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.
23
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, 2020, we had approximately $9.8 million in negative working
capital, which represents a decrease of approximately $2.7 million from $7.1
million in negative working capital as of December 31, 2019. The decrease in our
working capital results primarily from the net loss, before non-controlling
interest, of $2.7 million for 2020.
In May 2013, REGS filed an Offer in Compromise with the IRS. REGS received a
letter from the IRS, dated March 27, 2014, rejecting its Offer in Compromise and
in accordance with the rejection letter REGS has submitted a written appeal. As
a result of the IRS rejection of the Offer in Compromise, the Installment Plan,
mentioned in Part 1, Item 1, was terminated. In June 2014, REGS received notices
of intent to levy property or rights to property from the IRS for the amounts
owed for the past due payroll taxes, penalty, and interest. The appeal submitted
by REGS was denied by the IRS, however, the IRS has not taken any current
action. As of December 31, 2020, the outstanding balance due to the IRS was
$1,085,400 and REGS continues to be represented by tax counsel specializing in
federal tax matters.
As shown in the accompanying consolidated financial statements, the Company has
experienced recurring losses, and has accumulated a deficit of approximately
$29.7 million as of December 31, 2020, and $27.0 million as of December 31,
2019. For the years ended December 31, 2020, and 2019, we incurred net losses of
approximately $2.7 million and $2.5 million, respectively.
Realization of a major portion of our assets as of December 31, 2020, 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.
24
Results of Continuing Operations for the Years Ended December 31, 2020 and 2019
Total revenues were $2.9 million and $4.3 million for the years ended December
31, 2020 and 2019, respectively. The decrease of approximately $1.4 million or
32% in revenues comparing the year ended December 31, 2020 to the year ended
December 31, 2019 is primarily attributable to the decreases in revenues from
our products segment revenue, which includes our environmental solutions
segment, which decreased from $4.1 million for the year ended December 31, 2019
to $2.7 million for the year ended December 31, 2020, a decrease of
approximately $1.4 million or approximately 34%. Environmental solutions segment
generated less revenue as the volume of media sales decreased, primarily due to
a shortage of capital to produce the media internally, and the general slowdown
of our construction contracts due to the slowdown in the economy, and the
reduced capacity of current employees of both the Company and its customers,
attributable to the COVID-19 pandemic. The decline was partially offset by the
completion of 10 internally built kilns that were delivered. Our Solid Waste
segment remained consistent at $0.2 million for both 2020 and 2019.
Operating expenses, which include cost of products, cost of solid waste and
general and administrative (G&A) expenses, salaries and related expenses, were
approximately $5.1 million for the year ended December 31, 2020 compared to $5.1
million for the year ended December 31, 2019. In total operating expenses were
consistent, but individual components did change throughout the year. The
decrease in product costs of approximately $0.2 million for the year ended
December 31, 2020 from the year ended December 31, 2019, which coincides with
the reduction in product revenue above, although the margins were reduced due to
the production of kilns for PWS, therefore the costs were reduced less than the
revenue, proportionately. Also contributing to the reduced operating expenses
was a decrease in general and administrative expenses of approximately $0.3
million in the year ended December 31, 2020 from the year ended December 31,
2019, which was a result of reduced insurance expenses, and professional
services during 2020. This was partially offset by an increase of $0.4 million
in salaries and related expenses, as a large amount of payroll related expenses
were allocated to discontinued operations in 2019, but those expenses are now in
continuing operations in our subsidiary building kilns.
Total non-operating other expense, net, was $0.6 million for the year ended
December 31, 2020 compared to $0.1 for the year ended December 31, 2019. The
increase in expense in 2020 compared to 2019 is primarily due to the reduced
other income, which in 2019 included the collection of a $0.3 million note
receivable that had previously been written off, and an increase in interest
expense of $0.4 million as a result of the increase overall debt outstanding.
There is no provision for income taxes for both the years ended December 31,
2020 and 2019, due to our net losses for both periods and we continue to
maintain full allowances covering our net deferred tax benefits as of December
31, 2020 and 2019.
Net loss, before non-controlling interest, for the year ended December 31, 2020
was $2.7 million, consistent with December 31, 2019 net loss, before
non-controlling interest, of $2.7 million. The net loss attributable to SEER
after deducting $34,700 for the non-controlling interest was $2.7 million for
the year ended December 31, 2020 as compared to $2.5 million, after deducting
$151,200 in non-controlling interest, and $1.8 million for discontinued
operations for the year ended December 31, 2019.
25
Results of Discontinued Operations for the Years Ended December 31, 2020 and
2019
During the fourth quarter of 2019, the Company ceased bidding on, and accepting
contracts for the services division of its REGS subsidiary. All revenue and
expenses of our REGS subsidiary for 2019 are classified as discontinued
operations. Commencing in 2020, all REGS operations involve the building of
kilns for PWS and other customers. All discontinued operations consist of our
industrial cleaning operations, reported during 2019. We are presenting these in
a table form, as the industrial cleaning business operations did not have
results in 2020.
For the year ended
December 31,
2020 2019
Services revenue $ - $ 1,661,500
Services costs - (2,481,400 )
General and administrative expenses - (502,400 )
Salaries and related expenses - (512,400 )
Other income (expense) - 49,300
Total expenses - (3,446,900 )
Operating income - (1,785,400 )
Income tax benefit - -
Total income from discontinued operations $ - $ (1,785,400 )
There is no provision for income taxes for both the years ended December 31,
2020 and 2019, due to our net losses for both periods and we continue to
maintain full allowances covering our net deferred tax benefits as of December
31, 2020 and 2019.
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,
2020 2019
Operating activities $ (1,690,100 ) $ (2,100,800 )
Investing activities 160,500 708,700
Financing activities $ 1,222,200 $ 1,631,100
Operating Activities
Net cash used in operating activities during the year ended December 31, 2020
was $1.7 million compared to $2.1 million during the year ended December 31,
2019. 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, asset
impairment expense, non-cash interest expense related to the issuance of common
stock for short-term debt penalty, a change in the provision for doubtful
accounts. In 2020, net non-cash adjustments totaled approximately $0.2 million
and in 2019, net non-cash adjustments totaled $0.3 million. In addition to the
non-cash adjustments to net income, changes in assets and liabilities include:
a) changes in accounts receivable provided $0.3 million in cash in 2020,
compared to $0.6 million in 2019, a net decrease in cash provided of $0.3
million, b) increase in accounts payable and accrued expenses provided $0.4
million in 2020, compared to using $0.3 million in 2019, a net increase in cash
of $0.7 million, c) decrease in billings in excess of revenue on uncompleted
contracts provided $0.2 million in 2020, compared to $0.1 million in 2019, a net
decrease in cash of $0.1 million, d) increase in inventory used $0.3 million in
2020, compared to $0 in 2019, a net decrease in cash of $0.3 million.
26
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, 2020 and $0.7 million for the year ended December 31, 2019.
During 2020, we had additions to property and equipment of $0.1 million, and
proceeds of $0.3 million from the sale of fixed assets. During 2019, we had
additions to property and equipment of $0.1 million, proceeds from a minority
interest in a new subsidiary of $0.2 million, and proceeds of $0.6 million from
a notes receivable that includes a previously impaired note.
Financing Activities
Net cash provided by financing activities was approximately $1.2 million for
2020 and net cash used in financing activities was approximately $1.6 million
for 2019. Proceeds from the issuance of convertible and short-term debt,
including the payroll protection program and notes from related parties, was
$1.5 million and $2.0 million in 2020 and 2019, respectively. Payments on notes
payable and capital lease obligations was $0.3 million in 2020 and $0.4 million
in 2019.
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 $1,000
and $11,800 had been reserved as of December 31, 2020 and 2019, 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, 2020, and 2019, 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.
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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, 2020 the Company
did not have any impairment charges. The Company incurred $32,800 in impairment
charges in 2019.
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.
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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