Strategic Environmental & Energy Resources, Inc. - Quarter Report: 2018 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10 - Q

For the quarterly period ended June 30, 2018

OR

For the transition period from ___________________________

000-54987 

(Commission File Number)

Strategic Environmental & Energy Resources, Inc.

(Exact name of registrant as specified in its charter)

751 Pine Ridge Road, Golden, CO 80403 

(Address of principal executive offices including zip code)

303-277-1625 

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).  Yes ☒  No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes ☐  No ☒

As of July 31, 2018 the Registrant had 56,803,575 shares outstanding of its $.001 par value common stock.

Strategic Environmental & Energy Resources, Inc.

Quarterly Report on FORM 10-Q For The Period Ended

June 30, 2018

TABLE OF CONTENTS

Part I. FINANCIAL INFORMATION 

Item 1. Financial Statements

*These numbers were derived from the audited financial statements for the year ended December 31, 2017. See accompanying notes.

**Includes 2,200,000 and 190,000 shares issuable at June 30, 2018 and December 31, 2017, respectively, per terms of short-term notes.

See accompanying notes.

  STRATEGIC ENVIRONMENTAL & ENERGY RESOURCES, INC. 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  (Unaudited) 

See accompanying notes.

STRATEGIC ENVIRONMENTAL & ENERGY RESOURCES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS  
(Unaudited)  

See accompanying notes.

NOTE 1 – ORGANIZATION AND FINANCIAL CONDITION

Organization and Going Concern

Strategic Environmental & Energy Resources, Inc. (“SEER,” “we,” or the “Company”), a Nevada corporation, is a provider of next-generation clean-technologies, waste management innovations and related services. SEER has three wholly-owned subsidiaries in continuing operations, and two majority-owned subsidiaries; all of which together provide technology solutions and services to companies primarily in the oil and gas, refining, landfill, food, beverage & agriculture and renewable fuel industries. The three wholly-owned subsidiaries include: 1) REGS, LLC (d/b/a Resource Environmental Group Services (“REGS”)) provides industrial and proprietary cleaning services to refineries, oil fields and other private and governmental entities; 2) MV, LLC (d/b/a MV Technologies) (“MV”), designs and builds biogas conditioning solutions for the production of renewable natural gas and odor control systems primarily for landfill operations, waste-water treatment facilities, oil and gas fields, refineries, municipalities and food, beverage & agriculture operations throughout the U.S.; 3) SEER Environmental Materials, LLC,(“SEM”), a materials technology company focused on development of cost-effective chemical absorbents.

The two majority-owned subsidiaries are; 1) Paragon Waste Solutions, LLC (“PWS”) and 2) ReaCH4Biogas (“Reach”). PWS is currently owned 54% by SEER (see Note 8) and Reach is owned 85% by SEER.

PWS is developing specific opportunities to deploy and commercialize patented technologies for a non-thermal plasma-assisted oxidation process that makes possible the clean and efficient destruction of solid hazardous chemical and biological waste (i.e., regulated medical waste, chemicals, pharmaceuticals and refinery tank waste, etc.) without landfilling or traditional incineration and without harmful emissions. Additionally, PWS’ technology “cleans” and conditions emissions and gaseous waste streams (i.e., volatile organic compounds and other greenhouse gases) generated from diverse sources such as refineries, oil fields, and many others.

Reach (the trade name for BeneFuels, LLC), is currently owned 85% by SEER and focuses specifically on developing renewable biomethane projects that convert raw biogas to pipeline quality gas and/or compressed natural gas (“CNG”) for fleet vehicle fuel. Reach had minimal operations for the quarter ended June 30, 2018 and 2017.

Principals of Consolidation

The accompanying consolidated financial statements include the accounts of SEER, its wholly-owned subsidiaries, REGS, MV and SEM and its majority-owned subsidiaries PWS and Reach, since their respective acquisition or formation dates. All material intercompany accounts, transactions, and profits have been eliminated in consolidation. The Company has non-controlling interest in joint ventures, which are reported on the equity method.

Going Concern

As shown in the accompanying consolidated financial statements, the Company has experienced recurring losses, and has accumulated a deficit of approximately $23.2 million as of June 30, 2018, and $21.5 million as of December 31, 2017. For the six months ended June 30, 2018 and 2017 we had net losses from continuing operations before adjustment for losses attributable to non-controlling interest of approximately $1.8 million and $1.8 million, respectively. As of June 30, 2018 and December 31, 2017 our current liabilities exceed our current assets by approximately $5.7 million and $5.2 million, respectively. The primary reason for the increase in negative working capital from December 31, 2017 to June 30, 2018 is due to an increase in accounts payable of approximately $560,000 and an increase in short term debt of $488,000. 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 December 31, 2017.

NOTE 1 – ORGANIZATION AND FINANCIAL CONDITION, continued

Realization of a major portion of our assets as of June 30, 2018 and December 31, 2017, 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. Critical to achieving profitability will be our ability to license and or sell, permit and operate through our joint ventures and licensees our CoronaLux™ waste destruction units. We have increased our business development efforts to address opportunities identified in expanding domestic markets attributable to increased federal and state emission control regulations (particularly in the nation’s oil and gas fields) and a growing demand for energy conservation and renewable energies. In addition, the Company is evaluating various forms of financing that may be available to it. There can be no assurance that the Company will secure additional financing for working capital, 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.

Basis of presentation Unaudited Interim Financial Information

The accompanying interim condensed consolidated financial statements are unaudited. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all of the normal recurring adjustments necessary to present fairly the financial position and results of operations as of and for the periods presented. The interim results are not necessarily indicative of the results to be expected for the full year or any future period.

Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The Company believes that the disclosures are adequate to make the interim information presented not misleading. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in the Company’s Report on Form 10-K filed on April 17, 2018 for the years ended December 31, 2017 and 2016.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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 and 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.

Reclassifications

Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation. These reclassifications had no effect on reported consolidated net loss.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

Revenue Recognition

In May 2014, the FASB issued guidance on revenue from contracts with customers that superseded most current revenue recognition guidance, including industry-specific guidance. The underlying principle of the guidance is to recognize revenue to depict the transfer of goods or services to customers at an amount to which the company expects to be entitled in exchange for those goods or services. The new guidance requires an evaluation of revenue arrangements with customers following a five-step approach: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations; and (5) recognize revenue when (or as) the company satisfies each performance obligation. Revenues are recognized when control of the promised services are transferred to the customers in an amount that reflects the expected consideration in exchange for those services. A customer obtains control when it has the ability to direct the use of and obtain the benefits from the services. Other major provisions of the guidance include capitalization of certain contract costs, consideration of the time value of money in the transaction price and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company adopted the provisions of this guidance effective January 1, 2018 as required under the guidance. The adoption of this guidance did not have any material impact on the Company’s consolidated condensed financial statements (see Note 3).

Research and Development

Research and development (“R&D”) costs are charged to expense as incurred. R&D expenses consist primarily of salaries, project materials, contract labor and other costs associated with ongoing product development and enhancement efforts. R&D expenses were $600 and $3,900 for the six months ended June 30, 2018 and 2017, respectively.

Income Taxes

The Company accounts for income taxes pursuant to Accounting Standards Codification (“ASC”) 740, Income Taxes, which utilizes the asset and liability method of computing deferred income taxes. The objective of this method is to establish deferred tax assets and liabilities for any temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled.

ASC 740 also provides detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in the financial statements. Tax positions must meet a “more-likely-than-not” recognition threshold at the effective date to be recognized. During the six months ended June 30, 2018 and 2017 the Company recognized no adjustments for uncertain tax positions.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. No interest and penalties related to uncertain tax positions were recognized at June 30, 2018 and December 31, 2017. The Company expects no material changes to unrecognized tax positions within the next twelve months.

The Company has filed federal and state tax returns through December 31, 2016. The tax periods for the years ending December 31, 2010 through 2016 are open to examination by federal and state authorities.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

Recently issued accounting pronouncements

Changes to accounting principles generally accepted in the United States of America (U.S. GAAP) are established by the Financial Accounting Standards Board (FASB) in the form of accounting standards updates (ASU’s) to the FASB’s Accounting Standards Codification. The Company considers the applicability and impact of all new or revised ASU’s.

Leases

In February 2016, the FASB issued guidance on lease accounting that supersedes the current guidance on leases. The new guidance establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with the classification affecting the pattern of expense recognition in the statement of operations. The new guidance is applicable to the Company for interim and annual reporting periods beginning after December 15, 2018. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Early adoption of the amendments in the guidance is permitted. The Company’s minimum lease commitments for operating leases as of June 30, 2018 was approximately $311,000. The Company is currently evaluating the impact of the guidance on its consolidated condensed financial statements.

NOTE 3 – REVENUE

The Company adopted the provisions of the guidance in the new revenue standard under ASC 606 effective January 1, 2018 applying the modified retrospective method to all contracts. Results for reporting periods beginning after January 1, 2018 are presented under the new revenue recognition guidance, while prior period amounts are not adjusted and continue to be reported in accordance with the historic accounting under previous revenue recognition guidance. The adoption of this guidance did not have any material impact on the Company’s consolidated condensed financial statements. There was no impact to net revenue for the quarter ended June 30, 2018 as a result of applying the new revenue recognition guidance.

Products Revenue

Product revenue generated from contracts with customers, for the manufacture of products for the removal and treatment of hazardous vapor and gasses. Total estimated revenue includes all of the following: (1) the basic contract price, (2) contract options, and (3) change orders. Once contract performance is underway, we may experience changes in conditions, client requirements, specifications, designs, materials and expectations regarding the period of performance. Such changes are “change orders” and may be initiated by us or by our clients. In many cases, agreement with the client as to the terms of change orders is reached prior to work commencing; however, sometimes circumstances require that work progress without obtaining client agreement. Revenue related to change orders is recognized as costs are incurred if it is probable that costs will be recovered by changing the contract price. The Company does not incur pre-contract costs. Under the new revenue recognition guidance, we found no change in the manner we recognize product revenue. Provisions for estimated losses on uncompleted contracts are recorded in the period in which the losses are identified and included as additional loss. Provisions for estimated losses on contracts are shown separately as liabilities on the balance sheet, if significant, except in circumstances in which related costs are accumulated on the balance sheet, in which case the provisions are deducted from the accumulated costs. A provision as a liability is reported as a current liability.

We include in current assets and current liabilities amounts related to contracts realizable and payable. Costs and estimated earnings in excess of billings on uncompleted contracts represent the excess of contract costs and profits recognized to date over billings to date and are recognized as a current asset. Revenue contract liabilities represent the excess of billings to date over the amount of contract costs and profits recognized to date and are recognized as a current liability.

Products revenue also includes media sales which are recognized as the product is shipped to the customer for use.

Services Revenue 

Our services revenue is primarily comprised of services related to industrial cleaning and mobile railcar cleaning, which we recognize as services are rendered.

Solid Waste Revenue

The Company’s revenues from waste destruction licensing agreements are recognized as a single accounting unit over the term of the license. Revenue from joint venture operations of the Company’s CoronaLux™ units is recognized as the revenue is earned by the joint venture. Revenue from management services is recognized as services are performed.

Disaggregation of Revenue

Contract Balances

Where a performance obligation has been satisfied but not yet invoiced at the reporting date, a contract asset is recognized on the balance sheet. Where a performance obligation has not yet been satisfied but an invoice has been raised at the reporting date, a contract liability is recognized on the balance sheet.

The opening and closing balances of the Company’s accounts receivables and contract liabilities (current and non-current) are as follows:

The majority of the Company’s revenue is generally invoiced on a weekly or monthly basis, and the payments are generally received within approximately 30-60 days. Deferred revenue is recorded when cash payments are received or due in advance of the Company’s performance, including amounts that are refundable.

Remaining Performance Obligations

 As of June 30, 2018, the aggregate amount of the transaction price allocated to the remaining performance obligations was approximately $731,000, of which the Company expects to recognize revenue of approximately 94% over the next 24 months, including 89% over the next 12 months.

The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected term of one year or less and (ii) contracts for which the Company recognizes revenue at the amounts to which it has the right to invoice for services performed.

NOTE 4 – PROPERTY AND EQUIPMENT

Property and equipment was comprised of the following:

Depreciation expense for the three months ended June 30, 2018 and 2017 was $96,200 and $167,300, respectively and for the six months ended June 30, 2018 and 2017 was $229,300 and $323,700, respectively. For the three months ended June 30, 2018 depreciation expense included in cost of goods sold and selling, general and administrative expenses was $78,000 and $18,200 respectively. For the six months ended June 30, 2018 depreciation expense included in cost of goods sold and selling, general and administrative expenses was $192,500 and $36,800, respectively. For the three months ended June 30, 2017 depreciation expense included in cost of goods sold and selling, general and administrative expenses was $142,600 and $24,700 respectively. For the six months ended June 30, 2017 depreciation expense included in cost of goods sold and selling, general and administrative expenses was $274,700 and $49,000, respectively.

Accumulated depreciation on leased CoronaLux™ units included in accumulated depreciation and amortization above is $249,400 and $381,900 as of June 30, 2018 and 2017, respectively.

Property and equipment included the following amounts for leases that have been capitalized at:

NOTE 5 – INTANGIBLE ASSETS

Intangible assets were comprised of the following:

The estimated useful lives of the intangible assets range from seven to ten years. Amortization expense was $24,800 and $62,300 for the three months ended June 30, 2018 and 2017, respectively and $52,400 and $85,000 for the six months ended June 30, 2018 and 2017, respectively.

NOTE 6 – ACCRUED LIABILITIES

Accrued liabilities were comprised of the following:

NOTE 7 – UNCOMPLETED CONTRACTS

Costs, estimated earnings and billings on uncompleted contracts are as follows:

NOTE 8 – INVESTMENT IN PARAGON WASTE SOLUTIONS LLC

Since its inception through June 30, 2018, we have provided approximately $6.3 million in funding to PWS for working capital and the further development and construction of various prototypes and commercial waste destruction units. No members of PWS have made capital contributions or other funding to PWS other than SEER. The intent of the operating agreement is that we will provide the funding as an advance against future earnings distributions made by PWS.

Payments received for non-refundable licensing and placement fees have been recorded as deferred revenue in the accompanying consolidated balance sheets at June 30, 2018 and December 31, 2017 and are recognized as revenue ratably over the term of the contract.

NOTE 9 – PAYROLL TAXES PAYABLE

In 2009 and 2010, REGS, a subsidiary of the Company, became delinquent for unpaid federal employer and employee payroll taxes, accrued interest and penalties were incurred related to these unpaid payroll taxes.

As of June 30, 2018, and December 31, 2017, the outstanding balance due to the IRS was $1,021,900, and $997,700, respectively.

Other than this outstanding payroll tax matter arising in 2009 and 2010, all state and federal taxes have been paid by REGS in a timely manner.

NOTE 10 – DEBT

Debt as of June 30, 2018 and December 31, 2017, was comprised of the following:

NOTE 11 – RELATED PARTY TRANSACTIONS

Notes payable, related parties

Related parties accrued interest due to certain related parties as of June 30, 2018 and December 31, 2017 are as follows:

We believe the stated interest rates on the related party notes payable represent reasonable market rates based on the note payable arrangements we have executed with third parties.

In March 2012, the Company entered into an Irrevocable License & Royalty Agreement with PWS that grants PWS an irrevocable world-wide license to the IP in exchange for a 5% royalty on all revenues from PWS and its affiliates. The term shall commence as of the date of this Agreement and shall continue for a period not to exceed the life of the patent or patents filed by the Company. PWS may sub license the IP and any revenue derived from sub licensing shall be included in the calculation of Gross Revenue for purposes of determining royalty payments due the Company. Royalty payments are due 30 days after the end of each calendar quarter. PWS generated licensing revenues of approximately $67,400 for the six months ended June 30, 2018 and $161,500 for the year ended December 31, 2017, as such, royalties of approximately $28,600 and $25,300 were due at June 30, 2018 and December 31, 2017, respectively.

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. Operations to date have included the destruction of medical waste. For the six months ended June 30, 2018 and the year ended December 31, 2017, PWS has recorded $17,900 and $19,800 in income which represents their 50% interest in the net income of the joint venture, respectively. In addition, for the year ended December 31, 2017, PWS billed the joint venture approximately $57,000 in costs incurred on behalf of the joint venture. PWS did not incur any costs incurred on behalf of the joint venture for the six months ended June 30, 2018.

NOTE 12 – DISCONTINUED OPERATIONS

During the third quarter of 2017, we sold our fixed railcar cleaning division which included substantially all assets and liabilities of Tactical (except for cash) as well as three locations in REGS including Illinois, Maryland and Pennsylvania for a sales price of $2.4 million of proceeds received at the close on July 31, 2017, subject to an adjustment for working capital changes, and guaranteed payments of $1.1 million over the next three years. In addition, the Company is entitled to receive another $1.5 million based on the performance of the fixed railcar cleaning locations, also over the next three years. Accordingly, the revenue and expenses associated with the railcar cleaning locations are presented as “Discontinued operations” on our consolidated statement of operations and on our consolidated statement of cash flows for the six months ending June 30, 2017. The sale was completed on July 31, 2017.

In December 2017, the Company and the buyer signed Amendment No. 1 to the Asset Purchase Agreement which modified certain terms in the original asset purchase agreement providing for a reduction to the first guaranteed payment in the amount of $276,000 in exchange for immediate release of certain liabilities arising from the collection by the Company of certain trade receivables included in the sale. In May 2018, the buyer paid the Company $224,000 as completion of the first guaranteed payment plus an additional $41,000 for exceeding performance benchmarks.

Major classes of line items constituting pretax loss on discontinued operations:

NOTE 13 – EQUITY TRANSACTIONS

2018

During the six months ended June 30, 2018, the Company recorded 2,010,000 shares of $.001 par value common stock as issuable to short-term note holders as required under their respective agreements. (See Note 10)

During the six months ended June 30, 2018, the Company sold 250,000 shares of $.001 par value common stock at $.48 per share in a private placement, receiving proceeds of $120,000.

During the six months ended June 30, 2018, the Company issued 75,000 shares of $.001 par value common stock at $.77 per share for services valued at approximately $58,000.

2017

During the six months ended June 30, 2017, the Company issued 500,000 shares of $.001 par value common stock valued at $350,000 in connection with the late payment penalty due on short-term notes. (See Note 10)

During the six months ended June 30, 2017, the Company recorded 700,000 shares of $.001 par value common stock valued at $470,000 as issuable to short-term note holders as required under their respective agreements. (See Note 10)

During the six months ended June 30, 2017, the Company issued 13,496 shares of its $.001 par value common stock upon the cashless exercise of 166,666 common stock options.

During the six months ended June 30, 2017, the Company issued an option to purchase 1,000,000 shares of its $.001 par value common stock at a strike price of $1.00 to Richard Robertson in connection with his employment agreement dated January 9, 2017. At the date of issuance 100,000 shares vested immediately and the remaining 900,000 options vest over a period of four years in a series of 16 successive equal quarterly installments of 56,250 commencing March 31, 2017 and ending December 31, 2020. The Company used the Black Scholes option pricing model to estimate the fair value of the options granted at $102,354. The assumptions used in calculating such value include a risk-free interest rate of 1.89%, expected volatility of 36.87%, an expected life of 5.5 years and a dividend rate of 0.

During the six months ended June 30, 2017, the Company issued an option to purchase 1,000,000 shares of its $.001 par value common stock at a strike price of $0.70 to Don Moorhead in connection with his agreement dated May 1, 2017. The options vest over a period of two years in a series of 8 successive equal quarterly installments of 125,000 commencing July 1, 2017 and ending April 1, 2019. The Company used the Black Scholes option pricing model to estimate the fair value of the options granted at $231,500. The assumptions used in calculating such value include a risk-free interest rate of 1.84%, expected volatility of 39.17%, an expected life of 4.5 years and a dividend rate of 0.

Non-controlling Interest

The non-controlling interest presented in our condensed consolidated financial statements reflects a 46% non-controlling equity interest in PWS (see Note 7). Net loss attributable to non-controlling interest, as reported on our condensed consolidated statements of operations, represents the net loss of PWS attributable to the non-controlling equity interest. The non-controlling interest is reflected within stockholders’ equity on the condensed consolidated balance sheet.

NOTE 14 – CUSTOMER CONCENTRATIONS

The Company had sales from operations to three customers and two customers for the three and six months ended June 30, 2018 that represented approximately 43% and 33% of our total sales, respectively. For the three and six months ended June 30, 2017, the Company did not have sales representing more than 10% to any one customer. The concentration of the Company’s business with a relatively small number of customers may expose us to a material adverse effect if one or more of these large customers were to experience financial difficulty or were to cease being customer for non-financial related issues.

NOTE 15 – NET LOSS PER SHARE

Basic net loss per share is computed by dividing net loss attributable to common shareholders by the weighted average number of common shares outstanding. Diluted net loss per share is computed by dividing net loss attributable to common shareholders by the weighted average number of common shares outstanding plus the number of common shares that would be issued assuming exercise or conversion of all potentially dilutive common shares. Potentially dilutive securities are excluded from the calculation when their effect would be anti-dilutive. For all years presented in the consolidated financial statements, all potentially dilutive securities have been excluded from the diluted share calculations as they were anti-dilutive as a result of the net losses incurred for the respective years. Accordingly, basic shares equal diluted shares for all years presented.

Potentially dilutive securities were comprised of the following:

NOTE 16 – ENVIRONMENTAL MATTERS AND REGULATION

Significant federal environmental laws affecting us are the Resource Conservation and Recovery Act (“RCRA”), the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), also known as the “Superfund Act”, the Clean Air Act, the Clean Water Act and the Toxic Substances Control Act (“TSCA”).

Pursuant to the EPA’s authorization of the RCRA equivalent programs, a number of states have regulatory programs governing the operations and permitting of hazardous waste facilities. Our facilities are regulated pursuant to state statutes, including those addressing clean water and clean air. Our facilities are also subject to local siting, zoning and land use restrictions. We believe we are in substantial compliance with all federal, state and local laws regulating our business.

NOTE 17 – SEGMENT INFORMATION AND MAJOR CUSTOMERS

The Company currently has identified three segments as follows:

Reach has had minimal operations through June 30, 2018.

The composition of our reportable segments is consistent with that used by our Chief Operating Decision Maker (“CODM”) to evaluate performance and allocate resources. All of our operations are located in the U.S. We have not allocated corporate selling, general and administrative expenses, and stock-based compensation to the segments. All intercompany transactions have been eliminated.

Segment information for the three months ended June 30, 2018 and 2017 is as follows:

Segment information for the six months ended June 30, 2018 and 2017 is as follows:

NOTE 18 – LITIGATION

In January 2016, an employee of SEM was involved in a vehicle accident while on Company business. Various actions were filed by the claimants in both state and federal courts. In August 2016, an involuntary proceeding was commenced by one of the claimants against SEM under Chapter 7 of the Bankruptcy code. In September 2016, the case was converted to a Chapter 11 under the Bankruptcy code. During the pendency of all actions, SEM continued to manage its affairs and operate normally. In the fourth quarter of 2016, the parties reached a settlement concerning the distribution of insurance proceeds and all issues of liability. On March 27, 2017 the Bankruptcy Courts confirmed the dismissal of the SEM Chapter 11 case. As part of the bankruptcy proceedings, the Company reached a settlement with claimants and recorded an accrued litigation expense of $212,500 at December 31, 2016. It was agreed among the parties that all pending state and/or federal claims will be dismissed with prejudice. The accrued litigation outstanding at June 30, 2018 and December 31, 2017 was $133,333 and $133,333, respectively.

NOTE 19 – SUBSEQUENT EVENTS

As of August 14, 2018, the Company’s four short term notes for which the penalty period for shares to be issued has been reached. The Company has recorded 720,000 shares of its common stock as issuable under the terms of those agreements. The shares were valued at approximately $151,200 and are recorded as interest expense. Additional shares will be issued by the Company under the terms of the agreements.

In anticipation of a larger on-going funding program, on May 8, 2018, the Company entered into a $1 million secured promissory note with a third-party lender.  The note provides for interest accruing at 6.5% per annum due May 8, 2025.   For the first six months of the loan, no payments will be made but interest will accrue.  For months seven through twenty-four, interest only payments will be due monthly and commencing on the 25th month of the loan, the remaining unpaid principal and interest will be amortized over the remaining five-year period with equal monthly principal and interest payments.  This note is part of a larger financing arrangement with an international lender who has proposed a second $1 million convertible loan to take place within the next month.  This second note is convertible at $0.80 per share at the election of lender.  As of the date of issuance of this report, the initial funds had not been received by the Company and all documents related to the entire agreement that stipulate details to the loan program will be executed by the parties upon initial proceeds being received by the Company. 

On July 11, 2018, the Company entered into a $500,000 note payable, interest at 20% per annum, unpaid principal and interest maturing 3 years from note date. A one-time payment of 200,000 shares of the Company’s common stock was required at signing. No principal nor interest is due or payable for the first six months of the note, the fees shall accrue and commencing on month seven, the principal and interest shall be amortized over the remaining 30 months. The note is secured by all assets of SEM, including all accounts receivable in favor of SEM and a personal guarantee of an officer of the Company.

On July 12, 2018, the Company issued 140,000 shares of $.001 par value common stock at $.295 per share for accrued interest on a short term note totaling approximately $37,700 and principal totaling approximately $2,000, net of fees.

Effective August 8, 2018, Donald F. Moorehead resigned as Chairman of SEER and CEO of Paragon Waste Solutions (“Paragon”).   Mr. Moorehead will remain as an advisor to the Board and J. John Combs III will resume the role as Chairman of the Board.

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 10K filed with the Securities and Exchange Commission on April 17, 2018. 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 10K 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 oil & gas, environmental, waste management and renewable energy industries. SEER currently operates five companies with four offices in the western and mid-western U.S. Through these operating companies, SEER provides products and services throughout the U.S. and has licensed technologies with many customer installations throughout the U.S. Each of the five operating companies is discussed in more detail below. The Company also has non-controlling interests in joint ventures, some of which have no or minimal operations.

The Company’s domestic strategy is to grow internally through SEER’s subsidiaries that have well established revenue streams and, simultaneously, establish long-term alliances with and/or acquire complementary domestic businesses in rapidly growing markets for renewable energy, waste and water treatment and oil & gas 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 (“CNG”) fuel generation, as well as general solid waste and medical/pharmaceutical waste destruction. Many of SEER’s current operating companies share customer bases and each provides truly synergistic services, technologies and products as well as annuity type revenue streams.

The company now owns and manages four operating entities and one entity that has no significant operations to date.

Subsidiaries

REGS, LLC d/b/a Resource Environmental Group Services (“REGS”): (operating since 1994) provides general industrial cleaning services and waste management to many industry sectors focusing primarily on oil & gas production (upstream) and refineries (downstream).

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 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.

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”) (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, 2017.

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.

Joint Ventures

MV RCM Joint Venture: In April 2013, MV Technologies, Inc (“MV”) and RCM International, LLC (“RCM”) entered into an Agreement to develop hybrid scrubber systems that employ elements of RCM Technology and MV Technology (the “Joint Venture”). RCM and MV Technologies will independently market the hybrid scrubber systems. The contractual Joint Venture has an initial term of five years and will automatically renew for successive one-year periods unless either Party gives the other Party one hundred and eighty (180) days’ notice prior to the applicable renewal date. Operations to date of the Joint Venture have been limited to formation activities.

Paragon Waste (UK) Ltd: In June 2014, PWS and PCI Consulting Ltd (“PCI”) formed Paragon Waste (UK) Ltd (“Paragon UK Joint Venture”) to develop, permit and exploit the PWS waste destruction technology within the territory of Ireland and the United Kingdom. PWS and PCI each own 50% of the voting shares of Paragon UK Joint Venture. Operations to date of the Paragon UK Joint Venture have been limited to formation, the delivery of a CoronaLux™ unit with a third party in the United Kingdom and application and permitting efforts with regulatory entities.

P&P Company: In February 2015, PWS and Particle Science Tech of Environmental Protection, Inc. (“Particle Science”) formed a joint venture, Particle & Paragon Environmental Solutions, Inc (“P&P”) to exploit the PWS technology in China, including Hong Kong, Macao and Taiwan. PWS and Particle Science each own 50% of P&P. Operations to date have been limited to formation of P&P and the sale and delivery of a CoronaLux™ unit to Particle Science in China.

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 will have an exclusive license to the CoronaLux™ technology in a six-state area of the Southern United States. In addition to the equity position, PWS will be the operating partner for the business and sell a number of additional systems to the joint venture over the next five years.  In 2017, PSMW purchased and installed three CoronaLux™ units at an PSMW facility. Operations in the form of medical waste destruction began in the first quarter of 2018.

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 $23.2 million as of June 30, 2018, and $21.5 million as of December 31, 2017. For the six months ended June 30, 2018 and 2017 we had net losses from continuing operations before adjustment for losses attributable to non-controlling interest of approximately $1.8 million and $1.8 million, respectively. As of June 30, 2018 and December 31, 2017 our current liabilities exceed our current assets by approximately $5.7 million and $5.2 million, respectively. The primary reason for the increase in negative working capital from December 31, 2017 to June 30, 2018 is due to an increase in accounts payable of approximately $560,000 and an increase in short term debt of $350,000. 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 December 31, 2017.

Realization of a major portion of our assets as of June 30, 2018 and December 31, 2017, 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. Critical to achieving profitability will be our ability to license and or sell, permit and operate through our joint ventures and licensees our CoronaLux™ waste destruction units. We have increased our business development efforts to address opportunities identified in expanding domestic markets attributable to increased federal and state emission control regulations (particularly in the nation’s oil and gas fields) and a growing demand for energy conservation and renewable energies. In addition, the Company is evaluating various forms of financing that may be available to it. There can be no assurance that the Company will secure additional financing for working capital, 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.

Our primary need for liquidity is to fund working capital requirements of our businesses, capital expenditures and for general corporate purposes, including debt repayment. We have incurred losses and experienced negative operating cash flows for the past several years, and accordingly, the Company has taken a number of actions to continue to support its operations and meet its obligations. The sale of assets and liabilities of Tactical and certain locations within REGS provided the Company working capital in 2017 to repay short-term notes totaling $650,000 and accelerate growth of our high-margin technology divisions. We anticipate selling, general and administrative (SG&A) expenses to be reduced somewhat in 2018 with expected annualized savings in SG&A in the range of $0.5 million to $0.7 million. We believe that the actions discussed above are probable of occurring and mitigating the substantial doubt raised by our historical operating results and satisfying our estimated liquidity needs 12 months from the issuance of the financial statements. However, we cannot predict, with certainty, the outcome of our actions to generate liquidity, including the availability of additional debt financing, or whether such actions would generate the expected liquidity as currently planned. If we continue to experience operating losses, and we are not able to generate additional liquidity through the mechanisms described above or through some combination of other actions, while not expected, we might need to secure additional sources of funds, which may or may not be available to us. Additionally, a failure to generate additional liquidity could negatively impact our access to inventory or services that are important to the operation of our business.

Results of Continuing Operations for the Three Months Ended June 30, 2018 and 2017

Total revenues were approximately $2.4 million and $2.5 million for the three months ended June 30, 2018 and 2017, respectively. The decrease in revenue comparing Q2 2018 to Q2 2017 is driven by a decrease of approximately $.3 million or 17% in environmental solutions revenue offset by an increase of $.2 million or 43% in industrial cleaning revenue. The decrease in the environmental solutions revenue is due to a decline in long-term contract revenue in Q2 2018, offset somewhat by an increase in recurring media revenue in this segment. The increase in industrial cleaning revenue is due to a mobile rail car cleaning contract in 2018.

Operating costs, which include cost of products, cost of services, solid waste costs, general and administrative (G&A) expenses and salaries and related expenses, were $2.9 million for the quarter ended June 30, 2018 compared to $3.4 million for the quarter ended June 30, 2017. The decrease in operating costs between the quarters was primarily the result of a 1) a 17% decrease in environmental solutions revenue resulting in a 22% decrease in environmental solutions costs totaling approximately ($275,000), 2) a 43% increase in industrial cleaning revenue and an improvement in industrial cleaning margin resulting in a 6% decrease in industrial cleaning costs totaling approximately $55,000, 3) an improvement in solid waste margin resulting in a 84% decrease in solid waste costs totaling approximately ($44,000), 4) an approximately $101,000 decrease in general and administrative expenses primarily driven by an decrease in depreciation and amortization of approximately ($44,000), a decrease in warrant expense of approximately ($84,000), offset by an increase in professional services of approximately $48,000 related to timing of annual audit, 5) an approximately $32,000 decrease in salaries and related expenses. Product costs as a percentage of product revenues were 62% for the quarter ended June 30, 2018 and 66% for the quarter ended June 30, 2017. The decrease in margin performance for the product sales is due to a lesser mix of media and one time revenue. Services costs as a percentage of services revenues were 101% for the quarter ended June 30, 2018 and 154% for the quarter ended June 30, 2017. The improvement in margin performance for the services sector is due to an increased utilization of manpower and the ability to utilize and bill our own equipment versus renting third-party equipment. Solid waste costs as a percentage of licensing revenues were 10% for the quarter ended June 30, 2018 and 71% for the quarter ended June 30, 2017. The increase in margin performance for the solid waste segment is related to a change in the revenue mix to now include management services revenue and an elimination of the Company paying any costs on behalf of the MWS joint venture.

Total non-operating other income (expense), net was $(585,300) for the quarter ended June 30, 2018 compared to ($530,200) for the quarter ended June 30, 2017. For the quarter ended June 30, 2018 non-operating expenses were comprised of interest expense of $(613,800) offset by interest income of $11,800 and other income of $16,700. For the quarter ended June 30, 2017 non-operating expenses were comprised of interest expense of $(529,600) and other expense of $(600). The increase in interest expense in Q2 2018 compared to Q2 2017 was primarily the result of timing of short term debt and the Company having to issue common stock to note holders in accordance with penalty clauses included in the short term notes when the Company was unable to satisfy the notes when they came due. The increase in interest income and other income for the quarter ended June 30, 2018 compared to the quarter ended June 30, 2017 was primarily the result of interest income and amortization of note discount from notes receivable and sublease income, respectively.

There is no provision for income taxes for the quarter ended June 30, 2018 due to prior year losses and for the quarter ended June 30, 2018, year-to-date losses.

The Company had a net loss, before non-controlling interest, for the quarter ended June 30, 2018 of ($1,031,100) compared to a net loss, before non-controlling interest, of ($1,336,500) for the quarter ended June 30, 2017. Net loss attributable to SEER after deducting $4,200 for the non-controlling interest income was ($1,026,900) for the quarter ended June 30, 2018 compared to a net loss attributable to SEER of ($1,296,500), after deducting $40,000 in non-controlling interest loss for the quarter ended June 30, 2017. The decrease in net loss for the quarter ended June 30, 2018 as compared to the quarter ended June 30, 2017 was largely related to the fact that continuing operations of the Company improved in Q2 2018 as compared to Q2 2017 as new revenue streams were identified and SG&A expense decreased as anticipated.

Results of Continuing Operations for the Six Months Ended June 30, 2018 and 2017

Total revenues were approximately $4.3 million and $5.1 million for the six months ended June 30, 2018 and 2017, respectively. The decrease in revenue comparing Q2 2018 to Q2 2017 is driven by a decrease of approximately $1.1 million or 32% in environmental solutions revenue offset by an increase of $.3 million or 24% in industrial cleaning revenue. The decrease in the environmental solutions revenue is due to a decline in long-term contract revenue in Q2 2018, offset somewhat by an increase in recurring media revenue in this segment. The increase in industrial cleaning revenue is primarily due to a new mobile rail car cleaning contract in 2018.

Operating costs, which include cost of products, cost of services, solid waste costs, general and administrative (G&A) expenses and salaries and related expenses, were $5.2 million for the six months ended June 30, 2018 compared to $6.4 million for the six months ended June 30, 2017. The decrease in operating costs between the quarters was primarily the result of a 1) a 32% decrease in environmental solutions revenue resulting in a 39% decrease in environmental solutions costs totaling approximately ($938,000), 2) a 24% increase in industrial cleaning revenue resulting in a 6% increase in industrial cleaning costs totaling approximately $85,000, 3) an improvement in solid waste margin resulting in a 77% decrease in solid waste costs totaling approximately ($85,000), 4) an approximately $150,000 decrease in general and administrative expenses primarily driven by an decrease in depreciation and amortization of approximately ($44,000), a decrease in warrant expense of approximately ($84,000), a decrease in professional services of approximately ($68,000), 5) offset by an increase in business insurance costs related to continuing operations of approximately $59,000, and 6) an approximately ($44,000) decrease in salaries and related expenses. Product costs as a percentage of product revenues were 61% for the six months ended June 30, 2018 and 68% for the six months ended June 30, 2017. The increase in margin performance for the product sales is due to a greater mix of media and one time revenue. Services costs as a percentage of services revenues were 93% for the six months ended June 30, 2018 and 109% for the six months ended June 30, 2017. The improvement in margin performance for the services sector is due to an increased utilization of manpower and the ability to utilize and bill our own equipment versus renting third-party equipment. Solid waste costs as a percentage of licensing revenues were 14% for the six months ended June 30, 2018 and 77% for the six months ended June 30, 2017. The increase in margin performance for the solid waste segment is related to a change in the revenue mix to now include management services revenue and an elimination of the Company paying any costs on behalf of the MWS joint venture.

