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 14, 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. SEER is dedicated to assembling complementary service and clean-technology environmental businesses that provide safe, innovative, cost effective, and profitable solutions in the environmental, waste management and renewable energy industries. SEER currently operates four companies. Through these operating companies, SEER provides products and services throughout North America. Some of SEER’s current customers include Cargill, ConAgra, Simplot, JBS, and many other companies in the food, beverage, and agricultural space, as well as water treatment and landfill businesses. 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 25 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, 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. 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 original purpose of developing advanced chemical absorbents and catalysts that enhance the capability of biogas produced from, landfill, wastewater treatment operations and agricultural digester operations. January 1, 2023, the operations of SEM were discontinued. Results for the six months ended June 30, 2023 and 2022 are included in discontinued operations. The entity remains active and will now be used to form a joint venture to manufacture licensed biochar products and/or process and repurpose windmill blades. The initial facility is currently targeted for Texas. 19 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. PWS recently sold certain assets and its technology and associated IP to its joint venture partner, Paragon Southwest Medical Waste, LLC (“PSMW”)(see below). The sale was a unit transfer transaction. PWS retained certain international rights and continues to promote and market the CoronaLux technology in international markets. 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 June 30, 2023. 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 six months ended June 30, 2023. Joint Ventures 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. The Company’s interest in PSMW was converted to a 2% interest in Amlon Holdings in June 2023 when PSMW was acquired by Amlon Holdings. Eco SEER Saudi : On December 17, 2022, SEER and Eco Tadweer (“ET”), a business entity incorporated in the Kingdom of Saudi Arabia (“KSA”) entered into a joint venture with SEER owning a minority, non-controlling 49% interest in the joint venture. The purpose of the joint venture is to market and monetize SEER’s technologies in and around the KSA. While SEER is entitled to appoint one of three managers, ET is responsible for funding, operation and management of the joint venture. 20 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 $33.2 million as of June 30, 2023, and $32.0 million as of December 31, 2022. For the six months ended June 30, 2023, the Company incurred a net loss of approximately $1.2 million and for the six months ended June 30, 2022, the Company incurred a net loss of approximately $0.9 million. The Company had a working capital deficit of approximately $10.6 million as of June 30, 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 June 30, 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 six months ended June 30, 2023, the Company raised approximately $0.9 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 June 30, 2023, and 2022 Total revenues were $0.7 million and $1.1 million for the three months ended June 30, 2023, and 2022, respectively. The decrease of approximately $0.4 million or 34% in revenues comparing the three months ended June 30, 2023, to the three months ended June 30, 2022, is attributable to the decreases in revenues from our products segment revenue, which includes our environmental solutions segment. Our product percent-complete contract revenue decreased due to several material projects being postponed due to site preparation delays. Operating expenses, which include cost of products, cost of solid waste, general and administrative (G&A) expenses, and salaries and related expenses, were approximately $1.1 million for the three months ended June 30, 2023 and approximately $1.4 million for the three months ended June 30, 2022. Product costs decreased $0.3 million for the three months ended June 30, 2023, compared to the three months ended June 30, 2022, due to above mentioned percent-complete project delays. Total other income and expense was a net expense of $0.2 million for both the three months ended June 30, 2023 and 2022. The majority of other income and expense is interest expense, with was consistent at $0.2 million for both the three months ended June 30, 2023 and 2022. There is no provision for income taxes for both the three months ended June 30, 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 June 30, 2023, and 2022. Loss from continuing operations was approximately $0.6 million and $0.5 million, for the three months ended June 30, 2023 and 2022, respectively. The net loss attributable to SEER after adding $2,100 for the non-controlling interest and deducting $0.2 million of income from discontinued operations was $0.4 million for the three months ended June 30, 2023, as compared to a net loss of $0.5 million, after deducting $18,200 in non-controlling interest and deducting $34,000 loss from discontinued operations, for the three months ended June 30, 2022. As noted above, income from discontinued operations, partially offset by a decrease in revenue, decreased net loss by $0.1 million. 21 Results of Operations for the Six Months Ended June 30, 2023, and 2022 Total revenues were $1.3 million and $1.9 million for the six months ended June 30, 2023, and 2022, respectively. The decrease of approximately $0.6 million or 33% in revenues comparing the six months ended June 30, 2023, to the six months ended June 30, 2022, is attributable to the decreases in revenues from our products segment revenue, which includes our environmental solutions segment, and our solid waste segment. Our product percent-complete contract revenue decreased due to several material projects being postponed due to site preparation delays. Our solid waste segment also decreased $0.1 million, as we no longer collect a management fee from our PWS subsidiary. Operating expenses, which include cost of products, cost of solid waste, general and administrative (G&A) expenses, and salaries and related expenses, were approximately $2.3 million for the six months ended June 30, 2023 and approximately $2.6 million for the six months ended June 30, 2022. Product costs decreased $0.3 million for the six months ended June 30, 2023, compared to the six months ended June 30, 2022 due to above mentioned percent-complete project delays. Total other income and expense was a net expense of $0.4 million for the six months ended June 30, 2023, compared to $0.2 million for the six months ended June 30, 2022. The majority of other income and expense is interest expense, with was consistent at $0.4 million for both the six months ended June 30, 2023 and 2022. The prior year period also included a $0.1 million gain on debt extinguishment from the forgiveness of the Company’s PPP Loans from the US Treasury. There is no provision for income taxes for both the six months ended June 30, 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 June 30, 2023, and 2022. Loss from continuing operations was approximately $1.4 million and $0.9 million, for the six months ended June 30, 2023 and 2022, respectively. The net income attributable to SEER after adding $700 for the non-controlling interest and $160,300 gain from discontinued operations was $1.2 million for the six months ended June 30, 2023, as compared to a net loss of $0.9 million, after deducting $22,200 in non-controlling interest and deducting $0.1 million loss from discontinued operations, for the six months ended June 30, 2022. As noted above, the decrease in margin, prior years gain on debt distinguishment, partially offset by current year’s income from discontinued operations, increased net loss by $0.3 million. 22 Results of Discontinued Operations for the Six Months Ended June 30, 2023 and 2022 As of January 1, 2023, the Company abandoned its SEM subsidiary. All revenue and expenses of our SEMS subsidiary for 2023 are classified as discontinued operations. For the Six Months ended June 30, 2023 2022 Services revenue $ - $ 120,400 Services costs - (130,500 ) General and administrative expenses (14,300 ) (25,800 ) Salaries and related expenses - (17,200 ) Other Expense 174,600 (2,200 ) Total expenses 160,300 (175,700 ) Operating income 160,300 (55,300 ) Income tax benefit - - Total income (loss) from discontinued operations $ 160,300 $ (55,300 ) There is no provision for income taxes for both the six months ended June 30, 2023, and 2022, due to our net loss carryforwards and we continue to maintain full allowances covering our net deferred tax benefits as of June 30, 2023 and 2022. Changes in Cash Flow Operating Activities The Company had net cash used by operating activities for the six months ended June 30, 2023, and 2022 of $1.0 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 $0.9 million for the six months ended June 31, 2022 increased to $1.2 million for the six months ended June 30, 2023. Non-cash adjustments increased cash uses of $0.2 million for the six months ended June 30, 2023, compared to cash uses of $17,800 for the six months ended June 30, 2022. In addition to the non-cash adjustments to net income, changes in assets and liabilities include: a) changes in accounts payable, accrued liabilities, and customer deposits provided $0.2 million in the first six months of 2023, compared to providing $0.8 million in the first six months of 2022, b) changes in contract assets provided $0.1 million in the first six months of 2023, compared to using $0.2 million in the first six months of 2022, c) changes in contract liabilities used $23,000 in the first six months of 2023, compared to using $0.2 million in the first three months of 2022, and d) changes in accounts receivable provided $0.1 million in the first six months of 2023, compared to using $27,600 in the first three months of 2022. Investing activities Net cash provided by investing activities was $0.3 million for the six months ended June 30, 2023, compared to a use of $31,800 for the six months ended June 30, 2022. The Company sold fixed assets during the current year and collected $0.3 million. 23 Financing Activities Net cash provided by financing activities was approximately $0.7 million for the six months ended June 30, 2023, compared with providing $0.3 million for the six months ended June 30, 2022. The Company’s financing activities for both periods consist of new borrowing, net of any principal payments made during the period. 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 forecasted cash flows used in the impairment testing of goodwill and intangible assets. The carrying amount of intangible assets; valuation allowances and reserves for receivables; revenue recognition related to contracts accounted for under the percentage of completion method; and the Company’s ability to continue as a going concern. 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 June 30, 2023, and December 31, 2022. The Company is exposed to credit risk in the normal course of business, primarily related to accounts receivable. Our customers operate primarily in the food, beverage, and agricultural space, as well as water treatment and landfill 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 June 30, 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 June 30, 2023. 24 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.