Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Certain statements in this Management's Discussion and Analysis ("MD&A"), other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "may," "would," "expect," "intend," "could," "estimate," "should," "anticipate," or "believe," and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. Readers should carefully review the risk factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 filed with the Securities and Exchange Commission on April 17, 2023.
The following MD&A is intended to help readers understand the results of our operation and financial condition, and is provided as a supplement to, and should be read in conjunction with, our Interim Unaudited Financial Statements and the accompanying Notes to Interim Unaudited Financial Statements under Part 1, Item 1 of this Quarterly Report on Form 10-Q.
Growth and percentage comparisons made herein generally refer to the three-month period ended March 31, 2023 compared with the three-month period ended March 31, 2022 unless otherwise noted. Unless otherwise indicated or unless the context otherwise requires, all references in this document to "we, "us, "our," the "Company," and similar expressions refer to SusGlobal Energy Corp., and depending on the context, its subsidiaries.
SPECIAL NOTICE ABOUT GOING CONCERN AUDIT OPINION
OUR AUDITORS ISSUED OPINIONS EXPRESSING SUBSTANTIAL DOUBT AS TO OUR ABILITY TO CONTINUE IN BUSINESS AS A GOING CONCERN FOR THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021. YOU SHOULD READ THIS QUARTERLY REPORT ON FORM 10-Q WITH THE "GOING CONCERN" ISSUES IN MIND.
This Management's Discussion and Analysis should be read in conjunction with the unaudited interim condensed consolidated financial statements included in this Quarterly Report on Form 10-Q (the "Financial Statements"). The financial statements have been prepared in accordance with generally accepted accounting policies in the United States ("GAAP"). Except as otherwise disclosed, all dollar figures included therein and in the following management discussion and analysis are quoted in United States dollars.
OVERVIEW
The following organization chart sets forth our wholly-owned subsidiaries:
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On February 4, 2019, the Company registered its common stock, having a par value of $.0001 per share, pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and is effective pursuant to General Instruction A.(d).
SusGlobal Energy Corp. ("SusGlobal") was formed by articles of amalgamation on December 3, 2014, in the Province of Ontario, Canada and its executive office is in Toronto, Ontario, Canada, at 200 Davenport Road. Our telephone number is 416-223-8500. Our website address is www.susglobalenergy.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K are all available, free of charge, on our website as soon as practicable after we file the reports with the Securities and Exchange Commission (the "SEC"). SusGlobal Energy Corp., a company in the start-up stages and Commandcredit Corp. ("Commandcredit"), an inactive Canadian public company, amalgamated to continue business under the name of SusGlobal Energy Corp.
On May 23, 2017, SusGlobal filed an Application for Authorization to continue in another Jurisdiction with the Ministry of Government Services in Ontario and a certificate of corporate domestication and certificate of incorporation with the Secretary of State of the State of Delaware under which it changed its jurisdiction of incorporation from Ontario to the State of Delaware (the "Domestication"). In connection with the Domestication each of the currently issued and outstanding common shares were automatically converted on a one-for-one basis into common shares compliant with the laws of the state of Delaware (the "Shares"). As a result of the Domestication, pursuant to Section 388 of the General Corporation Law of the State of Delaware (the "DGCL"), SusGlobal continued its existence under the DGCL as a corporation incorporated in the State of Delaware. The business, assets and liabilities of SusGlobal and its subsidiaries on a consolidated basis, as well as its principal location and fiscal year, were the same immediately after the Domestication as they were immediately prior to the Domestication. SusGlobal filed a Registration Statement on Form S-4 to register the Shares and this registration statement was declared effective by the Securities and Exchange Commission on May, 12, 2017.
SusGlobal is a renewables company focused on acquiring, developing and monetizing a global portfolio of proprietary technologies in the waste to energy and regenerative products application.
When the terms "the Company," "we," "us" or "our" are used in this document, those terms refer to SusGlobal Energy Corp., and its wholly-owned subsidiaries, SusGlobal Energy Canada Corp., SusGlobal Energy Canada I Ltd., SusGlobal Energy Belleville Ltd., SusGlobal Energy Hamilton Ltd., and 1684567 Ontario Inc.
On December 11, 2018, the Company began trading on the OTCQB venture market exchange, under the ticker symbol SNRG.
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As the global amount of organic waste continues to grow, a solution for sustainable global management of these wastes is paramount. SusGlobal through its proprietary technology and processes is equipped and confident to deliver this objective. Management believes renewable energy is the energy of the future. Sources of this type of energy are more evenly distributed over the earth's surface than finite energy sources, making it an attractive alternative to petroleum-based energy. Biomass, one of the renewable resources, is derived from organic material such as forestry, food, plant and animal residuals. SusGlobal can therefore help you turn what many consider waste into precious energy and regenerative products. The portfolio will be comprised of three distinct types of technologies: (a) Process Source Separated Organics ("SSO") in anaerobic digesters to divert from landfills and recover biogas. This biogas can be converted to gaseous fuel for industrial processes, electricity to the grid or cleaned for compressed renewable gas. (b) Maximizing the capacity of existing infrastructure (anaerobic digesters) to allow processing of SSO to increase biogas yield. (c) and (c) process SSO and digestate to produce an organic compost or a pathogen free organic liquid fertilizer. The convertibility of organic material into valuable end products such as biogas, liquid biofuels, organic fertilizers and compost shows the utility of renewables. These products can be converted into electricity, fuels and marketed to agricultural operations that are looking for an increase in crop yields, soil amendment and environmentally-sound practices. This practice also diverts these materials from landfills and reduces Greenhouse Gas Emissions ("GHG") that result from landfilling organic wastes. The Company can provide peace of mind that the full lifecycle of organic material is achieved, global benefits are realized and stewardship for total sustainability is upheld. It is management's objective to grow SusGlobal into a significant sustainable waste to energy and regenerative products provider, as Leaders in The Circular Economy®.
We believe the products and services offered can benefit both the public and private markets. The following includes some of our work managing organic waste streams: Anaerobic Digestion, Dry Digestion, Wastewater Treatment, In-Vessel Composting, SSO Treatment, Biosolids Heat Treatment, Leachate Management, Composting and Liquid Fertilizers.
The Company can provide a full range of services for handling organic residuals in a period where innovation and sustainability are paramount. From start to finish we offer in-depth knowledge, a wealth of experience and cutting-edge technology for handling organic waste.
The primary focus of the services SusGlobal provides includes integrating our technologies with capital investment to optimizing the processing of SSO. Our processes not only divert significant organic waste from landfills, but also result in methane avoidance, with significant GHG reductions from waste disposal. The processes produce regenerative products through the conversion of organic wastes into organic fertilizer, both dry compost and liquid.
Currently, the primary customers are municipalities in both rural and urban centers in Ontario, Canada. Where necessary, to be in compliance with provincial and local environmental laws and regulations, SusGlobal submits applications to the respective authorities for approval prior to any necessary engineering being carried out.
We are a "smaller reporting company," as defined under SEC Regulation S-K. As such, we also are exempt from the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and also are subject to less extensive disclosure requirements regarding executive compensation in our periodic reports and proxy statements. We will continue to be deemed a smaller reporting company until (i) our public float exceeds $250 million on the last day of our second fiscal quarter in our prior fiscal year (if our annual revenues exceeded $100 million in such prior fiscal year); or (ii) our public float exceeds $700 million on the last day of our second fiscal quarter in our prior fiscal year (if our annual revenues were less than $100 million in such prior fiscal year).
The Coronavirus Outbreak ("COVID-19") May Adversely Affect Our Business Operations and Financial Condition
In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic which has resulted in substantial global economic disruption and uncertainty. In response to the COVID-19 pandemic, the measures implemented by various authorities have caused us to change the Company's business practices, including those related to where employees work, the distance between employees in the Company's facilities, limitations on in-person meetings between employees and with customers, suppliers, service providers and stakeholders, as well as restrictions on business travel to domestic and international locations.
The Company is fortunate that its operations have not been forced to close as we're considered an essential service. To date, there has been no material impact on the Company's workforce, operations, financial performance, liquidity, or supply chain as a result of COVID-19. However, the extent and continued impact of the COVID-19 pandemic on our business will depend on certain developments including the duration and spread of the outbreak and new variant strains of the virus; the availability and distribution of effective vaccines; the severity of the economic decline attributable to the pandemic and timing, nature and sustainability of economic recovery; and government responses, including vaccination or testing mandates, all of which are highly uncertain and unpredictable.
The Company will continue to monitor health orders issued by applicable governments to ensure compliance with evolving domestic and global COVID-19 guidelines.
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RECENT BUSINESS DEVELOPMENTS
On April 25, 2023, the Company announced that its wholly owned subsidiary SusGlobal Energy Belleville Ltd., generated approximately 9,500 additional Verified Emission Reduction and Removals ("VERRs") and recently sold a further 3,000 carbon credits as part of the Anew™ SusGlobal Belleville Composting Offset Project in Ontario (the "Project"). The project has to date generated approximately 114,500 VERRs (generated from 2017-2022) with an approximate market value of $3.70 (C$5) and $7.40 (C$10) per VERR. The Project report was submitted to the GHG CleanProjects® Registry, a business unit of the Standards Division of the Canadian Standards Association ("CSA"). The Project is part of the Offset Development and Marketing Agreement with Anew Canada ULC (formerly known as Blue Source Canada ULC) ("Anew Canada") for developed and marketed greenhouse gas ("GHG") offset credits from the Company's 49-acre Organic & Non-Hazardous Waste Processing & Composting Facility in Belleville, Ontario.
The Project has enabled an increase in the diversion of organic waste from landfills, thereby avoiding methane generation. Methane is a highly potent greenhouse gas which is 28 times more effective at trapping heat energy in our atmosphere than carbon dioxide. As organic wastes decompose in landfills, the methane builds up and must be released to prevent dangerous working conditions. By diverting waste that contributes to this problem, the Project benefits the community as well as the climate.
This initial sale of carbon credits expands the Company's ability to deliver on its mission to reduce organic wastes from wood, leaf and yard material, treated municipal sewage waste (biosolids), residential curbside green bin material or SSO and paper sludge otherwise destined for landfills.
On March 28, 2023, the Company and PACE Savings and Credit Union Limited ("PACE") finalized a full and final mutual release of all obligations owing to PACE, including accrued interest, in exchange for an amount of $923,625 (C$1,250,000). The funds are held in escrow by the Company's Canadian legal counsel. The funds will be released to PACE once the letter of credit, in the amount of $204,550 (C$276,831) is released by the Ministry of the Environment, Conservation and Parks (the "MECP") to PACE. Immediately prior to this full and final mutual release, the amounts owing to PACE, included in the interim condensed consolidated balance sheets, include $3,449,388 (C$4,668,274) disclosed under long-term debt and accrued interest of $391,414 (C$529,725) disclosed under accrued liabilities. The Company raised the funds by securing a 2nd. mortgage on March 1, 2023 in the amount of $1,108,350 (C$1,500,000) prior to disbursements of $184,725 (C$250,000), on its Belleville, Ontario Canada property.
New and Renewed Consulting Contracts
The Company entered into an Executive Chairman Consulting Agreement (the "CEO's Consulting Agreement"), by and among the Company, Travellers International Inc. ("Travellers"), and the CEO, who is also a director, the Executive Chairman and President of the Company, effective January 1, 2023 (the "Effective Date"). The CEO's Consulting Agreement replaced the consulting agreement which expired on December 31, 2022.
Pursuant to the terms of the CEO's Consulting Agreement, for his services as the CEO, the compensation is at a rate of $29,556 (C$40,000) per month for twelve (12) months, beginning on the Effective Date, and at a rate of $36,945 (C$50,000) per month for twelve (12) months, beginning January 1, 2024. In addition, the Company agreed to grant the CEO 3,000,000 restricted shares of the Company's common stock, par value of $0.0001 per share (the "Common Stock") on the Effective Date. This common stock was issued on January 3, 2023. The Company has also agreed to reimburse the CEO for certain out-of-pocket expenses incurred by the CEO.
The CEO's Consulting Agreement is for a term of twenty-four (24) months. Upon a Constructive Discharge (as defined in the CEO's Consulting Agreement) and subject to certain notification requirements and the Company's opportunity to cure the Constructive Discharge, the CEO will be entitled to a compensation of twelve (12) months' fees, as well as any bonus compensation owing.
The Company also entered into an Executive Consulting Agreement (the "CFO Consulting Agreement"), by and between the Company and the CFO of the Company, effective January 1, 2023. Pursuant to the terms of the CFO Consulting Agreement, the CFO is entitled to fees of $9,236 (C$12,500) per month for twelve (12). In addition, the Company has also agreed to grant the CFO 100,000 restricted shares of the Company's common stock, par value of $0.0001 per share on the Effective Date. The Company has also agreed to reimburse the CFO for certain out-of-pocket expenses incurred by the CFO. This common stock was issued on January 3, 2023. The CFO's Consulting Agreement replaced the consulting agreement which expired on December 31, 2022.
The CFO's Consulting Agreement is for a term of twelve (12) months. Upon a Constructive Discharge (as defined in the CFO's Consulting Agreement) and subject to certain notification requirements and the Company's opportunity to cure the Constructive Discharge, the CFO will be entitled to a compensation of two (2) months' fees, as well as any bonus compensation owing.
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Financings
(a) Securities Purchase Agreements
At March 31, 2023, the Company had and currently has 5 security purchase agreements outstanding with 4 investors. The outstanding principal balance at March 31, 2023 of the convertible promissory notes was $5,682,160 with a fair value of $7,563,466. At the time of this filing, the outstanding principal balance was $5,632,160 after 1 additional conversion of $50,000 on the October 29, 2021 investor note, for 375,052 common shares of the Company.
Please refer to the interim condensed consolidated financial statements, convertible promissory notes, note 11 and fair value measurement, note 12 for details on the convertible promissory notes.
(b) Pace Savings & Credit Union Limited ("PACE")
As noted above, on March 28, 2023, the Company and PACE Savings and Credit Union Limited ("PACE") finalized a full and final mutual release of all obligations owing to PACE, including accrued interest, in exchange for an amount of $923,625 (C$1,250,000). The funds are held in escrow by the Company's Canadian legal counsel. The funds will be released to PACE once the letter of credit, in the amount of $204,550 (C$276,831) is released by the Ministry of the Environment, Conservation and Parks (the "MECP") to PACE. Immediately prior to this full and final mutual release, the amounts owing to PACE, included in the interim condensed consolidated balance sheets, include $3,449,388 (C$4,668,274) disclosed under long-term debt and accrued interest of $391,414 (C$529,725) disclosed under accrued liabilities. The Company raised the funds by securing a 2nd. mortgage on March 1, 2023 in the amount of $1,108,350 (C$1,500,000) prior to disbursements of $184,725 (C$250,000), on its Belleville, Ontario Canada property.
The remaining PACE long-term debt was initially payable as noted below:
(i) The credit facility bears interest at the PACE base rate of 7.00% plus 1.25% per annum, currently 12.50%, is payable in monthly blended installments of principal and interest of $6,476 (C$8,764) and matures on September 2, 2022. The first and only advance on the credit facility on February 2, 2017, in the amount of $1,182,240 (C$1,600,000), is secured by a business loan general security agreement, a $1,182,240 (C$1,600,000) personal guarantee from the CEO and a charge against the Haute leased premises. Also pledged as security are the shares of the wholly-owned subsidiaries, and a limited recourse guarantee against each of these parties. On April 3, 2020, the pledged shares were delivered by PACE and are currently held as security for the personal guarantee from the CEO and charge against the Haute leased premises. The credit facility is fully open for prepayment at any time without notice or bonus.
(ii) The credit facility advanced on June 15, 2017, in the amount of $480,180 (C$600,000), bears interest at the PACE base of 7.00% plus 1.25% per annum, currently 12.50%, is payable in monthly blended installments of principal and interest of $3,621 (C$4,901), and matures on September 2, 2022. The credit facility is secured by a variable rate business loan agreement on the same terms, conditions and security as noted above.
(iii) The corporate term loan advanced on September 13, 2017, in the amount of $2,751,772 (C$3,724,147), bears interest at PACE base rate of 7.00% plus 1.25% per annum, currently 12.50%, is payable in monthly blended installments of principal and interest of $21,953 (C$29,711), and matures September 13, 2022. The corporate term loan is secured by a business loan general security agreement representing a floating charge over the assets and undertakings of the Company, a first priority charge under a registered debenture and a lien registered under the Personal Property Security Act in the amount of $2,956,323 (C$4,000,978) against the assets including inventory, accounts receivable and equipment. The corporate term loan also included an assignment of existing contracts included in the asset purchase agreement.
For the three-month period ended March 31, 2023, $102,842 (C$139,089) (2022-$75,525; C$95,625) in interest was incurred on the PACE long-term debt. As at March 31, 2023 $391,413 (C$529,725) (December 31, 2022-$288,407; C$390,636) in accrued interest is included in accrued liabilities in the interim condensed consolidated balance sheets
(c) Other Financings
(i) The Company obtained a 1st mortgage provided by private lenders to finance the acquisition of the shares of 1684567 and to provide funds for additional financing needs, including additional lands, received in four tranches totaling $3,842,280 (C$5,200,000) (December 31, 2022-$3,839,160; C$5,200,000). The fourth tranche was received on August 13, 2021 in the amount of $1,402,770 (C$1,900,000) and a portion of this fourth tranche, $1,369,871 (C$1,853,933), was used to fund a portion of the purchase of the Hamilton Property, described under long-lived assets, net note 7. The 1st mortgage is repayable interest only on a monthly basis at an annual rate of the higher of the Royal Bank of Canada's prime rate plus 6.05% per annum (currently 12.50%) and 10% per annum with a maturity date of December 1, 2023. The Company continues to be charged at the rate of 10% per annum. The 1st mortgage payable is secured by the shares held of 1684567, a 1st mortgage on the premises located at 704 Phillipston Road, Roslin, Ontario, Canada and a general assignment of rents.
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Financing fees on the 1st mortgage totaled $298,086 (C$403,419). As at March 31, 2023 $31,581 (C$42,740) (December 31, 2022-$31,555; C$42,740) of accrued interest is included in accrued liabilities in the consolidated balance sheets. In addition, as at March 31, 2023 there is $41,288 (C$55,877) (December 31, 2022-$56,409; C$76,404) of unamortized financing fees included in long-term debt in the consolidated balance sheets.
(ii) On August 17, 2021, the Company obtained a vendor take-back 1st mortgage in the amount of $1,477,800 (C$2,000,000), on the purchase of the Hamilton Property, described under long-lived assets, net (note 7). The 1st mortgage bears interest at an annual rate of 2% per annum, repayable monthly interest only with a maturity date of August 17, 2023, secured by the assets on the Hamilton Property.
(iii) On March 1, 2023, the Company obtained a 2nd mortgage in the amount of $1,108,350 (C$1,500,000) bearing interest at the annual rate of 12%, repayable monthly, interest only with a maturity date of March 1, 2024, secured as noted under (d) i) above. The Company incurred financing fees of $44,334 (C$60,0000). In addition, as at March 31, 2023 there is $40,657 (C$55,069) of unamortized financing fees included in long-term debt in the consolidated balance sheets
For the three-month period ended March 31, 2023, $114,457 (C$154,797) (2022-$111,853; C$141,622) in interest was incurred on the mortgages payable. As at March 31, 2023 $42,512 (C$57,534) (December 31, 2022- $31,555; C$42,740) in accrued interest is included in accrued liabilities in the interim condensed consolidated balance sheets.
(iii) As a result of the COVID-19 virus, the Government of Canada launched the Canada Emergency Business Account (the "CEBA"), a program to ensure that small businesses have access to the capital they need to see them through the current challenges and better position them to quickly return to providing services to their communities and creating employment. The program is administered by Canadian chartered banks and credit unions.
The Company has received a total of $73,890 (C$100,000) under this program, from its Canadian chartered bank.
Under the initial term date of the loans, which is detailed in the CEBA term loan agreements, the amount is due on December 31, 2022 and is interest-free. If the loans are not repaid by December 31, 2022, the Company can make payments, interest only, on a monthly basis at an annual rate of 5%, under the extended term date, beginning January 1, 2023, maturing December 31, 2025.
The CEBA term loan agreements were amended by extending the interest free repayment date by one year to December 31, 2023. If paid by December 31, 2023, 33.33% ($24,630; C$33,333), previously 25%, of the loans would be forgiven. Repayment terms on the extended period are unchanged.
The CEBA term loan agreements contain a number of positive and negative covenants, for which the Company is not in full compliance.
(iv) On April 8, 2021, the Company took delivery of a truck and hauling trailer for a total purchase price of $161,330 (C$218,338) plus applicable harmonized sales taxes. The purchase was financed by a bank term loan of $147,780 (C$200,000), over a forty-eight-month term, bearing interest at 4.95% per annum with monthly blended instalments of principal and interest payments of $3,621 (C$4,901) due April 7, 2025.
For the three-month period ended March 31, 2023, $781 (C$1,057) (2022- $1,576; C$1,996) in interest was incurred.
(v) On April 18, 2023, the CEO converted $177,784 (C$238,000) of outstanding loans to the Company in return for 856,483 common shares of the Company, priced at the closing trading price of $0.2076 per share.
(d) Financings Related to Obligations Under Capital Lease
There were no new capital leases entered into by the Company during the three-month period ended March 31, 2023.The original terms of the obligations under capital lease outstanding at March 31, 2023 is noted below.
