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 four companies with its headquarters in Broomfield, Colorado. Through its operating companies, SEER provides environmental products and solutions throughout North America. SEER’s operating companies are 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 management/treatment, emissions capture and conditioning, and environmental soil amendments and organic 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 25 plus-year service experience to place these innovations and solutions into the growing markets of renewable biogas, emission capture and control, renewable “green gas” capture and sale, organic soil amendments and fertilizers, as well as general solid waste and medical/pharmaceutical waste destruction. Many of SEER’s current operating companies share customer bases and each provides synergistic services, technologies and products. Financial Condition As of December 31, 2023, we had approximately $11.6 million in negative working capital, which represents a decrease of approximately $2.2 million from $9.4 million in negative working capital as of December 31, 2022. The primary reason for that working capital deficit increase from December 31, 2022 to December 31, 2023, is due a decrease in accounts receivable, and contract assets, and an increase in accrued liabilities 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 $34.4 million as of December 31, 2023, and $32.0 million as of December 31, 2022. For the years ended December 31, 2023 and 2022, respectively, the Company incurred net losses of approximately $2.4 million and $2.7 million. Realization of a major portion of our assets as of December 31, 2023, 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. 21 Results of Continuing Operations for the Years Ended December 31, 2023, and 2022 Total revenues were $2.9 million and $4.0 million for the years ended December 31, 2023, and 2022, respectively. The decrease of approximately $1.1 million or 28% in revenues comparing the year ended December 31, 2023, to the year ended December 31, 2022, is primarily attributable to the decreases in revenues from our products segment revenue, which includes our environmental solutions segment, which decreased from $3.9 million for the year ended December 31, 2022, to $2.9 million for the year ended December 31, 2023, an decrease of approximately $1.0 million or approximately 26%. Our product percent-complete contract revenue decreased due to several material projects being postponed due to site preparation delays and capital constraints of the Company. Media sales have also decreased, as the Company’s capital constraints have slowed our ability to produce media, and fill orders. Our solid waste segment also decreased $0.1 million, as we no longer collect a management fee from our PWS subsidiary. Operating expenses, which include cost of products, cost of solid waste and general and administrative (G&A) expenses, salaries and related expenses, and impairment were approximately $4.6 million and $5.4 million for the years ended December 31, 2023, and 2022. Product costs decreased approximately $1.0 million for the year ended December 31, 2023, compared to the year ended December 31, 2022 due to above mentioned percent-complete project delays. General and administrative expenses decreased by $0.1 million, due to an decrease in accounting and professional fees related to decreased auditing prep fees. During the year ended December 31, 2023, the Company incurred impairment losses of $0.2 million, compared to impairment losses of $0 for the year ended December 31, 2022, as the impairment losses incurred in fiscal year 2022 are reported in discontinued operations. Total non-operating income or expense, net was $0.9 million of other expense for the year ended December 31, 2023, compared to $0.6 million of other income for the year ended December 31, 2022. During the year ended December 31, 2023, the Company incurred interest expense of $0.9 million, compared to $0.8 million for the year ended December 31, 2022. The Company also recognized a gain on debt extinguishment of $0.1 million during the year ended December 31, 2022, which was $0 for the year ended December 31, 2023. There is no provision for income taxes for both the years ended December 31, 2023, and 2022, 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, 2023, and 2022. Net loss, before discontinued operations and non-controlling interest, for the year ended December 31, 2023, was $2.5 million compared to $2.0 million for the year ended December 31, 2022. The net loss attributable to SEER after deducting $7,700 for the non-controlling interest and adding a gain from discontinued operations of $0.2 million was $2.4 million for the year ended December 31, 2023, as compared to net income attributable to SEER after deducting $71,200 for the non-controlling interest and deducting a loss from discontinued operations of $0.7 million was $2.6 million for the year ended December 31, 2022. Liquidity and Capital Resources The following table summarizes the net cash provided by (used in) operating, investing and financing activities for the periods indicated: Years ended December 31, 2023 2022 Operating activities $ (937,500 ) $ (1,024,000 ) Investing activities 323,600 (8,300 ) Financing activities $ 650,300 $ 865,000 22 Operating Activities Net cash used in operating activities during the year ended December 31, 2023, was $0.9 million compared to $1.0 million during the year ended December 31, 2022. 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, gain/loss on sale off fixed assets, including assets held for sale, impairment loss, gain on debt extinguishment, and bad debt expense/recovery. In 2023, net non-cash adjustments totaled approximately ($0.1) million and in 2022, net non-cash adjustments totaled $0.4 million. 2023 non-cash adjustments included $0.2 million related to impairment loss, gain on assets held for sale of approximately ($0.2), and $0.1 million related to bad debt adjustment. In addition to the non-cash adjustments to net income, changes in assets and liabilities include: a) changes in accounts receivable provided $0.5 million in cash in 2023, compared to cash used of $0.3 million in 2022, a net increase in cash used of $0.8 million, b) changes in contract liabilities provided $0.3 million in cash in 2023, compared to providing $10,100 in 2022, a net increase in cash provided of $0.3 million, c) changes in contract assets provided $0.1 million in 2023, compared to using $0.1 million in 2022, a net increase in cash provided of $0.2 million, d) accounts payable, accrued liabilities, and customer deposits provided $0.7 million in 2023, compared to providing $1.4 million in 2022, a net decrease in cash provided of $0.7 million, d) inventory used $7,400 in 2023, compared to providing $0.2 million in 2022, 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, and proceeds from the sale of assets. Our net cash flow provided by investing activities was $0.3 million for the year ended December 31, 2023 and used $8,300 for the year ended December 31, 2022. During 2023, we had proceeds of $0.3 million from the sale of assets held for sale. Financing Activities Net cash provided by financing activities was approximately $0.7 million for 2023 and approximately $0.9 million for 2022. Proceeds from the issuance of short-term and long-term debt, was $0.9 million and $1.0 million in 2023 and 2022, respectively. Payments on notes payable was $0.2 million in 2023 and $0.1 million in 2022. 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. 23 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 $24,200 and $179,000 had been reserved as of December 31, 2023, and 2022, 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, 2023, and 2022, 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. This impairment loss is included in discontinued operations in this report for fiscal year 2022. An impairment loss was charged to investments in the amount of $182,200 for the year ended December 31, 2023. 24 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable