Strategic Environmental & Energy Resources, Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion is intended to assist in understanding our business and the results of our operations. It should be read in conjunction with the Consolidated Financial Statements and the related footnotes and “Risk Factors” that appear elsewhere in this Report. Certain statements in this Report constitute “forward-looking statements.” Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Factors that might cause such a difference include, among others, uncertainties relating to general economic and business conditions; industry trends; changes in demand for our products and services; uncertainties relating to customer plans and commitments and the timing of orders received from customers; announcements or changes in our pricing policies or that of our competitors; unanticipated delays in the development, market acceptance or installation of our products and services; changes in government regulations; availability of management and other key personnel; availability, terms and deployment of capital; relationships with third-party equipment suppliers; and worldwide political stability and economic growth. The words “believe,” “expect,” “anticipate,” “intend” and “plan” and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. Unless the context requires otherwise, when we refer to “we,” “us” and “our,” we are describing SEER and its consolidated subsidiaries on a consolidated basis. Overview SEER was formed as a publicly traded company in early 2008 through a reverse merger. 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 and owned 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 industrial services. The focus of the SEER family of companies, however, is to increase margins by securing or developing proprietary, patented and patent-pending technologies, and then leveraging its 20 plus-year service experience to place these innovations and solutions into the growing markets of emission capture and control, renewable “green gas” capture and sale, compressed natural gas fuel generation, as well as general solid waste and medical/pharmaceutical waste destruction. Many of SEER’s current operating companies share customer bases and each provides truly synergistic services, technologies and products as well as annuity type revenue streams. Financial Condition As of December 31, 2021, we had approximately $7.5 million in negative working capital, which represents a decrease of approximately $2.3 million from $9.8 million in negative working capital as of December 31, 2020. The primary reason for that working capital deficit decrease from December 31, 2020, to December 31, 2021, is due to abandonment of REGS as an entity, stranding a net of liabilities that are no longer consolidated liabilities under the Parent Company. As shown in the accompanying consolidated financial statements, the Company has experienced recurring losses, and has accumulated a deficit of approximately $29.4 million as of December 31, 2021, and $29.7 million as of December 31, 2020. For the year ended December 31, 2021, the Company realized net income of approximately $0.5 million and in 2020, the Company incurred a net loss of approximately $2.8 million. 24 Realization of a major portion of our assets as of December 31, 2021, is dependent upon our continued operations. The Company is dependent on generating additional revenue or obtaining adequate capital to fund operating losses until it becomes profitable. In addition, we have undertaken a number of specific steps to continue to operate as a going concern. We continue to focus on developing organic growth in our operating companies, diversifying our service customer base and market concentrations and improving gross and net margins through increased attention to pricing, aggressive cost management and overhead reductions, including discontinuing a line of business with insufficient margins. Critical to achieving profitability will be our ability to license and or sell, permit and operate through our joint ventures and licensees our CoronaLux™ waste destruction units. We have increased our business development efforts to address opportunities identified in expanding domestic markets attributable to increased federal and state emission control regulations and a growing demand for energy conservation and renewable energies. In addition, the Company is evaluating various forms of financing that may be available to it. There can be no assurance that the Company will secure additional financing for working capital on favorable terms or at all, increase revenues and achieve the desired result of net income and positive cash flow from operations in future years. These financial statements do not give any effect to any adjustments that would be necessary should the Company be unable to report on a going concern basis. Results of Continuing Operations for the Years Ended December 31, 2021, and 2020 Total revenues were $3.5 million and $2.7 million for the years ended December 31, 2021, and 2020, respectively. The increase of approximately $0.8 million or 28% in revenues comparing the year ended December 31, 2021, to the year ended December 31, 2020, is primarily attributable to the increases in revenues from our products segment revenue, which includes our environmental solutions segment, which increased from $2.5 million for the year ended December 31, 2020, to $3.2 million for the year ended December 31, 2021, an increase of approximately $0.7 million or approximately 29%. Environmental solutions segment generated more revenue, as the COVID affected general economic slowdown during fiscal year 2020 improved during 2021. Our Solid Waste segment remained consistent at $0.2 million for both 2021 and 2020. Operating expenses, which include cost of products, cost of solid waste and general and administrative (G&A) expenses, salaries and related expenses, were approximately $4.2 million for both the years ended December 31, 2021, and 2020. In total, operating expenses were consistent, but individual components did change throughout the year. The increase in product costs of approximately $0.5 million for the year ended December 31, 2021, from the year ended December 31, 2020, coincides with the increase in product revenue above from $2.5 million to $3.2 million. Margins were consistent at 32% for year ended December 31, 2021, compared to 31% for the year ended December 31, 2020. This increase in product costs was offset by a decrease in general and administrative expenses of approximately $0.1 million in the year ended December 31, 2021, from the year ended December 31, 2020, which was a result of reduced marketing and travel expenses during 2021, and by a decrease of $0.3 million in salaries and related expenses, as a result of a full year of reduced headcount, and ERTC credit program, and reduced payroll taxes. Total non-operating income or expense, net was $1.0 million of other income for the year ended December 31, 2021, compared to $0.9 million expense for the year ended December 31, 2020. During the year ended December 31, 2021, the