General
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.
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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.
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).
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RECENT BUSINESS DEVELOPMENTS
On March 28, 2023, the Company and PACE finalized a full and final mutual release of all the obligations owing to PACE, including accrued interest, in exchange for an amount of $922,875 (C$1,250,000). The funds are being 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 $204,384 (C$276,831), is released by the Ministry of the Environment, Conservation and Parks (the "MECP") to PACE. On December 31, 2022, prior to this full and final mutual release, the obligations owing to PACE, included under long-term debt in the consolidated balance sheets, totaled $3,446,586 (C$4,668,273). The Company raised the funds by securing a 2nd mortgage in the amount of $1,107,450 (C$1,500,000) prior to disbursements of $184,575 (C$250,000), on its Belleville, Ontario Canada property.
On September 21, 2022, the Company announced that its wholly owned subsidiary SusGlobal Energy Belleville Ltd. ("SusGlobal Belleville") has generated its first Verified Emission Reductions and Removals ("VERRs") and sold its first carbon credits as part of the Anew™ SusGlobal Belleville Composting Offset Project in Ontario (the "Project"). The Project generated approximately 105,000 VERRS (generated from 2017 through 2021) with an approximate market value of between CA$5.00 (US$3.65) and CA$10.00 (US$7.30) 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.
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 $29,532 (C$40,000) per month for twelve (12) months, beginning on the Effective Date, and at a rate of $36,915 (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 $9,229 (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
On December 31, 2022, the Company had and currently has 5 security purchase agreements outstanding with 4 investors. The outstanding principal balance at December 31, 2022 of the convertible promissory notes was $5,825,260 with a fair value of $7,796,433. At the time of this filing, the outstanding principal balance was $5,632,160 after 4 conversions on one of the investor notes, in total $193,100 for 1,424,465 common shares of the Company, subsequent to December 31, 2022.
Please refer to the consolidated financial statements, convertible promissory notes, note 12 and fair value measurement, note 13 for details on the convertible promissory notes.
(b) PACE
On February 18, 2021, PACE Savings and Credit Union Limited ("PACE") and the Company reached a new agreement to repay all amounts owing to PACE on or before July 30, 2021. Management was not able to meet the July 30, 2021 deadline. On August 13, 2021, PACE agreed to allow the Company until August 31, 2021 to bring the arrears current and continue to September 2022, the original maturity date. Management was not able to meet the August 31, 2021 deadline. On November 15, 2021, the Company paid all arrears to PACE and PACE agreed to allow the Company to continue payments to the end of the terms of each obligation, September 2022. Similarly, the Company paid all arrears to PACE on March 15, 2022 and PACE allowed the Company to continue payments to the end of the terms of each obligation, September 2022. Management continues discussions with equity investors to repay its other creditors and is in discussions with PACE to settle its overdue obligations. See above, under Recent Developments for details of a full and final mutual release of all obligations to PACE, including accrued interest, for a final payment of $922,875 (C$1,250,000).
Details of each of the remaining credit facilities and corporate term loan are as follows:
| (i) | The credit facility bears interest at the PACE base rate of 11.00% plus 1.25% per annum, currently 12.25%, is payable in monthly blended installments of principal and interest of $6,470 (C$8,764) and matured on September 2, 2022. The first and only advance on this credit facility received on February 2, 2017, in the amount of $1,181,280 (C$1,600,000), is secured by a business loan general security agreement, a $1,181,280 (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. 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. |
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| (ii) | The credit facility advanced on June 15, 2017, in the amount of $442,980 (C$600,000), bears interest at the PACE base of 11.00% plus 1.25% per annum, currently 12.25%, is payable in monthly blended installments of principal and interest of $3,618 (C$4,901), and matured 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. |
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| (iii) | The corporate term loan advanced on September 13, 2017, in the amount of $2,749,538 (C$3,724,147), bears interest at the PACE base rate of 11.00% plus 1.25% per annum, currently 12.25%, is payable in monthly blended installments of principal and interest of $21,936 (C$29,711), and matured 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 $2,953,922 (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 (the "APA").
For the year ended December 31, 2022, $357,038 (C$464,168) (2021-$318,714; C$399,391), in interest was incurred on the PACE long-term debt. As at December 31, 2022, $288,407 (C$390,636) (2021-$43,233; C$54,808) in accrued interest is included in accrued liabilities in the consolidated balance sheets. |
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(c) First Mortgages
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 $3,839,160 (C$5,200,000) (December 31, 2021-$4,101,760; C$5,200,000). The fourth tranche was received on August 13, 2021 in the amount of $1,402,277 (C$1,900,000) and a portion of this fourth tranche, $1,368,759 (C$1,853,933), was used to fund a portion of the purchase of the Hamilton Property. 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 private lenders continue to charge 12.5% 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. Financing fees on the 1st mortgage totaled $374,627 (C$507,419). As at December 31, 2022 $31,555 (C$42,740) (December 31, 2021-$33,713; C$42,740) of accrued interest is included in accrued liabilities in the consolidated balance sheets. In addition, as at December 31, 2022 there is $56,409 (C$76,404) (December 31, 2021-$90,794; C$115,104) 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 $1,476,600 (C$2,000,000), on the purchase of the Hamilton Property. This 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.
For the year ended December 31, 2022, $430,772 (C$560,026) (2021-$319,062; C$399,827) in interest was incurred on the 1st mortgages payable.
(d) Canada Emergency Business Account (the "CEBA")
As a result of the COVID-19 virus, the Government of Canada launched 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.
On April 27, 2020, the Company received a total of $59,064 (C$80,000) and on December 17, 2020 a further $14,766 (C$20,000) 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 amounts are due on December 31, 2022 and are 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% ($24,610; 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.
(e) Financings Related to Obligations Under Capital Lease
The Company entered into three obligations under capital lease relating to machinery and equipment at their waste management and organic composting facility. The first lease, (i) below, was fully repaid in November 2021.
| (i) | The lease agreement for certain equipment for the Company's organic waste processing and composting facility at a cost of $211,634 (C$286,650), was payable in monthly blended installments of principal and interest of $4,312 (C$5,840), plus applicable harmonized sales taxes and an option to purchase the equipment for a final payment of $21,115 (C$28,600), plus applicable harmonized sales taxes on October 31, 2021. The lease agreement bore interest at the rate of 5.982% annually, compounded monthly and was due September 30, 2021. The final payment was made on November 5, 2021. |
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| (ii) | The lease agreement for certain equipment for the Company's organic composting facility at a cost of $182,692 (C$247,450), was payable in monthly blended installments of principal and interest of $3,779 (C$5,118), plus applicable harmonized sales taxes for a period of forty-six months plus the first two monthly blended installments of $7,383 (C$10,000) plus applicable harmonized sales taxes and an option to purchase the equipment for a final payment of $ 18,221 (C$24,680) plus applicable harmonized sales taxes on February 27, 2022. The leasing agreement bore interest at the rate of 6.15% annually, compounded monthly and was due January 27, 2022. The final payment was made on June 7, 2022. |
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| (iii) | The lease agreement for certain equipment for the Company's organic waste processing and composting facility at a cost of $287,679 (C$389,650), is payable in monthly blended installments of principal and interest of $5,059 (C$6,852), plus applicable harmonized sales taxes for a period of fifty-nine months plus an initial deposit of $14,360 (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 January 27, 2025. |
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| | For the year ended December 31, 2022, $4,762 (C$6,191) (2021-$13,426; C$16,825) in interest was incurred. |
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(f) Other
On April 8, 2021, the Company took delivery of a truck and hauling trailer for a total purchase price of $161,199 (C$218,338) plus applicable harmonized sales taxes. The purchase was financed by a bank term loan of $147,660 (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 $3,618 (C$4,901) due April 7, 2025.
For the year ended December 31, 2022, $5,500 (C$7,150) (2021-$5,355; C$6,711) in interest was incurred.
During the year ended December 31, 2022, the Company raised $907,760 (2021-$292,866 net of share issue cost of $10,620), in a private placement on the issuance of 4,444,041 (2021-1,195,348) common shares of the Company.
During the year ended December 31, 2022, the director's company, Travellers, converted a total of $nil (C$nil) (2021- $371,001; C$461,620) of loans provided during the year and $33,371 (C$45,200) (2021-$80,323; C$101,700) of accounts payable owing to Travellers for 193,778 (2021-1,726,076) common shares. For the year ended December 31, 2022, $nil (C$nil) (2021-$264; C$331) of interest was incurred on loans from the CFO which were repaid during the year.
Treatment of Organic Waste and Septage
On February 28, 2019, the Company announced that it had received the project completion report titled: Development Optimization and Validation of an Innovative Integrated Anaerobic Thermophilic Digester Treatment of Organic Waste and Septage. The report was written by a research team at Fleming College's Centre for Advancement of Water and Wastewater Technologies, located in Lindsay, Ontario, Canada. The collaborative project was supported by the Advancing Water Technologies Program (the "AWT Program") of Southern Ontario Water Consortium. The project focused on the development of a new and innovative technology for handling and processing organic residuals. This new technology utilizes the anaerobic mesophilic digestion process coupled with thermophilic digestion to maximize biogas yields and produce organic fertilizer through optimal operations.
The Company signed an Offset Development and Marketing Agreement (the "Agreement") with Blue Source Canada ULC ("Bluesource") to develop and market greenhouse gas offset credits from the Company's 49-acre Organic & Non-Hazardous Waste Processing & Composting Facility in Belleville, Ontario, in order for the Company to monetize and realize benefits from its voluntary activities.
On September 21, 2022, the Company announced that its wholly owned subsidiary SusGlobal Energy Belleville Ltd. ("SusGlobal Belleville") has generated its first Verified Emission Reductions and Removals ("VERRs") and sold its first carbon credits as part of the Anew™ SusGlobal Belleville Composting Offset Project in Ontario (the "Project"). The Project generated approximately 105,000 VERRS (generated from 2017 through 2021) with an approximate market value of between $3.70 (C$5.00) and $7.38 (C$10.00) 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.
The Company has begun providing details to Anew Canada to generate additional VERRs for 2022.
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.
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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 year ended December 31, 2022, tipping fees ranged from $53 (C$69) to $122 (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.
Market Opportunity
Industry Overview
Sustainable solutions to processing organic waste streams and diverting them from landfills to reduce GHG provides an opportunity for the infrastructure which SusGlobal operates with the ECA's attached to the Company's facilities. As more governments legislate and mandate that no organic wastes are to be landfilled as part of a climate change initiative SusGlobal is able to process these waste streams and produce regenerative products as part of the Company's Circular Economy initiative.
Industry Trends
The organic fertilizer market is expected to grow at a compound annual growth rate. The major drivers for this market are increasing consumption of organic food and products such as cannabis, wine and favorable government rules and regulations. SusGlobal produces a dry organic compost currently and expects to produce an organic liquid pathogen-free fertilizer in its Hamilton Facility to meet the growing demand in this market.
Operating Businesses and Revenue
The Company has five wholly-owned and active subsidiaries: SusGlobal Energy Canada Corp., SusGlobal Energy Canada I Ltd., SusGlobal Energy Belleville Ltd., SusGlobal Energy Hamilton Ltd. and 1684567 Ontario Inc. The Company currently has five full time employees and two independent contractors. Of the five full time employees, three were employed in management and administrative positions, and the balance in operations. The two independent contractors provide services in management positions. None of our employees are covered by collective bargaining agreements.
We operate the following businesses:
| • | Environmental Compliance Approvals: The Company owns the Environmental Compliance Approvals (the "ECAs") issued by the MECP from the Province of Ontario, in place to accept up to 70,000 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 waste processing and composting facility which is currently operating in Belleville, Ontario, Canada. The Company owns the Environmental Compliance Approvals (the "ECAs") issued by the MECP from the Province of Ontario, in place to accept up to 65,884 MT of waste annually from the province of Ontario at the newly acquired facility located in Hamilton, Ontario, Canada. |
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| • | 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. |
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| • | 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 an 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. As noted above, once operations commence, anticipated to be early 2024, in the newly acquired Hamilton Facility (purchased on August 17, 2021) and located in Hamilton, Ontario, Canada, it will have the capacity to process 65,884 MT of waste annually to produce an organic liquid fertilizer. |
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We generate revenue from the following activities:
• Tipping fees paid by municipalities and haulers from green bin programs of SSO and other non-hazardous waste,
• the sale of the regenerative products such as organic dry compost and in the future organic liquid fertilizer at our Hamilton Facility with solution-specific brands sold to consumer markets, agriculture, wine and the cannabis industry; and
• the sale of carbon credits generated by our facilities.
The direct costs of our revenue consist primarily of employee costs, utilities, various equipment and automotive related expenses, landfilling costs and depreciation.
Our Strengths
SusGlobal has the expertise, proprietary processes, technologies, the environmental compliance approvals and permits to operate and process high volumes of organic waste streams to produce proprietary regenerative products and sell in a high demand market.
Our Growth Strategy
SusGlobal owns 2 processing and production properties, one of which is under renovation, as part of a regional model and strategy which the Company expects will be exported to other municipalities in North America and globally. The processing facilities, one of which is under renovation, have production lines, warehouses, research and development and offices. The Company will continue to acquire, develop and monetize proprietary technologies and processes in the waste to regenerative products globally, focusing on implementing a robust intellectual property strategy. The Company will invest in research and development to bring more products to market and increase revenue and cash flow by increasing output, higher production speeds and overall efficiency of all segments of our business.
Sales and Marketing Strategy
The Company contacts major organic waste generators such as municipalities, commercial and industrial organic waste sources and bids for municipal and commercial contracts. The Company is expected to employ a sales team to market its products to the various agriculture, wine and cannabis industries and lawn and garden consumer market for its organic fertilizer products.
Competition
Many of our current and potential competitors are well established and have longer operating histories, significantly greater financial and operational resources, and name recognition than we have. Although some of our competitors have been in business for over 100 years, we believe that with our diverse product line, current and expected, better efficiencies resulting in lower wholesale cost of sales, we have the ability to obtain a large market share and continue to generate sales growth and compete in the industry. The principal competitive factors in all our product markets are technical features, quality, availability, price, customer support, and distribution coverage. The relative importance of each of these factors varies depending on the region. We believe using our expected direct store distribution model nationwide will open significant opportunities for growth.
The markets in which we operate currently and, in the future, can be generally categorized as highly competitive. In order to maximize our competitive advantages, we expect to continue to expand our product portfolio to capitalize on market trends, changes in technology and new product releases.
Intellectual Property
The protection of our intellectual property is an essential aspect of our business. We own our domain names and trademarks relating to our website's design and content, including our brand name and various logos and slogans. We rely upon a combination of trademarks, trade secrets, copyrights, confidentiality procedures, contractual commitments, and other legal rights to establish and protect our intellectual property. We generally enter into confidentiality agreements and invention or work product assignment agreements with our employees and consultants to control access to and clarify ownership of our software, documentation, and other proprietary information.
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As of the date of this filing, we held 4 registered trademarks in the United States. Trademarks include the terms SUSGLOBAL®, CARING FOR EARTH'S JOURNEY®, EARTH'S JOURNEY®, LEADERS IN THE CIRCULAR ECONOMY®. Our SUSGRO trademark application has been opposed by The Scotts Miracle-Gro Company (NYSE: SMG).
Seasonal Trends
Our operating revenues tend to be somewhat higher in summer months, primarily due to waste volumes resulting from higher construction and demolition waste volumes and the availability of leaf and yard waste along with any contracts involving the grinding of leaf and yard waste. In addition, revenue from the sale of organic compost would be higher beginning in late spring and tapering off in the fall.
Employees
As noted above, we currently have five full time employees (five on December 31, 2022), and two independent contractors. Of the five full time employees, three were employed in management and administrative positions, and the balance in operations. The two independent contractors provide services in management positions. None of our employees are covered by collective bargaining agreements.
Financial Assurance and Insurance Obligations
Financial Assurance
Municipal and governmental waste service contracts generally require contracting parties to demonstrate financial responsibility for their obligations under the contract. Financial assurance is also a requirement for (i) obtaining or retaining disposal site or waste transfer station operating permits; and (ii) estimated post-closure and environmental remedial obligations at our operations. We have established financial assurance using letters of credit and/or deposits with the municipalities. The type of assurance used is based on several factors, most importantly: the jurisdiction, contractual requirements, market factors and availability of credit capacity.
As of the date of this filing, a letter of credit in favor of the MECP is supported by our credit facility with PACE and will be in force no later than September 30, 2023. As required by the MECP, on a tri-annual basis, the financial assurance is reviewed and updated. The financial assurance requested by the MECP was updated to $470,767 (C$637,637). The Company will replace the existing letter of credit provided by PACE well in advance of September 30, 2023 and anticipates this to be provided by its Canadian chartered bank.
Insurance
We carry a broad range of insurance coverages, including general liability, automobile liability, workers' compensation, real and personal property, directors' and officers' liability, environmental and pollution legal liability and other coverages we believe are customary to the industry. Our exposure to loss for insurance claims is generally limited to the per-incident deductible under the related insurance policy. We do not expect the impact of any known casualty, property, environmental or other contingency to have a material impact on our financial condition, results of operations or cash flows. For the years ended December 31, 2022 and 2021, we have self-insured certain coverages.
Regulation
Our business is subject to extensive and evolving federal, provincial and local environmental, health, safety and transportation laws and regulations. These laws and regulations are administered by the MECP, Environment Canada, and various other federal, provincial and local environmental, zoning, transportation, land use, health and safety agencies in Canada. Many of these agencies regularly examine our operations to monitor compliance with these laws and regulations and have the power to enforce compliance, obtain injunctions or impose civil or criminal penalties in case of non-compliance. On November 5, 2020, the MECP conducted two audits for two of our ECAs. The MECPs comments were received late December 2020. The audits resulted in the Company taking corrective action regarding sampling, testing and commenced the removal of exceeding waste from the site, commencing in 2021. The Company has completed some of the corrective action and communicates regularly with the MECP and will continue with the remaining corrective action through 2023. As at December 31, 2022, The Company has accrued the estimated costs totaling $667,635 (C$904,287) in connection with the corrective action.
An offence notice for exceeding odor units was filed by the MECP on the Company. A proceeding was held remotely on March 21, 2022, at a Provincial Offence Court and was adjourned to April 11, 2022, to address and accept a Crown resolution offer of fines assessed by the MECP, in the amount of $96,906 (C$131,255). On May 16, 2022 the Company agreed to accept the Crown resolution offer and fine in the amount of $96,906 (C$131,255).
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Since the primary mission of our business is to manage solid and liquid waste hauled to our organic waste processing and composting facility in an environmentally sound manner, our capital expenditures are related, either directly or indirectly, to environmental protection measures, including compliance with federal, provincial and local rules. There are costs associated with siting, design, permitting, operations, monitoring, site maintenance, corrective actions, financial assurance, and facility closure and post-closure obligations. With acquisition, development or expansion of a waste management or waste transfer station, we must often spend considerable time, effort and money to obtain or maintain required permits and approvals. There are no assurances that we will be able to obtain or maintain required governmental approvals. Once obtained, operating permits are subject to renewal, modification, suspension or revocation by the issuing agency. Compliance with current regulations and future requirements could require us to make significant capital and operating expenditures. However, most of these expenditures are made in the normal course of business and do not place us at any competitive disadvantage.
The primary Provincial statutes affecting our business are summarized below:
Provincial and Local Regulations
Various provincial and local regulations affect our operations. The Province of Ontario has its own laws and regulations governing solid waste disposal, water and air pollution, and, in most cases, releases and cleanup of hazardous substances and liabilities for such matters. The Province of Ontario has also adopted regulations governing the design, operation, maintenance and closure of waste transfer stations. Some regions, municipalities and other local governments in Ontario have adopted similar laws and regulations. Our facilities and operations are likely to be subject to these types of requirements.
Our operations are affected by the increasing preference for alternatives to landfill disposal. Many regional and local governments in Ontario mandate recycling and waste reduction at the source and prohibit the disposal of certain types of waste, such as yard waste, food waste and electronics at landfills. The number of regional and local governments in Ontario with recycling requirements and disposal bans continues to grow, while the logistics and economics of recycling the items remain challenging. In addition, Ontario has imposed timelines for the ban of organics from landfills in the province in an effort to totally divert these wastes from landfills. This will provide opportunities for the expansion of facilities like ours. This had already occurred in the province of Quebec and in the United States of America (the "USA"), where various states have enacted, or are considering enacting, laws that restrict the disposal within the state of solid waste generated outside the state. While laws that overtly discriminate against out-of-state waste have been found to be unconstitutional, some laws that are less overtly discriminatory have been upheld in court. From time to time, the United States Congress has considered legislation authorizing states to adopt regulations, restrictions, or taxes on the importation of out-of-state or out-of-jurisdiction waste. Additionally, several state and local governments have enacted "flow control" regulations, which attempt to require that all waste generated within the state or local jurisdiction be deposited at specific sites. In 1994, the U.S. Supreme Court ruled that a flow control ordinance that gave preference to a local facility that was privately owned was unconstitutional, but in 2007, the Court ruled that an ordinance directing waste to a facility owned by the local government was constitutional. The United States Congress' adoption of legislation allowing restrictions on interstate transportation of out-of-state or out-of-jurisdiction waste or certain types of flow control, or courts' interpretations of interstate waste and flow control legislation, could adversely affect our solid and hazardous waste management services.
Federal, Provincial and Local Climate Change Initiatives
Considering regulatory and business developments related to concerns about climate change, we have identified a strategic business opportunity to provide our public and private sector customers with sustainable solutions to reduce their Greenhouse Gas ("GHG") emissions. As part of our on-going marketing evaluations, we assess customer demand for and opportunities to develop waste services offering verifiable carbon reductions, such as waste reduction, increased recycling, and conversion of biogas and discarded materials into electricity and fuel. We use carbon life cycle tools in evaluating potential new services and in establishing the value proposition that makes us attractive as an environmental service provider. We are active in support of public policies that encourage development and use of lower carbon energy and waste services that lower users' carbon footprints. We understand the importance of broad stakeholder engagement in these endeavors, and actively seek opportunities for public policy discussion on more sustainable materials management practices. In addition, we work with stakeholders at the federal and provincial level in support of legislation that encourages production and use of renewable, low-carbon fuels and electricity. Despite the past U.S. withdrawal from the Paris Climate Accords, we have seen no reduction in customer demand for services aligned with their GHG reduction goals and strategies. Ontario is part of the WCI led by the state of California and, if anything, California has doubled down on their GHG reduction goals. The states of Oregon and Washington are also considering joining the WCI that currently includes, amongst other states and provinces, California, Ontario and Quebec as members.
We continue to assess the physical risks to company operations from the effects of severe weather events and use risk mitigation planning to increase our resiliency in the face of such events. We are investing in infrastructure to withstand more severe storm events, which may afford us a competitive advantage and reinforce our reputation as a reliable service provider through continued service in the aftermath of such events.
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Item 1A. Risk Factors.
To keep our stockholders and the public informed about our business, we may make "forward-looking statements." Forward-looking statements usually relate to future events and anticipated revenues, earnings, cash flows or other aspects of our operations or operating results. Forward-looking statements are often identified by the words, "will," "may," "should," "continue," "anticipate," "believe," "expect," "plan," "forecast," "project," "estimate," "intend" and words of a similar nature and generally include statements containing:
• projections about accounting and finances;
• plans and objectives for the future;
• projections or estimates about assumptions relating to our performance; or
• our opinions, views or beliefs about the effects of current or future events, circumstances or performance.
You should view these statements with caution. These statements are not guarantees of future performance, circumstances or events. They are based on facts and circumstances known to us as of the date the statements are made. All aspects of our business are subject to uncertainties, risks and other influences, many of which we do not control. Any of these factors, either alone or taken together, could have a material adverse effect on us and could change whether any forward-looking statement ultimately turns out to be true. Additionally, we assume no obligation to update any forward-looking statement as a result of future events, circumstances or developments. The following discussion should be read together with the Consolidated Financial Statements and the notes thereto. Outlined below are some of the risks that we believe could affect our business and financial statements for 2023 and beyond and that could cause actual results to be materially different from those that may be set forth in forward-looking statements made by the Company.
Any investment in our securities involves a high degree of risk, including the risks described below. Our business, financial condition and results of operations could suffer as a result of these risks, and the trading price of our shares could decline, perhaps significantly, and you could lose all or part of your investment. The risks discussed below also include forward-looking statements and our actual results may differ substantially from those discussed in these forward-looking statements. See the section entitled "Information Regarding Forward-Looking Statements."
The COVID-19 Outbreak 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 were not 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 possible 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.
Risks Related to Our Business and Industry
We may experience claims that our products infringe the intellectual property rights of others, which may cause us to incur unexpected costs or prevent us from selling our products.
We seek to improve our business processes and develop new products and applications. Many of our competitors have a substantial amount of intellectual property that we must continually monitor to avoid infringement. We cannot guarantee that we will not experience claims that our processes and products infringe issued patents (whether present or future) or other intellectual property rights belonging to others. If we are sued for infringement and lose, we could be required to pay substantial damages or be enjoined from using or selling the infringing products or technology. Further, intellectual property litigation is expensive and time-consuming, regardless of the merits of any claim, and could divert our management's attention from operating our business.
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Our relationship with our employees could deteriorate, and certain key employees could leave the Company, which could adversely affect our business and our results of operations.
Our business involves complex operations and therefore demands a management team and employee workforce that is knowledgeable and expert in many areas necessary for our operations. We rely on our ability to attract and retain skilled employees, including our specialized research and development and sales and service personnel, to maintain our efficient production. The departure of a significant number of our highly skilled employees or of one or more employees who hold key management positions could have an adverse impact on our operations, including as a result of customers choosing to follow a regional manager to one of our competitors.
We face intense competition, and our failure to compete successfully may have an adverse effect on our net sales, gross profit and financial condition.
Our industry is highly competitive. Many of our competitors may have greater financial, technical and marketing resources than we do and may be able to devote greater resources to promoting and selling certain products.
If we do not compete successfully by developing and deploying new cost-effective products, processes and technologies on a timely basis and by adapting to changes in our industry and the global economy, our net sales, gross profit and financial condition could be adversely affected.
Failure to comply with the Foreign Corrupt Practices Act, or FCPA, and other similar anti-corruption laws, could subject us to penalties and damage our reputation.
We are subject to the FCPA, which generally prohibits U.S. companies and their intermediaries from making corrupt payments to foreign officials for the purpose of obtaining or keeping business or otherwise obtaining favorable treatment and requires companies to maintain certain policies and procedures. Certain of the jurisdictions in which we conduct business may be at a heightened risk for corruption, extortion, bribery, pay-offs, theft and other fraudulent practices. Under the FCPA, U.S. companies may be held liable for actions taken by their strategic or local partners or representatives. If we, or our intermediaries, fail to comply with the requirements of the FCPA, or similar laws of other countries, governmental authorities in the United States or elsewhere, as applicable, could seek to impose civil and/or criminal penalties, which could damage our reputation and have a material adverse effect on our business, financial condition and results of operations.
We are not insured against all potential risks.
To the extent available, we maintain insurance coverage that we believe is customary in our industry. Such insurance does not, however, provide coverage for all liabilities, including certain hazards incidental to our business, and we cannot assure you that our insurance coverage will be adequate to cover claims that may arise or that we will be able to maintain adequate insurance at rates we consider reasonable.
We may not be able to consummate future acquisitions or successfully integrate acquisitions into our business, which could result in unanticipated expenses and losses.
Part of our strategy is to grow through acquisitions. Consummating acquisitions of related businesses, or our failure to integrate such businesses successfully into our existing businesses, could result in unanticipated expenses and losses. Furthermore, we may not be able to realize any of the anticipated benefits from the acquisitions.
In connection with potential future acquisitions, the process of integrating acquired operations into our existing operations may result in unforeseen operating difficulties and may require significant financial resources that would otherwise be available for the ongoing development or expansion of existing operations. Some of the risks associated with acquisitions include:
• unexpected losses of key employees or customers of the acquired company;
• conforming the acquired company's standards, processes, procedures and controls with our operations;
• coordinating new product and process development;
• hiring additional management and other critical personnel;
• negotiating with labor unions; and
• increasing the scope, geographic diversity and complexity of our operations.
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In addition, we may encounter unforeseen obstacles or costs in the integration of businesses we may acquire. Also, the presence of one or more material liabilities of an acquired company that are unknown to us at the time of acquisition may have a material adverse effect on our financial condition or results of operations.
Business disruptions could seriously harm revenues and increase our costs and expenses.
Our operations could be subject to extraordinary events, including natural disasters, political disruptions, terrorist attacks, acts of war and other business disruptions, which could seriously harm our net sales and increase our costs and expenses. These blackouts, floods and storms could cause disruptions to our operations or the operations of our suppliers, distributors, resellers or customers. Similar losses and interruptions could also be caused by earthquakes, telecommunications failures, water shortages, tsunamis, typhoons, fires, extreme weather conditions, medical epidemics and other natural or manmade disasters for which we are predominantly self-insured.
Risks Relating to Our Common Stock
An active trading market may not result for our common stock.
On December 11, 2018, our common stock commenced quotation on the OTCQB Market, under the symbol, SNRG. We cannot predict the extent to which investor interest in us will lead to the development of an active trading market or how liquid that market might become. An active public market for our common stock may not develop or be sustained. If an active public market does not develop or is not sustained, it may be difficult for you to sell your shares of common stock at a price that is attractive to you, or at all.
We have a history of net losses and we expect to incur additional losses.
In each year since our inception, we have incurred losses and have generated in total, since inception, only $5,521,371 in revenue. For the year ended December 31, 2022, net losses attributable to common stockholders aggregated $12,010,548 (2021-$4,865,855) and, at December 31, 2022, the Company's accumulated deficit was $30,345,197 (2021-$18,334,649). We expect to incur further losses in the development of our business. We cannot assure you that we can achieve profitable operations in any future period.
Our independent registered public accounting firms' reports contains an explanatory paragraph that expresses substantial doubt as to our ability to continue as a going concern.
Although our consolidated financial statements have been prepared assuming we will continue as a going concern, our current independent registered public accounting firm, and our former independent registered public accounting firm, in each of their report accompanying our consolidated financial statements as of and for the years ended December 31, 2022 and 2021 respectively, expressed substantial doubt as to our ability to continue as a going concern as of December 31, 2022 and as at December 31, 2021, as a result of our operating losses since inception, because the Company expects to incur further losses in the development of its business and the Company's ability to settle its current liabilities owing to service providers and creditors. The inclusion of a going concern explanatory paragraph may make it more difficult for us to secure additional financing or enter into strategic relationships on terms acceptable to us, if at all, and may materially and adversely affect the terms of any financing that we may obtain.
We have no intention of declaring dividends in the foreseeable future.
The decision to pay cash dividends on our common stock rests with our board of directors and will depend on our earnings, unencumbered cash, capital requirements and financial condition. We do not anticipate declaring any dividends in the foreseeable future, as we intend to use any excess cash to fund our operations. Investors in our common stock should not expect to receive dividend income on their investment in the foreseeable future.
We may issue preferred stock in the future, and the terms of the preferred stock may reduce the value of our common stock.
Under the certificate of incorporation of the Company, our Board of Directors are authorized to create and issue one or more additional series of preferred stock, and, with respect to each series, to determine number of shares constituting the series and the designations and the powers, preferences and rights, and the qualifications, limitations and restrictions thereof, which may include dividend rights, conversion or exchange rights, voting rights, redemption rights and terms and liquidation preferences, without stockholder approval. If we create and issue one or more additional series of preferred stock, it could affect your rights or reduce the value of our outstanding common stock. Our Board of Directors could, without stockholder approval, issue preferred stock with voting and other rights that could adversely affect the voting power of the holders of our common stock and which could have certain anti-takeover effects.
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Special Meetings of our Stockholders may only be called by our Board of Directors or our CEO and as such, our stockholders do not have the ability to call a meeting.
Under our bylaws only our Board of Directors or CEO may call a special meeting of shareholders and as such, your ability to participate and take certain corporate actions like amending the Company's certificate of incorporation or electing directors is limited.
We may be exposed to risks relating to evaluations of controls required by Sarbanes-Oxley Act of 2002.
Pursuant to Sarbanes-Oxley Act of 2002, our management will be required to report on, and our independent registered public accounting firm may in the future be required to attest to, the effectiveness of our internal control over financial reporting. Although we prepare our financial statements in accordance with accounting principles generally accepted in the United States of America ("US GAAP"), our internal accounting controls may not meet all standards applicable to companies with publicly traded securities. If we fail to implement any required improvements to our disclosure controls and procedures, we may be obligated to report control deficiencies and our independent registered public accounting firm may not be able to certify the effectiveness of our internal controls over financial reporting. In either case, we could become subject to regulatory sanction or investigation. Further, these outcomes could damage investor confidence in the accuracy and reliability of our financial statements.
If our internal controls and accounting processes are insufficient, we may not detect in a timely manner misstatement that could occur in our financial statements in amounts that could be material.
As a public company, we will have to devote substantial efforts to the reporting obligations and internal controls required of a public company, which will result in substantial costs. A failure to properly meet these obligations could cause investors to lose confidence in us and have a negative impact on the market price of our shares. We expect to devote significant resources to the documentation, testing and continued improvement of our operational and financial systems for the foreseeable future. These improvements and efforts with respect to our accounting processes that we will need to continue to make may not be sufficient to ensure that we maintain adequate controls over our financial processes and reporting in the future. Any failure to implement required, new or improved controls, or difficulties encountered in their implementation, could cause us to fail to meet our reporting obligations in the USA or result in misstatements in our financial statements in amounts that could be material. Insufficient internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our shares and may expose us to litigation risk.
As a public company, we will be required to document and test our internal control procedures to satisfy the requirements of Section 404 of Sarbanes-Oxley, which requires annual management assessments of the effectiveness of our internal control over financial reporting. During the course of our testing, we may identify deficiencies which we may not be able to remediate in time to meet our deadline for compliance with Section 404. We may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404. If we are unable to conclude that we have effective internal control over financial reporting, then investors could lose confidence in our reported financial information, which could have a negative effect on the trading price of our shares.
Information Regarding Forward-Looking Statements
Statements in this Form 10-K may be "forward-looking statements." Forward-looking statements include, but are not limited to, statements that express our intentions, beliefs, expectations, strategies, predictions or any other statements relating to our future activities or other future events or conditions. These statements are based on current expectations, estimates and projections about our business based, in part, on assumptions made by management. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may, and are likely to, differ materially from what is expressed or forecasted in the forward-looking statements due to numerous factors, including those described above and those risks discussed from time to time in this prospectus, including the risks described under "Risk Factors," and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this prospectus and in other documents which we file with the SEC.
In addition, such statements could be affected by risks and uncertainties related to:
• our ability to raise funds for general corporate purposes and operations, including our clinical trials;
• our ability to recruit qualified management and technical personnel;
• our ability to complete successfully within our industry;
• fluctuations in foreign currency exchange rates;
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• our ability to maintain and enhance our technological capabilities and to respond effectively to technological changes in our industry; and
• our ability to protect our intellectual property, on which our business avoiding infringing the intellectual property rights of others;
Any forward-looking statements speak only as of the date on which they are made, and except as may be required under applicable securities laws, we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this prospectus.
If we fail to implement our business strategy, our financial performance and our growth could be materially and adversely affected.
Our future financial performance and success are dependent in large part upon our ability to implement our business strategy successfully. Implementation of our strategy will require effective management of our operational, financial and human resources and will place significant demands on those resources.
See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview for more information on our business strategy.
There are risks involved in pursuing our strategy, including the following:
• Our employees, customers or investors may not embrace and support our strategy.
• We may not be able to hire or retain the personnel necessary to manage our strategy effectively.
• We may be unsuccessful in implementing improvements to operational efficiency and such efforts may not yield the intended result.
• We may not be able to maintain cost savings achieved through restructuring efforts.
• Strategic decisions with respect to our asset portfolio may result in impairments to our assets.
See Item 1A. Risk Factors - We may record material charges against our earnings due to impairments to our assets.
• Our ability to make strategic acquisitions depends on our ability to identify desirable acquisition targets, negotiate advantageous transactions despite competition for such opportunities, fund such acquisitions on favorable terms, obtain regulatory approvals and realize the benefits we expect from those transactions.
• Acquisitions, investments and/or new service offerings may not increase our earnings in the timeframe anticipated, or at all, due to difficulties operating in new markets or providing new service offerings, failure of emerging technologies to perform as expected, failure to operate within budget, integration issues, or regulatory issues, among others.
• Integration of acquisitions and/or new services offerings could increase our exposure to the risk of inadvertent noncompliance with applicable laws and regulations.
• Liabilities associated with acquisitions, including ones that may exist only because of past operations of an acquired business, may prove to be more difficult or costly to address than anticipated.
• Execution of our strategy, particularly growth through acquisitions, may cause us to incur substantial additional indebtedness, which may divert capital away from our traditional business operations and other financial plans.
• We continue to seek to divest underperforming and non-strategic assets if we cannot improve their profitability. We may not be able to successfully negotiate the divestiture of underperforming and non-strategic operations, which could result in asset impairments or the continued operation of low-margin businesses.
In addition to the risks set forth above, implementation of our business strategy could also be affected by a number of factors beyond our control, such as increased competition, legal developments, government regulation, general economic conditions, increased operating costs or expenses and changes in industry trends. We may decide to alter or discontinue certain aspects of our business strategy at any time. If we are not able to implement our business strategy successfully, our long-term growth and profitability may be adversely affected. Even if we are able to implement some or all of the initiatives of our business strategy successfully, our operating results may not improve to the extent we anticipate, or at all.
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Compliance with existing or increased future regulations and/or enforcement of such regulations may restrict or change our operations, increase our operating costs or require us to make additional capital expenditures, and a decrease in regulation may lower barriers to entry for our competitors.
Stringent government regulations at the federal, state, provincial and local level in the U.S. and Canada have a substantial impact on our business, and compliance with such regulations is costly. A large number of complex laws, rules, orders and interpretations govern environmental protection, health, safety, land use, zoning, transportation and related matters. Among other things, governmental regulations and enforcement actions may restrict our operations and adversely affect our financial condition, results of operations and cash flows by imposing conditions such as:
• limitations on constructing a new waste transfer stations, recycling or processing facilities or on expanding existing facilities;
• limitations, regulations or levies on collection and disposal prices, rates and volumes;
• limitations or bans on disposal or transportation of out-of-state waste or certain categories of waste;
• mandates regarding the management of solid waste, including requirements to recycle, divert or otherwise process certain waste, recycling and other streams; or
• limitations or restrictions on the recycling, processing or transformation of waste, recycling and other streams.
We also have a significant financial obligation relating to closure, post-closure and environmental remediation at our existing facility. The obligation is supported by a letter of credit from PACE in favor of the MOECP. Environmental regulatory changes could accelerate or increase such costs, requiring our expenditures to materially exceed our current letter of credit.
Our operations are subject to environmental, health and safety laws and regulations, as well as contractual obligations that may result in significant liabilities.
There is risk of incurring significant environmental liabilities in the acceptance, use and storage of waste materials. Under applicable environmental laws and regulations, we could be liable if our operations cause environmental damage to our property or to the property of other landowners, particularly as a result of the contamination of air, drinking water or soil. Under current law, we could also be held liable for damage caused by conditions that existed before we acquired our current facility. This risk is of particular concern as we execute our growth strategy, partially though acquisitions, because we may be unsuccessful in identifying and assessing potential liabilities during our due diligence investigations. Further, the counterparties in such transactions may be unable to perform their indemnification obligations owed to us. Additionally, we could be liable if we arrange for the transportation and acceptance at our facility of hazardous substances that cause environmental contamination, or if a predecessor owner made such arrangements and, under applicable law, we are treated as a successor to the prior owner. Any substantial liability for environmental damage could have a material adverse effect on our financial condition, results of operations and cash flows.
In the ordinary course of our business, we may in the future, become involved in legal and administrative proceedings relating to land use and environmental laws and regulations. These include proceedings in which:
• agencies of federal, state, provincial or local governments seek to impose liability on us under applicable statutes, sometimes involving civil or criminal penalties for violations, or to revoke or deny renewal of a permit we need; and
• local communities, citizen groups, landowners or governmental agencies oppose the issuance of a permit or approval we need, allege violations of the permits under which we operate or laws or regulations to which we are subject, or seek to impose liability on us for environmental damage.
We generally seek to work with the authorities or other persons involved in these proceedings to resolve any issues raised. If we are not successful, the adverse outcome of one or more of these proceedings could result in, among other things, material increases in our costs or liabilities as well as material charges for asset impairments.
General economic conditions can directly and adversely affect our revenues and our income from operations margins.
Our business is directly affected by changes in national and general economic factors that are outside of our control, including consumer confidence, interest rates and access to capital markets. A weak economy generally results in decreased consumer spending and decreases in volumes of waste generated, which decreases our revenues. In addition, we have a relatively high fixed-cost structure, which is difficult to quickly adjust to match shifting volume levels. Consumer uncertainty and the loss of consumer confidence may limit the number or amount of services requested by customers. Economic conditions may also limit our ability to implement our pricing strategy. For example, many of our contracts have price adjustment provisions that are tied to an index such as the Consumer Price Index, and our costs may increase in excess of the increase, if any, in the Consumer Price Index.
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Some of our customers may have suffered financial difficulties affecting their credit risk, which could negatively impact our operating results.
Many non-governmental customers have also suffered serious financial difficulties, including bankruptcy in some cases. Purchasers of our recycling commodities can be particularly vulnerable to financial difficulties in times of commodity price volatility. The inability of our customers to pay us in a timely manner or to pay increased rates, particularly significant accounts, could negatively affect our operating results.
We are increasingly dependent on technology in our operations and if our technology fails, our business could be adversely affected.
We may experience problems with the operation of our current information technology systems or the technology systems of third parties on which we rely, as well as the development and deployment of new information technology systems, that could adversely affect, or even temporarily disrupt, all or a portion of our operations until resolved. Inabilities and delays in implementing new systems can also affect our ability to realize projected or expected cost savings.
Additionally, any systems failures could impede our ability to timely collect and report financial results in accordance with applicable laws and regulations.
A cybersecurity incident could negatively impact our business and our relationships with customers and expose us to litigation risk.
We use computers in substantially all aspects of our business operations. We also use mobile devices, social networking and other online activities to connect with our employees and our customers. Such uses give rise to cybersecurity risks, including security breach, espionage, system disruption, theft and inadvertent release of information. Our business involves the storage and transmission of numerous classes of sensitive and/or confidential information and intellectual property, including customers' personal information, private information about employees, and financial and strategic information about the Company and its business partners. Further, as the Company pursues its strategy to grow through potential acquisitions and to pursue new initiatives that improve our operations and cost structure, the Company is also expanding and improving its information technologies, resulting in a larger technological presence and corresponding exposure to cybersecurity risk. If we fail to assess and identify cybersecurity risks associated with acquisitions and new initiatives, we may become increasingly vulnerable to such risks. Additionally, while we have implemented measures to prevent security breaches and cyber incidents, our preventative measures and incident response efforts may not be entirely effective. The theft, destruction, loss, misappropriation, or release of sensitive and/or confidential information or intellectual property, or interference with our information technology systems or the technology systems of third parties on which we rely, could result in business disruption, negative publicity, brand damage, violation of privacy laws, loss of customers, potential litigation and liability and competitive disadvantage.
Our business is subject to operational and safety risks, including the risk of personal injury to employees and others.
The operation of an organic waste processing and composting facility involves risks such as truck accidents, equipment defects, malfunctions and failures.
Any of these risks could potentially result in injury or death of employees and others, a need to shut down or reduce operation of the facility, increased operating expense and exposure to liability for pollution and other environmental damage, and property damage or destruction.
While we seek to minimize our exposure to such risks through comprehensive training, compliance and response and recovery programs, as well as vehicle and equipment maintenance programs, if we were to incur substantial liabilities in excess of any applicable insurance, our business, results of operations and financial condition could be adversely affected. Any such incidents could also tarnish our reputation and reduce the value of our brand. Additionally, a major operational failure, even if suffered by a competitor, may bring enhanced scrutiny and regulation of our industry, with a corresponding increase in operating expense.
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We have substantial financial assurance and insurance requirements and increases in the costs of obtaining adequate financial assurance, or the inadequacy of our insurance coverages, could negatively impact our liquidity and increase our liabilities.
The amount of insurance we are required to maintain for environmental liability is governed by statutory requirements. We believe that the cost for such insurance is high relative to the coverage it would provide and, therefore, our coverages are generally maintained at the minimum statutorily-required levels. We face the risk of incurring additional costs for environmental damage if our insurance coverage is ultimately inadequate to cover those damages. We also carry a broad range of other insurance coverages that are customary for a company our size. We use these programs to mitigate risk of loss, thereby enabling us to manage our self-insurance exposure associated with claims. The inability of our insurers to meet their commitments in a timely manner and the effect of significant claims or litigation against insurance companies may subject us to additional risks. To the extent our insurers are unable to meet their obligations, or our own obligations for claims are more than we estimated, there could be a material adverse effect to our financial results.
Our capital requirements and our business strategy could increase our expenses, cause us to change our growth and development plans, or result in an inability to maintain our desired credit profile.
If economic conditions or other risks and uncertainties cause a significant reduction in our cash flows from operations, we may reduce or suspend capital expenditures, growth and acquisition activity and implementation of our business strategy. We may choose to incur indebtedness to pay for these activities, although our access to capital markets is not assured and we may not be able to incur indebtedness at a cost that is consistent with current borrowing rates. We also may need to incur indebtedness to refinance scheduled debt maturities, and it is possible that the cost of financing could increase significantly, thereby increasing our expenses and increasing our net losses. Further, our ability to execute our financial strategy and our ability to incur indebtedness is somewhat dependent upon our ability to maintain investment grade credit ratings on our senior debt. The credit rating process is contingent upon our credit profile, as well as a number of other factors, many of which are beyond our control, including methodologies established and interpreted by third-party rating agencies. If we were unable to maintain our investment grade credit ratings in the future, our interest expense would increase.
Additionally, as of December 31, 2022, we have $7,285,747 (C$9,868,274) (2021-$7,727,628; C$9,796,689) of debt that is exposed to changes in market interest rates within the next 12 months. In addition, as of December 31, 2022, we had a letter of credit outstanding of $204,384 (C$276,831) to 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 $470,767 (C$637,637). If interest rates increase, our interest expense would also increase, increasing our net losses and decreasing our cash flow.
As at December 31, 2022, and the date of this filing, the Company did not have any revolving credit facility to support cash flow requirements. In the event of a default under any of our credit facilities, term loans, obligations under capital lease, convertible promissory notes, mortgages payable and loans from related parties, we could be required to immediately repay such debt under default, which we may not be able to do. Additionally, any such default may cause a default under many of our other credit agreements and debt instruments. Without waivers from lenders party to those agreements, and/or the availability of other financing, either debt or equity, any such default would have a material adverse effect on our ability to continue to operate.
The seasonal nature of our business and severe weather events may cause our results to fluctuate, and prior performance is not necessarily indicative of our future results.
Our operating revenues tend to be somewhat higher in summer months, primarily due to the higher organic compost sales and higher leaf and yard waste volumes. The volumes of industrial and residential waste in certain regions where we operate also tend to increase during the summer months. Our second and third quarter revenues and results of operations typically reflect these seasonal trends.
Service disruptions caused by severe storms, extended periods of inclement weather or climate extremes resulting from climate change can significantly affect the operating results of the areas affected. While weather-related and other event driven special projects can boost revenues through additional work for a limited time, as a result of significant start-up costs and other factors, such revenue will generate earnings at comparatively higher margins.
For these and other reasons, operating results in any interim period are not necessarily indicative of operating results for an entire year, and operating results for any historical period are not necessarily indicative of operating results for a future period. Our stock price may be negatively or positively impacted by interim variations in our results.
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We may experience adverse impacts on our reported results of operations as a result of adopting new accounting standards or interpretations.
Our implementation of and compliance with changes in accounting rules, including new accounting rules and interpretations, could adversely affect our reported financial position or operating results or cause unanticipated fluctuations in our reported operating results in future periods.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our principal executive office is in Toronto, Ontario, Canada. We lease this property from an Ontario company controlled by the CEO of the Company, who is also executive chairman, president and a director. This lease expired on December 31, 2019. The Company is currently on a month-to-month lease. Prior to the business acquisition of May 2019, we leased the land on which our organic waste processing and composting facility is situated, near Belleville, Ontario, Canada. This property is now owned by one of the Company's wholly-owned subsidiaries, 1684567 Ontario Inc., and the Company does not expend funds to satisfy this lease, as the Company is now both the landlord and the tenant.
We believe that our operating property, vehicle and equipment are adequately maintained and sufficient for our current operations. However, we expect to continue to make investments in additional property and equipment for expansion, for replacement of assets and to support our strategy of continuous improvement through efficiency and innovation.
For more information, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations included within this report.
Item 3. Legal Proceedings.
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. We are not currently aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition, or operating results.
The Company received opposition to one of its trademarks and continues to respond to the opposing counsel's requests. The opposition will be heard by the trademark trial and review board unless resolved between the parties prior.
The Company has one known claim filed against it, one filed, for unpaid legal fees, in the amount of $48,167 (C$65,241). The unpaid fees are included in accounts payable in the consolidated balance sheets.
Item 4. Mine Safety Disclosures.
The Company has no reporting to provide relative to information concerning mine safety and other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Market Price of Common Stock
Our common stock is quoted on the OTCQB marketplace run by OTC Markets Group, Inc. under the symbol "SNRG". As of the date of this filing, the number of stockholders of record was eighty-seven (87). This does not include persons whose stock is in nominee or "street name" accounts through brokers.
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Securities.
The information below was derived from the audited Consolidated Financial Statements included within this report and in previous annual reports, including those we filed with the SEC. This information should be read together with those Consolidated Financial Statements and the notes thereto. These historical results are not necessarily indicative of the results to be expected in the future.
There were no declared dividends in 2022 and since incorporation. Future decisions to pay cash dividends are at the discretion of our Board of Directors. It is our intention to retain any future profits for use in the development and expansion of our business and for general corporate purposes.
Unregistered Sales of Equity Securities and Use of Proceeds.
During the year ended December 31, 2022, the Company issued a total of 16,252,746 Common Stock for non-cash proceeds and 4,444,041 for cash proceeds, as follows:
- 230,000 common shares were issued for proceeds previously received.
- 1,050,000 common shares were issued to officers and 10,000 to an employee.
- 193,778 common shares were issued on the conversion of related party debt to equity.
- 2,372,090 common shares were issued on the conversion of debt to equity.
- 4,125,211 common shares on the extinguishment of debt.
- 6,655,000 common shares were issued for professional services.
- 1,616,667 common shares issues on the extension of maturity dates on debt.
- 4,444,041 common shares issued on private placement for proceeds of $907,760.\
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 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
This section includes a discussion of our results of operations for the years ended December 31, 2022 and 2021. This discussion may contain forward-looking statements that anticipate results based on management's plans that are subject to uncertainty. We discuss in more detail various factors that could cause actual results to differ materially from expectations in Item 1A. Risk Factors. The following discussion should be read considering those disclosures and together with the Consolidated Financial Statements and the notes thereto.
Overview
Our Company's goals are targeted at serving our customers, our employees, the environment, the communities in which we work and our stockholders. Increasingly, customers want more of their waste materials recovered, while waste streams are becoming more complex, and our aim is to address the current needs, while anticipating the expanding and evolving needs of our customers.
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CONSOLIDATED RESULTS OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 2022 COMPARED TO THE YEAR ENDED DECEMBER 31, 2021
| | | 2022 | | | 2021 | |
| Revenue | $ | 589,035 | | $ | 754,334 | |
| | | | | | | |
| Cost of sales | | 1,171,481 | | | 1,254,150 | |
| Gross loss | | (582,446 | ) | | (499,816 | ) |
| Operating expenses | | | | | | |
| Management compensation-stock-based compensation | | 240,450 | | | 217,035 | |
| Management compensation-fees | | 461,520 | | | 284,088 | |
| Professional fees | | 900,458 | | | 684,757 | |
| Marketing | | 991,383 | | | 298,417 | |
| Interest expenses | | 799,716 | | | 753,057 | |
| Office and administration | | 338,136 | | | 335,062 | |
| Rent and occupancy | | 215,482 | | | 160,019 | |
| Insurance | | 79,158 | | | 81,338 | |
| Filing fees | | 80,926 | | | 122,408 | |
| Amortization of financing costs | | 109,765 | | | 101,431 | |
| Repairs and maintenance | | (5,895 | ) | | 42,183 | |
| Director compensation | | 57,690 | | | 53,136 | |
| Stock-based compensation | | 2,092,230 | | | 162,187 | |
| Foreign exchange loss | | 971,641 | | | 39,191 | |
| Total operating expenses | | 7,332,660 | | | 3,334,309 | |
| Net Loss before Other Expenses and Income Taxes Recovery | | (7,915,100 | ) | | (3,834,125 | ) |
| Other Expenses | | (4,167,530 | ) | | (1,067,272 | ) |
| Income Taxes Recovery | | 72,088 | | | 35,542 | |
| Net loss | $ | (12,010,548 | ) | $ | (4,865,855 | ) |
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
During the year, the Company generated $589,035 (2021-$754,334) of revenue from its organic composting facility and the garbage collection services, a decrease of $165,299 over the prior year. The majority of the revenue from the organic composting facility relates to revenue from tipping fees charged for organic and other waste accepted at the facility and a lesser portion relating to the sale of organic compost processed at the facility. The Company also earned revenue from its garbage collection services of $26,886 (2021-$154,882), which it acquired effective May 24, 2019 on the purchase of 1684567. Up until early January 2021, the Company was also providing landfill management services, which are now handled by the individual townships. And, during the current, the Company ceased the garbage collection services to focus on its organic composting facility.
The reduction in revenue is primarily due to the Company no longer providing garbage collection services, offset by an increase in tipping fees from new business from an existing customer group.
In the operation of the organic composting facility, the Company processes the organic and other waste received and produces the end product, organic compost. The cost of producing the organic compost totaled $1,171,481 for the current year ended December 31, 2022 compared to $1,254,150 for the prior year ended December 31, 2021. The costs include equipment rental, deliver, fuel, repairs and maintenance, direct wages and benefits, depreciation, utilities and outside contractors. In addition, the Company calculated the inventory on hand at the end of the year for its organic compost to be $58,695 (2022-$20,582). These costs also include an estimate for the clean-up of certain waste as ordered by the MECP. This estimate and the significant reduction in revenue, significantly increased the gross loss during the year, compared to the prior year an increase of $82,630.
Operating expenses increased significantly by $3,998,351 from $3,334,309 for the year ended December 31, 2021 to $7,383,660 for the year ended December 31, 2022. The increase was primarily the result of increases in management compensation, professional fees, marketing expenses, professional fees, stock-based compensation and foreign exchange loss. explained in greater detail below.
During the year, the Company incurred management compensation expense in the form of fees $461,520 compared to $284,088 in the prior year ended December 31, 2021, an increase of $177,432, primarily due to the increase in the officers' compensation for the year ended December 31, 2022. The lower figure for the year ended December 31, 2021 included a settlement amount for the former chief executive officer, lowering the fees by $79,800. The management compensation in the form of stock-based compensation totaled $240,450 (2021-$217,035) during the year-ended December 31, 2022 relating to the Common Stock issued to the CEO and the CFO who were issued 1,000,000 and 50,000, respectively, for each year pursuant to their consulting agreements.
Professional fees increased by $215,701 from $684,757 in the year ended December 31, 2021 to $900, 458 in the year ended December 31, 2022, primarily due to increased estimated costs for the 2022 audit, review and tax related services including additional costs for certain 2021 services. In addition, the Company had engaged the services of a chartered professional accounting firm in 2021 for services in both 2021 and 2022 to assist management with various documentation and reporting matters and the valuation of the convertible promissory notes both in 2021 and for two quarters in 2022 along with engaging the services of a corporate valuation services firm in 2022 to assist management in the valuation of the convertible promissory notes for Q3 and for the year-end. In addition, the Company incurred additional professional fees in connection with its S-1/A registration statement.
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Marketing expenses increased by $692,966 from $298,417 in the prior year to $991,383 in the current year primarily due to a new marketing campaign which commenced in Q3 of 2021.
During the year, the Company incurred interest expense of $799,716, an increase of $46,659 over the prior year amount of $753,057. The increase is primarily due to the interest on the 1st mortgage in Hamilton, outstanding for a full year in 2022 versus 136 days in the prior year. In addition, the interest incurred on the outstanding obligations to PACE increased based on the increased prime rate of interest during the current year by 4%. This increased interest was offset by lower interest on other long-term debt as the principal balance decreased and lower interest on the obligations under capital lease from payments during the year and the full repayment of one of the remaining obligations. Further, there is an absence of interest on the 2019 convertible notes which totaled $90,906 in the prior year. And, as a result of the Company's fair value option election, all interest incurred on the 2021 and 2022 convertible promissory notes was included in the fair value of the notes outstanding on December 31, 2021 and December 31, 2022.
Office and administration expenses were flat with a small increase of $3,074 from $335,062 in the prior year to $338,136 in the current year.
Rent and occupancy expense increased by $55,463 from $160,019 in the prior year to $215,482 in the current year, primarily due to an increase in the monthly rental on the Company's Toronto, Ontario, Canada office and additional realty taxes incurred on the new Hamilton, Ontario, Canada property, a full year in the current year versus 136 days in the prior year.
Insurance expense was flat with a small decrease of $2,180 from the prior year.
Filing fees decreased by $41,482 from $122,408 in the prior year to $80,926 in the current year, primarily due to the absence of investor relations activities carried out in the prior year and not in the current year and the absence of the fee for the Company's application to the Nasdaq, offset by costs associated with the special meeting of the shareholders on March 24, 2022, administrative costs incurred in the filing of the S-1 (and S-1/A) registration statement.
During the year, the amortization of financing costs increased by $8,334 from $101,431 in the prior year to $109,765 in the current year due primarily to the amortization of an additional financing cost in connection with the extension of the maturity date for the 1st mortgage on the Company's Belleville, Ontario, Canada facility from September 1, 2021 to December 1, 2023.
Repairs and maintenance decreased by $48,078 from $42,183 in the prior year to a credit of $5,895 in the current year primarily due to a credit on roof repairs incurred in the prior year at the Company's Toronto, Ontario, Canada office and an overall decrease in repairs and maintenance.
Director compensation decreased by $4,554 from $53,136 in the prior year to $57,690 in the current year. The increase is partially due to a new independent director appointed in Q2 of 2021 and thus did not serve as a director for the entire 2021 year. Each independent director is entitled to a fee of $19,230 (C$25,000) annually. By December 31, 2022 and 2021, the Company had three independent directors for whom the Company has accrued their annual fees. In addition, during the year, one of the independent directors was awarded stock-based compensation consisting of 750,000 common shares of the Company, valued at $105,750, based on the trading price on commencement of the consulting agreement, for services provided in developing certain contacts to further the Company's business opportunities. This amount is disclosed as stock-based compensation in the consolidated statements of operations and comprehensive loss.
Stock-based compensation increased by $1,930,043 from a balance of $162,187 in the prior year to $2,092,230 in the year as a result of consulting agreements with several new service providers to provide general business consulting services whose services expire at various periods through to October 2023. A total of 6,655,000 common shares were issued in connection with the new consulting agreements. Also included is $1,919 related to the issuance of 10,000 common shares to an employee during the year.
The foreign exchange loss increased by $932,450 from $39,191 in the prior year to $971,641 in the current year due to losses incurred on the translation and settlement of expenses and balances denominated in US dollars, primarily the convertible promissory notes.
The other expenses increased by $3,100,258 from $1,067,272 in the prior year to $4,167,530 in the current year. In the current year, the adjustment for the revaluation of the convertible promissory notes totaled $8,323,370 (2021-$1,018,825), the gain of extinguishment of convertible promissory notes totaled $4,274,820 (2021-$nil), an accrual for a break fee for a previous banker in the amount of $250,000 (2021-$nil) and revenue from proceeds earned on the sale of carbon credits on the Greenhouse Gas Clean Projects® Registry, in the amount of $131,020. In the prior year, the Company recorded various impairment losses on intangible assets totaling $513,254, gains of $420,216 on the forgiveness of the 2019 convertible promissory notes, including accrued interest and net gains on the disposal of long-lived assets in the amount of $44,591.
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Critical Accounting Estimates and Assumptions
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, the 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 December 31, 2022.
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.
For the year ended December 31, 2022, an impairment loss of $nil (C$nil) (2021-$513,254; C$643,175) was recorded and included under other expenses in the consolidated statements of operations and comprehensive loss. Refer also to note 17, other expenses, to the consolidated financial statements.
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.
At December 31, 2022, the Company tested the long-lived assets for impairment to determine whether the carrying value exceeded the fair value. The Company used quoted market values and independent appraisals of its long-lived assets and determined that no impairment loss was required to be recognized.
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Liquidity and Capital Resources
As at December 31, 2022, the Company had a cash balance of $42,900 (2021-$36,033) and current liabilities in the amount of $22,339,175 (2021-$13,944,507). As at December 31, 2022, the Company had a working capital deficit of $21,580,552 (2021-$13,651,619). The Company does not currently have sufficient funds to satisfy the current debt obligations. Should the Company's creditors seek or demand payment, the Company does not have the resources to pay or satisfy any such claims currently. The Company has been in discussions with other creditors and equity investors for new financing options to repay or re-finance certain current debt obligations.
The Company's total assets at December 31, 2022 were $9,865,775 (2021-$8,571,721) and total current liabilities were $22,339,175 (2021-$13,944,507). Significant losses from operations have been incurred since inception and there is an accumulated deficit of $30,345,197 as of December 31, 2022 (2021-$18,334,649). Continuation as a going concern is dependent upon generating significant new revenue, raising external capital and refinancing certain current debt. whilst achieving profitable operations and maintaining current fixed expense levels.
To pay current debt obligations 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 $22,339,175 in current liabilities, the Company estimates that approximately $25,500,000 in additional funds 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.
Interest Rate Exposure - Interest rate risk is the risk borne by an interest-bearing asset or liability as a result of fluctuations in interest rates. Financial assets and financial liabilities with variable interest rates expose the Company to cash flow interest rate risk.
Our exposure to market risk for changes in interest rates relates primarily to our financing activities. We have $7,285,747 (C$9,868,274) (2021-$7,727,628; C$9,796,689) of debt that is exposed to changes in market interest rates within the next 12 months. We currently estimate that a 100-basis point increase in the interest rates of our outstanding variable-rate debt obligations would increase our 2022 interest expense by approximately $72,900 (2021-$77,300).
Our remaining outstanding debt obligations have fixed interest rates through the scheduled maturity of the debt. The fair value of our fixed-rate debt obligations would not be expected to increase or decrease significantly if market interest rates change.
Credit Risk Exposure - is the risk of loss associated with a counterparty's inability to perform its payment obligations. As at December 31, 2022, the Company's credit risk is primarily attributable to cash and trade receivables. As at December 31, 2022, the Company's cash was held with reputable Canadian chartered banks, a US banks and a credit union.
Commodity Price Exposure - In the normal course of our business, we are subject to operating agreements that expose us to market risks arising from changes in the prices for commodities such as diesel fuel, propane, and electricity. We attempt to manage these risks through operational strategies that focus on capturing our costs in the prices we charge our customers for the services provided. Accordingly, as the market prices for these commodities increase or decrease, our revenues may also increase or decrease.
Currency Rate Exposure - Our operations are currently in Ontario, Canada. Where significant, we have quantified and described the impact of foreign currency translation on components of income, including operating revenue and operating expenses. However, the impact of foreign currency has not materially affected our results of operations.
Summary of Cash and Debt Obligations
The following is a summary of our cash and debt balances as of December 31:
| | | 2022 | | | 2021 | |
| Cash | $ | 42,900 | | $ | 36,033 | |
| Debt: | | | | | | |
| Current portion | $ | 16,710,639 | | $ | 11,654,984 | |
| Long-term portion | | 116,978 | | | 1,882,357 | |
| Total debt | $ | 16,827,617 | | $ | 13,537,341 | |
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We use long-term borrowings in addition to the cash we are able to generate from operations as part of our overall financial strategy to support and grow our business. The components of our borrowings as of December 31, 2022 are described in notes 10, 11, 12 and 14 to the consolidated financial statements.
Changes in our outstanding debt balances from December 31, 2021 to December 31, 2022 were primarily attributable to (i) increase in net debt borrowings of $1,865,681 and (ii) the impacts of other non-cash changes in our debt balances due to foreign currency translation and the loss on the revaluation of convertible promissory notes.
Refer to Security Purchase Agreements, Financing Agreements with PACE and Other financings noted above for details.
Summary of Cash Flow Activity
The following is a summary of our cash flows for the years ended December 31:
| | | 2022 | | | 2021 | |
| Net cash used in operating activities (a) | $ | (1,207,557 | ) | $ | (2,040,974 | ) |
| Net cash used in investing activities (b) | $ | (1,868,864 | ) | $ | (2,152,725 | ) |
| Net cash provided by financing activities (c) | $ | 2,773,441 | | $ | 4,195,676 | |
| | (a) | Net Cash Used in Operating Activities - The most significant items affecting the comparison of our operating cash flows in 2022 as compared with 2021 are summarized below: |
| | | |
| | | Increase in Net Loss - Our loss from operations, excluding depreciation and amortization and other expenses increased by $4,127,315 in 2022, principally driven by reduced revenue resulting in a gross loss, higher marketing costs, professional fees, stock-based compensation and foreign exchange loss. |
| | | |
| | | Changes in Assets and Liabilities -Our net cash used in operating activities was impacted by changes in assets and liabilities. |
| | | |
| | (b) | Net Cash Used in Investing Activities - The Company purchased long-lived assets in 2022 in the amount of $1,865,681 compared to $1,875,440 in 2021. In addition, the Company purchased intangible assets totaling $326,012 in 2021 and $nil in 2022. |
| | (c) | Net Cash Provided by Financing Activities - The most significant items affecting the comparison of our financing cash flows for the periods presented are summarized below: |
| | | |
| | | Debt Borrowings (Repayments) - In the current year, the Company incurred net debt borrowings of $1,865,681 a decrease of $2,037,129 from the prior year and an increase of $614,894 in private placement proceeds in 2022 from the prior year. |
Refer to notes 10, 11, 12 and 14 to the consolidated financial statements for additional information related to our various borrowings.
Summary of Contractual Obligations and Commitments
The following table summarizes our contractual obligations of principal payments as of December 31, 2022 and the anticipated effect of these obligations on our liquidity in future years:
| | | 2023 | | | 2024 | | | 2025 | | | 2026 | | | 2027 | | | Thereafter | | | Total | |
| Contractual Obligations: | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| Long-term debt and obligations under capital lease (a) | $ | 8,933,451 | | $ | 59,366 | | $ | 5,117 | | $ | - | | $ | - | | $ | - | | $ | 8,997,934 | |
| Convertible promissory notes | | 5,825,260 | | | - | | | - | | | - | | | - | | | - | | | 5,825,260 | |
| Management consulting agreements | | 465,132 | | | 442,980 | | | - | | | - | | | - | | | - | | | 908,112 | |
| Truck and trailer financing (b) | | 37,164 | | | 39,046 | | | 13,449 | | | - | | | - | | | - | | | 89,659 | |
| Various third-party consulting and other agreements | | 700,000 | | | 125,000 | | | 125,000 | | | - | | | - | | | - | | | 950,000 | |
| Hamilton-construction in progress commitments | | 4,879,084 | | | - | | | - | | | - | | | - | | | - | | | 4,879,084 | |
| Road maintenance obligation (c) | | 7,383 | | | 7,383 | | | 7,383 | | | - | | | - | | | - | | | 22,149 | |
| Anticipated liquidity impact as of December 31, 2022 | $ | 20,847,474 | | $ | 673,775 | | $ | 150,949 | | $ | - | | $ | - | | $ | - | | $ | 21,672,198 | |
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| (a) | These amounts represent the scheduled principal payments related to the Company's long-term debt, obligations under capital lease, excluding interest. |
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| | Refer to notes 10, 11 and 14 to the consolidated financial statements for additional information on our long-term debt and our obligations under capital lease. |
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| (b) | Truck and trailer financing |
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| (c) | The road maintenance obligation is invoiced annually by the City of Belleville, Ontario, Canada in the amount of $7,383 (C$10,000) and expires September 30, 2025. |
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Going Concern
The consolidated financial statements have been prepared in accordance with US GAAP, which assumes that the Company will be able to meet its obligations and continue its operations for the next twelve months.
As at December 31, 2022, the Company had a working capital deficit of $21,580,552 (2021-$13,651,619), incurred a net loss of $12,010,548 (2021-$4,865,855) for the year and had an accumulated deficit of $30,345,197 (December 31, 2021-$18,334,649) and expects to incur further losses in the development of its business.
The Company incurred a net loss of $12,010,548 (2021-$4,865,855) for the year ended December 31, 2022 and as at that date had a working capital deficit of $21,580,552 (2021-$13,651,619) and an accumulated deficit of $30,345,197 (December 31, 2021-$18,334,649) and expects to incur further losses in the development of its business. On February 18, 2021, PACE and the Company reached a new agreement to repay all amounts owing to PACE on or before July 30, 2021. Management was not able to meet the July 30, 2021 deadline. On August 13, 2021, PACE agreed to allow the Company until August 31, 2021 to bring the arrears current and continue to September 2022, the original maturity date. Management was not able to meet the August 31, 2021 deadline. On November 15, 2021, the Company paid all arrears to PACE and PACE agreed to allow the Company to continue payments to the end of the terms of each obligation, September 2022. Similarly, the Company paid all arrears to PACE on March 15, 2022 and PACE allowed the Company to continue payments to the end of the terms of each obligation, September 2022. Management continues discussions with equity investors to raise the necessary funds and repay other creditors and with PACE to settle its overdue obligations. The Company was successful in extending the maturity date on one of its 1st mortgages, which had a maturity date of September 1, 2022 to December 1, 2023. One of the Company's significant customer contracts expired at the end of December 31, 2020 and one customer contract was terminated by the Company in September of 2021. 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. Refer to note 22 (d), subsequent events, for details on a full and final mutual release of the Company's obligations to PACE.
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 necessary financing to further the development of its business and satisfy its obligations to PACE and its other 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 recorded on these consolidated financial statements.
Beginning in March 2020 the Governments of Canada and Ontario, as well as foreign governments, instituted emergency measures as a result of the novel strain of coronavirus ("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 full extent to which the COVID-19 pandemic and the various responses to it might impact the Company's business, operations and financial results will depend on numerous evolving factors that are not subject to accurate prediction and that are beyond the Company's control.
These consolidated financial statements do not include any adjustments to reflect the potential 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. Such adjustments could be material.
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Recently 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.
On January 1, 2021, the Company early adopted ASU No. 2020-06, -Debt-"Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity": simplifies accounting for convertible instruments by removing major separation models required under current US GAAP. ASU 2020-06 reduces the number of models used to account for convertible instruments, amends diluted earnings per share "EPS" calculations for convertible instruments, and amends the requirements for a contract (or embedded derivative) that is potentially settled in an entity's own shares to be classified in equity. The ASU updates the guidance on certain embedded conversion features that are not required to be accounted for as derivatives under Topic 815, Derivatives, or Hedging, or that do not result in substantial premiums accounted for as paid-in capital, such that those features are no longer required to be separated from the host contract. The convertible debt instruments will be accounted for as a single liability measured at amortized cost. This will also result in the interest expense recognized for convertible debt instruments to be typically closer to the coupon interest rate when applying the guidance in Topic 835, Interest. The amendments add certain disclosure requirements to increase transparency and decision-usefulness about a convertible instrument's terms and features. Under ASU 2020-06, the Company must use the if-converted method for including convertible instruments in diluted EPS as opposed to the treasury stock method. ASU 2020-06 is effective for annual reporting periods beginning after December 15, 2023. Early adoption is allowed under the standard with either a modified retrospective or full retrospective method. There were no embedded conversion features accounted for as equity or derivatives in the convertible promissory notes outstanding on January 1, 2021 The Company early adopted ASU 2020-06 on January 1, 2021 using the modified retrospective method. As a result, the adoption of ASU 2020-06 did not have any impact on the opening balances in the annual consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.
Item 8. Financial Statements and Supplementary Data.
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