Strategic Environmen

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Strategic Environmental & Energy Res : & ENERGY RESOURCES, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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08/14/2019 | 09:52 pm

The following discussion is intended to assist you in understanding our business
and the results of our operations. It should be read in conjunction with the
Condensed Consolidated Financial Statements and the related notes that appear
elsewhere in this report as well as our Report on Form 10K filed with the
Securities and Exchange Commission on April 16, 2019. Certain statements made in
our discussion may be forward looking. Forward-looking statements involve risks
and uncertainties and a number of factors could cause actual results or outcomes
to differ materially from our expectations. These risks, uncertainties, and
other factors include, among others, the risks described in our Annual Report on
Form 10K filed with the Securities and Exchange Commission, as well as other
risks described in this Quarterly Report. Unless the context requires otherwise,
when we refer to "we," "us" and "our," we are describing Strategic Environmental
& Energy Resources, Inc.
and its consolidated subsidiaries on a consolidated
basis.






SEER BUSINESS OVERVIEW




Strategic Environmental & Energy Resources, Inc. ("the Company" or "SEER") was
originally organized under the laws of the State of Nevada on February 13, 2002
for the purpose of acquiring one or more businesses, under the name of Satellite
Organizing Solutions, Inc
("SOZG"). In January 2008, SOZG changed its name to
Strategic Environmental & Energy Resources, Inc., reduced its number of
outstanding shares through a reverse stock split and consummated the acquisition
of both, REGS, LLC and Tactical Cleaning Company, LLC. SEER is dedicated to
assembling complementary service and environmental, clean-technology businesses
that provide safe, innovative, cost effective, and profitable solutions in the
oil & gas, environmental, waste management and renewable energy industries. SEER
currently operates five companies with four offices in the western and
mid-western U.S. Through these operating companies, SEER provides products and
services throughout the U.S. and has licensed technologies with many customer
installations throughout the U.S. Each of the five operating companies is
discussed in more detail below. The Company also has non-controlling interests
in joint ventures, some of which have no or minimal operations.



The Company's domestic strategy is to grow internally through SEER's
subsidiaries that have well established revenue streams and, simultaneously,
establish long-term alliances with and/or acquire complementary domestic
businesses in rapidly growing markets for renewable energy, waste and water
treatment and oil & gas services. The focus of the SEER family of companies,
however is to increase margins by securing or developing proprietary patented
and patent-pending technologies and then leveraging its 20 plus-year service
experience to place these innovations and solutions into the growing markets of
emission capture and control, renewable "green gas" capture and sale, compressed
natural gas ("CNG") fuel generation, as well as general solid waste and
medical/pharmaceutical waste destruction. Many of SEER's current operating
companies share customer bases and each provides truly synergistic services,
technologies and products as well as annuity type revenue streams.



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






Subsidiaries




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



MV, LLC (d/b/a MV Technologies), ("MV"): (operating since 2003) MV designs and
sells patented and/or proprietary, dry scrubber solutions for management of
Hydrogen Sulfide (H2S) in biogas, landfill gas, and petroleum processing
operations. These system solutions are marketed under the product names H2SPlus™
and OdorFilter™. The markets for these products include land fill operations,
agricultural and food product processors, wastewater treatment facilities, and
petroleum product refiners. MV also develops and designs proprietary
technologies and systems used to condition biogas for use as renewable natural
gas ("RNG"), for a number of applications, such as transportation fuel and
natural gas pipeline injection.






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Paragon Waste Solutions, LLC ("PWS"): (formed late 2010) PWS is an operating
company that has developed a patented waste destruction technology using a
pyrolytic heating process combined with "non-thermal plasma" assisted oxidation.
This technique involves gasification of solid waste by heating the waste in a
low-oxygen environment, followed by complete oxidation at higher temperatures in
the presence of plasma. The term "non-thermal plasma" refers to a low energy
ionized gas that is generated by electrical discharges between two electrodes.
This technology, commercially referred to as CoronaLux™, is designed and
intended for the "clean" destruction of hazardous chemical and biological waste
(i.e., hospital "red bag" waste) thereby eliminating the need for costly
segregation, transportation, incineration or landfill (with their associated
legacy liabilities). PWS is a 54% owned subsidiary.



ReaCH4BioGas ("Reach") (trade name for Benefuels, LLC): (formed February 2013)
owned 85% by SEER. Reach develops renewable natural gas projects that convert
raw biogas into pipeline quality gas and/or Renewable, "RNG", for fleet
vehicles. Reach had no operations as of June 30, 2019.



SEER Environmental Materials, LLC ("SEM"): (formed September 2015) is a wholly
owned subsidiary established as a materials technology business with the purpose
of developing advanced chemical absorbents and catalysts that enhance the
capability of biogas produced from, landfill, wastewater treatment operations
and agricultural digester operations.



PelleChar, LLC ("PelleChar"): (formed September 2018) owned 51% by SEER.
PelleChar has secured third-party pellet manufacturing capabilities from one of
the nation's premier pellet manufacturer. Working closely with Biochar Now,
LLC
, PelleChar intends to commence sales in 2019 of its proprietary pellets
containing the proven and superior Biochar Now product starting with the
landscaping and big agriculture markets. At this time, PelleChar is the only
company able to offer a soil amendment pellet containing the Biochar Now product
that is produced using the patented pyrolytic process. PelleChar had minimal
operations as of June 30, 2019.






Joint Ventures




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



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



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






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PWS MWS Joint Venture: In October 2014, PWS and Medical Waste Services, LLC
("MWS") formed a contractual joint venture to exploit the PWS medical waste
destruction technology. In 2015, MWS licensed and installed a CoronaLux™ unit at
an MWS facility, and subsequently received a limited permit to operate from the
South Coast Air Quality Management District ("SCAQMD") and the California
Department of Public Health
. In November 2017, PWS received final air quality
permit approval from SCAQMD allowing for full operations of the CoronaLux™ unit
at the MWS facility.



Paragon Southwest Joint Venture: In December 2017, PWS and GulfWest Waste
Solutions, LLC
("GWWS") formed Paragon Southwest Medical Waste, LLC ("PSMW") to
exploit the PWS medical waste destruction technology. PSMW will have an
exclusive license to the CoronaLux™ technology in a six-state area of the
Southern United States. In addition to the equity position, PWS will be the
operating partner for the business and sell a number of additional systems to
the joint venture over the next five years. In 2017, PSMW purchased and
installed three CoronaLux™ units at an PSMW facility. Operations in the form of
medical waste destruction began in the first quarter of 2018.



SEER's Financial Condition and Liquidity



As shown in the accompanying consolidated financial statements, the Company has
experienced recurring losses, and has accumulated a deficit of approximately $26
million
as of June 30, 2019, and $24.4 million as of December 31, 2018. For the
three months ended June 30, 2019 and 2018 we had net losses from continuing
operations before adjustment for losses attributable to non-controlling interest
of approximately $1 million and $1.1 million, respectively. For the six months
ended June 30, 2019 and 2018 we had net losses from continuing operations before
adjustments for losses attributable to non-controlling interest of approximately
$1.6 million and $1.8 million, respectively. As of June 30, 2019, and December
31, 2018
our current liabilities exceed our current assets by approximately $6.2
million
and $5.3 million, respectively. The primary reason for the increase in
negative working capital from December 31, 2018 to June 30, 2019 is due to a net
increase in short term debt of approximately $.4 million, and losses from
operations. The Company has limited common shares available for issue which may
limit the ability to raise capital or settle debt through issuance of shares.
These factors raise substantial doubt about the ability of the Company to
continue to operate as a going concern for a period of at least one year after
the date of the issuance of our audited financial statements for the period
ended December 31, 2018.



Realization of a major portion of our assets as of June 30, 2019, is dependent
upon our continued operations. The Company is dependent on generating additional
revenue or obtaining adequate capital to fund operating losses until it becomes
profitable. In addition, we have undertaken a number of specific steps to
continue to operate as a going concern. We continue to focus on developing
organic growth in our operating companies, diversifying our service customer
base and market concentrations and improving gross and net margins through
increased attention to pricing, aggressive cost management and overhead
reductions. Critical to achieving profitability will be our ability to license
and or sell, permit and operate through our joint ventures and licensees our
CoronaLux™ waste destruction units. We have increased our business development
efforts to address opportunities identified in expanding domestic markets
attributable to increased federal and state emission control regulations
(particularly in the nation's oil and gas fields) and a growing demand for
energy conservation and renewable energies. In addition, the Company is
evaluating various forms of financing that may be available to it. There can be
no assurance that the Company will secure additional financing for working
capital, increase revenues and achieve the desired result of net income and
positive cash flow from operations in future years. These financial statements
do not give any effect to any adjustments that would be necessary should the
Company be unable to report on a going concern basis.



Our primary need for liquidity is to fund working capital requirements of our
businesses, capital expenditures and for general corporate purposes, including
debt repayment. We have incurred losses and experienced negative operating cash
flows for the past several years, and accordingly, the Company has taken a
number of actions to continue to support its operations and meet its
obligations. The sale of assets and liabilities of Tactical and certain
locations within REGS provided the Company working capital in 2017 to repay
short-term notes totaling $650,000 and accelerate growth of our high-margin
technology divisions. We reduced selling, general and administrative (SG&A)
expenses in 2018 as a result of the sale of those assets. We formed PelleChar
and raised $1 million of minority interest investment to bring that product to
market and add to the operating cash flows of the Company. We believe that the
actions discussed above are probable of occurring and mitigating the substantial
doubt raised by our historical operating results and satisfying our estimated
liquidity needs 12 months from the issuance of the financial statements.
However, we cannot predict, with certainty, the outcome of our actions to
generate liquidity, including the availability of additional debt financing, or
whether such actions would generate the expected liquidity as currently planned.
If we continue to experience operating losses, and we are not able to generate
additional liquidity through the mechanisms described above or through some
combination of other actions, while not expected, we might need to secure
additional sources of funds, which may or may not be available to
us. Additionally, a failure to generate additional liquidity could negatively
impact our access to inventory or services that are important to the operation
of our business.






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Results of Operations for the Three Months Ended June 30, 2019 and 2018



Total revenues were approximately $1.5 million and $2.4 million for the three
months ended June 30, 2019 and 2018, respectively. The decrease in revenue
comparing Q2 2019 to Q2 2018 is driven by a decrease of approximately $.3
million
or 37% in industrial cleaning revenue coupled by a decrease in revenue
of $.7 million or 42% in environmental solutions revenue. The decrease in the
industrial cleaning revenue is due largely to a lack of mobile rail car cleaning
services further reduced by a decrease in overall utilization of assets. The
decrease in environmental solutions revenue is due to a decrease in media sales
revenue. Solid waste revenue also decreased when comparing Q2 2019 to Q2 2018 by
$.2 million or 26% due to a decrease in joint venture operating revenue.



Operating costs, which include cost of products, cost of services, solid waste
costs, general and administrative (G&A) expenses and salaries and related
expenses, were $2.3 million for the three months ended June 30, 2019 compared to
$2.9 million for the three months ended June 30, 2018. The decrease in operating
costs between the quarters was primarily the result of a 1) a 42% decrease in
environmental solutions revenue resulting in a 41% decrease in environmental
solutions costs totaling approximately ($387,400), 2) a 37% decrease in
industrial cleaning revenue resulting in a 6% decrease in industrial cleaning
costs totaling approximately ($48,900), 3) an approximately ($83,400) decrease
in general and administrative expenses primarily driven by a decrease in
professional services of approximately $69,000 and 4) an approximately ($63,300)
decrease in salaries and related expenses. Product costs as a percentage of
product revenues were 64% for the quarter ended June 30, 2019 and 62% for the
quarter ended June 30, 2018. The decrease in margin performance for the product
sales is due to a decreased long-term project margin. Services costs as a
percentage of services revenues were 149% for the quarter ended June 30, 2019
and 101% for the quarter ended June 30, 2018. The decrease in margin performance
for the services sector is due to a decreased utilization of manpower and the
ability to utilize and bill our own equipment versus renting third-party
equipment. We also were not able to recapture all project startup costs during
the quarter. Solid waste costs as a percentage of revenues were 15% for the
quarter ended June 30, 2019 and 10% for the quarter ended June 30, 2018. The
decrease in margin performance for the solid waste segment is related to a
decrease in operating fee revenue.



Total non-operating other income (expense), net was ($118,400) for the three
months ended June 30, 2019 compared to ($583,300) for the three months ended
June 30, 2018. For the three months ended June 30, 2019 non-operating expenses
were comprised of interest expense of ($112,400) and other expense of ($6,000).
For the three months ended June 30, 2018 non-operating expenses were comprised
of interest expense of ($613,800) offset by interest income of $11,800 and other
income of $16,700. The decrease in interest expense in Q2 2019 compared to Q2
2018 was primarily the result of timing of short term debt and the Company
having to issue common stock to note holders in accordance with penalty clauses
included in the short term notes when the Company was unable to satisfy the
notes when they came due.



There is no provision for income taxes for the quarter ended June 30, 2019 due
to prior year losses and for the quarter ended June 30, 2019, year-to-date
losses.



The Company had a net loss, before non-controlling interest, for the three
months ended June 30, 2019 of ($990,900) compared to a net loss, before
non-controlling interest, of ($1,072,100) for the three months ended June 30,
2018
. Net loss attributable to SEER after deducting $39,100 for the
non-controlling interest income was ($951,800) for the three months ended June
30, 2019
compared to a net loss attributable to SEER of ($1,026,900), after
deducting $4,200 in non-controlling interest loss for the three months ended
June 30, 2018. The decrease in net loss for the three months ended June 30, 2019
as compared to the three months ended June 30, 2018 was largely related to the
fact that interest expense decreased approximately $501,400 for the three months
ended June 30, 2019 as compared to the three months ended June 30, 2018.



Results of Operations for the Six Months Ended June 30, 2019 and 2018



Total revenues were approximately $2.9 million and $4.3 million for the six
months ended June 30, 2019 and 2018, respectively. The decrease in revenue
comparing the six months ending June 30, 2019 to the six months ending June 30,
2018
is driven by a decrease of approximately $1 million or 58% in industrial
cleaning revenue and by a decrease of $.4 million or 18% in environmental
solutions revenue. The decrease in the industrial cleaning revenue is due
largely to a lack of mobile rail car cleaning services further reduced by a
decrease in overall utilization of assets. The decrease in environmental
solutions revenue is due to a decrease in media sales. Solid waste revenue
decreased by $0.04 million or 20% for the six months ended June 30, 2019 as
compared to the six months ended June 30, 2018.






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Operating costs, which include cost of products, cost of services, solid waste
costs, general and administrative (G&A) expenses and salaries and related
expenses, were $4.3 million for the six months ended June 30, 2019 compared to
$5.2 million for the six months ended June 30, 2018. The decrease in operating
costs between the six months ending June 30, 2019 compared to the six months
ending June 30, 2018 was primarily the result of a 1) a 18% decrease in
environmental solutions revenue resulting in a 17% decrease in environmental
solutions costs totaling approximately ($255,900), 2) a 58% decrease in
industrial cleaning revenue resulting in a 27% decrease in industrial cleaning
costs totaling approximately ($437,700), 3) an approximately ($60,800) decrease
in general and administrative expenses primarily driven by a decrease in
depreciation of approximately ($31,000) coupled with a decrease in utilities and
facilities expenses of approximately ($23,000) and 4) an approximately
($144,700) decrease in salaries and related expenses. Product costs as a
percentage of product revenues were 61% for the six months ended June 30, 2019
and 61% for the six months ended June 30, 2018. Services costs as a percentage
of services revenues were 159% for the six months ended June 30, 2019 and 93%
for the six months ended June 30, 2018. The decrease in margin performance for
the services sector is due to a decreased utilization of manpower and the
ability to utilize and bill our own equipment versus renting third-party
equipment. We also were not able to recapture all project startup costs during
the six months ended. Solid waste costs as a percentage of revenues were 25% for
the six months ended June 30, 2019 and 14% for the six months ended June 30,
2018
. The decrease in margin performance for the solid waste segment is related
to a decrease in joint venture operating revenue.



Total non-operating other income (expense), net was ($86,000) for the six months
ended June 30, 2019 compared to ($918,600) for the six months ended June 30,
2018
. For the six months ended June 30, 2019 non-operating expenses were
comprised of interest expense of ($262,200) offset by interest income of $9,800
and other income of $166,400 primarily related to a reduction of aged accounts
payable balances which have passed their statute of limitations for collections.
For the six months ended June 30, 2018 non-operating expenses were comprised of
interest expense of ($979,600) offset by interest income of $21,700 and other
income of $39,300. The decrease in interest expense for the six months ended
June 30, 2019 as compared to the six months ended June 30, 2018 was primarily
the result of timing of short term debt and the Company having to issue common
stock to note holders in accordance with penalty clauses included in the short
term notes when the Company was unable to satisfy the notes when they came due.



There is no provision for income taxes for the six months ended June 30, 2019
due to prior year losses and for the six months ended June 30, 2019,
year-to-date losses.



The Company had a net loss, before non-controlling interest, for the six months
ended June 30, 2019 of ($1,569,800) compared to a net loss, before
non-controlling interest, of ($1,819,400) for the six months ended June 30,
2018
. Net loss attributable to SEER after deducting $67,400 for the
non-controlling interest income was ($1,502,400) for the six months ended June
30, 2019
compared to a net loss attributable to SEER of ($1,757,600), after
deducting $20,800 in non-controlling interest loss for the six months ended June
30, 2018
. The decrease in net loss for the six months ended June 30, 2019 as
compared to the six months ended June 30, 2018 was largely related to the fact
that interest expense decreased approximately $717,400 for the six months ended
June 30, 2019 as compared to the six months ended June 30, 2018.






27





Changes in Cash Flow



Operating Activities




The Company had net cash used by operating activities for the six months ended
June 30, 2019 of ($1,017,500) compared to net cash used by operating activities
for the six months ended June 30, 2018 of ($296,800), a reduction of cash of
approximately ($720,700). Cash used by operating activities is driven by our net
loss and adjusted by non-cash items as well as changes in operating assets and
liabilities. Non-cash adjustments primarily include depreciation, amortization
of intangible assets, stock-based compensation expense and non-cash interest
expense. Non-cash adjustment totaled $223,000 and $1,177,300 for the six months
ended June 30, 2019 and 2018, respectively, so non-cash adjustments had a larger
impact on net cash used by operating activities for the six months ended June
30, 2018
when compared to the six months ended June 30, 2019 by approximately
$954,300. For the six months ended June 30, 2018, the net positive change in
operating assets and liabilities was $345,300 compared to the six months ended
June 30, 2019 of $329,300. The minimal change in operating assets and
liabilities had a lesser impact on net cash used by operating activities for the
six months ended June 30, 2019 compared to the six months ended June 30, 2018.






Investing activities




Net cash provided by investing activities was $714,300 for the six months ended
June 30, 2019 compared to $223,9000 for the six months ended June 30, 2018. The
purchase of property and equipment was ($64,000) for the six months ended June
30, 2019
compared to no use of cash for the purchase of property and equipment
for the six months ended June 30, 2018. During the six months ended June 30,
2019
, the Company received $226,000 in proceeds from outside minority investment
in PelleChar. The proceeds from notes receivable totaled $552,800 and $224,000
for the six months ended June 30, 2019 and 2018, respectively. The increase in
notes receivable proceeds relates to the Company's negotiation of an early
earnout payment received in full.






Financing Activities




Net cash provided by financing activities was $294,500 for the six months ended
June 30, 2019 compared to $196,400 for the six months ended June 30, 2018. The
primary difference is that in the six months ended June 30, 2019, we had net
proceeds related to debt of approximately $294,500 compared to net proceeds
related to debt of approximately $76,400 in the six months ended June 30, 2018
and proceeds from the sale of common stock of $120,000 for the six months ended
June 30, 2018, but no proceeds from the sale of common stock for the six months
ended June 30, 2019.






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Critical Accounting Policies, Judgments and Estimates






Use of Estimates




The preparation of these consolidated financial statements in conformity with
accounting principles generally accepted in the United States (U.S. GAAP)
requires management to make a number of estimates and assumptions related to the
reported amount of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the period. Significant
items subject to such estimates and assumptions include the carrying amount of
intangible assets; valuation allowances and reserves for receivables, inventory
and deferred income taxes; revenue recognition related to contracts accounted
for under the percentage of completion method; share-based compensation; and
loss contingencies, including those related to litigation. Actual results could
differ from those estimates.



Accounts Receivable and Concentration of Credit Risk



Accounts receivable are recorded at the invoiced amounts less an allowance for
doubtful accounts and do not bear interest. The allowance for doubtful accounts
is based on our estimate of the amount of probable credit losses in our accounts
receivable. We determine the allowance for doubtful accounts based upon an aging
of accounts receivable, historical experience and management judgment. Accounts
receivable balances are reviewed individually for collectability, and balances
are charged off against the allowance when we determine that the potential for
recovery is remote. An allowance for doubtful accounts of approximately $227,500
and $227,500 has been reserved as of June 30, 2019 and December 31, 2018,
respectively.



We are exposed to credit risk in the normal course of business, primarily
related to accounts receivable. Our customers operate primarily in the oil
production and refining, rail transport, biogas generating and wastewater
treatment industries in the United States. Accordingly, we are affected by the
economic conditions in these industries as well as general economic conditions
in the United States. To limit credit risk, management periodically reviews and
evaluates the financial condition of its customers and maintains an allowance
for doubtful accounts. As of June 30, 2019, and December 31, 2018, we do not
believe that we have significant credit risk.



Fair Value of Financial Instruments



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






Long-lived Assets




We evaluate the carrying value of long-lived assets for impairment on an annual
basis or whenever events or changes in circumstances indicate that the carrying
amounts may not be recoverable. An asset is considered to be impaired when the
anticipated undiscounted future cash flows of an asset group are estimated to be
less than its carrying value. The amount of impairment recognized is the
difference between the carrying value of the asset group and its fair value.
Fair value estimates are based on assumptions concerning the amount and timing
of estimated future cash flows. No impairment was determined as of June 30,
2019
. As of December 31, 2018, the Company determined an impairment to one
CoronaLux™ units of $70,700 incurred due to lack of use of the licensed unit.






Revenue Recognition




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






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Stock-based Compensation




We account for stock-based awards at fair value on the date of grant and
recognize compensation over the service period that they are expected to vest.
We estimate the fair value of stock options and stock purchase warrants using
the Black-Scholes option pricing model. The estimated value of the portion of a
stock-based award that is ultimately expected to vest, taking into consideration
estimated forfeitures, is recognized as expense over the requisite service
periods. The estimate of stock awards that will ultimately vest requires
judgment, and to the extent that actual forfeitures differ from estimated
forfeitures, such differences are accounted for as a cumulative adjustment to
compensation expenses and recorded in the period that estimates are revised.

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