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, 2023. 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 was abandoned during the third fiscal quarter of 2021. 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 landfill 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. 18 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. ReaCH4BioGas (“Reach” or “Benefuels”) (trade name for Benefuels, LLC): (formed February 2013) owned 85% by SEER. Reach develops renewable natural gas projects that convert raw biogas into pipeline quality gas and/or Renewable, “RNG”, for fleet vehicles. Reach has had minimal operations as of December 31, 2022. 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 year ended December 31, 2022. 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 2017, PSMW purchased and installed three CoronaLux™ units at an PSMW facility. In July 2022, the Company exchanged its patents and related technology to its joint venture, PSMW, in exchange for units in PSMW. 19 SEER’s Financial Condition and Liquidity As shown in the accompanying consolidated financial statements, the Company has experienced recurring losses, and has accumulated a deficit of approximately $32.8 million as of March 31, 2023, and $32.0 million as of December 31, 2022. For the three months ended March 31, 2023, the Company incurred a net loss of approximately $0.8 million and for the three months ended March 31, 2022, the Company incurred a net loss of approximately $0.4 million. The Company had a working capital deficit of approximately $10.2 million as of March 31, 2023, and a working capital deficit of $9.4 million as of December 31, 2022. These factors raise substantial doubt about the ability of the Company to continue to operate as a going concern. Realization of a major portion of the Company’s assets as of March 31, 2023, is dependent upon continued operations. The Company is dependent on generating additional revenue or obtaining adequate capital to fund operating losses until it becomes profitable. For the three months ended March 31, 2023, the Company raised approximately $0.7 million from the issuance of short-term and long-term debt, for a net cash provided by financing activities of approximately $0.7 million. In addition, the Company has undertaken a number of specific steps to continue to operate as a going concern. The Company continues to focus on developing organic growth in our operating companies and improving gross and net margins through increased attention to pricing, aggressive cost management and overhead reductions, including discontinuing SEM, a line of business with historically insufficient margins. The Company has limited common shares available for issue which may limit the ability to raise capital or settle debt through issuance of shares. The Company has increased business development efforts to address opportunities identified in expanding markets attributable to increased interest in energy conservation and emission control regulations. In addition, the Company is evaluating various forms of financing which may be available to it. There can be no assurance that the Company will secure additional financing for working capital, 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 March 31, 2023, and 2022 Total revenues were $0.6 million and $0.8 million for the three months ended March 31, 2023, and 2022, respectively. The decrease of approximately $0.2 million or 25% in revenues comparing the three months ended March 31, 2023, to the three months ended March 31, 2023, is attributable to the decreases in revenues from our products segment revenue, which includes our environmental solutions segment, which decreased to approximately $0.6 million for the three months ended March 31, 2023, from approximately $0.8 million for the three months ended March 31, 2022. 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 $1.1 million for the three months ended March 31, 2023 and approximately $1.2 million for the three months ended March 31, 2022. Product costs decreased $0.1 million for the three months ended March 31, 2023, compared to the three months ended March 31, 2022. 20 Total non-operating expense, net was $0.2 million for the three months ended March 31, 2023, compared to $15,400 expense for the three months ended March 31, 2022. During the three months ended March 31, 2022, the Company recorded $0.1 million in gain on debt extinguishment, which resulted from the forgiveness of the Company’s PPP Loans from the US Treasury, and approximately $0.1 million gain on the exchange of convertible units in a joint venture for an outstanding debt and liabilities. These gains were offset by $0.2 million in interest expense, which is comparable to interest expense of $0.2 million for the three months ended March 31, 2023. There is no provision for income taxes for both the three months ended March 31, 2023, and 2022, due to our net losses for both periods and we continue to maintain full allowances covering our net deferred tax benefits as of March 31, 2023, and 2022. Loss from continuing operations was approximately $0.8 million and $0.4 million, for the three months ended March 31, 2023 and 2022, respectively. The net income attributable to SEER after adding $2,800 for the non-controlling interest and deducting $11,700 from loss on discontinued operations was $0.8 million for the three months ended March 31, 2023, as compared to a net loss of $0.4 million, after deducting $4,100 in non-controlling interest and deducting $21,300 loss from discontinued operations, for the three months ended March 31, 2022. As noted above, an increase in operating expenses, reducing margins increased net loss by $0.5 million. Results of Discontinued Operations for the Three Months Ended March 31, 2023 and 2022 As of March 31, 2023, the Company abandoned its SEM subsidiary. All revenue and expenses of our SEMS subsidiary for 2023 are classified as discontinued operations. For the three months ended March 31, 2023 2022 Services revenue $ - $ 103,900 Services costs (6,400 ) (101,900 ) General and administrative expenses - (9,900 ) Salaries and related expenses (4,800 ) (12,300 ) Other Expense (500 ) (1,100 ) Total expenses (11,700 ) (125,200 ) Operating income (11,700 ) (21,300 ) Income tax benefit - - Total income (loss) from discontinued operations $ (11,700 ) $ (21,300 ) There is no provision for income taxes for both the three months ended March 31, 2023, and 2022, due to our net loss carryforwards and we continue to maintain full allowances covering our net deferred tax benefits as of March 31, 2023 and 2022. 21 Changes in Cash Flow Operating Activities The Company had net cash used by operating activities for the three months ended March 31, 2023, and 2022 of $0.6 million and $0.4 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 and amortization of intangible assets. Net loss of $0.4 million for the three months ended March 31, 2022 increased to $0.8 million for the three months ended March 31, 2023. Non-cash adjustments decreased cash uses of $5,600 for the three months ended March 31, 2023, compared to cash uses of $30,300 for the three months ended March 31, 2022. In addition to the non-cash adjustments to net income, changes in assets and liabilities include: a) changes in inventory used approximately $14,700 in cash in the first three months of 2023, compared to providing $71,300 in the first three months of 2022, b) changes in prepaid expenses and other assets used approximately $73,800 in the first three months of 2023, compared to using $70,000 in the first three months of 2022, c) changes in accounts payable, accrued liabilities, and customer deposits used $72,100 in the first three months of 2023, compared to providing $274,400 in the first three months of 2022, d) changes in contract liabilities used $89,800 in the first three months of 2023, compared to using $2,400 in the first three months of 2022. Investing activities Net cash used by investing activities was $28,300 for the three months ended March 31, 2022. There was no cash used in investing activities for the three months ended March 31, 2023. Financing Activities Net cash provided by financing activities was approximately $0.7 million for the three months ended March 31, 2023, compared with providing $0.3 million for the three months ended March 31, 2022. 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 $179,000 has been reserved as of March 31, 2023, and December 31, 2022. 22 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 March 31, 2023, and December 31, 2022, 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 March 31, 2023. 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. Item 3. Quantitative and Qualitative Disclosures About Market Risk Not Applicable.