(i) The lease agreement for certain equipment for the Company's organic waste processing and composting facility at a cost of $287,912 (C$389,650), is payable in monthly blended installments of principal and interest of $5,063 (C$6,852), plus applicable harmonized sales taxes for a period of fifty-nine months plus an initial deposit of $14,372 (C$19,450) plus applicable harmonized sales taxes and an option to purchase the equipment for a final payment of a nominal amount of $74 (C$100) plus applicable harmonized sales taxes on February 27, 2025. The leasing agreement bears interest at the rate of 3.59% annually, compounded monthly, due February 27, 2025.
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For the three-month period ended March 31, 2023, $1,052 (C$1,423) (2022-$1,760; C$2,229) in interest was incurred.
Operations
The Company owns Environmental Compliance Approvals (the "ECAs") issued by the MECP from the Province of Ontario, in place to accept up to 70,000 metric tonnes ("MT") of waste annually from the provinces of Ontario, Quebec and from New York state, and to operate a waste transfer station with the capacity to process up to an additional 50,000 MT of waste annually. Once built, the location of the waste transfer station will be alongside the Organic and Non-Hazardous Waste Processing and Composting Facility which is currently operating in Belleville, Ontario, Canada.
Waste Transfer Station- Access to the waste transfer station is critical to haulers who collect waste in areas not in close proximity to disposal facilities where such disposal continues to be permitted. Tipping fees charged to third parties at waste transfer stations are usually based on the type and volume or weight of the waste deposited at the waste transfer station, the distance to the disposal site, market rates for disposal costs and other general market factors.
Organic Composting Facility- As noted above, the Company's organic waste processing and composting facility, located in Belleville, Ontario Canada, has ECAs in place to accept up to 70,000 MT of waste annually and is currently in operation. Certain assets of the organic waste processing and composting facility, including the ECAs for the waste transfer station (not yet built), were acquired by the Company on September 15, 2017, from the Receiver for Astoria, under the APA. The Company charges tipping fees for the waste accepted at the organic waste composting facility based on arrangements in place with the customers and the type of waste accepted. Typical waste accepted includes, SSO, leaf and yard, food, liquid, paper sludge and biosolids. During the three-month period ended March 31, 2023, tipping fees ranged from $51 (C$69) to $118 (C$159) per MT.
The Company owns a 40,535 square foot facility on 3.26 acres in Hamilton, Ontario (the "Hamilton Facility"), which includes an Environmental Compliance Approval to process 65,884 MT per annum of organic waste, 24 hours per day 7 days a week. The facility will be designed to produce, distribute and warehouse the Company's SusGro™ organic liquid fertilizer and other products that are to be provided under private label and to be sold through big box retailers, consumer lawn and garden suppliers, and for end use to the wine, cannabis and agriculture industries. With the addition of a further 11,000 square feet of office space and R&D labs, the Hamilton facility will also house the continued development of SusGlobal's proprietary formulations and branded liquid and dry organic fertilizers.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2023, the Company had a bank balance of $5,920 (December 31, 2022-$42,900) and current debt obligations and other current liabilities in the amount of $23,597,279 (December 31, 2022-$22,339,175). As at March 31, 2023, the Company had a working capital deficit of $21,794,263 (December 31, 2022-$21,580,552). The Company does not currently have sufficient funds to satisfy the current debt obligations.
The Company's total assets as at March 31, 2023 were $10,808,965 (December 31, 2022-$9,865,775) and total current liabilities were $23,597,279 (December 31, 2022-$22,339,175). Significant losses from operations have been incurred since inception and there is an accumulated deficit of $31,380,369 as at March 31, 2023 (December 31, 2022 -$30,345,197). Continuation as a going concern is dependent upon generating significant new revenue and generating external capital and securing debt to satisfy its creditors' demands and to achieve profitable operations while maintaining current fixed expense levels. The Company is also anticipating a successful underwritten offering in connection with its filed registration statement although there can be no assurance that the underwritten offering will be completed.
To pay current liabilities and to fund any future operations, the Company requires significant new funds, which the Company may not be able to obtain. In addition to the funds required to liquidate the $23,597,279 in current debt obligations and other current liabilities, the Company estimates that approximately $27,500,000 must be raised to fund capital requirements and general corporate expenses for the next 12 months.
In the normal course of business, we are exposed to market risks, including changes in interest rates, certain commodity prices and Canadian currency rates. The Company does not use derivatives to manage these risks.
During the three-month period ended March 31, 2023, the April 2021 Investor converted his unsecured convertible promissory notes having a stated amount of $400,000 and a fair value on conversion of $463,862 common shares of the Company.
As at March 31, 2023, the current and long-term portions of our debt obligations totaled $17,701,463 (December 31, 2022-$16,827,617).
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In addition, as at March 31, 2022, the Company had an outstanding letter of credit provided by PACE, in the amount of $221,548 (C$276,831), in favor of the MECP. The letter of credit is a requirement of the MECP and is in connection with the financial assurance provided by the Company, for it to be in compliance with the MECPs environmental objectives. The MECP regularly evaluates the Company's organic waste processing and composting facility to ensure compliance is adhered to and the letter of credit is subject to change by the MECP. The Company is in the process of obtaining a letter of credit for the new financial assurance with the MECP in the amount of $510,301 (C$637,637).
CONSOLIDATED RESULTS OF OPERATIONS - FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 2023 COMPARED TO THE THREE-MONTH PERIOD ENDED MARCH 31, 2022
| | | For the three-month periods
ended | |
| | | March 31, 2023 | | | March 31, 2022 | |
| | | | | | | |
| Revenue | $ | 164,687 | | $ | 144,470 | |
| | | | | | | |
| Cost of Sales | | | | | | |
| Opening inventory | | 58,695 | | | 20,582 | |
| Depreciation | | 108,372 | | | 116,203 | |
| Direct wages and benefits | | 40,852 | | | 52,088 | |
| Equipment rental, delivery, fuel and repairs and maintenance | | 21,424 | | | 170,188 | |
| Utilities | | 12,937 | | | 38,812 | |
| Outside contractors | | - | | | 24,568 | |
| | | 242,280 | | | 422,441 | |
| Less: closing inventory | | (60,959 | ) | | (16,806 | ) |
| Total cost of sales | | 181,321 | | | 405,635 | |
| | | | | | | |
| Gross (loss) | | (16,634 | ) | | (261,165 | ) |
| | | | | | | |
| Operating expenses | | | | | | |
| Management compensation-stock-based compensation | | 57,600 | | | 60,113 | |
| Management compensation-fees | | 116,456 | | | 118,469 | |
| Marketing | | 10,951 | | | 376,488 | |
| Professional fees | | 116,688 | | | 261,652 | |
| Interest expense | | 219,675 | | | 191,243 | |
| Office and administration | | 52,890 | | | 60,577 | |
| Rent and occupancy | | 50,193 | | | 50,925 | |
| Insurance | | 13,543 | | | 28,838 | |
| Filing fees | | 12,457 | | | 54,175 | |
| Amortization of financing costs | | 18,824 | | | 33,532 | |
| Directors' compensation | | 15,969 | | | 14,809 | |
| Stock-based compensation | | 334,291 | | | 130,512 | |
| Repairs and maintenance | | 19,687 | | | 2,329 | |
| Foreign exchange (income) | | (7,873 | ) | | (77,749 | ) |
| Total operating expenses | | 1,031,351 | | | 1,305,913 | |
| | | | | | | |
| Net Loss Before Other (Loss) Expense | | (1,047,985 | ) | | (1,567,078 | ) |
| Other Income (Expense) | | 12,813 | | | (1,296,148 | ) |
| Net Loss | $ | (1,035,172 | ) | $ | (2,863,226 | ) |
During the three-month period ended March 31, 2023, the Company generated $164,687 of revenue from its organic waste processing and composting facility compared to $144,470 in the three-month period ended March 31, 2022. The increase in revenue is primarily due to additional waste revenue from new business in the amount of $35,077, new revenue from the sale of carbon credits in the amount of $10,229 offset by a reduction of garbage collection revenue of $25,089 as the Company began reducing this service in the prior year.
In the operation of the organic waste processing and composting facility, the Company processes organic and other waste received and produces the end product, compost. The cost of producing the compost totaled $181,321 for the three-month period ended March 31, 2023 compared to $405,635 for the three-month period ended March 31, 2022. These costs include equipment rental, delivery, fuel, repairs and maintenance, direct wages and benefits, depreciation, utilities and outside contractors. Included are the costs for the estimate of the clean-up of certain waste as ordered by the MECP which decreased significantly from the prior period. In addition, with ceasing the garbage collection operation, the Company no longer requires the use of outside contractors.
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Operating expenses reduced by $274,462 from $1,305,913 in the three-month period ended March 31, 2022 to $1,031,351 in the three-month period ended March 31, 2023, explained further below.
Management compensation related to stock-based compensation reduced by $2,513, in the three-month period ended March 31, 2023 compared to the three-month period ended March 31, 2022, as a result of the new common stock issued to the officers as stipulated in their executive consulting contracts, effective January 1, 2023. The total stock-based compensation valued at $446,400 (2022-$240,450), based on the trading price of the shares on the effective date will be expensed over the terms of the executive consulting contracts. And, the management compensation relating to fees reduced by $2,013, from $118,469 in the three-month period ended March 31, 2022 to $116,456 in the three-month period ended March 31, 2023, the result of increased monthly fees, effective January 1, 2023, offset by the foreign exchange impact of the weakening Canadian dollar.
Marketing expenses reduced by $365,537, from $376,488 in the three-month period ended March 31, 2022 to $10,951 for the three-month period ended March 31, 2023, primarily the result of a new marketing campaign which had not yet commenced during the current period.
Professional fees reduced by $144,964, from $261,652 in the three-month period ended March 31, 2022 to $116,688 in the three-month period ended March 31, 2023. The primary reasons for the decrease include the absence of professional fees incurred on the issuance of convertible promissory notes in the current period whereas $75,000 in professional fees was incurred in the prior period. In addition, the Company incurred lower fees from consultants engaged to assist management in various reporting matters.
Interest expense increased by $28,432 from $191,243 in the three-month period ended March 31, 2022 to $219,675 in the three-month period ended March 31, 2023. This increase was primarily due to increases in in the prime rate of interest on the Companies variable debt and additional interest from the new mortgage received March 1, 2023.
Office and administration expenses reduced by $7,687, from $60,577 in the three-month period ended March 31, 2022 to $52,890 in the three-month period ended March 31, 2023, primarily resulting from the translation of expenses originating from a weakening Canadian dollar.
Rent and occupancy decreased nominally by $732, from $50,925 in the three-month period ended March 31, 2022 to $50,193 in the three-month period ended March 31, 2023.,
Insurance decreased by $15,295, from $28,838 in the three-month period ended March 31, 2022 to $13,543 in the three-month period ended March 31, 2023, primarily due to the absence of insurance on the Company's new facility under construction in Hamilton, Ontario, Canada, whose construction has ceased temporarily.
Filing fees decreased by $41,718, from $54,175 in the three-month period ended March 31, 2022 to $12,457 in the three-month period ended March 31, 2023, primarily due to the absence of costs associated with the special meeting of the shareholders on March 24, 2022, administrative costs incurred in the filing of the S-1 registration statement and an increase in investor relations activities.
The amortization of financing costs reduced by $14,708, from $33,532 in the three-month period ended March 31, 2022 to $18,824 in the three-month period ended March 31, 2023, due to certain financing costs in connection with the mortgages payable having been fully amortized by the end of Q3-2022.
Directors' compensation increased nominally by $1,160 from $14,809 in the three-month period ended March 31, 2022 to $15,969 in the three-month period ended March 31, 2023, due to the appointment of a new independent director during the current period.
Stock-based compensation increased by $203,779, from $130,512 in the three-month period ended March 31, 2022 to $334,291 in the three-month period ended March 31, 2023, as a result of significant new consulting services provided by several new service providers.
Repairs and maintenance increased by $17,358, from $2,329 in the three-month period ended March 31, 2022 to $19,687 in the three-month period ended March 31, 2023, due to the cost of repairs to the Company's composting buildings.
The foreign exchange income decreased by $69,876, from income of $77,749 in the three-month period ended March 31, 2022 to income of $7,873 in the three-month period ended March 31, 2023, due primarily to the translation of significant United States dollar denominated transactions and balances during the period including the convertible promissory notes, compared to the prior period, during a period of a strengthening Canadian dollar.
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During the current three-month period ended March 31, 2023, the Company recorded a gain on the revaluation of the convertible promissory notes in the amount of $33,326 compared to loss of $1,296,148 in the prior period ended March 31, 2022 due primarily no new convertible promissory notes issued during the current period versus $1,425,000 in the prior period and a loss on the conversion of a convertible promissory note of $20,513.
As at March 31, 2023, the Company had a working capital deficit of $21,794,263 (December 31, 2022-$21,580,552), incurred a net loss of $1,035,172 (March 31, 2022-$2,863,226) for the three months ended March 31, 2023 and had an accumulated deficit of $31,380,369 (December 31, 2022-$30,345,197) and expects to incur further losses in the development of its business.
These factors cast substantial doubt as to the Company's ability to continue as a going concern, which is dependent upon its ability to obtain the necessary financing to further the development of its business satisfy its outstanding obligations to its creditors and upon achieving profitable operations. There is no assurance of funding being available or available on acceptable terms. Realization values may be substantially different from carrying values as shown.
Beginning in March 2020 the Governments of Canada and Ontario, as well as foreign governments instituted emergency measures as a result of COVID-19. The virus has had a major impact on Canadian and international securities and currency markets and consumer activity which may impact the Company's financial position, its results of operations and its cash flows significantly. The situation is constantly evolving, however, so the extent to which the COVID-19 outbreak will impact businesses and the economy is highly uncertain and cannot be predicted. Accordingly, the Company cannot predict the extent to which its financial position, results of operations and cash flows will be affected in the future.
The interim condensed consolidated financial statements do not include any adjustments to reflect the future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result if the Company was unable to continue as a going concern.
CRITICAL ACCOUNTING ESTIMATES
Use of estimates
The preparation of the Company's consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are based on management's best knowledge of current events and actions the Company may undertake in the future. The Company regularly evaluates estimates and assumptions. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgements about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. Areas involving significant estimates and assumptions include: the allowance for doubtful accounts, inventory valuation, useful lives of long-lived and intangible assets, impairment of long-lived assets and intangible assets, valuation of asset acquisition, accruals, fair value of convertible promissory notes, deferred income tax assets and related valuation allowance, environmental remediation costs, stock-based compensation and going concern. Actual results could differ from these estimates. These estimates are reviewed periodically and as adjustments become necessary, they are reported in earnings in the period in which they become available.
Stock-based compensation
The Company records compensation costs related to stock-based awards in accordance with ASC 718, Compensation-Stock Compensation, whereby the Company measures stock-based compensation cost at the grant date based on the estimated fair value of the award. Compensation cost is recognized on a straight-line basis over the requisite service period of the award. Where necessary, the Company utilizes the Black-Scholes option-pricing model to estimate the fair value of stock options granted, which requires the input of highly subjective assumptions including: the expected option life, the risk-free rate, the dividend yield, the volatility of the Company's stock price and an assumption for employee forfeitures. The risk-free rate is based on the U.S. Treasury bill rate at the date of the grant with maturity dates approximately equal to the expected term of the option. The Company has not historically issued any dividends and does not expect to in the near future. Changes in any of these subjective input assumptions can materially affect the fair value estimates and the resulting stock- based compensation recognized. The Company has not issued any stock options and has no stock options outstanding at March 31, 2023.
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Indefinite Asset Impairments
The Company evaluates the intangible assets for impairment annually in the fourth quarter or when triggering events are identified and whether events and circumstances continue to support the indefinite useful life using Level 3 inputs.
Long-Lived Asset Impairments
In accordance with ASC 360, "Property, Plant and Equipment", long-lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable.
The Company evaluates at each balance sheet date whether events or circumstances have occurred that indicate possible impairment. If there are indications of impairment, the Company uses future undiscounted cash flows of the related asset or asset grouping over the remaining life in measuring whether the carrying amounts are recoverable. In the event that such cash flows are not expected to be sufficient to recover the recorded asset values, the assets are written down to their estimated fair value.
Convertible Promissory Notes
The Company has elected the fair value option to account for its convertible promissory notes issued after December 31, 2020. In accordance with ASC 825, the convertible promissory notes are marked-to-market at each reporting date with changes in fair value recorded as a component of other income (expense), in the interim condensed consolidated statements of operations and comprehensive loss. The Company has elected to include interest expense in the changes in fair value. Transaction costs are incurred as expensed. The Company did not elect the fair value option for the convertible promissory notes issued in 2019. These notes are measured at amortized cost.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
The following section provides a description of new accounting pronouncements ("Accounting Standard Update" or "ASU") issued by the Financial Accounting Standards Board ("FASB") that are applicable to the Company.
In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures ("ASU 2022-02"), which requires enhanced disclosure of certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty while eliminating certain current recognition and measurement accounting guidance. This ASU also requires the disclosure of current-period gross write-offs by year of origination for financing receivables and net investments in leases. ASU No. 2022-02 became effective for the Company's annual and interim periods beginning on January 1, 2023. As a result, the adoption of ASU 2022-02 did not have any impact on the opening balances in the interim condensed consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments ("ASU-2016-13"). ASU 2016-13 affects loans, debt securities, trade receivables, and any other financial assets that have the contractual right to receive cash. The ASU requires an entity to recognize expected credit losses rather than incurred losses for financial assets. ASU 2016-13 is effective for the fiscal year beginning after December 15, 2022, including interim periods within that fiscal year. The Company adopted this ASU on January1, 2023. As a result, the adoption of ASU 2016-13 did not have any impact on the opening balances in the interim condensed consolidated financial statements.
EQUITY
As at March 31, 2023, the Company had 118,618,245 common shares issued and outstanding. As at May 15, 2023, the Company had 120,479,780 common shares issued and outstanding.
STOCK OPTIONS, WARRANTS AND RESTRICTED STOCK UNITS
The Company has no stock options, warrants or restricted stock units outstanding as at March 31, 2023 and as of the date of this filing.
RELATED PARTY TRANSACTIONS
For three-month period ended March 31, 2022, the Company incurred $88,728 (C$120,000) (2022-$94,776; C$120,000), in management fees expense with Travellers International Inc. ("Travellers"), an Ontario company controlled by a director and the president and chief executive officer (the "CEO"); and $27,728 (C$37,500) (2022-$23,693; C$30,000) in management fees expense with the Company's chief financial officer (the "CFO"). As at March 31, 2023, unpaid remuneration and unpaid expenses in the amount of $252,983 (C$342,377) (December 31, 2022-$161,790; C$219,138) is included in accounts payable and $50,933 (C$69,012) (December 31, 2022-$22,705; C$30,753) is included in accrued liabilities in the interim condensed consolidated balance sheets.
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For the three-month period ended March 31, 2023, the Company incurred $24,334 (C$32,911) (2022-$23,506; C$29,762) in rent expense paid under a lease agreement with Haute Inc. ("Haute"), an Ontario company controlled by the CEO.
In addition, during the three-month period ended March 31, 2023, the Company paid the CFO interest of $nil (C$nil) (2022-$504; C$638) on loans totaling $nil (C$nil) (2022-$29,211 (C$36,000) provided to the Company and repaid during the prior period.
For the independent directors, the Company recorded directors' compensation during the three months ended March 31, 2023 of $15,969 (C$21,597) (2022-$14,809; C$18,750). In addition, on February 18, 2023 a new independent director was appointed and he was awarded 100,000 common shares of the Company on March 1, 2023 valued at $21,000 based on the closing trading price on the appointed date and included under stock-based compensation in the interim condensed consolidated statements of operations and comprehensive loss. As at March 31, 2023, outstanding directors' compensation of $137,282 (C$185,793) (December 31, 2022-$121,226; C$164,196) is included in accrued liabilities, in the interim condensed consolidated balance sheets.
Pursuant to the terms of the CEO's Consulting Agreement, for his services as the CEO, the compensation is at a rate of $29,576 (C$40,000) per month for twelve (12) months, beginning on the Effective Date, January 1, 2023, and at a rate of $36,970 (C$50,000) per month for twelve (12) months, beginning January 1, 2024. In addition, the Company agreed to grant the CEO 3,000,000 restricted shares of the Company's Common Stock, par value of $0.0001 per share (the "Common Stock") on the Effective Date. The Company has also agreed to reimburse the CEO for certain out-of-pocket expenses incurred by the CEO.
Pursuant to the terms of the CFO's Consulting Agreement for his services as the CFO, the compensation is at a rate of $9,243 (C$12,500) per month for twelve (12) months, beginning on the Effective Date, January 1, 2023. In addition, the Company agreed to grant the CFO 100,000 restricted shares of the Company's Common Stock, par value of $0.0001 per share (the "Common Stock") on the Effective Date. The Company has also agreed to reimburse the CFO for certain out-of-pocket expenses incurred by the CFO.
Furthermore, for the three-month period ended March 31, 2023, the Company recognized management stock-based compensation expense of $57,600 (2022-$60,113), on the common stock issued to the CEO and the CFO, 3,000,000 and 100,000 common stock, respectively, as stipulated in their executive consulting agreements, effective January 1, 2023 valued at the trading price on the Effective Date. The total stock-based compensation on the issuance of the common stock totaled $446,400 (2022-$240,450). The portion to be expensed for the balance of the consulting agreements, $388,800 (2022-$180,337) is included in prepaid expenses and deposits in the interim condensed consolidated balance sheets.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors.