Strategic Environmental & Energy Resources, Inc. - 10-K

Exhibit 99.1

 

Exhibit 99.1 Financial Statements

 

Annual Audited Consolidated Financial Statements    
    Page
     
Report of Independent Registered Public Accounting Firm   F-1
     
Consolidated Balance Sheets as of December 31, 2017 and 2016   F-2
     
Consolidated Statements of Operations for the Years Ended December 31, 2017 and 2016   F-3
     
Consolidated Statements of Stockholders’ Equity (Deficit) for the Years Ended December 31, 2017 and 2016   F-4
     
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017 and 2016   F-5
     
Notes to Consolidated Financial Statements   F-7
     
 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Shareholders and the Board of Directors

of Strategic Environmental & Energy Resources, Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Strategic Environmental & Energy Resources, Inc. and subsidiaries (the “Company”) as of December 31, 2017 and December 31, 2016, the related consolidated statements of operations, stockholders’ deficit and cash flows for the years ended December 31, 2017 and December 31, 2016, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and December 31, 2016, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

 

Explanatory Paragraph – Going Concern

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2, the Company has incurred significant losses since inception and has a accumulated deficit of approximately $22 million as of December 31, 2017 and needs to raise substantial amounts of additional funds to meet its obligations and afford it time to develop profitable operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ LJ Soldinger Associates, LLC

 

Deer Park, IL

April 17, 2018

 

We have served as the Company’s auditor since 2013.  

   

F-1

 

 

STRATEGIC ENVIRONMENTAL & ENERGY RESOURCES, INC.  
CONSOLIDATED BALANCE SHEETS

 

ASSETS  December 31, 
Current assets:  2017   2016 
Cash  $54,100   $233,200 
Accounts receivable, net of allowance for doubtful accounts of $460,100 and $235,500, respectively   692,400    1,188,100 
Notes receivable, net   184,600     
Costs and estimated earnings in excess billings on uncompleted contracts       13,600 
Assets held for sale       1,024,600 
Prepaid expenses and other current assets   340,900    518,500 
Total current assets   1,272,000    2,978,000 
           
Property and equipment, net   1,296,400    2,805,100 
Intangible assets, net   623,100    738,000 
Notes receivable, net of current portion   542,900     
Other assets   16,500    16,400 
TOTAL ASSETS  $3,750,900   $6,537,500 
           
LIABILITIES & STOCKHOLDERS’ EQUITY (DEFICIT)          
Current liabilities:          
Accounts payable  $1,436,900   $1,643,500 
Accrued liabilities   1,307,600    1,381,000 
Billings in excess of costs and estimated earnings on uncompleted contracts   227,300    1,090,800 
Deferred revenue   304,200    188,300 
Payroll taxes payable   997,700    993,300 
Customer deposits   21,600    330,000 
Liabilities held for sale       603,100 
Current portion of notes payable and capital lease obligations   2,166,300    571,800 
Notes payable - related parties, including accrued interest   11,800    11,800 
Total current liabilities   6,473,400    6,813,600 
Deferred revenue, non-current   113,100    283,600 
Notes payable and capital lease obligations, net of current portion   504,300    1,751,500 
Total liabilities   7,090,800    8,848,700 
Commitments and contingencies          
Stockholders’ Equity):          
Preferred stock; $.001 par value; 5,000,000 shares authorized; -0- shares issued          
Common stock; $.001 par value; 70,000,000 shares authorized; 56,528,575 and   56,500    54,500 
54,525,079 shares issued, issuable** and outstanding 2017 and 2016, respectively          
Common stock subscribed   25,000    25,000 
Additional paid-in capital   20,790,700    19,077,600 
Stock subscription receivable   (25,000)   (25,000)
Accumulated deficit   

(21,471,900

)   (19,273,500)
Total stockholders’ equity (deficit)   

(624,700

)   (141,400)
Non-controlling interest   (2,715,200)   (2,169,800)
Total equity (deficit)   

(3,339,900

)   (2,311,200)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $

3,750,900

   $6,537,500 

 

**Includes 190,000 shares issuable at December 31, 2017 per terms of short-term note agreements.

The accompanying notes are an integral part of these consolidated financial statements.

 

F-2

 

 

STRATEGIC ENVIRONMENTAL & ENERGY RESOURCES, INC.  

CONSOLIDATED STATEMENTS OF OPERATIONS  

 

   For the Year Ended December 31, 
   2017   2016 
Revenue:        
 Products  $5,256,300   $4,494,700 
 Services   2,254,200    2,929,000 
 Solid waste disposal   917,500    230,200 
Total revenue   8,428,000    7,653,900 
           
Operating expenses:          
Products costs   3,636,100    3,417,000 
Services costs   

2,718,100

    2,657,400 
Solid waste disposal costs   1,150,700    315,000 
General and administrative expenses   

2,521,500

    2,034,800 
Salaries and related expenses   2,238,400    2,182,800 
Loss on settlement   254,900      
 Other asset impairment   322,000    720,000 
 Fixed asset impairment   354,000    809,000 
 Litigation settlement       277,500 
Total operating expenses   13,195,700    12,413,500 
           
Loss from operations   (4,767,700)   (4,759,600)
           
Other income (expense):          
 Interest expense net   (1,425,600)   (324,200)
 Gain on disposition of assets       27,800 
 Other   

59,900

    (22,900)
 Total non-operating expense, net   

(1,365,700

)   (319,300)
           
Loss from continuing operations   (6,133,400)   (5,078,900)
           
Net income from discontinued operations   694,300    423,300 
Gain recognized on sale of rail operations   2,695,300     
Discontinued operations, net of tax   3,389,600    423,300 
           
Loss before earnings from equity method joint ventures   (2,743,800)   (4,655,600)
           
Income from equity method joint ventures       15,700 
           
Net Loss   (2,743,800)   (4,639,900)
Less: Loss attributable to non-controlling interest   (545,400)   (753,500)
Net loss attributable to SEER common stockholders  $(2,198,400)  $(3,886,400)
           
Net loss per share from continuing operations  $(.11)  $(.08)
Discontinued operations  $.01   $.01 
Net loss per share, basic and diluted  $(.10)  $(.07)
           
Weighted average shares outstanding – basic and diluted   55,264,804    53,951,309 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-3

 

 

STRATEGIC ENVIRONMENTAL & ENERGY RESOURCES, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)

 

   Preferred Stock  Common Stock  Additional Paid-in  Common Stock   Stock Subscription   Accumulated   Non-controlling   Total 
   Shares   Amount  Shares  Amount  Capital  Subscribed   Receivable   Deficit   Interest   Equity (Deficit) 
Balances, January 1, 2016          52,375,100  $52,400  $17,690,900  $50,000   $(25,000)  $(15,387,100)  $(1,416,300)  $964,900 
Sale of common stock            600,000   600   299,400                       300,000 
Issuance of common stock subscribed to            100,000   100   24,900   (25,000)                   
Issuance of common stock for intangibles            1,200,000   1,200   718,800                       720,000 
Issuance of common stock upon exercise of warrants            250,000   200   124,800                       125,000 
Proceeds from extension of warrants                    29,900                       29,900 
Discount from warrants issued with debt                    102,000                       102,000 
Stock-based compensation - options                    64,600                       64,600 
Stock-based compensation – warrants                    22,300                       22,300 
Net loss                                  (3,886,400)   (753,500)   (4,639,900)
Balance December 31, 2016          54,525,100  $54,500  $19,077,600  $25,000   $(25,000)  $(19,273,500)  $(2,169,800)  $(2,311,200)
Issuance of common stock upon settlement            300,000   300   173,700                       174,000 
Issuance of common stock upon debt penalty            1,690,000   1,700   1,137,300                       1,139,000 
Issuance of common stock upon cashless exercise of stock options            13,500                              
Proceeds from extension of warrants                    155,500                       155,500 
Stock-based compensation - options                    131,600                       131,600 
Stock-based compensation – warrants                    115,000                       115,000 
Net loss                                  (2,198,400)   (545,400)   (2,743,800)
Balance December 31, 2017          56,528,600  $56,500  $20,790,700  $25,000   $(25,000)  $(21,471,900)  $(2,715,200)  $(3,339,900)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 F-4

 

 

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

   

   For the Year Ended December 31, 
Cash flows from operating activities:  2017   2016 
Net loss  $(2,743,800)  $(4,639,900)
Income from equity method joint ventures       (15,700)
Income from discontinued operations   3,389,600    423,300 
Net loss from continuing operations   (6,133,400)   (5,078,900)
Adjustments to reconcile net loss to net cash provided by operating activities:          
Depreciation, amortization and impairment   774,800    740,700 
Stock-based compensation expense   246,600    91,500 
Non-cash expense for interest   1,147,000    97,100 

Provision for doubtful accounts receivable

   224,600     
Cost of sale of equipment to joint venture   316,800     
Settlement expense   254,900     
Gain on disposition of asset       (25,600)
Impairment of assets   

676,000

    1,529,000 
Changes in operating assets and liabilities:          
Accounts receivable   270,900    (397,400)
Costs in Excess of billings on uncompleted contracts   13,600    190,400 
Prepaid expenses and other assets   593,800    296,900 
Accounts payable and accrued liabilities   (279,800)   1,282,000 
Billings in excess of revenue on uncompleted contracts   (863,500)   502,900 
Customer deposits   21,600     
Deferred revenue   (54,600)   800 
Payroll taxes payable   4,400    22,800 
Net cash used in operating activities   (2,786,300)   (747,800)
           
Cash flows from investing activities:          
Purchase of property and equipment   (199,800)   (163,700)
Proceeds from sale of discontinued operations, net of costs   2,510,900     
Proceeds from the sale of property and equipment   74,300     
Insurance proceeds       59,000 
Purchase of intangible assets   (18,600)   (45,100)
Distributions for notes receivable   (300,000)    
Net cash used in investing activities   2,066,800    (149,800)
           
Cash flows from financing activities:          
Principal payments of notes and capital lease obligations   (1,468,000)   (863,600)
Payments of related party notes payable and accrued interest       (20,000)
Proceeds from issuance of convertible and short-term debt   1,275,000    1,155,000 
Proceeds from issuance of capital leases   88,800     
Proceeds from the extension of warrants   155,500     
Proceeds from the sale of common stock and warrants, net of expenses       454,900 
Net cash provided by financing activities   51.300    726,300 
Net cash flows from discontinued operations   489,100    173,900 
Net decrease in cash   (179,100)   2,600 
Cash at the beginning of year   233,200    230,600 
Cash at the end of year  $54,100   $233,200 

 

 F-5

 

 

STRATEGIC ENVIRONMENTAL & ENERGY RESOURCES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS – Continued

 

Supplemental disclosures of cash flow information:        
Cash paid for income taxes      
Cash paid for interest  $211,600   $257,500 
           
Supplemental disclosure of noncash financing and investing activities:          
           
Financed equipment  $88,400   $ 
Financing of insurance premiums  $438,300   $278,600 
Discount on convertible debt  $   $97,100 
Offset accounts receivable with note payable  $   $68,000 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 F-6

 

 

STRATEGIC ENVIRONMENTAL & ENERGY RESOURCES, INC.

 Notes to Consolidated Financial Statements

 

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 operating subsidiaries 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, odor control systems and natural gas vapor capture primarily for landfill operations, waste-water treatment facilities, oil and gas fields, refineries, municipalities and food, beverage & agriculture operations throughout the U.S.; 3) Strategic Environmental Materials, LLC,(“SEM”), a materials technology company focused on development of cost-effective chemical absorbents.

 

The two majority-owned subsidiaries include; 1) Paragon Waste Solutions, LLC (“PWS”) and 2) ReaCH4Biogas (“Reach”). PWS is currently owned 54% by SEER (see Note 7) 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 treating biogas for conversion to pipeline quality gas and/or compressed natural gas (“CNG”) for fleet vehicle fuel. Reach had minimal operations for the year ended December 31, 2017 and 2016.

 

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 $21.5 million as of December 31, 2017, and $19.2 million as of December 31, 2016. For the years ended December 31, 2017, and 2016, we incurred net losses from continuing operations of approximately $6.1 million and $5.0 million, respectively. The Company had a working capital deficit of approximately $5.2 million at December 31, 2017, an increase of $1.4 million in the working capital deficit of $3.8 million at December 31, 2016. Effective April 1, 2016, REGS, a wholly owned subsidiary, was notified that it would no longer be providing routine maintenance services to its largest customer but would still be eligible to provide other industrial cleaning services. The loss of revenue from this customer was approximately $2.5 million in 2016. These factors raise substantial doubt about the ability of the Company to continue to operate as a going concern.

 

 F-7

 

 

STRATEGIC ENVIRONMENTAL & ENERGY RESOURCES, INC.

 Notes to Consolidated Financial Statements

 

NOTE 1 - ORGANIZATION AND FINANCIAL CONDITION, continued

 

Going Concern, continued

 

Realization of a major portion of our assets as of 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. For the year ended December 31, 2017 we raised $2,510,900 from the sale of rail operations, $155,500 from the extension of common stock warrants and $1,275,000 from the issuance of short term notes, offset by payments of principal on five short term notes of $1,024,000. 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 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 though our joint ventures and licensees our CoronaLux™ waste destruction units. We have increased our business development efforts to address opportunities identified in expanding markets attributable to increased interest in energy conservation and emission control regulations. In addition, the Company is evaluating various forms of financing which may be available to it. There can be no assurance that the Company will secure additional financing for working capital, increase revenues and achieve the desired result of net income and positive cash flow from operations in future years. These financial statements do not give any effect to any adjustments that would be necessary should the Company be unable to report on a going concern basis.

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Reclassifications

 

Certain reclassifications have been made in the 2016 consolidated financial statements to conform to the 2017 presentation. These reclassifications have no effect on net income for 2016.

 

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 cash flows used in the impairment testing of definite lived tangible and intangible assets; valuation allowances and reserves for receivables; revenue recognition related to contracts accounted for under the percentage of completion method; revenue recognition method for perpetual technology license agreements; share-based compensation; discontinued operations; future consideration; and carry amounts of equity investments. Actual results could differ from those estimates.

 

Cash and Cash Equivalents

 

We consider all highly liquid debt investments with an original maturity of three months or less at the date of acquisition to be cash equivalents. Periodically, we maintain deposits in financial institutions in excess of federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents. As of December 31, 2017 and 2016, we did not hold any assets that would be deemed to be cash equivalents.

 

 F-8

 

 

STRATEGIC ENVIRONMENTAL & ENERGY RESOURCES, INC.

 Notes to Consolidated Financial Statements

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

Accounts Receivable and Concentration of Credit Risk

 

Accounts receivable are recorded at the invoiced amounts less an allowance for doubtful accounts. 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 periodically reviewed 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 $235,500 had been reserved as of December 31, 2017 and 2016, 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 landfill 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 December 31, 2016, we do not believe that we have significant credit risk.

 

As of December 31, 2017 we had four customers who comprised 10% or more of our accounts receivable and their combined accounts receivable equaled approximately $564,000. As of December 31, 2016, we had one customer who comprised 10% of our accounts receivable.

 

For the year ended December 31, 2017 we had no customer with sales in excess of 10% of our revenue. For the year ended December 31, 2016, we had one customer with sales in excess of 10% of our revenue and they represented approximately 17% of total revenues for the years ended December 31, 2016. The loss of this 2016 customer had a material adverse effect on our business, our results of operations and our working capital. In early 2016 we were notified by this significant customer that effective April 1, 2016 we would no longer be providing routine maintenance services but still be eligible to provide other industrial cleaning services. During 2016, the loss of revenue from this customer was approximately $2.5 million.

 

Inventories

 

Inventories are stated at the lower of cost or market and maintained on a first in, first out basis.

 

Vendor Concentration

 

The Company does not have any purchases from any one vendor comprising more that 10% of total purchases for 2017 and 2016. The Company does not believe it is substantially dependent upon nor exposed to any significant concentration risk related to purchases from any single vendor.

 

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.

 

 F-9

 

 

STRATEGIC ENVIRONMENTAL & ENERGY RESOURCES, INC.

 Notes to Consolidated Financial Statements

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

Fair Value

 

As defined in authoritative guidance, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (“exit price”). To estimate fair value, the Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable.

 

The authoritative guidance establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (“Level 1” measurements) and the lowest priority to unobservable inputs (“Level 3” measurements). The three levels of the fair value hierarchy are as follows:

 

Level 1 - Observable inputs such as quoted prices in active markets at the measurement date for identical, unrestricted assets or liabilities.

 

Level 2 - Other inputs that are observable, directly or indirectly, such as quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability.

 

Level 3 - Unobservable inputs for which there is little or no market data and which the Company makes its own assumptions about how market participants would price the assets and liabilities.

 

In instances in which multiple levels of inputs are used to measure fair value, hierarchy classification is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

 

Property and Equipment

 

Property and equipment are recorded at cost less accumulated depreciation. Expenditures for replacements, renewals and betterments are capitalized. Repairs and maintenance costs are expensed as incurred.

 

Depreciation is calculated using the straight-line method over the estimated useful lives of the assets of generally five to seven years for equipment, five to ten years for vehicles and three years for computer related assets. Assets are depreciated starting at the time they are placed into service. A portion of depreciation expense is charged to cost of product revenue on the consolidated statement of operations.

 

Leasehold improvements are amortized using the straight-line method over the shorter of the lease term (including reasonably assured renewal periods), which range from three to seven years, or their estimated useful life.

 

Intangible Assets

 

Intangible assets with estimable useful lives are amortized using the straight-line method over their respective estimated useful lives verses their estimated residual values, and are reviewed for impairment annually, or whenever events or circumstances indicate their carrying amount may not be recoverable. We conduct our annual impairment test on December 31 of each year. The Company has evaluated its intangibles for impairment and has determined that no impairment was necessary as of December 31, 2017.

 

 F-10

 

 

STRATEGIC ENVIRONMENTAL & ENERGY RESOURCES, INC.

 Notes to Consolidated Financial Statements

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

Impairment of 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. Further testing of specific assets or grouping of assets is required when undiscounted future cash flows associated with the assets is less than their carrying amounts. 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. We recorded impairment to three CoronaLux ™ units of approximately $354,000 and to five CoronaLux ™ units of $809,000 incurred due to lack of sale or license of the units for a period of more than 12 months since completion of the units for the years ended December 31, 2017 and 2016, respectively.

 

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 mobile 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.

 

 F-11

 

 

STRATEGIC ENVIRONMENTAL & ENERGY RESOURCES, INC.

 Notes to Consolidated Financial Statements

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

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 using the simplified method to estimate the expected term of the option and recorded in the period that estimates are revised.

 

Research and Development

 

Research and development (“R&D”) costs are charged to expense as incurred and are included in selling, general and administrative costs in the accompanying consolidated statement of operations. 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 $5,600 and $192,400 for the years ended December 31, 2017 and 2016, respectively. R & D expenses are included in general and administrative expenses.

 

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 years ended December 31, 2017 and 2016 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 December 31, 2017 and 2016. 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.

 

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.

 

 F-12

 

 

STRATEGIC ENVIRONMENTAL & ENERGY RESOURCES, INC.

 Notes to Consolidated Financial Statements

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

New Accounting Pronouncements Implemented

 

In May 2014, the Financial Accounting Standards Board (FASB) issued guidance creating Accounting Standards Codification (“ASC”) Section 606, “Revenue from Contracts with Customers”. The new section will replace Section 605, “Revenue Recognition” and creates modifications to various other revenue accounting standards for specialized transactions and industries. The section is intended to conform revenue accounting principles with a concurrently issued International Financial Reporting Standards with previously differing treatment between United States practice and those of much of the rest of the world, as well as, to enhance disclosures related to disaggregated revenue information. The updated guidance was effective for annual reporting periods beginning on or after December 15, 2016, and interim periods within those annual periods. On July 9, 2015, the FASB approved a one year delay of the effective date. The Company will now adopt the new provisions of this accounting standard at the beginning of fiscal year 2018. The adoption of this ASC is not expected to have any impact on the Company’s consolidated financial position, liquidity, or results of operations 

 

 F-13

 

 

STRATEGIC ENVIRONMENTAL & ENERGY RESOURCES, INC.

 Notes to Consolidated Financial Statements

 

In February 2016, the FASB issued new guidance related to leases that outlines a comprehensive lease accounting model and supersedes the current lease guidance. The new guidance requires lessees to recognize lease liabilities and corresponding right-of-use assets for all leases with lease terms of great than 12 months. It also changes the definition of a lease and expands the disclosure requirements of lease arrangements. The new guidance must be adopted using the modified retrospective approach and will be effective for the Company starting in the first quarter of fiscal 2019. Early adoption is permitted. The Company is in the process of determining the effects the adoption will have on its consolidated financial statements as well as whether to adopt the new guidance early.

 

In May 2017, the FASB issued Accounting Standards Update 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting. The new guidance clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. ASU 2017-09 is effective for public entities for annual reporting periods beginning after December 15, 2017, and interim periods within that reporting period. The Company is in the process of determining the effects the adoption will have on its consolidated financial statements

 

 F-14

 

 

STRATEGIC ENVIRONMENTAL & ENERGY RESOURCES, INC.

 Notes to Consolidated Financial Statements

 

NOTE 3 - PROPERTY AND EQUIPMENT

 

Property and equipment was comprised of the following:

 

   December 31, 
   2017   2016 
         
Field and shop equipment  $2,213,200   $1,907,500 
Vehicles   690,000    690,000 
Waste destruction equipment, placed in service   627,800    1,299,500 
Waste destruction equipment, not placed in service       712,100 
Furniture and office equipment   311,000    319,700 
Leasehold improvements   10,000    10,000 
Building and improvements   21,200    21,200 
Land   162,900    162,900 
    4,036,100    5,122,900 
Less: accumulated depreciation and amortization   (2,739,700)   (2,317,800)
Property and equipment, net  $1,296,400   $2,805,100 

 

Depreciation expense for the years ended December 31, 2017 and 2016 was $641,300 and $647,000, respectively. For the year ended December 31, 2017 depreciation expense included in cost of goods sold and selling, general and administrative expenses was $551,400 and $89,900, respectively. For the year ended December 31, 2016 depreciation expense included in cost of goods sold and selling, general and administrative expenses was $548,900 and $98,100, respectively.

 

Depreciation expense on leased CoronaLux™ units included in accumulated depreciation and amortization above is $70,100 and $136,100 for the years ended December 31, 2017 and 2016, respectively.

 

Property and equipment includes the following amounts for leases that have been capitalized at December 31:

 

   2017   2016 
         
Field and shop equipment  $407,100   $318,300 
Less: accumulated amortization   (232,200)   (153,800)
   $174,900   $164,500 

 

The capitalized leases have a security interest held by the lessor in their respective equipment.

 

The Company has evaluated its fixed assets and has determined that an impairment charge was required to two idle and one licensed CoronaLux™ units and five idle CoronaLux™ units of approximately $354,000 and $809,000 for the years ended December 31, 2017 and 2016, respectively.

 

 F-15

 

 

STRATEGIC ENVIRONMENTAL & ENERGY RESOURCES, INC.

 Notes to Consolidated Financial Statements

 

NOTE 4 – INTANGIBLE ASSETS

 

Intangible assets were comprised of the following:

 

   December 31, 2017 
   Gross carrying amount   Accumulated amortization   Net carrying value 
             
Goodwill  $277,800       $277,800 
Customer list   42,500    (42,500)    
Technology   1,090,500    (745,200)   345,300 
Trade name   54,900    (54,900)    
                
   $1,465,700   $(842,600)  $623,100 

 

   December 31, 2016 
   Gross carrying amount   Accumulated amortization   Net carrying value 
             
Goodwill  $277,800       $277,800 
Customer list   42,500    (42,500)    
Technology   1,069,500    (609,300)   460,200 
Trade name   57,300    (57,300)    
                
   $1,447,100   $(709,100)  $738,000 

 

The estimated useful lives of the intangible assets range from seven to ten years. Amortization expense, included in selling, general and administrative expenses in the accompanying consolidated statements of operations, was $133,500 and $93,700 for the years ended December 31, 2017 and 2016, respectively.

 

NOTE 5 - ACCRUED LIABILITIES

 

Accrued liabilities were comprised of the following:

 

   December 31, 
   2017   2016 
         
Accrued compensation and related taxes  $608,000   $644,800 
Accrued interest   105,700    58,900 
Accrued settlement/litigation claims   150,000    277,500 
Warranty and defect claims   71,700    35,700 
Other   372,200    364,100 
Total Accrued Liabilities  $1,307,600   $1,381,000 

 

 F-16

 

 

STRATEGIC ENVIRONMENTAL & ENERGY RESOURCES, INC.

 Notes to Consolidated Financial Statements

 

NOTE 6 - UNCOMPLETED CONTRACTS

 

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

 

   December 31, 
   2017   2016 
         
Revenue Recognized  $   $324,500 
Less: Billings to date       (310,900)
Costs and estimated earnings in excess of billings on uncompleted contracts
  $   $13,600 
           
Billings to date  $2,875,500   $3,063,500 
Revenue recognized   (2,648,200)   (1,972,700)
Billings in excess of costs and estimated earnings on uncompleted contracts
  $227,300   $1,090,800 

 

NOTE 7– INVESTMENT IN PARAGON WASTE SOLUTIONS LLC

 

In 2010, the Company and Black Stone Management Services, LLC (“Black Stone”) formed PWS, whereby a total of 1,000,000 membership units were issued, 600,000 membership units to the Company and 400,000 membership units to Black Stone. Fortunato Villamagna, who serves as President of our PWS subsidiary, is a managing member and Chairman of Black Stone. In June 2012, the Company and Blackstone each allocated 10% of their respective membership units in PWS to Mr. J John Combs III, an officer and shareholder of the Company and Mr. Michael Cardillo, a shareholder of the Company and an officer of a subsidiary. There was no value attributable to the units at the time of the allocation. At December 31, 2017 and 2016 the Company owned 54% of the membership units, Black Stone owned 26% of the membership units, an outside third party 10% of the membership units and two related parties (as noted above), each owned 5% of the membership units.

 

In August, 2011, we acquired certain intellectual property in regards to waste destruction technology (the “IP”) from Black Stone in exchange for 1,000,000 shares of our common stock valued at $100,000. We estimated the useful life of the IP at ten years, which was consistent with the useful life of other technology included in our intangible assets, and management’s initial assessment of the potential marketability of the IP. 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 commenced as of the date of the 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 $161,500 and $156,500 for the years ended December 31, 2017 and 2016, respectively, as such, royalties of $25,300 and $17,225 were due at December 31, 2017 and 2016, respectively.

 

Since its inception through December 31, 2017, we have provided approximately $6.1 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.

 

 F-17

 

 

STRATEGIC ENVIRONMENTAL & ENERGY RESOURCES, INC.

 Notes to Consolidated Financial Statements

  

NOTE 7– INVESTMENT IN PARAGON WASTE SOLUTIONS LLC, continued

 

Licensing Agreements

 

In 2014, Sterall ordered a total of six CoronaLux™ units, of which one unit was delivered during the year ending December 31, 2014, and five units have been pending delivery since that time. Sterall paid a non-refundable placement fee of $236,300 for the unit delivered in 2014 which the Company has been recognizing over the term of the agreement. Sterall also paid a deposit of $330,000 for the five units ordered leaving a balance of $851,500 still owed. The Company fully reserved the amount owed. In July 2017, the Company and Sterall signed a Settlement Agreement and Mutual Release which allows Sterall to keep the one unit delivered in 2014 and another unit also on site, in exchange for the Company’s retention of the $330,000 deposit paid by Sterall and the issuance of 300,000 shares of restricted common stock valued at $174,000. The two units written off by the Company related to this settlement agreement had a net book value of $290,100. In addition, a third unit located on the Sterall site was abandoned by the Company during 2017 and the Company recorded a full impairment of that unit’s net book value at December 31, 2017 equal to $120,900. As part of the settlement agreement, Sterall also forfeits all rights to operate the CoronoLux technology anywhere in the U.S. territories, but is granted an exclusive right to operate the systems in the limited and sole territory of Haiti for a period of 10 years in exchange for a 5% royalty payable to the Company on gross revenue derived from any source arising out of or related to the operation of the CoronoLux technology.

 

On February 22, 2014, SEER and PWS entered into an Agreement with Daniel McAteer & Associates ("DMA") to develop, permit and exploit the PWS waste destruction technology in Ireland and United Kingdom ("Limited Territory"). The Agreement called for the formation of a Joint Venture to be owned 50% by SEER and 50% by DMA. In accordance with the agreement, DMA was to pay a one-time license fee of $350,000 for an exclusive license for the limited purpose of medical waste destruction in the Limited Territory. On June 10, 2014 Paragon Waste (UK) Ltd ("Paragon UK", "UK Joint Venture"), was formed in accordance with the laws of Northern Ireland. A total of 300,100 shares were issued upon formation, 100 Ordinary A voting shares were issued, of which PWS received 50 Ordinary A shares and 300,000 Ordinary B non-voting shares were issued. In 2015, the Agreement with DMA was amended to where Paragon UK purchased the CoronaLux™ unit from PWS for $350,000. 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. As of December 31, 2017, a balance of $176,000 is still owed and has been fully reserved by the Company.

 

On March 4, 2014, PWS entered into a Licensing and Equipment Lease Agreement with eCycling International of South Carolina, LLC ("eCycling"). The License Agreement grants to eCycling the use of the PWS Technology and the CoronaLux™ waste destruction units for an initial term of five years and requires a payment of $176,875 as a non-refundable initial licensing fee and distributions of 50% of net operating profits, as defined in the agreement, in lieu of continuing royalty payments for the use of the licensed technology. eCycling originally paid the $176,875 placement fee to PWS and an additional $176,875 per the amended agreement during the year ended December 31, 2016 and the revenue is being recognized over the term of the Agreement. eCycling is still in the process of permitting the unit, and therefore, has not yet generated any NOP. During the year ending December 31, 2017, the Company recorded an impairment of this unit of approximately $75,000.

 

On November 17, 2014, PWS entered into an Exclusive Licensing and Equipment Lease Agreement, for a limited license territory, with Medical Waste Services, LLC ("MWS"). The License Agreement grants to MWS the use of the PWS Technology and the CoronaLux™ waste destruction units for an initial term of seven years and requires a payment of $225,000 as a non-refundable initial licensing fee and distributions of 50% of net operating profits, as defined in the agreement, in lieu of continuing royalty payments for the use of the licensed technology. PWS and Medical Waste Services, LLC ("MWS") formed a contractual joint venture to exploit the PWS medical waste destruction technology. MWS has received approval from the California Department of Public Health and a restricted permit from the South Coast Air Quality Management District ("SCAQMD") to operate the CoronaLux™ unit licensed by MWS at its facility in Southern California. Operations to date have included the destruction of medical waste under a temporary operating permit issued by SCAQMD since May 2015 and efforts to obtain a full operating permit from SCAQMD were successful and SCAQMD issued a ‘Notice of Intent to Issue Permit to Operate’ in March 2017. In November 2017, the full operating permit was issued by SCAQMD.

 

 F-18

 

 

STRATEGIC ENVIRONMENTAL & ENERGY RESOURCES, INC.

 Notes to Consolidated Financial Statements

 

NOTE 7– INVESTMENT IN PARAGON WASTE SOLUTIONS LLC, continued

 

In February 2015, PWS entered into a License Agreement with Particle Science Tech of Environmental Protection, Inc (“Particle”) a US subsidiary of Xinhua Energy Environmental Technology Co., Ltd (“Xinhua”), a large multi-national environmental company based in China. The agreement provides for the exclusive rights to distribute PWS’s patented technology in China, Hong Kong, Macau and the Taiwan territories (“Territory”). The grant was for both the medical waste, as well as the refinery vertical markets within the Territory. The Agreement calls for, among other things, the formation of a U.S. joint venture company, (“P&P Company”, to be owned 50/50 by PWS and Particle) and an obligation by Xinhua to fund all necessary and reasonable capital requirements to permit and roll out the PWS technology in the Territory as well as staff and manage the JV Entity’s operations. In 2015, PWS sold a CoronaLux™ unit to Xinhua for $430,500.

 

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 for $600,000. PWS incurred costs of $525,700 to prepare the three units for sale. Operations in the form of medical waste destruction began in the first quarter of 2018. 

 

Upon the occurrence of certain events and timely performance by Xinhua, a second placement fee of $350,000 is required to be paid and, upon that second payment, it will then be granted exclusive manufacturing rights to produce the units to be deployed in the Territory.

 

Payments received for non-refundable licensing and placement fees have been recorded as deferred revenue in the accompanying consolidated balance sheets at December 31, 2017 and 2016 and are recognized as revenue ratably over the term of the contract.

 

NOTE 8 – INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES

 

The Company has a non-controlling interest in several joint ventures, currently six primarily for licensing and operating PWS CoronaLux™ waste destruction units and one for development of hybrid scrubber systems. One joint venture had limited activity in 2017 while two joint ventures have limited their activity to formation only. No other operations have commenced. The following is summary information on the joint ventures that have had some activity in 2017 and 2016. The Company has no fixed commitment to fund any losses of the operating joint ventures and has no investment basis in any of the joint ventures therefore the Company has suspended the recognition of losses under the equity method of accounting.

 

   December 31, 
   2017   2016 
PWS-MWS Joint Venture          
Revenues  $224,000   $197,800 
Operating cost   184,400    152,000 
Net income   39,600    45,800 
Company’s share of net income  $13,600   $15,700 
           
Paragon UK Joint Venture          

Assets  $355,800   $555,500 
Liabilities   121,600    261,700 
Net Assets   234,200    293,800 
Net loss   85,700     
Company’s share of net loss  $   $ 
Advances to joint venture        
Equity in net assets        
           
PWS-Paragon Southwest Joint Venture          
Revenues  $   $ 
Operating cost        
Net income        
Company's share of net income  $   $ 
Assets purchased by JV  $600,000   $ 
Cost to Company to make assets sold ready for sale   (525,700)    
Net proceeds to Company  $74,300   $ 

 

 F-19

 

 

STRATEGIC ENVIRONMENTAL & ENERGY RESOURCES, INC.

 Notes to Consolidated Financial Statements

 

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.

 

In or around 2010, REGS retained Washington D.C.-based legal counsel specializing in resolving federal tax matters. REGS has been represented by this firm throughout all phases of this tax matter and related proceedings. In September 2011, REGS received approval from the Internal Revenue Service (“IRS”) to begin paying the outstanding federal payroll tax liability plus the related incurred interest and penalties totaling approximately $971,000 in installments (the “Installment Plan”). Under the Installment Plan, REGS was required to pay minimum monthly installments of $12,500 commencing September 2011, which increased to $25,000 per month in September 2012, until the liability was paid in full. Through the duration of the Installment Plan, the IRS continues to charge penalties and interest at statutory rates. If the conditions of the Installment Plan were not met, the IRS could cancel the installment plan and could demand the outstanding liability to be repaid through traditional enforcement proceedings available to the IRS. Additionally, the IRS has filed a notice of federal tax lien against certain of REGS assets in order to secure the obligation. The IRS is to release this lien if and when we pay the full amount due.

 

Two of the officers of REGS also have liability exposure for a portion of the taxes if REGS does not pay them.

 

In May 2013, REGS filed an Offer in Compromise (“OIC”) with the IRS. While the OIC was under review by the IRS, the requirement to pay $25,000 a month under the Installment Plan was suspended. REGS was informed by its legal counsel that the IRS had accepted REGS’ OIC. However by a letter dated March 27, 2014, REGS was notified that the OIC had been rejected. REGS then appealed that rejections decision. However that appeal has been denied. As a result, the Installment Plan is terminated. In June 2014, REGS received notices of intent to levy property or rights to property from the IRS for the amounts owed for the past due payroll taxes, penalty and interest. The IRS has not taken any current action against REGS and REGS continues to be represented by its legal counsel.

 

As of December 31, 2017 and 2016, the outstanding balance due to the IRS was $997,700, and $993,300, 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

 

In June 2011, we issued an unsecured promissory note to a third party in the amount of $40,000 (the “June 2011 Note”) bearing interest at a rate of 10% per annum and a three year warrant to purchase 13,000 shares of our common stock at an exercise price of $1.00 per share. In addition, a second note payable, to the same third party, in the amount of $25,000 plus $3,000 of accrued interest was also converted into the June 2011 Note, resulting in a new principal balance of $68,000. Principal payments were due beginning November 2011 and the June 2011 Note and accrued interest was paid in full during August 2016 through an offset to trade accounts receivable from the note holder.

 

 F-20

 

 

STRATEGIC ENVIRONMENTAL & ENERGY RESOURCES, INC.

 Notes to Consolidated Financial Statements

 

NOTE 10 – DEBT, continued

 

Debt as of December 31, 2017 and 2016 was comprised of the following:

 

   2017   2016 
June 2011 Note - paid in full during 2016  $   $ 
           
Convertible notes payable, interest at 8% per annum, unpaid principal and interest maturing 3 years from note date between August 2018 and October 2019, convertible into common stock at the option of the lenders at a rate of $0.70 per share; one convertible note for $250,000 has a personal guarantee of an officer of the Company.   1,605,000    1,605,000 
           
Debt discount (see Note 13)   (7,200)   (14,900)
           
Secured short term note payable dated October 24, 2016 with principal and interest due 60 days from issuance. The note requires a one-time fee in the amount of $10,000 to compensate for the first two weeks of the term and each week thereafter (weeks 3-8) a fee of $1,000 shall be due and owing accruing on the first day of the week. The total one time fee paid was $16,000. A fee of 100,000 shares of restricted common stock shall be issued as a penalty for each month or prorated for any two-week portion of any month the note is outstanding past the original maturity for months 3 through 6, and a fee of 200,000 shares of restricted common stock shall be issued to lender for each month or prorated for each two-week portion of any month the note is outstanding beginning in month 7 until paid in full. The note is secured by specific customer accounts receivables and a personal guarantee of an officer of the Company. This note was paid in full in April 2017. The penalty period for shares to be issued was reached and the Company issued 350,000 shares of its common stock under the terms of this agreement during 2017. The shares were valued at $245,000 recorded as interest expense.       200,000 
           
Secured short term note payable dated December 1, 2016 with principal and interest due 60 days from issuance. The note requires a one-time fee in the amount of $10,000 to compensate for the first two weeks of the term and each week thereafter (weeks 3-8) a fee of $1,000 shall be due and owing accruing on the first day of the week. The total one time fee paid was $16,000. A fee of 100,000 shares of restricted common stock shall be issued as a penalty for each month or prorated for any two-week portion of any month the note is outstanding for months 3 through 6, and a fee of 200,000 shares of restricted common stock shall be issued to lender for each month or prorated for each two-week portion of any month the note is outstanding past the original maturity beginning in month 7 until paid in full. The note is secured by specific customer accounts receivables and a personal guarantee of an officer of the Company. This note was paid in full in August 2017. The penalty period for shares to be issued was reached and the Company issued 800,000 shares of its common stock under the terms of this agreement during 2017. The shares were valued at $531,000 recorded as interest expense.       200,000 

           
Secured short term note payable dated January 23, 2017 with principal and interest due 60 days from issuance. The note requires a one-time fee in the amount of $10,000 to compensate for the first two weeks of the term and each week thereafter (weeks 3-8) a fee of $1,000 shall be due and owing accruing on the first day of the week. The total one time fee paid was $16,000. A fee of 100,000 shares of restricted common stock shall be issued as a penalty for each month or prorated for any two-week portion of any month the note is outstanding for months 3 through 6, and a fee of 200,000 shares of restricted common stock shall be issued to lender for each month or prorated for each two-week portion of any month the note is outstanding past the original maturity beginning in month 7 until paid in full. The note is secured by specific customer accounts receivables and a personal guarantee of an officer of the Company. This note was paid in full in August 2017. The penalty period for shares to be issued was reached and the Company issued 150,000 shares of its common stock under revised terms of the agreement during 2017. The shares were valued at $105,000 recorded as interest expense. No additional shares will be issued by the Company.        

 

 

 F-21

 

 

STRATEGIC ENVIRONMENTAL & ENERGY RESOURCES, INC.

 Notes to Consolidated Financial Statements 

           
Secured short term note payable dated March 20, 2017 with principal and interest due 60 days from issuance. The note requires a one-time fee in the amount of $10,000 to compensate for the first two weeks of the term and each week thereafter (weeks 3-8) a fee of $1,000 shall be due and owing accruing on the first day of the week. The total one time fee paid was $16,000. A fee of 100,000 shares of restricted common stock shall be issued as a penalty for each month or prorated for any two-week portion of any month the note is outstanding past the original maturity date for months 3 through 6, and a fee of 200,000 shares of restricted common stock shall be issued to lender for each month or prorated for each two-week portion of any month the note is outstanding past the original maturity beginning in month 7 until paid in full. The note is secured by specific customer accounts receivables and a personal guarantee of an officer of the Company. This note was paid in full in August 2017. The penalty period for shares to be issued was reached and the Company recorded 200,000 shares of its common stock under the terms of this agreement during 2017. The shares were valued at $128,000 recorded as interest expense. No additional shares will be issued by the Company under the terms of the agreement.        
           
Secured short term note payable dated September 13, 2017 with principal and interest due 60 days from issuance. The note requires a one-time fee in the amount of $15,000 to compensate for the first two weeks of the term and each week thereafter (weeks 3-8) a fee of $1,500 shall be due and owing accruing on the first day of the week. The total one time fee paid was $24,000. A fee of 100,000 shares of restricted common stock shall be issued as a penalty for each month or prorated for any two-week portion of any month the note is outstanding past the original maturity date for months 3 through 6, and a fee of 200,000 shares of restricted common stock shall be issued to lender for each month or prorated for each two-week portion of any month the note is outstanding past the original maturity date beginning in month 7 until paid in full. The note is secured by the future sale of CoronaLux units and a personal guarantee of an officer of the Company. The penalty period for shares to be issued has been reached and for the year ended December 31, 2017, the Company recorded 150,000 shares of its common stock as issuable under the terms of this agreement. The shares were valued at $100,000 recorded as interest expense. Additional shares will be issued by the Company under the terms of the agreement (see Note 22).   300,000     
           
Secured short term note payable dated October 13, 2017 with principal and interest due 60 days from issuance. The note requires a one-time fee in the amount of $4,000 to compensate for the first two weeks of the term and each week thereafter (weeks 3-8) a fee of $400 shall be due and owing accruing on the first day of the week. The total one time fee paid was $6,400. A fee of 40,000 shares of restricted common stock shall be issued as a penalty for each month or prorated for any two-week portion of any month the note is outstanding past the original maturity date for months 3 through 6, and a fee of 80,000 shares of restricted common stock shall be issued to lender for each month or prorated for each two-week portion of any month the note is outstanding past the original maturity date beginning in month 7 until paid in full. The note is secured by the future sale of CoronaLux units and a personal guarantee of an officer of the Company. The penalty period for shares to be issued has been reached and for the year ended December 31, 2017, the Company recorded 40,000 shares of its common stock as issuable under the terms of this agreement. The shares were valued at $30,000 recorded as interest expense. Additional shares will be issued by the Company under the terms of the agreement (see Note 22).   100,000     

 

 F-22

 

 

STRATEGIC ENVIRONMENTAL & ENERGY RESOURCES, INC.

 Notes to Consolidated Financial Statements

           
Secured short term note payable dated November 6, 2017 with principal and interest due 60 days from issuance. The note requires a one-time fee in the amount of $5,000 to compensate for the first two weeks of the term and each week thereafter (weeks 3-8) a fee of $400 shall be due and owing accruing on the first day of the week. The total one time fee paid was $7,400. A fee of 50,000 shares of restricted common stock shall be issued as a penalty for each month or prorated for any two-week portion of any month the note is outstanding past the original maturity date for months 3 through 6, and a fee of 100,000 shares of restricted common stock shall be issued to lender for each month or prorated for each two-week portion of any month the note is outstanding past the original maturity date beginning in month 7 until paid in full. The note is secured by the future sale of CoronaLux units and a personal guarantee of an officer of the Company. The penalty period for shares to be issued had not been reached as of December 31, 2017. Shares will be issued by the Company under the terms of the agreement (see Note 22).   125,000     
           
Note payable dated November 20, 2017, interest at 30% per annum, principal and accrued interest due on or before February 28, 2018. Unpaid interest at December 31, 2017 is approximately $11,800. The note is unsecured. During 2018, a verbal agreement was made to allow month-to-month extension of the due date as long as interest payments were made monthly.   300,000     
           
Note payable dated October 13, 2015, interest at 8% per annum, payable in 24 monthly installments of principal and interest $4,523, due October 1, 2017. Secured by certain assets of SEM and guaranteed by SEER and MV. This note was paid in full in October 2017.       43,600 
           
Note payable dated October 13, 2015, interest at 8% per annum, payable in 60 monthly installments of principal and interest $4,562, due October 1, 2020. Secured by real estate and other assets of SEM and guaranteed by SEER and MV.   137,900    180,000 
           
Capital lease obligations, secured by certain assets, maturing through Nov 2020
   109,900    109,600 
Total notes payable and capital lease obligations   2,670,600    2,323,300 
           
Less: current portion   (2,166,300)   (571,800)
Notes payable and capital lease obligations, long-term, including debt discount  $504,300   $1,751,500 

 

Debt maturities as of December 31, 2017 are as follows:

 

Year:     
2018   $2,116,800 
2019    393,100 
2020    49,100 
2021    1,700 
    $2,560,700 

 

The Company issued two notes in the amount of $200,000 each in May and August of 2016 which were paid in full in 2016.

 

Future minimum lease payments under capital leases, which include bargain purchase options, are as follows at December 31, 2017:

 

2018  $60,100 
2019   37,100 
2020   28,500 
Total minimum lease payments   125,700 
      
Amount representing interest   (15,800)
Present value of lease payments   109,900 
      
Less current portion   (49,500)
Non-current portion  $60,400 

 

 F-23

 

 

STRATEGIC ENVIRONMENTAL & ENERGY RESOURCES, INC.

 Notes to Consolidated Financial Statements

 

In connection with the issuance of convertible debt in 2016 noted above, the Company issued 71,000 warrants as an inducement to enter into the transactions. The 2016 warrants exercisable for 3 years at $0.85 per share were valued at $4,900 using the Black Scholes valuation method at the date of issuance. During 2016, the 2015 convertible debt agreements were modified to more closely reflect the convertible debt transactions made in 2016, including adjusting the conversion price from $1.10 per share to $0.70 per share and the warrant exercise price from $1.25 to $0.85. The value of the convertible debt amendments will be recognized prospectively by the Company.

 

NOTE 11 – RELATED PARTY TRANSACTIONS NOT DISCLOSED ELSEWHERE

 

Notes payable, related parties

 

Notes payable, related parties and accrued interest due to certain related parties as of December 31, 2017 and 2016 are as follows:

 

   2017   2016 
         
Accrued interest   11,800    11,800 
           
   $11,800   $11,800 

 

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 $161,500 and $156,500 for the years ended December 31, 2017 and 2016, respectively, as such, royalties of $25,300 and $17,225 were due for 2017 and 2016, respectively.

 

In September 2014, the Company entered into an Equity Purchase Agreement (“Equity Agreement”) with a third party (“Seller”) whereby the Company issued 1,200,000 shares of the Company’s common stock, valued at $1,212,000, in exchange for 22.5 membership interest units, representing 15% ownership interest in Sterall, LLC, a Delaware corporation. In March 2015 the Company and the Seller entered into a revised agreement whereby the 1,200,000 shares issued by the Company would be held by the Seller until the completion of an independent third party valuation. Based on the fair market value of the Purchased Units from the valuation obtained by the Company, an amount of Consideration Shares will be returned to the Company to the extent that the fair market value of the Consideration Shares issued (see below) are greater than the fair market value of the Purchased Units. In no event shall the Company be obligated to issue additional shares as consideration for the Purchased Units. For purposes of this amendment, the fair market value of each Consideration Share will be $0.83333. In the event the parties are unwilling to accept the fair market value of the Purchased Units, as determined by the independent valuation specialist, on or before the Closing Date this Agreement, the transaction covered by this Agreement (the “Contemplated Transaction”) may be rescinded by either Party in writing.

 

 F-24

 

 

STRATEGIC ENVIRONMENTAL & ENERGY RESOURCES, INC.

 Notes to Consolidated Financial Statements

 

In December 2014, PWS, Sterall, Inc and Sterall LLC entered into a Successor-In-Interest Agreement. The Successor-In-Interest Agreement states that Sterall Inc and Sterall LLC are in the process of consolidating their business under Sterall LLC and all agreements between PWS and Sterall Inc shall be binding in all regards Sterall LLC.

 

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 year ended December 31, 2017, PWS has recorded $19,800 in income which represents their 50% interest in the net income of the joint venture. 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.

 

Due to the ability of the Company to rescind the shares issued at the commencement of the transaction the shares were considered contingently issuable shares and as such the 1,200,000 share not considered issued and outstanding at December 31, 2015. The 15% ownership interest in Sterall was considered contingently held until the conclusion of this transaction.

 

As of December 31, 2015, an independent appraisal was not performed and the Amended Equity Agreement expired by its terms. The 1,200,000 shares subject to the original Equity Agreement and the Amended Equity Agreement became unrestricted in 2016 and are considered issued and outstanding. The shares were valued at $720,000 and were originally recorded as a long term other asset pending resolution of claims by the parties involved related to the Sterall licensing agreement from September 2013, Sterall equipment deposits of $330,000 from 2014 and the equity purchase agreement noted above. As of December 31, 2016, a settlement was not reached by the parties and an impairment of the long term asset in the amount of $720,000 was recorded by the Company. In July 2017, the Company and Sterall signed a Settlement Agreement and Mutual Release which allows Sterall to retain the one unit delivered in 2014 and another unit also on site, in exchange for the Company’s retention of the $330,000 deposit paid by Sterall and the issuance of 300,000 shares of restricted common stock. For the year ended December 31, 2017, the Company recorded an additional cost of $120,900 related to the Settlement Agreement and Mutual Release (see Note 7).

 

NOTE 12 - COMMITMENTS AND CONTINGENCIES

 

Operating Lease Commitments

 

Future commitments under non-cancellable operating leases with terms longer than one year for office and warehouse space as of December 31, 2017 are as follows:

 

Year     
2018   $242,600 
2019    139,800 
2020    48,900 
2021 and after     
Total   $431,300 

 

For the years ended December 31, 2017 and 2016, rent expense was $317,000 and $244,800, respectively.

 

NOTE 13 – ASSETS AND LIABILITIES HELD FOR SALE AND DISCONTINUED OPERATIONS

 

During the third quarter of 2017, we sold our fixed railcar cleaning division which includes 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 carrying value of the assets and liabilities associated with the railcar cleaning locations are presented as “Assets held for sale” and “Liabilities held for sale” on our consolidated balance sheet as of December 31, 2016, and “Discontinued operations” on our consolidated statement of operations for the year ending December 31, 2017 and 2016, and on our consolidated statement of cash flows for the years ending December 31, 2017 and 2016. The sale was completed on July 31, 2017. For the years ended December 31, 2017 and 2016 we recorded net income from discontinued operations equal to $694,300 and $423,300, respectively. For the year ended December 31, 2017 we recorded a gain on the sale of rail operations of $2,695,300.

 

 F-25

 

 

STRATEGIC ENVIRONMENTAL & ENERGY RESOURCES, INC.

 Notes to Consolidated Financial Statements

 

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.

 

Assets and liabilities held for sale were comprised of the following:

 

   December 31, 
2017
   December 31,
2016
 
         
Accounts receivable, net  $   $841,800 
Property and equipment, net       156,200 
Other       26,600 
Total Assets held for sale  $   $1,024,600 

 

Accounts payable  $   $513,500 
Accrued expenses and other       89,600 
 Total Liabilities held for sale  $   $603,100 

 

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

 

   For the year ending 
December 31,
 
   2017   2016 
         
Services revenue  $4,082,200   $4,029,700 
           
Services costs   3,070,200    3,146,500 
General and administrative expenses   117,800    203,200 
Salaries and related expenses   208,900    253,300 
Other (income) expense   (9,000)   3,400 
Total expenses   3,387,900    3,606,400 
           
Operating income   694,300    423,300 
Income tax benefit        
           
Total income from discontinued operations  $694,300   $423,300 

 

 F-26

 

 

STRATEGIC ENVIRONMENTAL & ENERGY RESOURCES, INC.

 Notes to Consolidated Financial Statements

 

Total gain on disposal of rail operations:

 

   July 31, 
   2017 
     
Consideration from sale  $2,641,000 
Net present value of future consideration   824,000 
Carrying value of net assets*   (653,600)
Gross gain on disposal   2,811,400 
Closing costs   (116,100)
Total gain on sale of rail operations  $2,695,300 
      
*Carrying value of net assets     
      
Accounts receivable, net  $1,130,500 
Property and equipment, net   177,200 
Other   60,200 
Total Assets  $1,367,900 
      
Accounts payable  $678,600 
Accrued expenses and other   35,700 
Total Liabilities  $642,900 
Carrying value of net assets  $653,600 

 

NOTE 14 – EQUITY TRANSACTIONS

 

Common Stock – Authorized common stock of the Company consists of 70,000,000 shares of $.001 par value, of which 56,528,575 shares were issued or issuable and outstanding at December 31, 2017.

 

Preferred Stock – Authorized preferred stock consists of 5,000,000 shares of preferred stock, $.001 par value, no shares of preferred stock are issued and outstanding.

 

2017 Common Stock Transactions

 

In 2017 the Company issued 13,496 shares of $.001 par value common stock in connection with the cashless exercise of 166,666 options.

 

 F-27

 

 

STRATEGIC ENVIRONMENTAL & ENERGY RESOURCES, INC.

 Notes to Consolidated Financial Statements

 

NOTE 14 – EQUITY TRANSACTIONS, continued

 

In 2017, the Company issued 300,000 shares of $.001 par value common stock valued at $174,000 in connection with a settlement agreement. (See Note 11)

 

In 2017, the Company issued 1,500,000 shares of $.001 par value common stock valued at $1,009,000 in connection with the late payment penalty due on short-term notes. (See Note 10)

 

In 2017, the Company recorded 190,000 shares of $.001 par value common stock valued at $130,000 as issuable to short-term note holders as required under their respective agreements. (See Note 10)

 

In 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 vesting of 56,250 options 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.

 

In 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 consulting 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 $231,514. 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.

 

2016 Common Stock Transactions

 

In 2016, we issued 600,000 shares of common stock for $300,000 of proceeds.

 

In 2016, we issued 250,000 shares of common stock upon exercise of common stock warrants, receiving proceeds of $125,000.

 

In 2016, we received $29,900 in proceeds for the extension of common stock warrants.

 

In 2016, we issued 100,000 shares of common stock in consideration of a $25,000 common stock subscription payment.

 

Warrants

 

In 2017, we received $155,500 in proceeds for the extension of common stock warrants. A balance of $5,300 is owed by warrant holders for the extension of their warrants. Certain warrant holders were offered the extensions at no additional cost to the warrant holder and the Company recorded stock based compensation expense of $83,677 for those warrant holders granted extensions without compensation to the Company.

 

In connection with services provided to the Company in 2017, the Company issued warrants to acquire 200,000 shares of common stock. The warrants exercisable for five years at $0.70 per share were valued at $31,300 using the Black Scholes valuation method. The assumptions used in the valuation of the warrants were; common stock price $0.63, expected life 5 years, volatility 28.72% and discount rate 1.92%.

 

In connection with the 2016 issuance of a $200,000 secured short term note payable that we issued a warrant was issued to purchase 500,000 shares of our common stock at $0.50 per share, exercisable over four years. The warrant was valued at $97,181 using a Black Scholes valuation and was charged to interest over the sixty days term of the note. The assumptions used in the valuation of the warrant were; common stock price $0.62, expected life 2 year, volatility 37.89% and discount rate 1.25%. The note was paid in full in 2016.

 

 F-28

 

 

STRATEGIC ENVIRONMENTAL & ENERGY RESOURCES, INC.

 Notes to Consolidated Financial Statements

 

In connection with the issuance of convertible debt in 2016 noted above, the Company issued warrants to acquire 71,000 shares of common stock as an inducement to enter into the transaction. The warrants exercisable for five years at $0.85 per share were valued at $4,900 using the Black Scholes valuation method. The assumptions used in the valuation of the warrants were; common stock price $0.60, expected life 2.5 years, volatility 36.71% and discount rate 1.14%.

 

A summary of warrant activity for the years ended December 31, 2017 and December 31, 2016 is presented as follows:

 

    Number of   Exercise 
    Warrants   Price 
Warrants Outstanding at January 1, 2016    9,839,430    $.50 to $1.25 
Issued    571,000    $.50 to $.85 
Exercised     (250,000)  $.50 
Forfeited/expired/canceled     (495,000)  $.70 
Warrants Outstanding at January 1, 2017    9,665,430    $.50 to $1.25 
Issued    200,000   $.70 
Exercised          
Forfeited/expired/canceled     (1,848,989)   $.50 to $1.00 
            
Warrants Outstanding at December 31, 2017    8,016,441    $.50 to $1.25 

 

NOTE 15 – STOCK-BASED COMPENSATION AND EMPLOYEE BENEFIT PLAN

 

Except as noted below, we do not have a qualified stock option plan, but have issued stock purchase warrants and stock options on a discretionary basis to employees, directors, service providers, private placement participants and outside consultants.

 

The Company utilizes ASC 718, Stock Compensation, related to accounting for share-based payments and, accordingly, records compensation expense for share-based awards based upon an assessment of the grant date fair value for stock options and restricted stock awards. The Black Scholes option pricing model was used to estimate the fair value of the options granted. This option pricing model requires a number of assumptions, of which the most significant are: expected stock price volatility, the expected pre-vesting forfeiture rate, and the expected option term (the amount of time from the grant date until the options are exercised or expire). The Company estimated a volatility factor utilizing a weighted average of comparable published volatilities. The Company applied the simplified method to determine the expected term of grants. The risk free interest rate is based on or approximates the U.S. Treasury yield curve in effect at the time of the grant.

 

Stock compensation expense for stock options is recognized on a straight-line basis over the vesting period of the award. The Company accounts for stock options as equity awards.

 

Share-based compensation expense recognized in the statements of operations is based on awards ultimately expected to vest, which considers estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company recognizes the expense or benefit from the effect of adjusting the estimated forfeiture rate in the period that the forfeiture estimate changes.

 

 F-29

 

 

STRATEGIC ENVIRONMENTAL & ENERGY RESOURCES, INC.

 Notes to Consolidated Financial Statements

 

The weighted average estimated fair value of stock option grants and the weighted average assumptions that were used in calculating such values for the years ended December 31, 2017 and 2016 are as follows:

 

   2017   2016 
         
Risk-free interest rate   1.84-1.89%   1.64%
Expected volatility   36.87-39.17%   37.07%
Expected life (in years)   4.5-5.5    3.25-4.00 
Dividend rate   0    0 
Weighted-average estimated fair value per award  $.17   $.20 

 

For the years ended December 31, 2017 and 2016, we recorded stock-based compensation awarded to employees of $131,600 and $64,600, respectively, which is included in selling, general and administrative expense in our consolidated statements of operations.

 

A summary of stock option activity for the year ended December 31, 2017 is presented as follows:

 

           Weighted   Weighted 
       Weighted   Average   Average 
   Number   Average   Remaining   Grant 
   Of   Exercise   Contractual   Date 
   Shares   Price   Life   Fair Value 
                 
Outstanding at January 1, 2017   865,000   $.89    2.7 years   $.40 
Granted   2,000,000   $.85        $.17 
Exercised   (200,000)  $.72        $.23 
Forfeited/expired/canceled   (530,000)  $.98        $.49 
Outstanding at December 31, 2017   2,135,000   $.85    8.3 years   $.17 
Vested and exercisable at December 31, 2017   687,500   $.86    .38 years   $.18 

 

A summary of stock option activity for the year ended December 31, 2016 is presented as follows:

 

           Weighted   Weighted 
       Weighted   Average   Average 
   Number   Average   Remaining   Grant 
   Of   Exercise   Contractual   Date 
   Shares   Price   Life   Fair Value 
                 
Outstanding at January 1, 2016   1,035,000   $.91    3.3 years   $.40 
Granted   80,000   $.67        $.20 
Exercised                 
Forfeited/expired/canceled   (250,000)  $.92        $.36 
Outstanding at December 31, 2016   865,000   $.89    2.7 years   $.40 
Vested and exercisable at December 31, 2016   767,825   $.89    0 years   $.40 

 

 F-30

 

 

STRATEGIC ENVIRONMENTAL & ENERGY RESOURCES, INC.

 Notes to Consolidated Financial Statements

 

As of December 31, 2017, there was approximately $87,900 of total unrecognized compensation cost related to non-vested stock options that is expected to be recognized over a weighted-average period of approximately three years. The intrinsic value of vested options outstanding as of December 31, 2017 was $23,375.

 

Employee Benefit Plan

 

We have a defined contribution 401(k) plan that covers substantially all employees. Additionally, at the discretion of management, we may make contributions to eligible participants, as defined. During the years ended December 31, 2017 and 2016, we made contributions of $0 each.

 

NOTE 16 – 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:

 

   December 31, 
   2017   2016 
Warrants   8,016,441    9,665,430 
Options   2,135,000    865,000 
Convertible notes payable, including accrued interest   2,375,099    2,342,857 
Issuable shares, short term debt penalty   190,000     
    12,716,540    12,873,287 

 

 F-31

 

 

STRATEGIC ENVIRONMENTAL & ENERGY RESOURCES, INC.

 Notes to Consolidated Financial Statements

 

NOTE 17 - SEGMENT INFORMATION AND MAJOR SEGMENT CUSTOMERS

 

The Company currently has identified four segments as follows:

 

  REGS Industrial Cleaning
  MV & SEM Environmental Solutions
  PWS Solid Waste

 

Reach is not currently operating but when operations commence would be part of the Environmental Solutions segment.

 

The composition of our reportable segments is consistent with that used by our chief operating decision maker 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, interest expense, depreciation and amortization and stock-based compensation to the segments. All intercompany transactions have been eliminated.

 

Segment information as of December 31, 2017 and 2016 and for the years then ended is as follows:

 

2017  Industrial  Environmental  Solid      
   Cleaning (2)  Solutions  Waste  Corporate  Total (3)
                
Revenue  $2,254,200   $5,256,300   $917,500   $—     $8,428,000 
Depreciation and amortization (1)   356,300    189,900    136,300    86,200    768,700 
Interest expense   23,800    15,200    100    1,386,400    1,425,500 
Stock-based compensation   —      —      —      246,600    246,600 
Net income (loss)   (1,307,700)   247,200    (1,329,600)   (3,743,500)   (6,133,600)
Capital expenditures (cash and
noncash)
   189,900    2,900    —      95,400    288,200 
Goodwill   —      227,800    —      —      227,800 
Total assets  $814,500   $1,339,600   $613,500   $983,300   $3,750,900 

 

2016  Industrial  Environmental  Solid      
   Cleaning (2)  Solutions  Waste  Corporate  Total (3)
                
Revenue  $2,929,000   $4,494,700   $230,200   $—     $7,653,900 
Depreciation and amortization (1)   350,600    162,600    136,300    91,200    740,700 
Interest expense   28,400    23,300    500    272,000    324,200 
Stock-based compensation   —      —      —      91,500    91,500 
Net income (loss)   (740,400)   (138,000)   (1,638,000)   (2,562,500)   (5,078,900)
Capital expenditures (cash and
noncash)
   134,500    3,900    22,800    2,500    163,700 
Goodwill   —      227,800    —      —      227,800 
Total assets  $1,128,900   $2,457,900   $1,811,000   $115,100   $5,512,900 

 

(1)Includes depreciation of property, equipment and leasehold improvement and amortization of intangibles

(2)Includes mobile rail car cleaning and excludes locations classified as discontinued operations

(3)Excludes discontinued operations

 

 F-32

 

 

STRATEGIC ENVIRONMENTAL & ENERGY RESOURCES, INC.

 Notes to Consolidated Financial Statements

 

Customer Concentrations by Segment

 

Industrial Cleaning

 

For the year ended December 31, 2017, we had two customers with sales in excess of 10% of industrial cleaning segment revenue and combined were 21% of segment revenues. For the year ended December 31, 2016 we had one customer with sales in excess of 10% of industrial cleaning segment revenue and combined were 52% of segment revenues.

 

Environmental Solutions

 

For the year end December 31, 2017 we had one customer with sales in excess of 10% of environmental solutions segment revenue for a total of 16% of segment revenues. For the year end December 31, 2016 we had one customer with sales in excess of 10% of environmental solutions segment revenue.

 

NOTE 18 - INCOME TAXES

 

As of December 31, 2017, we estimate we will have net operating loss carryforwards available to offset future federal income tax of approximately $12 million. These carryforwards will expire between the years 2029 through 2033. Under the Tax Reform Act of 1986, the amount of and the benefit from net operating losses that can be carried forward may be limited in certain circumstances. Events that may cause changes in the our tax carryovers include, but are not limited to, a cumulative ownership change of more than 50% over a three-year period. Therefore, the amount available to offset future taxable income may be limited. We carry a deferred tax valuation allowance equal to 100% of total deferred assets. In recording this allowance, we have considered a number of factors, but chiefly, our operating losses from inception. We have concluded that a valuation allowance is required for 100% of the total deferred tax assets as it is more likely than not that the deferred tax assets will not be realized.

 

Deferred tax assets were comprised of the following as of December 31, 2017 and 2016:

 

   2017  2016
       
Allowance for doubtful accounts  $118,000   $96,800 
Accrued expenses   99,000    146,200 
Current deferred tax asset   217,000    243,000 
           
Intangible and fixed assets   141,000    (447,000)
NOL carryforward   3,162,000    4,330,000 
Long-term deferred tax asset   3,303,000    3,883,000 
           
Total deferred tax asset   3,520,000    4,126,000 
Less valuation allowance   (3,520,000)   (4,126,000)
           
Net deferred tax asset  $—     $—   

 

The benefit for income taxes differed from the amount computed using the U.S. federal income tax rate of 34% for December 31, 2017 and 2016 as follows:

 

   2017  2016
       
Income tax benefit  $1,060,000   $1,304,000 
Non-deductible items   (93,000)   (784,000)
State and other benefits included in valuation   41,000    82,000 
Provisional impact of the TCJA   (1,614,000)   —   
Change in valuation allowance   606,000    (602,000)
Income tax benefit  $—     $—   

 

The Company has reflected the change in its deferred tax assets and the accompanying valuation allowance provisionally based on its judgement of the effects of the Tax Cuts and Jobs Act which was enacted on December 22, 2017.

 

 F-33

 

 

STRATEGIC ENVIRONMENTAL & ENERGY RESOURCES, INC.

 Notes to Consolidated Financial Statements

 

NOTE 19 – ENVIRONMENTAL COMPLIANCE

 

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 20 – LITIGATION

 

In March 2016, a complaint was filed by a lessor of property leased by REGS, a subsidiary of the Company. The month-to-month lease expired February 29, 2016, when REGS vacated the property. The landlord made certain claims including property damage, and loss of rents, attorney fees and other costs totaling approximately $97,000. REGS engaged defense counsel and zealously opposed the claims. In December 2016, the Company and the lessor reached a settlement of $65,000. At December 31, 2016 $39,000 was outstanding and subsequently paid in 2017 per the terms of the settlement agreement. The case was dismissed with prejudiced and the matter is closed.

 

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 December 31, 2017 was $133,333.

 

NOTE 21– INVESTMENT IN BIOCHAR NOW, LLC

 

In September 2017, the Company entered into loan and equity purchase agreement with BioChar Now, LLC (“BioChar”) which provided for an initial loan of $300,000 by the Company to BioChar and a subsequent loan of up to $7.7 million made or arranged by the Company. In exchange for these loans, the Company is entitled to repayment of all loaned capital and up to a 20% equity interest in BioChar, obtained as the loans are made in proportion to the  amounts the individual loans represent of the full $8 million proposed loan. The Company has no fixed commitment to fund any losses of BioChar and has no investment basis in BioChar, therefore the Company has suspended the recognition of losses under the equity method of accounting.

 

The Company made the initial $300,000 loan on September 14, 2017 which bears interest of 6% per annum and is repayable out of sales of product gross sale proceeds from BioChar’s Berthoud, Colorado facility beginning six months after receipt of the loan. If the loan is not repaid in full after 18 months, the interest rate will increase to 12%. As of December 31, 2017, the Company impaired the full amount of the $300,000 note receivable due to the absence of necessary gross profit from BioChar’s Berthoud facility to commence monthly installments are required under the note. 

 

NOTE 22 - SUBSEQUENT EVENTS

 

On January 23, 2018, the Company entered into a short-term loan agreement and received loan proceeds of $250,000 with principal and interest due 60 days from issuance. The note requires a one-time fee in the amount of $12,500 to compensate for the first two weeks of the term and each week thereafter (weeks 3-8) a fee of $1,250 shall be due and owing accruing on the first day of the week. A fee of 100,000 shares of restricted common stock shall be issued as a penalty for each month or prorated for any two-week portion of any month the note is outstanding for months 3 through 6, and a fee of 200,000 shares of restricted common stock shall be issued to lender for each month or prorated for each two-week portion of any month the note is outstanding beginning in month 7 until paid in full.

 

On February 26, 2018, the Company entered into a short-term loan agreement and received loan proceeds of $100,000. The principal and interest are due and payable on or before May 31, 2018. The note requires a one-time fee in the amount of $25,000 shall be paid as interest. In the event the note and interest are not paid on or before June 1, 2018, a fee of $5,000 shall be due and owing accruing on the first day of each month commencing June 1, 2018. The note is secured by all of the proceeds from the sale of SEM’s BioActive Media paid to or received by SEM or MV.

 

 F-34

 

 

STRATEGIC ENVIRONMENTAL & ENERGY RESOURCES, INC.

 Notes to Consolidated Financial Statements

 

During March 2018, the Company issued 250,000 shares of $.001 par value common stock for proceeds of $120,000.

 

During April 2018, the Company issued 75,000 shares of $.001 par value common stock for services provided and to be provided through May 31, 2018 totaling approximately $58,000.

 

As of April 15, 2018, the Company’s three short term notes for which the penalty period for shares to be issued has been reached. The Company has recorded 665,000 shares of its common stock as issuable under the terms of those agreements. The shares were valued at $306,900 and are recorded as interest expense. Additional shares will be issued by the Company under the terms of the agreements.

 

 F-35