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, 2022, we had approximately $9.6 million in negative working capital, which represents a decrease of approximately $2.1 million from $7.5 million in negative working capital as of December 31, 2021. The primary reason for that working capital deficit increase from December 31, 2021 to December 31, 2022, is is due an increase in accounts payable and short term borrowings. As shown in the accompanying consolidated financial statements, the Company has experienced recurring losses, and has accumulated a deficit of approximately $32.0 million as of December 31, 2021, and $29.4 million as of December 31, 2021. For the year ended December 31, 2022, the Company incurred a net loss of approximately $2.7 million the Company realized net income of approximately $0.5 million and in 2021. 24 Realization of a major portion of our assets as of December 31, 2022, is dependent upon our continued operations. The Company is dependent on generating additional revenue or obtaining adequate capital to fund operating losses until it becomes profitable. In addition, we have undertaken a number of specific steps to continue to operate as a going concern. We continue to focus on developing organic growth in our operating companies, diversifying our service customer base and market concentrations and improving gross and net margins through increased attention to pricing, aggressive cost management and overhead reductions, including discontinuing a line of business with insufficient margins. Critical to achieving profitability will be our ability to license and or sell, permit and operate through our joint ventures and licensees our CoronaLux™ waste destruction units. We have increased our business development 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, 2022, and 2021 Total revenues were $4.1 million and $3.5 million for the years ended December 31, 2022, and 2021, respectively. The increase of approximately $0.7 million or 19% in revenues comparing the year ended December 31, 2022, to the year ended December 31, 2021, is primarily attributable to the increases in revenues from our products segment revenue, which includes our environmental solutions segment, which increased from $3.2 million for the year ended December 31, 2021, to $4.0 million for the year ended December 31, 2022, an increase of approximately $0.8 million or approximately 25%. Environmental solutions segment generated more revenue, as the company continues to recover from the economic slowdown as result of COVID-19 pandemic. Operating expenses, which include cost of products, cost of solid waste and general and administrative (G&A) expenses, salaries and related expenses, were approximately $6.2 million and $4.2 million for the years ended December 31, 2022, and 2021. In total, operating expenses increased as a result of increased product costs of approximately $1.2 million for the year ended December 31, 2022, from the year ended December 31, 2021, coincides with the increase in product revenue above from $3.2 million to $4.0 million. Margins increased were 16.4% for the year ended December 31, 2022, compared to 31% for the year ended December 31, 2021. Salaries and related expenses increased by $0.3 million for the year ended December 31, 2022, from the year ended December 31, 2021. During the year ended December 31, 2022, the Company incurred impairment losses of $0.3 million, compared to impairment losses of $0 for the year ended December 31, 2021. Total non-operating income or expense, net was $0.6 million of other expense for the year ended December 31, 2022, compared to $1.0 million of other income for the year ended December 31, 2021. During the year ended December 31, 2022, the Company incurred interest expense of $0.8 million. This was compared to a gain on abandonment of $1.5 million during the year ended December 31, 2021. There is no provision for income taxes for both the years ended December 31, 2022, and 2021, 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, 2022, and 2021. Net loss, before discontinued operations and non-controlling interest, for the year ended December 31, 2022, was $2.7 million compared to a net gain, before discontinued operations and non-controlling interest, of $0.2 million for the year ended December 31, 2021. The net loss attributable to SEER after deducting $0.1 million for the non-controlling interest $2.6 million for the year ended December 31, 2022, as compared to 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. 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, 2022 2021 Operating activities $ (1,024,000 ) $ (1,547,500 ) Investing activities (8,300 ) 189,100 Financing activities $ 865,000 $ 1,499,900 25 Operating Activities Net cash used in operating activities during the year ended December 31, 2022, was $1.0 million compared to $1.5 million during the year ended December 31, 2021. 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, impairment loss, gain on debt extinguishment, and non-cash interest expense related to the issuance of common stock for short-term debt penalty. In 2022, net non-cash adjustments totaled approximately $0.5 million and in 2021, net non-cash adjustments totaled $2.1 million. 2022 non-cash adjustments included $0.3 million related to impairment loss, and $0.1 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 $0.3 million in cash in 2022, compared to cash used of $0.2 million in 2021, a net increase in cash used of $0.1 million, b) changes in contract assets used $0.1 million in cash in 2022, compared to providing $0 in 2021, a net decrease in cash provided of $0.1 million, c) inventory provided $0.2 million in 2022, compared to using $0.1 million in 2021, a net increase in cash provided of $0.3 million, d) accounts payable, accrued liabilities, and customer deposits provided $1.4 million in 2022, compared to providing $26,700 in 2021, a net increase in cash provided of $1.4 million, d) contract liabilites provided $10,100 in 2022, compared to providing $0.2 million in 2021, a net decrease in cash provided of $0.2 million, Investing activities Net cash used by investing activities is primarily attributable to the purchase of property and equipment. Our net cash flow used by investing activities was $8,300 and $0.2 million was provided by investing activities for the years ended December 31, 2022, and 2021 respectively. During 2021, we had proceeds of $0.2 million from the sale of fixed assets. Financing Activities Net cash provided by financing activities was approximately $0.9 million for 2022 and approximately $1.5 million for 2021. Proceeds from the issuance of short-term and long-term debt, including the payroll protection program and notes from related parties, was $0.9 million and $1.7 million in 2022 and 2021, respectively. Payments on notes payable was $0.1 million in 2022 and $0.2 million in 2021. Critical Accounting Policies, Judgments and Estimates Use of Estimates The preparation of these consolidated financial statements in conformity with accounting principles generally accepted in the United States (U.S. GAAP) requires management to make a number of estimates and assumptions related to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Significant items subject to such estimates and assumptions include the forecasted cash flows used in the impairment testing of goodwill and intangible assets, valuation allowances and reserves for receivables; revenue recognition related to contracts accounted for under the percentage of completion method; and the Company’s ability to continue as a going concern. Actual results could differ from those estimates. 26 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 $179,000 and $0 had been reserved as of December 31, 2022, and 2021, 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, 2022, and 2021, we do not believe that we have significant credit risk. Goodwill and Intangible Assets Intangible Assets. Intangible assets deemed to have finite lives are amortized on a straight-line basis over their estimated useful lives, where the useful life is the period over which the asset is expected to contribute directly, or indirectly, to our future cash flows. Intangible assets are reviewed for impairment on an interim basis when certain events or circumstances exist. For amortizable intangible assets, impairment exists when the carrying amount of the intangible asset exceeds its fair value. At least annually, the remaining useful life is evaluated. An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value. In testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. If the Company concludes otherwise, it is required to perform a quantitative impairment test. To the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset that is amortized over the remaining useful life of that asset, if any. Subsequent reversal of impairment losses is not permitted. Goodwill represents the excess of purchase price of acquired businesses over the fair value of the assets acquired and liabilities assumed. Goodwill is allocated to the reporting unit in which the business that created the goodwill resides. The Company evaluates the recoverability of goodwill annually; however, we could be required to evaluate the recoverability of goodwill more often if impairment indicators exist. In 2022, we early adopted ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment , which eliminates the two-step goodwill impairment process. Goodwill is first qualitatively assessed to determine whether further impairment testing is necessary. Factors that management considers in this assessment include macroeconomic conditions, industry and market considerations, overall financial performance (both current and projected), changes in management and strategy, and changes in the composition or carrying amount of net assets. If this qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, a one-step test is then performed by comparing the fair value of a reporting unit to its carrying amount. If the fair value of a reporting unit is less than its carrying value, an impairment charge will be recorded for the difference between the fair value and carrying value, but is limited to the carrying value of the reporting unit’s goodwill. An impairment loss was charged to goodwill in the amount of $277,800 for the year ended December 31, 2022. No impairment was recorded for the year ended December 31, 2021. 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. 27 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable