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, 2023 filed with the Securities and Exchange Commission on May 15, 2024.
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, 2024 compared with the three-month period ended March 31, 2023 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, 2023 AND 2022. 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 optimize 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 follow 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 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).
RECENT BUSINESS DEVELOPMENTS
As noted below, the Company's composting facility, near Belleville, Ontario, Canada (the "Belleville Facility"), ceased accepting waste after January 10, 2024 and continues to seek funding or re-financing to remediate the compliance matters in an effort to begin accepting waste again before the end of the current year.
On May 16, 2024, the Company was informed by its Canadian legal counsel that the City of Belleville, Ontario, Canada (the "City"), issued an order against the Company's Belleville Facility, its numbered company, 1684567 and its officers for the repayment of the cost of pumping out contaminated water from the City's roadside ditch, along with legal and other associated costs. On May 31, 2024, the companies and the officers filed notices of appeal to the Ontario Land Tribunal.
On or around November 27, 2023 and March 6, 2024, the Company experienced an outflow of contaminated water from its stormwater pond at its Belleville Facility, which spilled over into the City of Belleville's roadside ditch and has continued to periodically overflow. The Company is working with its environmental consultants and its Canadian legal counsel to assess the damage caused, remediate this occurrence and report regularly to the Ministry of the Environment, Conservation and Parks from the Province of Ontario (the "MECP").
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As a result of an order issued by the Ministry of Labour, Immigration, Training and Skills Development, specifically relating to high ammonia levels in one of the Company's composting buildings, the Company ceased accepting waste after January 10, 2024, to address this and other compliance matters issued by the MECP. The Company also received orders from the MECP to address repairs, the clean-up of unusable waste on site, re-habilitating its stormwater management system and other matters. Management anticipates these matters will take several months to complete, will require significant investment, and are dependent on the Company securing funding. We believe that our operating property, vehicle and equipment had been adequately maintained but will require significant investment to carry out repairs and improvements as ordered by the MECP. This will also include replacement of certain equipment at the Company's Belleville Facility.
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 was at a rate of $29,520 (C$40,000) per month for twelve (12) months, beginning on the Effective Date, and at a rate of $36,900 (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 $9,225 (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.
Financings
(a) Securities Purchase Agreements
At March 31, 2024, the Company had and currently has 5 security purchase agreements outstanding with 4 investors which are currently in default. The outstanding principal balance at March 31, 2024 of the convertible promissory notes was $7,728,440, including accrued interest of $1,518,280 and with a fair value of $10,653,510.
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) Mortgages
(i) On December 1, 2023, this 1st mortgage was renewed with a new maturity date of June 1, 2024 and a fixed interest rate of 13% per annum. On renewal, the 1st mortgage was increased by $307,215 (C$416,280), from $3,837,600 (C$5,200,000) to $4,144,815 (C$5,616,280), to account for increased interest based on the previous variable rate, three months of prepaid interest and a financing fee. The 1st mortgage is secured by the shares held of 1684567, a 1st mortgage on the premises located at the Belleville Facility and a general assignment of rents. Financing fees on the 1st mortgage totaled $344,342 (C$455,419). As at March 31, 2024 $134,337 (C$182,029) (December 31, 2023-$44,555; C$58,928) of accrued interest is included in accrued liabilities in the interim condensed consolidated balance sheets. In addition, as at March 31, 2024 there is $12,579 (C$17,044) (December 31, 2023-$32,764; C$43,333) of unamortized financing fees included in long-term debt in the interim condensed consolidated balance sheets.
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(ii) On March 1, 2023, the Company obtained a 2nd mortgage in the amount of $1,107,000 (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 paragraph (a)(i) above. The Company incurred financing fees of $44,280 (C$60,000). As at March 31, 2024 $10,919 (C$14,795) (December 31, 2023-$11,187; C$14,795) of accrued interest is included in accrued liabilities in the interim condensed consolidated balance sheets. In addition, as at March 31, 2024, there is $nil (C$nil) (December 31, 2023-$7,457 (C$9,863) of unamortized financing fees included in long-term debt in the interim condensed consolidated balance sheets.
(iii) On November 2, 2023, the Company completed the purchase of additional land, consisting of a 2.03-acre site in Hamilton, Ontario, Canada for $2,287,800 (C$3,100,000), prior to an additional disbursement of $43,155 (C$58,475) representing land transfer tax. The Company obtained vendor take-back mortgage in the amount of $1,476,000 (C$2,000,000) bearing interest at 7% annually, payable monthly, interest only and maturing November 2, 2025. An additional mortgage, as noted below under paragraph iv), was arranged to complete the purchase. As at March 31, 2024 $8,209 (C$11,123) in accrued interest is included in accrued liabilities in the interim condensed consolidated balance sheets.
(iv) In connection with the purchase of additional land noted above under paragraph (a) iii) above, a 2nd mortgage was obtained in the amount of $774,900 (C$1,050,000) bearing interest at 13% annually, payable monthly interest only and secured by a 3rd mortgage on the property in Belleville, Ontario, Canada.
(v) On December 14, 2023, the Company made arrangements to repay the previous 1st mortgage on the first property purchased in Hamilton, Ontario, Canada on August 17, 2021, for a new 1st mortgage in the amount of $1,648,174 ($C2,233,298) with new creditors. The original 1st mortgage was a vendor take back mortgage.
For the year three-month period ended March 31, 2024 $262,113 (C$353,537) (2023-$114,457; C$154,797) in interest was incurred on the mortgages payable.
(c) Other Financings
(i) 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.
These CEBA loans were repaid on January 9, 2024 and January 11, 2024, in total $51,660 (C$70,000) and $22,140 (C$30,000) was forgiven as outlined in the CEBA term loan agreements. The forgiven amount is recorded under other expenses (income) in the interim condensed consolidated statements of operations and comprehensive loss.
(ii) On April 8, 2021, the Company took delivery of a truck and hauling trailer for a total purchase price of $161,133 (C$218,338) plus applicable harmonized sales taxes. The purchase was financed by a bank term loan of $147,600 (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 $3,617 (C$4,901) due April 7, 2025.
For the three-month period ended March 31, 2024, $587 (C$792) (2023- $781; C$1,057) in interest was incurred.
(iii) On April 2, 2024, the Company received funds in the amount of $144,669 (C$196,028), on a 4th mortgage for the Belleville Facility and a 3rd mortgage on the additional land Hamilton, Ontario, Canada in the amount of $238,954 (C$323,786) net of unpaid interest, a financing fee and six months of capitalized interest, on the Company's Belleville Facility. A further sum of $24,354 (C$33,000) was advanced on May 27, 2024 and May 29, 2024 and added to the principal amount of this mortgage. On May 30, 2024, an additional amount was negotiated and this mortgage increased by a further $31,892 (C$43,214). This amended mortgage will now have a principal balance of $295,200 (C$400,000).
(iv) On April 15, 2024, the Company received proceeds of $100,500, net of an original issue discount of 10% and disbursements on a new convertible promissory note in the principal amount of $120,000. And, on May 31, 2024, the Company received a further $10,000 from this convertible promissory note investor. And, on May 23, 2024, the investor amended the convertible promissory note by increasing the principal by $12,223, resulting in proceeds to the Company of $10,000, net of an original issue discount of 10% and disbursements of $1,000.
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(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, 2024.The original terms of the obligations under capital lease outstanding at March 31, 2024 is noted below.
(i) The lease agreement for certain equipment for the Company's organic waste processing and composting facility at a cost of $287,562 (C$389,650), is payable in monthly blended installments of principal and interest of $5,057 (C$6,852), plus applicable harmonized sales taxes for a period of fifty-nine months plus an initial deposit of $14,354 (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.
For the three-month period ended March 31, 2024, $558 (C$752) (2023-$1,052; C$1,423) 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 Belleville 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 asset purchase agreement (the"APA"). The Company charges tipping fees for the waste accepted at the Belleville 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, 2024, tipping fees ranged from $51 (C$69) to $118 (C$159) per MT.
The Company owns a 41,535 square foot facility (approximately 27% complete) on 5.29 acres in Hamilton, Ontario (the "Hamilton Facility"), which includes the additional land purchased November 2, 2023 and 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 Hamilton Facility has been designed to produce, distribute and warehouse the Company's SusGro™ organic liquid fertilizer and other products that are anticipated 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, 2024, the Company had a bank balance of $222 (December 31, 2023-$1,263) and current debt obligations and other current liabilities in the amount of $31,273,370 (December 31, 2023-$30,823,963). As at March 31, 2024, the Company had a working capital deficit of $31,002,937 (December 31, 2023-$30,390,423). The Company does not currently have sufficient funds to satisfy the current debt obligations.
The Company's total assets as at March 31, 2024 were $11,242,878 (December 31, 2023-$11,755,903) and total current liabilities were $31,273,370 (December 31, 2023-$30,823,963). Significant losses from operations have been incurred since inception and there is an accumulated deficit of $40,096,275 as at March 31, 2024 (December 31, 2023 -$38,570,531). 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.
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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 $31,273,370 in current debt obligations and other current liabilities, the Company estimates that approximately $15,000,000 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.
As at March 31, 2024, the current and long-term portions of our debt obligations totaled $20,558,527 (December 31, 2023-$20,447,318). As a result of default and cross defaults, the long-term debt is presented as current debt, even where due beyond twelve months of the balance sheet date.
In addition, up until September 30, 2023, PACE had provided the Company a letter of credit in favor of the MECP in the amount of $204,301 (C$276,831) and, as security, has registered a charge of lease over the Belleville Facility.
The current letter of credit required by the MEC is $470,576 (C$637,637) and now $108,107 (C$146,487), while the Company re-assesses and re-submits it financial assurance to the MECP with the assistance of its environmental consultant. The Company has not yet satisfied this requirement 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 has engaged an environmental consulting firm to re-evaluate the financial assurance with the MECP which is based on the estimated environmental remediation and clean-up costs for its Belleville Facility. As a result of inspections carried out by the MECP during the prior years, some of which have resulted in MECP orders being issued, the Company has accrued estimated and actual costs for corrective measures in orders issued by the MECP $2,102,786 (C$2,849,304) (December 31, 2023-$2,153,214; C$2,847,790).
CONSOLIDATED RESULTS OF OPERATIONS - FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 2024 COMPARED TO THE THREE-MONTH PERIOD ENDED MARCH 31, 2023
| | | For the three-month periods
ended | |
| | | March 31, 2024 | | | March 31, 2023 | |
| | | | | | | |
| Revenue | $ | 38,575 | | $ | 164,687 | |
| | | | | | | |
| Cost of Sales | | | | | | |
| Opening inventory | | - | | | 58,695 | |
| Depreciation | | 78,933 | | | 108,372 | |
| Direct wages and benefits | | 18,102 | | | 40,852 | |
| Equipment rental, delivery, fuel and repairs and maintenance | | 172,870 | | | 21,424 | |
| Utilities | | (5,201 | ) | | 12,937 | |
| Outside contractors | | 4,448 | | | - | |
| | | 269,152 | | | 242,280 | |
| Less: closing inventory | | - | | | (60,959 | ) |
| Total cost of sales | | 269,152 | | | 181,321 | |
| | | | | | | |
| Gross (loss) | | (230,577 | ) | | (16,634 | ) |
| | | | | | | |
| Operating expenses | | | | | | |
| Management compensation-stock-based compensation | | 54,000 | | | 57,600 | |
| Management compensation-fees | | 139,013 | | | 116,456 | |
| Marketing | | 501 | | | 10,951 | |
| Professional fees | | 160,387 | | | 116,688 | |
| Interest expense | | 285,316 | | | 219,675 | |
| Office and administration | | 57,122 | | | 52,890 | |
| Rent and occupancy | | 60,330 | | | 50,193 | |
| Insurance | | 14,649 | | | 13,543 | |
| Filing fees | | 11,137 | | | 12,457 | |
| Amortization of financing costs | | 57,516 | | | 18,824 | |
| Directors' compensation | | 18,535 | | | 15,969 | |
| Stock-based compensation | | - | | | 334,291 | |
| Repairs and maintenance | | - | | | 19,687 | |
| Foreign exchange loss (income) | | 325,217 | | | (7,873 | ) |
| Total operating expenses | | 1,183,723 | | | 1,031,351 | |
| | | | | | | |
| Net Loss Before Other (Expense) Income | | (1,414,300 | ) | | (1,047,985 | ) |
| Other (Expense) Income | | (111,444 | ) | | 12,813 | |
| Net Loss | $ | (1,525,744 | ) | $ | (1,035,172 | ) |
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RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2024 AND 2023
As a result of an order issued by the Ministry of Labour, Immigration, Training and Skills Development, specifically relating to high ammonia levels in one of the Company's composting buildings at its Belleville Facility, the Company ceased accepting waste after January 10, 2024, to address this and other compliance matters issued by the MECP. The Company also received orders from the MECP to address repairs, the clean-up of unusable waste on site, re-habilitating its stormwater management system and other matters. Management anticipates these matters will take several months to complete, will require significant investment, and are dependent on the Company securing funding. We believe that our operating property, vehicle and equipment had been adequately maintained but will require significant investment to carry out repairs and improvements as ordered by the MECP. This will also include replacement of certain equipment at the Company's Belleville Facility.
During the three-month period ended March 31, 2024, the Company generated $38,575 of revenue from its Belleville Facility compared to $164,687 in the three-month period ended March 31, 2023. The decrease in revenue is due to the result of not accepting waste after January 10, 2024. The current period's revenue also included revenue from the sale of carbon credits in the amount of $16,468, an increase of $6,239 over the prior year's period.
In the operation of the Belleville Facility, the Company processes organic and other waste received and produces the end product, compost. The cost of producing the compost totaled $269,152 for the three-month period ended March 31, 2024 compared to $181,321 for the three-month period ended March 31, 2023. 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 completing certain known compliance matters as ordered by the MECP.
Operating expenses increased by $152,372 from $1,031,351 in the three-month period ended March 31, 2023 to $1,183,723 in the three-month period ended March 31, 2024, explained further below.
Management compensation related to stock-based compensation reduced by $3,600, in the three-month period ended March 31, 2024 compared to the three-month period ended March 31, 2023. The current stock-based compensation reflects the stock-based compensation issued to the CEO as stipulated in his executive consulting contract, effective January 1, 2023. This will be earned throughout the current year, in the amount of $54,000 per quarter. And the management compensation relating to fees increases $22,557 reflecting the increase in the CEO's compensation for the current year.
Marketing expenses reduced by $10,450, from $10,951 in the three-month period ended March 31, 2023 to $501 for the three-month period ended March 31, 2024, as the Company did not have a marketing campaign during the current period.
Professional fees increased by $43,699, from $116,688 in the three-month period ended March 31, 2023 to $160,387 in the three-month period ended March 31, 2024. The primary reason for the increase is due to additional legal fees incurred in addressing the orders issued by the MECP.
Interest expense increased by $65,641 from $219,675 in the three-month period ended March 31, 2023 to $285,316 in the three-month period ended March 31, 2024. This increase was primarily due to the increase in mortgages in December of 2023, new mortgages on the Hamilton, Ontario, Canada property purchase in November of 2023 and new loans from Haute Inc., in December 2023 and January 2024. These changes along with the new fixed rates on certain mortgages at 12% and 13% annually resulted in the increased interest expense. This was offset by the settlement of the PACE loans in November 2023, resulting in no interest incurred in the current period ending March 31, 204 compared to the interest incurred in the previous period ended March 31, 2023 of $102,842.
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Office and administration expenses increased nominally by $4,322, from $52,890 in the three-month period ended March 31, 2023 to $57,122 in the three-month period ended March 31, 2024.
Rent and occupancy increased by $10,137 from $50,193 in the three-month period ended March 31, 2023 to $60,330 in the three-month period ended March 31, 2024, primarily due to an increase in rent and related expenses of $6,931 for the Company's Toronto, Ontario, Canada office and additional property taxes of $3,206.
Insurance increased nominally by $1,106 from $13,543 in the three-month period ended March 31, 2023 to $14,649 in the three-month period ended March 31, 2024, as the Company continues to accrue for certain coverage which it has not been able to fund currently.
Filing fees decreased nominally by $1,320, from $12,457 in the three-month period ended March 31, 2023 to $11,137 in the three-month period ended March 31, 2024
The amortization of financing costs increased by $38,692, from $18,824 in the three-month period ended March 31, 2023 to $57,516 in the three-month period ended March 31, 2024, due to new financing fees incurred on the new or re-financed mortgages and loan from Haute Inc., in the fourth quarter of 2023 and for the new loan from Haute Inc., in January of 2024.
Directors' compensation increased by $2,566 from $15,969 in the three-month period ended March 31, 2023 to $18,535 in the three-month period ended March 31, 2024, because of the compensation for the four independent directors for the entire quarter versus not a full complement of four independent directors for the entire quarter in the prior year.
There was no stock-based compensation in the three-month period ended March 31, 2024, a reduction of $334,291 from the three-month period ended March 31, 2023.
There were no repairs and maintenance in the three-month period ended March 31, 2024, a reduction of $19,687 from the three-month period ended March 31, 2023.
The foreign exchange income in the three-month period ended March 31, 2023 in the amount of $7,873 reduced to a loss of $325,217 in the three-month period ended March 31, 2024 a change of $333,090, 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 weaking Canadian dollar compared to the United States dollar.
During the current three-month period ended March 31, 2024, the Company recorded a loss on the revaluation of the convertible promissory notes in the amount of $133,686 compared to gain of $33,326 in the three-month period ended March 31, 2023. In addition, during the current three-month period ended March 31, 2024, the Company recognized a gain of $22,242 on the forgiveness of a portion of the CEBA loans on repayment in January of 2024. And, in the prior three-month period ended March 31, 2023 the Company incurred a loss of $20,513, on the conversion of a portion of a convertible promissory note. In total, other (expense) income changed by $124,257 in the current three-month period ended March 31, 2024 compared to the prior three-month period ended March 31, 2023.
As at March 31, 2024, the Company had a working capital deficit of $31,002,937 (December 31, 2023-$30,390,423), incurred a net loss of $1,525,744 (March 31, 2023-$1,035,172) for the three months ended March 31, 2024 and had an accumulated deficit of $40,096,275 (December 31, 2023-$38,570,531) 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.
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.
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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, 2024.
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.
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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.
EQUITY
As at March 31, 2024, the Company had 125,332,019 common shares issued and outstanding. As at the date of this filing, the Company had 125,332,019 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, 2024 and as of the date of this filing.
RELATED PARTY TRANSACTIONS
For the three-month period ended March 31, 2024, the Company incurred $111,210 (C$150,000) (2023-$88,728; 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 $27,803 (C$37,500) (2023-$27,728; C$37,500) in management fees expense with the Company's chief financial officer (the "CFO"). As at March 31, 2024, unpaid remuneration and unpaid expenses in the amount of $128,796 (C$174,520) (December 31, 2023-$171,733; C$227,130) is included in accounts payable and $163,865 (C$222,039) (December 31, 2023-$138,963; C$183,789) is included in accrued liabilities in the interim condensed consolidated balance sheets.
For the three-month period ended March 31, 2024, the Company incurred $31,266 (C$42,172) (2023-$24,334; C$32,911) in rent expense paid under a lease agreement with Haute Inc. ("Haute"), an Ontario company controlled by the CEO. The lease agreement had expired and the Company is currently on a month-to-month arrangement.
In addition, on January 11, 2024, Travellers converted $101,130 (C$135,600) of accounts payable into 809,044 common shares of the Company at the closing trading price immediately prior to the conversion.
For the independent directors, the Company recorded directors' compensation during the three months ended March 31, 2024 of $18,535 (C$25,000) (2023-$15,969; C$21,597). In addition, in the prior year, 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, 2024, outstanding directors' compensation of $210,915 (C$285,793) (December 31, 2023-$197,186; C$260,793) 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. The CFO currently provides his services on a month-to-month basis.
Furthermore, for the three-month period ended March 31, 2024, the Company recognized management stock-based compensation expense of $54,000 (2023-$57,600), 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 $nil (2023-$446,400). The portion to be expensed for the balance of the consulting agreements, $162,000 (2023-$216,000) is included in prepaid expenses and deposits in the interim condensed consolidated balance sheets.
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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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
As a smaller reporting company, as that term is defined in Item 10(f)(1) of Regulation S-K, we are not required to provide the information required by this Item.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our CEO and CFO, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act") as of the end of the period covered by this Quarterly Report on Form 10-Q.
Our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met. Due to inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. Based on our evaluation, our CEO and CFO have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were not effective. The matters involving internal controls over financial reporting that may be considered material weaknesses included the small size of the Company and the resulting lack of a segregation of duties.
Notwithstanding these material weaknesses, management has concluded that the unaudited interim condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q present fairly, in all material respects, the financial position, results of operations and cash flows in conformity with generally accepted accounting principles.
Changes in Internal Control over Financial Reporting
During the three-month period ended March 31, 2024, there were no changes made by management to its internal controls over financial reporting.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, the Company may become involved in litigation relating to claims arising from the ordinary course of business. Management believes that there are currently no claims or actions pending against us, the ultimate disposition of which would have a material adverse effect on our results of operations, financial condition or cash flows, except as follows:
The Company has a claim against it for unpaid legal fees in the amount of $48,206 (C$65,241). The amount is included in accounts payable on the Company's interim condensed consolidated balance sheets.
On October 4, 2023, an action was launched by one of the October 2021 Investors, who claimed he was owed $1,300,000 plus accrued interest. The principal balance in the accounts and noted under convertible promissory notes, note 11(a) is $1,722,911 (December 31, 2023-$1,645,337), which is after conversions of $318,100 during 2022 and 2023 and includes accrued interest of $422,911 (December 31, 2023-$345,337). The Company has disclosed the fair value of this convertible promissory note as $2,495,508 (December 31, 2023-$2,404,558). The Company intends to repay the balance owed when it is financially able to do so.
On November 27, 2023 and March 6, 2024, the Company experienced an outflow of leachate impacted water from its stormwater pond into the City of Belleville's roadside ditch. The Company is working with its environmental consultants and its Canadian legal counsel to assess the damage caused, remediate this occurrence and report regularly to the MECP.
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The Company has a claim against it for unpaid hydro bills in the amount of $369,223 (C$500,302). The amount is included in accounts payable on the Company's interim condensed consolidated balance sheets.
In addition, on November 17, 2023, the Company received an amended claim filed against it from 2023 by Tradigital in the sum of $219,834 in owed fees plus the difference in stock price, 300,000 common shares of the Company, plus attorney fees and expenses. The case went to arbitration on March 11, 2024 and the Company defended its position. On April 4, 2024, the International Centre for Dispute Resolution indicated that no additional evidence is to be submitted and the hearings were declared closed as of April 29, 2024.The tribunal will endeavor to render the final decision within the timeframe provided for in the rules. Management agrees that outstanding fees, which are included in accounts payable in the interim condensed consolidated balance sheets, are only in the amount of $30,000, which was agreed to by the parties in earlier communications and through various e-mail correspondence. In addition, the management has no issue with the outstanding common shares to be provided to the claimant totaling 300,000. Management believes that the additional claim amount of $189,834 is without merit. Of the total of 300,000 common shares, 50,000 have been issued and the remaining 250,000 were previously disclosed as shares to be issued in the consolidated statements of stockholders' deficiency. On April 26, 2024, the arbitrator for this claim awarded Tradigital the sum of $118,170 which has been accrued by the Company as at December 31, 2023 and March 31, 2024 and the remaining 250,000 common shares were not required to be issued by the Company.
On April 1, 2024, the Company received notice of a complaint filed against it by one of the March 2022 Investors, seeking damages of no less than $4,545,393. The Company had thirty calendar days to respond and on April 30, 2024, the Company was able to extend the time to respond with opposing counsel, a further fifteen days. The Company has been unable to retain counsel to represent it in this matter. The full amount of the complaint has been included in the accounts. On May 21, 2024, the counsel for the plaintiff requested an entry for a default judgement against the Company.
Item 1A. Risk Factors.
As a smaller reporting company, we are not required to provide the information required by this item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the three-month period ended March 31, 2024, the Company issued for non-cash proceeds:
(i) 809,044 common shares were issued on the conversion of related party debt.
The securities above were offered and sold pursuant to an exemption from the registration requirements under Section 4(a)(2) of the Securities Act since, among other things, the transactions did not involve a public offering.
Item 3. Defaults upon Senior Securities.
Refer to Financings (a) Securities Purchase Agreements page 29.
Item 4. Mine Safety Disclosures.
Not Applicable.
Item 5. Other Information.
Not Applicable.
Item 6. Exhibits.
The following exhibits are filed as part of this quarterly report on Form 10-Q:
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| Exhibit No. | Description |
| | |
| 4.1* | First amendment, dated May 23, 2024, to convertible promissory note by and between SusGlobal Energy Corp., and AJB Capital Investments LLC, on April 12, 2024. |
| 31.1* | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2* | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32.1+ | Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (Section 906 of Sarbanes-Oxley Act of 2002). |
| 101.INS* | Inline XBRL Instance Document-the instance document does not appear in the Interactive Data File as its XBRL tags are embedded within the Inline XBRL document |
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document |
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
| * | Filed herewith |
| ** | Management contract or compensatory plan or arrangement |
| + | In accordance with SEC Release 33-8238, Exhibit 32.1 is being furnished and not filed. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | SUSGLOBAL ENERGY CORP. |
| | | |
| June 7, 2024 | By: | /s/ Marc Hazout |
| | | Marc Hazout |
| | | Executive Chairman, President and Chief Executive Officer |
| | | |
| | | |
| June 7, 2024 | By: | /s/ Ike Makrimichalos |
| | | Ike Makrimichalos |
| | | Chief Financial Officer (Principal Financial and Accounting Officer) |
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