Company recorded $1.5 million gain on abandonment, resulting from the cessation of operations and abandonment of the REGS subsidiary. We also recorded $0.2 million in gain on debt extinguishment, which resulted from the forgiveness of the Company’s PPP Loans from the US Treasury. Additionally, the Company reported interest expense of $0.7 million for the year ended December 31, 2021. There is no provision for income taxes for both the years ended December 31, 2021, and 2020, due to our net operating loss carryforward for both periods and we continue to maintain full valuation allowances covering our net deferred tax benefits as of December 31, 2021, and 2020. Net income, before discontinued operations and non-controlling interest, for the year ended December 31, 2021, was $0.2 million compared to a net loss, before discontinued operations and non-controlling interest, of $2.3 million for the year ended December 31, 2020. The net income attributable to SEER after deducting $0.2 million for the non-controlling interest and adding a gain from discontinued operations of $0.3 million was $0.3 million for the year ended December 31, 2021, as compared to a net loss of $2.7 million, after deducting $34,700 in non-controlling interest and adding the $0.4 million loss from discontinued operations, for the year ended December 31, 2020. As noted above, an increase in non-operating income during 2021 of $1.8 million primarily due to the $1.5 million gain from abandonment of REGS, the $0.2 million gain on debt extinguishment related to the forgiveness of the Company’s PPP Loan, and an increase in revenue of $0.8 million, were the primary reason for the increase in the net income. 25 Results of Discontinued Operations for the Years Ended December 31, 2021, and 2020 As of September 1, 2021, the Company abandoned its REGS subsidiary. All revenue and expenses of our REGS subsidiary for 2021 and 2020 are classified as discontinued operations. For the years ended December 31, 2021 2020 Services revenue $ 177,200 $ 171,400 Services costs (314,900 ) (423,700 ) General and administrative expenses (40,800 ) (102,300 ) Salaries and related expenses (150,800 ) (328,600 ) Other income 210,800 253,400 Gain on debt extinguishment 410,600 - Total expenses 114,900 (601,200 ) Operating income (loss) 292,100 (429,800 ) Income tax benefit - - Total income (loss) from discontinued operations $ 292,100 $ (429,800 ) There is no provision for income taxes for years ended December 31, 2021, and 2020, due to our net loss carryforwards and we continue to maintain full allowances covering our net deferred tax benefits as of December 31, 2021, and 2020. Liquidity and Capital Resources The following table summarizes the net cash provided by (used in) operating, investing and financing activities for the periods indicated: Year Ended December 31, 2021 2020 Operating activities $ (1,547,500 ) $ (1,690,100 ) Investing activities 189,100 160,500 Financing activities $ 1,499,900 $ 1,222,200 26 Operating Activities Net cash used in operating activities during the year ended December 31, 2021, was $1.5 million compared to $1.7 million during the year ended December 31, 2020. Cash used in operating activities is driven by our net loss and adjusted by non-cash items and changes in operating assets and liabilities. Non-cash adjustments primarily include depreciation and amortization of property & equipment and intangible assets, stock-based compensation expense, gain on abandonment of subsidiary, gain on debt extinguishment, and non-cash interest expense related to the issuance of common stock for short-term debt penalty. In 2021, net non-cash adjustments totaled approximately ($2.1) million and in 2020, net non-cash adjustments totaled $0.2 million. 2021 non-cash adjustments included ($1.5) million related to the gain on abandonment of subsidiary, and ($0.6) million related to gain on debt extinguishment. In addition to the non-cash adjustments to net income, changes in assets and liabilities include: a) changes in accounts receivable used $0.2 million in cash in 2021, compared to providing $0.3 million in 2020, a net decrease in cash provided of $0.5 million, b) costs in excess of billings on uncompleted contracts used $3,200 in cash in 2021, compared to providing $235,700 in 2020, a net decrease in cash provided of $0.2 million, c) inventory used $0.1 million in 2021, compared to using $0.3 million in 2020, a net decrease in cash used of $0.2 million, d) accounts payable, accrued liabilities, and customer deposits provided $26,700 in 2021, compared to providing $0.4 million in 2020, a net decrease in cash provided of $0.4 million, d) billings in excess of revenue on uncompleted contracts provided $0.2 million in 2021, compared to using $3,200 in 2020, a net increase in cash provided of $0.2 million, Investing activities Net cash provided by investing activities is primarily attributable to the purchase of property and equipment, and the proceeds from notes receivable. Our net cash flow provided by investing activities was $0.2 million for the year ended December 31, 2021, and 2020. During 2021, we had proceeds of $0.2 million from the sale of fixed assets. During 2020, we had additions to property and equipment of $0.1 million, and proceeds of $0.3 million from sale of fixed assets. Financing Activities Net cash provided by financing activities was approximately $1.5 million for 2021 and approximately $1.2 million for 2020. Proceeds from the issuance of convertible and short-term debt, including the payroll protection program and notes from related parties, was $1.7 million and $1.5 million in 2021 and 2020, respectively. Payments on notes payable and capital lease obligations was $0.2 million in 2021 and $0.3 million in 2020. 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. 27 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 $0 and $11,800 had been reserved as of December 31, 2021, and 2020, 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 December 31, 2021, and 2020, 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 the 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. For the year ended December 31, 2021, and 2020, the Company did not have any impairment charges. 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. 28 Stock-based Compensation We account for stock-based awards at fair value on the date of grant and recognize compensation over the service period that they are expected to vest. We estimate the fair value of stock options and stock purchase warrants using the Black-Scholes option pricing model. The estimated value of the portion of a stock-based award that is ultimately expected to vest, taking into consideration estimated forfeitures, is recognized as expense over the requisite service periods. The estimate of stock awards that will ultimately vest requires judgment, and to the extent that actual forfeitures differ from estimated forfeitures, such differences are accounted for as a cumulative adjustment to compensation expenses and recorded in the period that estimates are revised. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable