Item 1.
Business.
OVERVIEW
The following organization chart sets forth our wholly-owned
subsidiaries:
2
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 Energy Corp. 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 Energy Corp. continued its existence
under the DGCL as a corporation incorporated in the State of Delaware. The
business, assets and liabilities of the Company 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 Energy Corp. 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 (the SEC) on May, 23, 2017.
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. and
SusGlobal Energy Belleville Ltd.
SusGlobal is a renewable energy company focused on acquiring,
developing and monetizing a portfolio of proprietary technologies in the waste
to energy and regenerative products application globally.
With the growing amount of organic wastes being produced by
society as a whole, a solution for sustainable global management of these wastes
must be achieved. 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
earths 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. The portfolio will be comprised of four 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) Increasing the capacity of existing infrastructure (anaerobic
digesters) to allow processing of SSO to increase biogas yield; (c) Utilize
recycled plastics to produce liquid fuels; and (d) process digestate to produce
a pathogen free organic fertilizer.
The convertibility of organic material into valuable end
products such as biogas, liquid biofuels, organic fertilizers and compost shows
the utility of renewable energy. These products can be converted into
electricity and fuels and are 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 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 project 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, Biogas Production,
Wastewater Treatment, In-Vessel Composting, SSO Treatment, Biosolids Heat
Treatment and Composting.
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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
identifying idle or underutilized anaerobic digesters and integrating our
technologies with capital investment to optimizing the operation of the existing
digesters to reach their full capacity for processing SSO. Our processes not
only divert significant organic waste from landfills, but also result in methane
avoidance, with significant Greenhouse Gas (GHG) reductions from waste
disposal. The processes also produce renewable energy through the conversion of
wastewater biosolids and organic wastes in the same equipment (co-digestion) and
valuable end products such as biogas, electricity and pathogen free organic
fertilizer, considered Class AA organic fertilizer.
Currently, our primary customers are municipalities in both
rural and urban centers throughout southern and central Ontario, Canada. Much of
the research and development that has been carried out has been completed by our
CEO through multiple projects carried out prior to the formation of SusGlobal.
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.
Our Status as an Emerging Growth Company
We are an emerging growth company, as defined in the
Jumpstart Our Business Startups Act of 2012, and the JOBS Act. Certain specified
reduced reporting and other regulatory requirements are available to public
companies that are emerging growth companies. These provisions include:
-
an exemption from the auditor attestation requirement in the assessment of
our internal controls over financial reporting required by Section 404 of the
Sarbanes-Oxley Act of 2002;
-
an exemption from the adoption of new or revised financial accounting
standards until they would apply to private companies;
-
an exemption from compliance with any new requirements adopted by the
Public Company Accounting Oversight Board, or the PCAOB, requiring mandatory
audit firm rotation or a supplement to the auditors report in which the
auditor would be required to provide additional information about our audit
and our financial statements; and
-
reduced disclosure of our executive compensation arrangements.
We have elected to opt out of the extended transition period
for complying with new or revised accounting standards. This election is
irrevocable.
We will continue to be an emerging growth company until the
earliest of:
-
the last day of our fiscal year in which we have total annual gross
revenues of $1,000,000,000 (as such amount is indexed for inflation every five
years by the SEC to reflect the change in the Consumer Price Index for All
Urban Consumers published by the Bureau of Labor Statistics, setting the
threshold to the nearest $1,000,000) or more;
-
the last day of our fiscal year following the fifth anniversary of the
date of our first sale of common equity securities pursuant to an effective
registration statement under the Securities Act of 1933, as amended;
-
the date on which we have, during the prior three-year period, issued more
than $1,000,000,000 in non- convertible debt; or
-
the date on which we are deemed to be a large accelerated filer under the
rules of the Securities and Exchange Commission, or SEC, which means the
market value of our common stock that is held by non-affiliates (or public
float) exceeds $700 million as of the last day of our second fiscal quarter in
our prior fiscal year.
We are also 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 our public float exceeds $75 million on the last day of
our second fiscal quarter in our prior fiscal year.
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RECENT BUSINESS DEVELOPMENTS
Trademark Applications
On March 13, 2019, the Company filed trademark applications
with the Canadian and US trademark offices to register the SusGlobal logo,
Earths Journey, SusGro, Leaders in the Circular Economy and Caring for Earths
Journey.
Securities Purchase Agreements
On March 7 and 8 of 2019, the Company entered into securities
purchase agreements (the March 2019 SPAs) with two investors (the March 2019
Investors) pursuant to which each March 2019 Investor purchased two 12%
unsecured convertible promissory notes comprised of the first notes (the First
Notes) being in the amount of $275,000 each, and the remaining notes in the
amount of $275,000 each (the Back-End Notes, and, together with the First
Notes, the March 2019 Notes) in the aggregate principal amount of $1,100,000,
such principal and the interest thereon convertible into shares of the Companys
common stock (the Common Stock) at the March 2019 Investors option. Each
First Note contained a $25,000 Original Issuance Discount (OID) such that the
purchase price of each First Note was $250,000. The First Notes were paid for by
the March 2019 Investors upon the signing of the March 2019 SPAs. The Back-End
Notes were initially paid for by the issuance of two offsetting $250,000 secured
notes issued to the Company by the March 2019 Investors (the Investor Notes),
provided that prior to conversion of the Investor Notes, the March 2019
Investors must have paid back the Investor Notes in cash.
Although the March 2019 SPAs are dated March 7, 2019 and March
8, 2019 (each, a March 2019 Note Effective Date), they became effective upon
the payment in cash of the purchase price by the March 2019 Investors. The
purchase prices of $250,000 and $250,000 for the First Notes was paid in cash by
the March 2019 Investors on March 11, 2019. After payment of transaction-related
expenses, net proceeds to the Company from the First Notes totaled $456,000.
The maturity dates of the March 2019 Notes are March 7, 2020
and March 8, 2020. The March 2019 Notes shall bear interest at a rate of twelve
percent (12%) per annum (the March 2019 Notes Interest Rate), which interest
shall be paid by the Company to the March 2019 Investors in Common Stock at any
time the March 2019 Investors send a notice of conversion to the Company. The
March 2019 Investors are entitled to, at their option, convert all or any amount
of the principal face amount and any accrued but unpaid interest of the March
2019 Notes into Common Stock, at any time, at a conversion price for each share
of Common Stock equal to 65% multiplied by the lowest trading price (as defined
in the March 2019 Notes) of the Common Stock as reported on the National
Quotations Bureau OTC Marketplace exchange upon which the Companys shares are
traded during the twenty (20) consecutive Trading Day period immediately
preceding (i) the applicable March 2019 Note Effective Date; or (ii) the
conversion date (the March 2019 Notes Variable Conversion Price).
On January 28, 2019 (the January 2019 Notes Effective Date),
the Company entered into three securities purchase agreements (the January 2019
SPAs) with three investors (the January 2019 Investors) pursuant to which the
January 2019 Investors purchased 12% unsecured convertible promissory notes (the
January 2019 Notes) from the Company in the aggregate principal amount of
$337,500, such principal and the interest thereon convertible into shares of the
Companys Common Stock at the January 2019 Investors option. After payment of
transaction related expenses, net proceeds to the Company from the January 2019
Notes totaled $302,500 and were received on February 1 and 4 of 2019.
The maturity date of each January 2019 Note is January 28, 2020
(the January 2019 Notes Maturity Dates). The January 2019 Notes shall bear
interest at a rate of twelve percent (12%) per annum (the January 2019 Notes
Interest Rate), which interest shall be paid by the Company to the January 2019
Investors in Common Stock at any time the January 2019 Investors send a notice
of conversion to the Company. The January 2019 Investors are entitled to, at
their option, convert all or any amount of the principal face amount and any
accrued but unpaid interest of the January 2019 Notes into Common Stock, at any
time, at a conversion price for each share of Common Stock equal to 65%
multiplied by the lowest trading price (as defined in the Notes) of the Common
Stock as reported on the National Quotations Bureau OTC Marketplace exchange
upon which the Companys shares are traded during the twenty (20) consecutive
Trading Day period immediately preceding (i) the January 2019 Notes Effective
Date; or (ii) the conversion date (the January 2019 Notes Variable Conversion
Price).
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 Colleges 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.
Deposits on Acquisition of Shares and Assets
On February 5, 2019, the Company advanced a non-refundable
deposit of $52,776 ($72,000 CAD) in connection with an executed non-binding
letter of intent in the amount of $1,295,394 ($1,767,250 CAD) to acquire 100% of
the shares of a company, whose primary asset includes the 39.44 acres of
property in Roslin (near Belleville), Ontario, Canada which includes the site
the Company currently leases for its organic composting facility.
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On January 31, 2019, the Company advanced a deposit of $36,650
($50,000 CAD) in connection with a $1,905,800 ($2,600,000 CAD) offer to purchase
certain property located in Hamilton, Ontario, Canada, from the court appointed
receiver for future operations.
Asset Purchase
On September 15, 2017, the Company entered into an asset
purchase agreement (the APA) with Astoria Organic Matters Ltd., and Astoria
Organic Matters Canada LP (Astoria), pursuant to which the Company purchased
certain assets of Astoria from the court appointed receiver of Astoria, BDO
Canada Limited (the Receiver). The purchase price for the composting
buildings, Gore cover system, driveway and paving, office trailer, certain
machinery and equipment, computer equipment, computer software and intangible
assets (the Assets) consisted of cash of $3,005,300 ($4,100,000 CAD), funded
by PACE Savings and Credit Union Limited (PACE) and 529,970 restricted common
shares of the Company, determined to be valued at $529,970 ($700,000 CAD) based
on private placement pricing at the time. In addition, legal costs of $21,442
($29,253 CAD) in connection with acquiring the Assets are included in the cost
of the organic composting facility. In addition, the Company purchased certain
accounts receivable which it was required to collect, totaling $127,650
($174,147 CAD) and a deposit with a local municipality in the amount of $36,650
($50,000 CAD).
Financing Agreement with PACE
Effective January 1, 2017, the Company obtained a Line of
Credit of up to $4,031,500 ($5,500,000 CAD) with PACE (the PACE Line of
Credit). On February 2, 2017, the Company received the first and only advance
in the amount of $1,172,800 ($1,600,000 CAD) on the PACE Line of Credit. The
PACE Line of Credit was due February 2, 2019 and is now one of multiple credit
facilities with PACE, as noted below.
The funds advanced on the PACE Line of Credit of $1,172,800
($1,600,000 CAD) bore interest at the PACE base rate of 6.75% plus 1.25% per
annum, at the time 8%, and was payable on a monthly basis, interest only, until
refinanced, as noted below. The PACE Line of Credit is secured by a business
loan general security agreement, a $1,172,800 ($1,600,000 CAD) personal
guarantee from the president of the Company (the President) and a charge
against the Companys office premises lease. Also pledged as security are the
shares of the wholly-owned subsidiaries and a pledge of 3,300,000 shares of
Common Stock of the Company held by Landfill Gas Canada Ltd. (LFGC), an
Ontario company controlled by a director and chief executive officer of the
Company (the CEO), 500,000 shares of Common Stock of the Company held by the
chief financial officer (the CFO) and 2,000,000 shares of Common Stock of the
Company held by a directors company, and a limited recourse guarantee by each.
The PACE Line of Credit is fully open for prepayment at any time without notice
or bonus. A total commitment fee of $80,630 ($110,000 CAD) was paid to PACE. In
addition, the agents who assisted in establishing the PACE Line of Credit
received 1,620,000 shares of Common Stock of the Company determined to be valued
at $469,800, based on private placement pricing at the time and cash of $300,000, on
closing, for their services. Other closing costs in connection with the PACE
Line of Credit included legal fees of $28,377 ($38,713 CAD). As at December 31,
2018, $745,897 ($1,017,595 CAD) (2017-$817,932; $1,026,135 CAD) remains
outstanding. During the year, the Company incurred interest charges of $64,042
($82,945 CAD) (2017-$63,842; $82,901 CAD) on the PACE Line of Credit.
On July 27, 2018, the Company refinanced this credit facility
at the PACE base rate of 7% plus 1.25% per annum, currently 8.25%. The credit
facility is due on demand, but until a demand is made, is payable in monthly
blended installments of principal and interest of $6,424 ($8,764 CAD),
commencing August 2, 2018, amortized over a twenty-year period and matures on
September 2, 2022.
On June 15, 2017, PACE loaned the Company $439,800 ($600,000
CAD) under a variable rate business loan agreement (the PACE Business Loan
Agreement), for its bid for the purchase of certain assets of Astoria on terms
and conditions similar to the abovementioned PACE Line of Credit. As at December
31, 2018, $417,137 ($569,081 CAD) (2017-$457,428; $573,865 CAD) remains
outstanding under the PACE Business Loan Agreement. During the year, the Company
incurred interest charges of $35,870 ($46,458 CAD) (2017-$19,276; $25,031 CAD)
in connection with the PACE Business Loan Agreement.
On July 27, 2018, the Company refinanced this credit facility
at the PACE base rate of 7% plus 1.25% per annum, currently 8.25%. The credit
facility is due on demand, but until a demand is made, is payable in monthly
blended installments of principal and interest of $3,592 ($4,901 CAD),
commencing August 2, 2018, amortized over a twenty-year period and matures on
September 2, 2022.
On August 4, 2017, PACE loaned the Company $36,665 ($50,000
CAD) under a variable business loan agreement, to satisfy an outstanding
liability on terms and conditions similar to the abovementioned PACE Line of
Credit, except that the loan was due February 4, 2019. As at December 31, 2018, $36,344 ($49,583
CAD) (2017-$39,855; $50,000 CAD) remains outstanding. During the year, the
Company incurred interest charges of $3,126 ($4,048 CAD) (2017-$478; $625 CAD)
on this credit facility.
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On July 27, 2018, the Company refinanced this credit facility
at the PACE base rate of 7% plus 1.25% per annum, currently 8.25%. The credit
facility is payable on demand, but until a demand is made, is payable in monthly
blended installments of principal and interest of $313 ($427 CAD), commencing
August 4, 2018, amortized over a twenty-year period and matures on September 4,
2022.
On September 13, 2017, PACE loaned the Company $2,729,800
($3,724,147 CAD) under a corporate term loan (the PACE Corporate Term Loan).
The funds were used for the purpose of acquiring certain assets of Astoria from
the court appointed receiver on September 15, 2017. The PACE Corporate Term Loan
bore interest at the PACE base rate of 6.75% plus 1.25% per annum, 8% at the
time, payable in monthly blended installments of principal and interest of
$55,388 ($75,564 CAD), and matures on September 13, 2022. The PACE 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 Securities Act in the amount of $2,932,717 ($4,000,978 CAD)
against the Companys assets, including accounts receivable, inventory and
equipment. PACE has also provided the Company with a letter of credit in the
favor of the Ministry of the Environment and Climate Change (MOECC) in the
amount of $202,917 ($276,831 CAD) and, as security, has registered a charge of
lease over the premises, located at 704 Phillipston Road, Roslin, Ontario,
Canada. As at December 31, 2018, and the date of this filing, the MOECC has not
drawn on this letter of credit. The PACE Corporate Term Loan also includes an
assignment of existing contracts included under the APA. On June 13, 2018, the
unpaid and previously deferred interest on the PACE Corporate Term Loan for the
period beginning on March 13, 2018 and ending June 13, 2018, in the amount of
$50,828 ($69,343 CAD), was capitalized and included in the principal balance of
the PACE Corporate Term Loan. As at December 31, 2018, $2,528,400 ($3,449,387
CAD) (2017-$2,846,220; $3,570,719 CAD) remains outstanding under the PACE
Corporate Term Loan. During the year, the Company incurred interest charges of
$218,514 ($283,013 CAD) (2017-$68,048; $88,358 CAD) under PACE Corporate Term
Loan. The shares pledged as security for the Line of Credit and the other credit
facilities also pertain to this corporate term loan.
On July 26, 2018, the Company refinanced the PACE Corporate
Term Loan. The first and only blended installment of principal and interest of
$21,377 ($29,164 CAD) was due August 1, 2018 at the rate of 8% per annum, and
amortized over a twenty-year period. The PACE Corporate Term Loan is due on
demand, but until a demand is made, is payable in monthly blended installments
of principal and interest of $21,778 ($29,711 CAD), commencing August 13, 2018,
at the PACE base rate of 7% plus 1.25% per annum, currently 8.25%. The PACE
Corporate Term Loan continues to be amortized over a twenty-year period and
matures on September 13, 2022.
Other
On April 11, 2018, three directors each loaned the Company
$19,928 ($25,000 CAD) for working capital purposes (the Director Loans). The
Director Loans bear interest at the rate of 12% per annum, are due on demand and
unsecured. There are no written agreements evidencing the Director Loans. During
the year, $5,026 ($6,510 CAD) of interest was charged on the Director Loans. As
at December 31, 2018, $4,772 ($6,510 CAD) (December 31, 2017-$nil; $nil CAD) in
interest is included in accrued liabilities and the Director Loans remain
outstanding in the amount of $54,975 ($75,000 CAD).
On April 3, 2018, a new loan was provided by Travellers
International Inc. (Travellers), an Ontario company controlled by the
Executive Chairman and President, who is also a director of the Company, in the
amount of $159,420 ($200,000 CAD) (the Travellers Loan). A portion of the
funds, $110,777 ($151,128 CAD), was used to pay two overdue monthly principal
and interest instalments on the Companys PACE Corporate Term Loan. This new
loan is due on demand, unsecured and bears interest at the rate of 12% per
annum. There is no written agreement evidencing the Travellers Loan. During the
year, $14,094 ($18,254 CAD) (2017-$15,056; $19,550 CAD) in interest was charged
on the Travellers Loan and other loans repaid to Travellers during the year. As
at December 31, 2018, $13,110 ($17,885 CAD) (December 31, 2017-$22,120; $27,750
CAD) in interest is included in accrued liabilities and the Travellers Loan
remains outstanding in the amount of $146,600 ($200,000 CAD).
On February 16, 2018, the Company finalized a lease agreement
for certain equipment for its organic composting facility, which was previously
on monthly rental, in the amount of $181,381 ($247,450 CAD) (the 2018 Equipment
Lease Agreement). The 2018 Equipment Lease Agreement is for a period of
forty-eight months, with two initial monthly installments of $7,330 ($10,000
CAD) each, plus the applicable harmonized sales taxes, followed by forty-six
monthly blended installments of principal and interest of $3,751 ($5,118 CAD),
plus the applicable harmonized sales taxes. The Company has the option to
purchase the equipment on the forty ninth month for an amount of $18,090
($24,680 CAD), plus the applicable harmonized sales taxes. The 2018 Equipment
Lease Agreement bears interest at the rate of 6.15% annually, compounded
monthly, due January 27, 2022. During the year, $8,514 ($11,027 CAD) of interest
was charged on the 2018 Equipment Lease Agreement.
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On October 30, 2017, the Company finalized a lease agreement
for certain equipment for its organic composting facility, which commenced on
October 30, 2017, in the amount of $210,114 ($286,650 CAD) (the October 2017
Equipment Lease Agreement). The October 2017 Equipment Lease Agreement requires
monthly blended installments of principal and interest of $4,281 ($5,840 CAD),
plus applicable harmonized sales taxes and a final balloon payment of $20,964
($28,600 CAD), plus applicable harmonized sales taxes on October 31, 2021. The
October 2017 Equipment Lease Agreement bears interest at the rate of 5.982%
annually, compounded monthly, due September 30, 2021. During the year, $10,724
($13,889 CAD) (2017-$2,064; $2,680) of interest was charged on the October 2017
Equipment Lease Agreement.
On September 21, 2017, the company finalized a lease agreement
for the lease of certain equipment for its organic composting facility, in the
amount of $12,593 ($17,180 CAD) (the September 2017 Equipment Lease
Agreement). The September 2017 Equipment Lease Agreement requires monthly
blended installments of principal and interest of $929 ($1,268 CAD) at a monthly
interest rate of 5.95%, due and fully paid on November 10, 2018. During the
year, $299 ($388 CAD) (2017-$136; $177 CAD) of interest was charged under the
September 2017 Equipment Lease Agreement.
On May 11, 2017, the Company signed a posting agreement with
CrowdVest, a Tennessee limited liability company (CrowdVest), to act as the
Companys online intermediary technology platform in connection with the
Companys offering of shares of Common Stock pursuant to Rule 506 of Regulation
D under the Securities Act of 1933. As compensation, CrowdVest received 20,000
restricted shares of Common Stock of the Company, based on an issuance price of
$5 per share, once the 506(c)-general solicitation offering commenced. The
offering terminated on October 27, 2017 and was not extended.
On May 9, 2017, the company signed a memorandum of agreement
with Kentech (the Kentech Agreement), a corporation existing under the laws of
the province of Ontario, Canada (Kentech). The Kentech Agreement provides the
Company the right to acquire and the right to use the equipment and innovative
processes of Kentech in relation to the production of liquid fertilizer from
organic waste material. The Kentech Agreement is for a period of five years,
commencing on the date of the Kentech Agreement. The Kentech Agreement may be
terminated by either party upon providing six months notice.
Effective January 1, 2017, new consulting agreements were
finalized for the services of the President and the CEO (the Consulting
Agreements). The Consulting Agreements are for a period of three years,
commencing January 1, 2017. For each of the President and the CEO, the monthly fees
are as follows: $3,665 ($5,000 CAD) for 2017 and $10,995 ($15,000 CAD) for 2018
and 2019. In addition, the CEO was granted 3,000,000 RSUs on January 1, 2017,
determined to be valued at $990,000, based on private placement pricing at the time. On
January 1, 2018, 1,000,000 RSUs were exchanged into 1,000,000 shares of Common
Stock of the Company. The RSUs of the remaining
two installments are expected to vest on January 1, 2019 and 2020, upon meeting certain
performance objectives. On May 17, 2018, the Presidents Consulting Agreement
was amended by the Board of Directors (the Board), to add the granting of 3,000,000 RSUs,
determined to be valued at $3,000,000 based on private placement pricing at the time on the same
terms and conditions as those of the CEO. On this date, the President was issued
1,000,000 shares of Common Stock of the Company in exchange for 1,000,000
RSUs. The RSUs of the remaining two installments are expected to vest on
January 1, 2019 and 2020, upon meeting certain performance objectives.
On December 7, 2016, the Company was awarded funding for the
AWT Program, a program for business led
collaborations in the water sector. The AWT Program is administered by the
Southern Ontario Water Consortium to assist small and medium sized businesses in
the Province of Ontario, Canada, leverage world-class research facilities and
academic expertise to develop and demonstrate water technologies for successful
introduction to market. In addition, the AWT Program is designed to enhance the
Ontario water cluster and continue to build Ontarios reputation for water
excellence around the world. The Companys academic partner is the CAWT at
Fleming College in Lindsay, Ontario, Canada. The original AWT Program budget was
for $586,400 ($800,000 CAD), of which the Company contributes 50% in cash and
in-kind contributions and CAWT contributes 50%. CAWT revised its budget for the
second and third years of the AWT Program. As a result, the cash commitments for
2017 and 2018, the second and third years of the AWT Program were cancelled.
The Company had already completed and provided its commitment
for the first year of the AWT Program which ended March 31, 2017, consisting of
professional fees of $7,217 ($9,432 CAD) and a contribution to the capital
requirements of the AWT Program, totaling $71,017 ($94,000 CAD), for equipment
to be used in the AWT Program and to be retained by CAWT.
On October 21, 2016, the Company hired the services of a
contractor to assume the role of vice-president of corporate development
(VPCD), effective November 1, 2016, for a period of fourteen months, at the
rate of $2,932 ($4,000 CAD) per month, plus applicable taxes. In addition, the
contractor was offered up to 115,000 shares of Common Stock of the Company, at a
price of $0.10 per common share, exercisable within 180 days of the effective
date of the contract. On April 30, 2017, the contractor exercised the offer to
purchase 115,000 shares of Common Stock of the Company. At the end of the
fourteen-month term, the VPCD continued to provide services on a monthly basis
for the first three months of 2018.
8
On November 4, 2016, the Companys BioGrid Project, a project
described in the expansion and operation agreement (the BioGrid Agreement)
with the Township of Georgian Bluffs and the Township of Chatsworth (the
Municipalities), was terminated.
On August 19, 2016, Travellers provided an unsecured loan
bearing interest at an annual rate of 12% in the amount of 153,930 ($210,000
CAD) which was required to initiate a letter of credit in the amount of $146,600
($200,000 CAD). This loan was repaid in full, with accrued interest on April 3,
2018. Fees for the letter of credit included $7,330 ($10,000 CAD) incurred and
charged by Travellers and $2,199 ($3,000 CAD) charged by the Companys chartered
bank. There is no written agreement evidencing this loan and the loan was
approved by the Board of Directors of the Company.
On August 3, 2016, the Company signed an agreement with Grimsby
Energy Inc. from Grimsby, Ontario, Canada, to allow hydrolyzed and pasteurized
organic wastes to be processed at their Anaerobic Biodigester. The agreement
commenced November 1, 2016 and can be terminated by either party within three
hundred and sixty-five days minimum written notice. Up to the date of this
filing, there has been no activity under this agreement.
On May 14, 2015, the Ontario Ministry of Environment and
Climate Change announced formal targets to be met to satisfy a commitment
necessary to join the Western Climate Initiative (the WCI) along with Quebec
and California, who are in the WCI with Cap and Trade commitments since 2014.
The Ontario emission targets are very ambitious, with greenhouse gas (GHG)
emission reductions of 15% by 2020, 37% by 2030 and 80% by 2050, all from a 1990
baseline. Ontario achieved a 6% reduction in GHG emissions from 1990 levels in
2014, mainly by closing all coal-fired power plants. The targets announced will
require a focused program to reduce GHG emissions. The Companys activities all
contribute to GHG reductions, so we will be a key part of Ontarios initiative.
The Company has also contacted counterparties in Quebec and California to
explore opportunities for relevant projects. SusGlobal is committed to making
all its commercial activities carbon neutral. New Cap and Trade regulations
became effective on January 2017. Subsequently, on July 3, 2018, the new premier
of the Province of Ontario announced the end of the Cap and Trade program in
Ontario.
On May 6, 2015, the Company finalized an agreement with Syngas,
a company incorporated under the laws of Malaysia (Syngas), providing an
exclusive license for the Company to use Syngas Intellectual Property within
North America for a period of five years from the date of this agreement, for a
consideration of $1, renewable every five years upon written request (the
Syngas License Agreement). Syngas produces equipment that uses an innovative
process to produce liquid transportation fuel from plastic waste material. The
Company issued 20,000 shares of Common Stock of the Company to an introducing
party, determined to be valued at $2,000. The Syngas License Agreement is being
amortized on a straight-line basis, over a period of 10 years. There are no
other obligations under the Syngas License Agreement.
The Company and Syngas intend to collaborate and cooperate with
a view to achieving economic and financial success for their respective
businesses. The Company will continue to pursue other similar intellectual
property around the world as we combine this and other technologies in
innovative configurations to monetize the portfolio of proprietary technologies
and processes to deliver value to our customers and shareholders.
Operations
The Company owns the Environmental Compliance Approvals (the
ECAs) issued by the Ministry of the Environment and Climate Change (the
MOECC), from the Province of Ontario, in place to accept up to 70,000 metric
tonnes of waste annually from the provinces of Ontario and Quebec and from
western New York state, and to operate a waste transfer station with the
capacity to process up to 50,000 metric tonnes of waste annually. Once built,
the location of the waste transfer station will be alongside the organic
composting facility which is currently in operation near Belleville, Ontario,
Canada.
Waste Transfer Station
-
Access to the waste
transfer station is critical to haulers who collect waste in areas not in close
proximity to disposal facilities where such disposal continues to be permitted.
Tipping fees charged to third parties at waste transfer stations are usually
based on the type and volume or weight of the waste deposited at the waste
transfer station, the distance to the disposal site, market rates for disposal
costs and other general market factors.
Organic Composting Facility
-
As noted above, the
Companys organic composting facility, located near Belleville, Ontario Canada,
has ECAs in place to accept up to 70,000 metric tonnes of waste annually and is
currently in operation. Certain assets of the organic composting facility,
including the ECAs for the waste transfer station, 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 composting facility
based on arrangements in place with the customers and the type of waste
accepted. Typical waste accepted includes, leaf and yard, biosolids, food,
liquid, paper sludge and source separated organics. During the year, tipping
fees ranged from $19 ($25 CAD) to $100 ($130 CAD) per metric tonne.
9
Compost Sales.
The Company also sells organic compost
(screened and unscreened) to local customers. During the year, the average
selling price of the compost per metric tonne was approximately $14 ($18 CAD).
Competition
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
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. This will be more evident when our organic composting
facility will have been in operation for a full fiscal year.
Employees
As of December 31, 2018, the Company had six full-time
employees and three independent contractors. Of the six full time employees, two
were employed in management and administrative positions, and the balance in
operations. The three 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.
A letter of credit in favor of the MOECC is supported by our
credit facility with PACE. As at December 31, 2018 and the date of filing, the
MOECC has not drawn on the letter of credit.
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.
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 MOECC,
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
violations.
Because the primary mission of our business is to collect and
manage solid and liquid waste 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.
10
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
In light of 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 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 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 has 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.
Item 1A.
Risk Factors.
In an effort 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:
11
-
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 2019 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.
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 managements attention from operating our
business.
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
regional 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, and our
competitors may therefore have greater financial, technical and marketing
resources available to them than we do.
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.
12
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 companys 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.
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. 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.
13
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 only
$1,273,482 in revenue. For the year ended December 31, 2018, net losses
attributable to common stockholders aggregated $3,894,016 (2017-$2,212,481) and,
at December 31, 2018, the Companys accumulated deficit was $8,554,312
(2017-$4,660,296). 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 report 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 independent registered public accounting firm,
in its report accompanying our consolidated financial statements as of and for
the years ended December 31, 2018 and 2017, expressed substantial doubt as to
our ability to continue as a going concern as of December 31, 2018, as a result
of our operating losses since inception and because the Company expects to incur
further losses in the development of our business. 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.
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 Companys 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.
14
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.
For
as long as we are an emerging growth company, we will not be required to
comply with certain reporting requirements, including those relating to
accounting standards and disclosure about our executive compensation, that apply
to some other public companies.
As
an emerging growth company under the JOBS Act, we are permitted to, and intend
to, rely on exemptions from certain disclosure requirements. We are an emerging
growth company until the earliest of:
-
the last day of the fiscal year during which we have total annual gross
revenues of $1 billion or more;
-
the last day of the fiscal year following the fifth anniversary of an
offering; the date on which we have, during the previous 3-year period, issued
more than $1 billion in non- convertible debt; or
-
the date on which we are deemed a large accelerated filer as defined
under the federal securities laws.
For
so long as we remain an emerging growth company, we will not be required to:
-
have an auditor report on our internal control over financial reporting
pursuant to the Sarbanes- Oxley Act of 2002;
-
comply with any requirement that may be adopted by the Public Company
Accounting Oversight Board regarding mandatory audit firm rotation or a
supplement to the auditors report providing additional information about the
audit and the financial statements (auditor discussion and analysis);
-
submit certain executive compensation matters to shareholders advisory
votes pursuant to the say on frequency and say on pay provisions
(requiring a non-binding shareholder vote to approve compensation of certain
executive officers) and the say on golden parachute provisions (requiring a
non-binding shareholder vote to approve golden parachute arrangements for
certain executive officers in connection with mergers and certain other
business combinations) of the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010; and
-
include detailed compensation discussion and analysis in our filings under
the Exchange Act and instead may provide a reduced level of disclosure
concerning executive compensation.
In
addition, the JOBS Act provides that an emerging growth company can take
advantage of the extended transition period for complying with new or revised
accounting standards. The Company has elected to opt out of this extended
transition period for complying with new or revised accounting standards. This
election is irrevocable.
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 Managements Discussion and
Analysis of Financial Condition and Results of Operations in this prospectus
and in other documents which we file with the SEC.
15
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;
-
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.
Managements 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.
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-
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.
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 MOECC. 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
17
-
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.
Some
of our customers 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 large national 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 composting
facility involves risks such as truck accidents, equipment defects, malfunctions
and failures.
18
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.
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 and our ability to obtain
financing on favorable terms could be adversely affected.
Additionally,
we have $3,727,778 ($5,085,645 CAD) of debt as of December 31, 2018 that is
exposed to changes in market interest rates within the next 12 months. In
addition, as of December 31, 2018, we had a letter of credit outstanding of
$202,917 ($276,831 CAD). If interest rates increase, our interest expense would
also increase, increasing our net losses and decreasing our cash flow.
As
at December 31, 2018, 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 our any of our credit facilities, term loans, obligations under
capital lease 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.
19
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.
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.