Total non-operating other income (expense), net was $(918,600) for the six months ended June 30, 2018 compared to ($962,400) for the six months ended June 30, 2017. For the six months ended June 30, 2018 non-operating expenses were comprised of interest expense of $(979,600) offset by interest income of $21,700 and other income of $39,300. For the six months ended June 30, 2017 non-operating expenses were comprised of interest expense of $(956,500) and other expense of $(5,900). The increase in interest expense for the first half of 2018 compared to the first half of 2017 was primarily the result of timing of short term debt and the Company having to issue common stock to note holders in accordance with penalty clauses included in the short term notes when the Company was unable to satisfy the notes when they came due. The increase in interest income and other income for the first half of 2018 compared to the first half of 2017 was primarily the result of interest income and amortization of note discount from notes receivable and sublease income, respectively.

There is no provision for income taxes for the six months ended June 30, 2018 due to prior year losses and for the six months ended ended June 30, 2018, year-to-date losses.

The Company had a net loss, before non-controlling interest, for the six months ended June 30, 2018 of ($1,778,400) compared to a net loss, before non-controlling interest, of ($1,756,500) for the six months ended June 30, 2017. Net loss attributable to SEER after deducting $20,800 for the non-controlling interest income was ($1,757,600) for the six months ended June 30, 2018 compared to a net loss attributable to SEER of ($1,665,300), after deducting $91,200 in non-controlling interest loss for the six months ended June 30, 2017. The Company had a net loss from continuing operations for the six months ended June 30, 2018 of ($1,819,400) compared to a net loss from continuing operations for the six months ended June 30, 2017 of ($2,234,800). The decrease in net loss from continuing operations for the six months ended June 30, 2018 as compared to the six months ended June 30, 2017 was largely related to the fact that continuing operations of the Company improved in the first half of 2018 as compared to the first half of 2017 as new revenue streams were identified and SG&A expense decreased as anticipated.

Changes in Cash Flow

Operating Activities

The Company had net cash used by operating activities for the six months ended June 30, 2018 of ($296,800) compared to net cash used by operating activities for the six months ended June 30, 2017 of ($529,900), an improvement to cash of approximately $233,100. 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 and note discounts, stock based compensation expense and non-cash interest expense related to issuable common stock shares as penalty for delay in repayment of short-term notes. Non-cash adjustment totaled $1,177,300 and $1,373,100 for the six months ended June 30, 2018 and 2017, respectively, so non-cash adjustments had a larger impact on net cash used by operating activities for the six months ended June 30, 2017 when compared to the six months ended June 30, 2018 by approximately $195,800. For the six months ended June 30, 2018, the net positive change in operating assets and liabilities was $345,300 compared to the six months ended June 30, 2017 where the net positive change in operating assets and liabilities, as described above, was $331,800. The positive change in operating assets and liabilities had a slightly greater impact on net cash used by operating activities for the six months ended June 30, 2018 compared to the six months ended June 30, 2017.

Investing activities

There was no use of cash to purchase property and equipment during the six months ended June 30, 2018 compared to a use of cash of $61,700 to purchase property and equipment during the six months ended June 30, 2017. During the six months ended June 30, 2018, the Company received $224,000 of cash from notes receivable, compared to none for the six months ended June 30, 2017.

Financing Activities

Net cash provided by financing activities was $196,400 for the six months ended June 30, 2018 compared to net cash provided by financing activities of $31,600 for the six months ended June 30, 2017. The primary differences for the six months ended June 30, 2018, as compared to the six months ended June 30, 2017 are we had net cash provided related to debt of approximately $76,400 compared to net use of cash related to debt of approximately ($107,000), respectively, and for the six months ended June 30, 2018 we had proceeds from the sale of common stock of $120,000 as compared to proceeds of approximately $138,000 from the extension of warrants for the six months ended June 30, 2017.

DISCONTINUED OPERATIONS

Results of Discontinuing Operations for the Three Months Ended June 30, 2018 and 2017

Total revenues were approximately $0 and $1,723,600 for the three months ended June 30, 2018 and 2017, respectively.

Operating costs, which include cost of services, general and administrative (G&A) expenses and salaries and related expenses, were approximately $0 and $1,609,800 for the three months ended June 30, 2018 and 2017, respectively. Other incomes were $41,000 and $9,800 for the three months ended June 30, 2018 and 2017, respectively.

Total net income from discontinued operations was $41,000 and $123,600 for the three months ended June 30, 2018 and 2017, respectively. Income for the quarter ended June 30, 2018 was a result of exceeding performance benchmarks for the sale of the rail operations.

There is no provision for income taxes for the three months ended June 30, 2018 due to prior year consolidated losses and for the three months ended June 30, 2017, due to year-to-date consolidated net loss for the period.

Results of Discontinuing Operations for the Six Months Ended June 30, 2018 and 2017

 Total revenues were approximately $0 and $3,325,100 for the six months ended June 30, 2018 and 2017, respectively.

Operating costs, which include cost of services, general and administrative (G&A) expenses and salaries and related expenses, were approximately $0 and $2,856,300 for the six months ended June 30, 2018 and 2017, respectively. Other incomes were $41,000 and $9,600 for the six months ended June 30, 2018 and 2017, respectively.

Total net income from discontinued operations was $41,000 and $478,300 for the six months ended June 30, 2018 and 2017, respectively. Income of $41,000 for the six months ended June 30, 2018 was a result of exceeding performance benchmarks for the sale of the rail operations.

There is no provision for income taxes for the six months ended June 30, 2018 due to prior year consolidated losses and for the six months ended June 30, 2017, due to year-to-date consolidated net loss for the period.

Changes in Cash Flow

Operating Activities

 The Company had net cash provided by discontinued operations for the six months ended June 30, 2018 and 2017 of $41,000 and $611,700, respectively.

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 $460,100 and $460,100 has been reserved as of June 30, 2018 and December 31, 2017, respectively.

We are exposed to credit risk in the normal course of business, primarily related to accounts receivable. Our customers operate primarily in the oil production and refining, rail transport, biogas generating and wastewater treatment industries in the United States. Accordingly, we are affected by the economic conditions in these industries as well as general economic conditions in the United States. To limit credit risk, management periodically reviews and evaluates the financial condition of its customers and maintains an allowance for doubtful accounts. As of June 30, 2018, and December 31, 2017, we do not believe that we have significant credit risk.

Fair Value of Financial Instruments

The carrying amounts of our financial instruments, including accounts receivable and accounts payable, are carried at cost, which approximates their fair value due to their short-term maturities. We believe that the carrying value of notes payable with third parties, including their current portion, approximate their fair value, as those instruments carry market interest rates based on our current financial condition and liquidity. We believe the amounts due to related parties also approximate their fair value, as their carried interest rates are consistent with those of our notes payable with third parties.

Long-lived Assets

We evaluate the carrying value of long-lived assets for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. An asset is considered to be impaired when the anticipated undiscounted future cash flows of an asset group are estimated to be less than 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 impairment was determined as of June 30, 2018. As of December 31, 2017, the Company determined an impairment to three CoronaLux ™ units of $354,000 incurred due to lack of sale or license of the three units for a period of more than 12 months since completion of the units.

Revenue Recognition

We recognize revenue related to contract projects and services when all of the following criteria are met: (i) persuasive evidence of an agreement exists, (ii) delivery has occurred or services have been rendered, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured. Our revenue is primarily comprised of services related to industrial cleaning and railcar cleaning, which we recognize as services are rendered.

Product revenue generated from projects, which include the manufacturing of products, for removal and treatment of hazardous vapor and gasses is accounted for under the percentage-of-completion method for projects with durations in excess of three months and the completed-contract method for all other projects. Total estimated revenue includes all of the following: (1) the basic contract price (2) contract options and (3) change orders. Once contract performance is underway, we may experience changes in conditions, client requirements, specifications, designs, materials and expectations regarding the period of performance. Such changes are “change orders” and may be initiated by us or by our clients. In many cases, agreement with the client as to the terms of change orders is reached prior to work commencing; however, sometimes circumstances require that work progress without obtaining client agreement. Revenue related to change orders is recognized as costs are incurred if it is probable that costs will be recovered by changing the contract price. The Company does not incur pre-contract costs. Under the percentage-of-completion method, we recognize revenue primarily based on the ratio of costs incurred to date to total estimated contract costs. Provisions for estimated losses on uncompleted contracts are recorded in the period in which the losses are identified and included as additional loss. Provisions for estimated losses on contracts are shown separately as liabilities on the balance sheet, if significant, except in circumstances in which related costs are accumulated on the balance sheet, in which case the provisions are deducted from the accumulated costs. A provision as a liability is reported as a current liability.

For contracts accounted for under the percentage-of-completion method, we include in current assets and current liabilities amounts related to construction contracts realizable and payable. Costs and estimated earnings in excess of billings on uncompleted contracts represent the excess of contract costs and profits recognized to date over billings to date and are recognized as a current asset. Billings in excess of costs and estimated earnings on uncompleted contracts represents the excess of billings to date over the amount of contract costs and profits recognized to date and are recognized as a current liability.

The Company’s revenues from waste destruction licensing agreements are recognized as a single accounting unit over the term of the license.  In accordance with Accounting Standards Codification (“ASC”) 605, for revenues which contain multiple deliverables, the Company separates the deliverables into separate accounting units if they meet the following criteria: (i) the delivered items have a stand-alone value to the customer; (ii) the fair value of any undelivered items can be reliably determined; and (iii) if the arrangement includes a general right of return, delivery of the undelivered items is probable and substantially controlled by the seller.  Deliverables that do not meet these criteria are combined with one or more other deliverables into one accounting unit.  Revenue from each accounting unit is recognized based on the applicable accounting literature, primarily ASC 605.

The Company has five-year agreements with two companies in which the Company amortizes various fees on a straight-line basis over the initial five-year term of the agreement.

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.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our filings with the Securities and Exchange Commission (SEC) are recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our chief executive officer and chief financial officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure based on the definition of “disclosure controls and procedures” as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

As of the end of the period covered by this report, and under the supervision and with the participation of our management, including our Chief Executive Officer and the person performing the similar function as Chief Financial Officer, we evaluated the effectiveness of the design and operation of these disclosure controls and procedures. Based on this evaluation and subject to the foregoing, our Chief Executive Officer and Acting Chief Financial Officer concluded that our disclosure controls and procedures were not effective.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15 (f) under the Exchange Act) during the quarter ended June 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

From time to time, the Company may become a party to legal actions or proceedings in the ordinary course of its business.  As of June 30, 2018, there were no other such actions or proceedings, either individually or in the aggregate, that, if decided adversely to the Company’s interests, the Company believes would be material to its business.

ITEM 1A. Risk Factors

Please review our report on Form 10K Part 1, Item 1A for a complete statement of “Risk Factors” that pertain to our business.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.

During the six months ended June 30, 2018, the Company recorded 2,010,000 shares of $.001 par value common stock as issuable to short-term note holders as required under their respective agreements. (See Note 9)

During the six months ended June 30, 2018, the Company sold 250,000 shares of $.001 par value common stock at $.48 per share in a private placement, receiving proceeds of $120,000.

During the six months ended June 30, 2018, the Company issued 75,000 shares of $.001 par value common stock at $.77 per share for services valued at approximately $58,000.

The issuance of the shares of our common stock described above was pursuant to the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended and related state private offering exemptions. All of the investors were Accredited Investors as defined in the Securities Act who took their shares for investments purposes without a view to distribution and had access to information concerning the company and its business prospects, as required by the Securities Act.

In addition, there was no general solicitation or advertising for the purchase of these shares. All certificates for these shares issued pursuant to Section 4(2) contain a restrictive legend. Finally, our stock transfer agent has been instructed not to transfer any of such shares unless such shares are registered for resale or there is an exemption with respect to their transfer.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

EXHIBIT INDEX

SIGNATURES

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized.