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. The Company's REGS subsidiary 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 (H2S) 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.
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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.
REGS, LLC d/b/a Resource Environmental Group Services ("REGS"): (operated 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 2021 and 2020. No contracts have
been uncompleted relating to the services division; therefore, the services
division did not have any performance obligations as of December 31, 2020, nor
thereafter. 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 three months ended March 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 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.
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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 $29.8 million as of March 31, 2022, and $29.4 million as of
December 31, 2021. For the three months ended March 31, 2022, and 2021 we
incurred a net loss of approximately $0.4 million, and $0.3 million,
respectively. As of March 31, 2022, and December 31, 2021, our current
liabilities exceed our current assets by approximately $7.6 million and $7.5
million, respectively. The primary reason for that working capital deficit
increased from December 31, 2021, to March 31, 2022, is due to a net loss for
the quarter. 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 March 31, 2022.
Realization of a major portion of our assets as of March 31, 2022, 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 March 31, 2022, and 2021
Total revenues were $0.9 million and $0.7 million for the three months ended
March 31, 2022, and 2021, respectively. The increase of approximately $0.2
million or 22% in revenues comparing the three months ended March 31, 2022, to
the three months ended March 31, 2021, is attributable to the increases in
revenues from our products segment revenue, which includes our environmental
solutions segment, which increased from approximately $0.7 million for the three
months ended March 31, 2021, to approximately $0.9 million for the three months
ended March 31, 2022, an increase of approximately $0.2 million or approximately
22%. 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 approximately $1.3 million for the three months ended March 31, 2022, an
increase of approximately $0.4 million from $0.9 million for the three months
ended March 31, 2021. Product costs increased $0.2 million for the three months
ended March 31, 2021, compared to the three months ended March 31, 2022,
primarily due to increased job costs connected to our percent complete
contracts, as percent complete contract activity has increased, and the
increased costs for freight was material for the quarter. Salaries and related
expenses increased $0.2 million for the three months ended March 31, 2021,
compared to the three months ended March 31, 2022, primarily due to ERTC credits
that reduced payroll taxes during the first quarter of 2021.
20
Total non-operating expense, net was $19,100 for the three months ended March
31, 2022, compared to $0.2 million expense for the three months ended March 31,
2021. 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 subsidiary for an outstanding
debt and liabilities. The units had no basis, resulting in a gain for the
quarter.
There is no provision for income taxes for both the three months ended March 31,
2022, and 2021, 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,
2022, and 2021.
Loss from continuing operations was approximately $0.4 million, for both the
three months ended March 31, 2022, and 2021. The net income attributable to SEER
after deducting $4,100 for the non-controlling interest was $0.4 million for the
three months ended March 31, 2022, as compared to a net loss of $0.3 million,
after deducting $12,800 in non-controlling interest and adding $33,500 gain from
discontinued operations, for the three months ended March 31, 2021. As noted
above, an increase in operating expenses, reducing margins increased net loss by
$0.2 million, which was offset by reduced non-operating expenses by $0.1 million
due to gain on debt extinguishment and the exchange of debt and liabilities for
units of an entity invested in by SEER.
Results of Discontinued Operations for the Three Months Ended March 31, 2022 and
2021
As of September 1, 2021, the Company abandoned its REGS subsidiary. All revenue
and expenses of our REGS subsidiary for 2021 are classified as discontinued
operations.
For the three months ended
March 31,
2022 2021
Services revenue $ - $ 177,200
Services costs - (179,600 )
General and administrative expenses - (2,700 )
Salaries and related expenses - (29,000 )
Other income - 67,600
Gain on debt extinguishment - -
Total expenses - (143,700 )
Operating income - 33,500
Income tax benefit - -
Total income from discontinued operations $ - $ 33,500
There is no provision for income taxes for both the three months ended March 31,
2022, and 2021, due to our net loss carryforwards and we continue to maintain
full allowances covering our net deferred tax benefits as of March 31, 2022 and
2021.
21
Changes in Cash Flow
Operating Activities
The Company had net cash used by operating activities for the three months ended
March 31, 2022, and 2021 of $0.4 million and $0.7 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 extinguishment of debt. Net
loss increased from the three months ended March 31, 2021, of approximately $0.3
million, to $0.4 million for the three months ended March 31, 2022. Non-cash
adjustments increased cash uses of $46,500 for the three months ended March 31,
2022, compared to cash uses of $16,500 for the three months ended March 31,
2021.
In addition to the non-cash adjustments to net income, changes in assets and
liabilities include: a) changes in inventory provided approximately $71,300 in
cash in the first three months of 2022, compared to using $53,700 in the first
three months of 2021, a net increase in cash of approximately $125,000, b)
changes in prepaid expenses and other assets used approximately $70,000 in the
first three months of 2022, compared to using $221,400 in the first three months
of 2021, a net increase in cash of approximately $151,400, c) changes in
accounts payable, accrued liabilities, and customer deposits provided $274,400
in the first three months of 2022, compared to using $17,100 in the first three
months of 2021, a net increase in cash provided of approximately $0.3 million,
d) changes in contract liabilities used $2,400 in the first three months of
2022, compared to providing $84,600 in the first three months of 2021, a net
increase in cash used of approximately $0.1 million.
Investing activities
Net cash used by investing activities was $28,300 for the three months ended
March 31, 2022, compared to providing $75,800 of cash for the three months ended
March 31, 2021. The purchase of property and equipment was $28,300 for the three
months ended March 31, 2022, and $0 for the three months ended March 31, 2021.
The proceeds from sale of fixed assets totaled $75,800 for the three months
ended March 31, 2021, while $0 for the current quarter ended March 31, 2022.
Financing Activities
Net cash provided by financing activities was approximately $0.3 million for the
three months ended March 31, 2022, compared with providing $0.7 million for the
three months ended March 31, 2021. The net of proceeds and payments related to
debt accounted for the difference, providing approximately $0.3 million in the
three months ended March 31, 2022, compared to approximately $0.6 million in the
three months ended March 31, 2021, and the net proceeds related to paycheck
protection program of approximately $0.1 in the three months ended March 31,
2021.
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 $19,800
and $0 has been reserved as of March 31, 2022, and December 31, 2021,
respectively.
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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,
2022, and December 31, 2021, 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, 2022.
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.
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