling interest of approximately $0.8 million and $1.5 million, respectively. As of September 30, 2021, and December 31, 2020, our current liabilities exceed our current assets by approximately $7.3 million and $9.8 million, respectively. The primary reason for that working capital deficit decreased from December 31, 2020, to September 30, 2021, is due to abandonment of REGS as an entity, and stranded a net of liabilities that are no longer consolidated liabilities under the Company. The Company has limited common shares available for issue which may limit the ability to raise capital or settle debt through issuance of shares. These factors raise substantial doubt about the ability of the Company to continue to operate as a going concern for a period of at least one year after the date of the issuance of our audited financial statements for the period ended September 30, 2021. Realization of a major portion of our assets as of September 30, 2021, 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 focus to address opportunities identified in domestic markets attributable to increased federal and state emission control regulations 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. Results of Operations for the Three Months Ended September 30, 2021, and 2020 Total revenues were $1.2 million and $1.1 million for the three months ended September 30, 2021, and 2020, respectively. The increase of approximately $0.1 million or 18% in revenues comparing the three months ended September 30, 2021, to the three months ended September 30, 2020, is attributable to the increases in revenues from our products segment revenue, which includes our environmental solutions segment, which increased from approximately $1.0 million for the three months ended September 30, 2020, to approximately $1.2 million for the three months ended September 30, 2021, an increase of approximately $0.2 million or approximately 19%. Environmental solutions segment generated more revenue as activity increased in our construction contracts, due to the relief of a general slowdown in the economy attributable to the COVID-19 pandemic the prior year period. Operating expenses, which include cost of products, cost of solid waste and general and administrative (G&A) expenses, and salaries and related expenses, were consistent at approximately $1.2 million for the three months ended September 30, 2021, and 2020. Total non-operating expense, net was $1.5 million of other income for the three months ended September 30, 2021, compared to $0.2 million expense for the three months ended September 30, 2020. During the three months ended September 30, 2021, the Company recorded $1.5 million gain on abandonment, resulting from the ceasing of operations and abandonment of the REGS subsidiary. We also recorded $0.2 million in gain on debt extinguishment, which resulted from the forgiveness of the Company’s PPP Loans from the US Treasury. 23 There is no provision for income taxes for both the three months ended September 30, 2021, and 2020, due to our net losses for both periods and we continue to maintain full allowances covering our net deferred tax benefits as of September 30, 2021, and 2020. Net income, before discontinued operations and non-controlling interest, for the three months ended September 30, 2021, was $1.5 million compared to a net loss, before discontinued operations and non-controlling interest, of $0.5 million for the three months ended September 30, 2020. The net income attributable to SEER after deducting $0.3 million for the non-controlling interest and adding a gain from discontinued operations of $0.4 million was $1.7 million for the three months ended September 30, 2021, as compared to a net loss of $0.6 million, after deducting $30,700 in non-controlling interest and deducting $0.1 million loss from discontinued operations, for the three months ended September 30, 2020. As noted above, an increase in non-operating income during 2021 of $1.7 million primarily due to the $1.5 million gain from abandonment of REGS and the $0.2 million gain on debt extinguishment related to the forgiveness of the Company’s PPP Loan, an increase in revenue of $0.2 million, and a decrease of operating expenses of $0.2 million, were the primary reason for the increase in the net income. Results of Operations for the Nine Months Ended September 30, 2021, and 2020 Total revenues were $2.9 million and $2.5 million for the nine months ended September 30, 2021, and 2020, respectively. The increase of approximately $0.4 million or 16% in revenues comparing the nine months ended September 30, 2021, to the nine months ended September 30, 2020, is attributable to the increases in revenues from our products segment revenue, which includes our environmental solutions segment, which increased from $2.3 million for the nine months ended September 30, 2020, to $2.7 million for the nine months ended September 30, 2021, an increase of approximately $0.2 million, or approximately 16%. Activity increased in our construction contracts, due to the relieving of a general slowdown in the economy attributable to the COVID-19 pandemic the prior year period. Operating expenses, which include cost of products, cost of solid waste and general and administrative (G&A) expenses, and salaries and related expenses, were approximately $3.3 million for the nine months ended September 30, 2021, compared to $3.5 million for the nine months ended September 31, 2020. The decrease primarily consists of a decrease in general and administrative costs of approximately $0.1 million, as a result of reduced professional fees during the nine months ended, and a reduction in salaries and related of approximately $0.5 million due to the general decreased headcount, and the utilization of the Employee Retention Tax Credit (“ERTC”) program from the U.S Treasury, as part of the COVID-19 stimulus package. The ERTC program refunds a portion of taxes paid for payroll. This was partially offset by higher costs of products as we recognized more costs related to our construction contracts, due to the relieving of a general slowdown in the economy attributable to the COVID-19 pandemic the prior year period. This was partially offset by an increase in product costs due to activity increased in our construction contracts, due to the relieving of a general slowdown in the economy attributable to the COVID-19 pandemic the prior year period. Total non-operating other income, net was $1.1 million for the nine months ended September 30, 2021, compared to expense of $0.6 million for the nine months ended September 30, 2020. During the nine months ended September 30, 2021, the Company recorded a $1.5 million gain on abandonment, resulting from the ceasing of operations and abandonment of the REGS subsidiary. We also recorded $0.2 million in gain on debt extinguishment, which resulted from the forgiveness of the Company’s PPP Loans from the US Treasury. There is no provision for income taxes for both the nine months ended September 30, 2021, and 2020, due to our net losses for both periods and we continue to maintain full allowances covering our net deferred tax benefits as of September 31, 2021, and 2020. Net income, before non-controlling interest and discontinued operations, for the nine months ended September 30, 2021, was $0.7 million compared to a net loss, before non-controlling interest and discontinued operations, of $1.6 million for the nine months ended September 30, 2020. The net loss attributable to SEER after deducting $0.2 million for the non-controlling interest and adding a gain from discontinued operations of $0.3 million was $0.8 million for the nine months ended September 30, 2021, as compared to a loss of $1.8 million, after deducting $0.1 million in non-controlling interest and deducting a loss from discontinued operations of $0.3 million, for the nine months ended September 30, 2020. As noted above, a decrease in operating expenses during 2021 of 4%, an increase in revenue of 16%, and an increase in non-operating income of $1.7 million primarily due to the $1.5 million gain from the abandonment of REGS and the $0.2 million gain on debt extinguishment related to forgiveness of the Company’s PPP Loan, were the primary reasons for the change from a net loss to a net income for the nine months ended September 30, 2021. We also recorded a gain from discontinued operations of $0.3 million compared to a loss of $0.4 million, resulting in a $0.7 million favorable result to net income. Results of Discontinued Operations for the Three and Nine Months Ended September 30, 2020 and 2019 As of September 1, 2021 the Company abandoned its REGS subsidiary. All revenue and expenses of our REGS subsidiary for 2021 and 2020 are classified as discontinued operations. For the three months ended For the nine months ended September 30, September 30, 2021 2020 2021 2020 Services revenue $ - $ 142,300 $ 177,200 $ 171,400 Services costs (55,800 ) (192,600 ) (314,900 ) (368,400 ) General and administrative expenses (22,900 ) (26,200 ) (40,800 ) (79,900 ) Salaries and related expenses (51,200 ) (72,500 ) (150,800 ) (254,100 ) Other income (expense) 145,200 12,400 210,800 186,200 Gain on debt extinguishment 410,600 - 410,600 - Total expenses 425,900 (278,900 ) 114,900 (516,200 ) Total income (loss) from discontinued operations $ 425,900 $ (136,600 ) $ 292,100 $ (344,800 ) There is no provision for income taxes for both the three or nine months ended September 30, 2021 and 2020, due to our net loss carryforwards and we continue to maintain full allowances covering our net deferred tax benefits as of September 30, 2021 and 2020. 24 Changes in Cash Flow Operating Activities The Company had net cash used by operating activities for the nine months ended September 30, 2021, and 2020 of $1.4 million and $1.3 million, respectively. Cash used by operating activities is driven by our net loss and adjusted by non-cash items as well as changes in operating assets and liabilities. Non-cash adjustments primarily include depreciation, amortization of intangible assets, stock-based compensation expense, provision for bad debt, non-cash interest expense, gain on debt extinguishment, and gain on abandonment of subsidiary. Net loss decreased for the nine months ended September 30, 2021, from approximately $1.9 million, to a gain of $1.0 million. Non-cash adjustments decreased cash flows $2.1 million for the nine months ended September 30, 2021, compared to increasing cash flows $0.3 million for the nine months ended September 30, 2020. Gain on abandonment of subsidiary totaled $1.5 million during first nine months of 2021 compared to $0 in the first nine months of 2020, non-cash expense for interest was $0 in the first nine months of 2021, and $0.1 million in the first nine months of 2020, gain on extinguishment of debt totaled $0.6 million during first nine months of 2021 compared to $0 in the first nine months of 2020, and gain on disposal of fixed assets was $0.2 million in the first half of 2021, and $0 in the first half of 2020. In addition to the non-cash adjustments to net income, changes in assets and liabilities include: a) changes in account receivable used approximately $0.3 million in cash in the first nine months of 2021, compared to providing $0.2 million in the first nine months of 2020, a net decrease in cash of approximately $0.5 million, b) changes in inventory used approximately $21,900 in the first three months of 2021, compared to using $136,300 in the first nine months of 2020, a net increase in cash of approximately $0.1 million, c) changes in accounts payable, accrued liabilities, and customer deposits provided $0.1 million in the first nine months of 2021, compared to providing $0.2 million in the first nine months of 2020, a net decrease in cash provided of approximately $0.1 million, d) changes in costs in excess of billings on uncompleted contracts used $96,800 in the first nine months of 2021, compared to using $15,000 in the first half of 2020, a net increase in cash used of approximately $0.1 million. Investing activities Net cash provided by investing activities was $0.2 million for the nine months ended September 30, 2021, compared to using $0.1 million of cash for the nine months ended September 30, 2020. The purchase of property and equipment was $3,000 for the nine months ended September 30, 2021, and $131,600 for the nine months ended September 30, 2020. The proceeds from sale of fixed assets totaled $0.2 million for the nine months ended September 30, 2021, while $0 for the nine months ended September 30, 2020. Financing Activities Net cash provided by financing activities was approximately $1.3 million for the nine months ended September 30, 2021, which was consistent with the nine months ended September 30, 2020. The net of proceeds and payments related to debt of approximately $1.2 million in the nine months ended September 30, 2021, compared to approximately $0.7 million in the nine months ended September 30, 2020, and the net proceeds related to paycheck protection program of approximately $0.1 in the nine months ended September 30, 2021, compared to approximately $0.6 million in the nine months ended September 30, 2020. 25 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 $800 and $11,800 has been reserved as of September 30, 2021, and December 31, 2020, respectively. The Company is exposed to credit risk in the normal course of business, primarily related to accounts receivable. Our customers operate primarily in the 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 September 30, 2021, and December 31, 2020, 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 The Company evaluates 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 its 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. No impairments were determined as of September 30, 2021. Revenue Recognition Revenue is recognized under FASB guidelines, which 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. 26 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 3. Quantitative and Qualitative Disclosures About Market Risk Not Applicable.