|
|
For the three-month
periods ended
|
|
|
For the nine-month
periods ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
390,723
|
|
$
|
279,394
|
|
$
|
1,025,695
|
|
$
|
639,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Opening inventory
|
|
24,738
|
|
|
115,733
|
|
|
18,550
|
|
|
53,964
|
|
Depreciation
|
|
105,990
|
|
|
98,823
|
|
|
302,816
|
|
|
291,134
|
|
Direct wages and benefits
|
|
71,347
|
|
|
41,526
|
|
|
180,379
|
|
|
125,634
|
|
Equipment rental, delivery, fuel and
repairs
|
|
|
|
|
|
|
|
|
|
|
|
|
and maintenance
|
|
24,053
|
|
|
41,354
|
|
|
228,535
|
|
|
102,552
|
|
Utilities
|
|
19,309
|
|
|
22,755
|
|
|
79,535
|
|
|
54,643
|
|
Outside
contractors
|
|
17,824
|
|
|
(27
|
)
|
|
22,526
|
|
|
16,654
|
|
|
|
263,261
|
|
|
320,164
|
|
|
832,341
|
|
|
644,581
|
|
Less: closing
inventory
|
|
(27,538
|
)
|
|
(73,795
|
)
|
|
(27,538
|
)
|
|
(73,795
|
)
|
Total cost of sales
|
|
235,723
|
|
|
246,369
|
|
|
804,803
|
|
|
570,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
155,000
|
|
|
33,025
|
|
|
220,892
|
|
|
68,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Management compensation-stock- based
|
|
|
|
|
|
|
|
|
|
|
|
|
compensation (note 11)
|
|
85,000
|
|
|
332,500
|
|
|
750,000
|
|
|
1,997,500
|
|
Management compensation-fees (note 11)
|
|
81,800
|
|
|
82,619
|
|
|
243,778
|
|
|
256,377
|
|
Marketing
|
|
5,785
|
|
|
-
|
|
|
252,462
|
|
|
-
|
|
Professional fees
|
|
63,357
|
|
|
246,245
|
|
|
270,328
|
|
|
383,287
|
|
Interest expense (notes 10, 11, 13, 14, 15,
16 and 17)
|
|
152,952
|
|
|
90,939
|
|
|
408,382
|
|
|
267,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office and administration (note 11)
|
|
62,906
|
|
|
39,182
|
|
|
176,850
|
|
|
102,767
|
|
Rent and occupancy (note 11)
|
|
33,024
|
|
|
54,925
|
|
|
92,085
|
|
|
123,842
|
|
Insurance
|
|
17,508
|
|
|
14,172
|
|
|
45,518
|
|
|
44,757
|
|
Filing fees
|
|
2,546
|
|
|
1,479
|
|
|
31,643
|
|
|
11,518
|
|
Amortization of financing costs
|
|
88,956
|
|
|
-
|
|
|
154,721
|
|
|
-
|
|
Directors' compensation (note 11)
|
|
(14,648
|
)
|
|
766
|
|
|
(1,948
|
)
|
|
2,331
|
|
Repairs and maintenance
|
|
4,219
|
|
|
1,471
|
|
|
8,973
|
|
|
20,240
|
|
Total operating
expenses
|
|
583,405
|
|
|
864,298
|
|
|
2,432,792
|
|
|
3,210,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
(428,405
|
)
|
|
(831,273
|
)
|
|
(2,211,900
|
)
|
|
(3,141,825
|
)
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
income
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange gain (loss)
|
|
25,828
|
|
|
(27,107
|
)
|
|
(51,649
|
)
|
|
(6,093
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
$
|
(402,577
|
)
|
$
|
(858,380
|
)
|
$
|
(2,263,549
|
)
|
$
|
(3,147,918
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share-basic and diluted
|
$
|
(0.01
|
)
|
$
|
(0.02
|
)
|
$
|
(0.05
|
)
|
$
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares
outstanding- basic and diluted
|
|
43,082,783
|
|
|
40,003,672
|
|
|
42,285,041
|
|
|
39,222,148
|
|
The accompanying notes are an integral part of these interim
condensed consolidated financial statements.
6
SusGlobal Energy Corp.
|
Interim Condensed Consolidated Statements of Changes
in Stockholders' Deficiency
|
For the three and nine-month periods ended September
30, 2019 and 2018
|
(Expressed in United States Dollars)
|
(unaudited)
|
|
|
|
Number of
Shares
|
|
|
Common
Shares
|
|
|
Additional
Paid- in
Capital
|
|
|
Share
Subscriptions
Payable
|
|
|
Stock
Compensation
Reserve
|
|
|
Accumulated
Deficit
|
|
|
Accumulated Other
Comprehensive
Loss
|
|
|
Stockholders'
Deficiency
|
|
Balance-December 31, 2018
|
|
40,299,531
|
|
$
|
4,031
|
|
$
|
5,754,260
|
|
$
|
4,600
|
|
$
|
1,330,000
|
|
$
|
(8,554,312
|
)
|
$
|
(80,827
|
)
|
$
|
(1,542,248
|
)
|
Shares issued for proceeds previously
received
|
|
5,000
|
|
|
1
|
|
|
4599
|
|
|
(4,600
|
)
|
|
-
|
|
|
-
|
|
|
|
|
|
-
|
|
Shares issued on vesting of
2018 stock award
|
|
1,000,000
|
|
|
100
|
|
|
999,900
|
|
|
-
|
|
|
(1,000,000
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Shares issued for professional
services
|
|
100,000
|
|
|
10
|
|
|
52,990
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
53,000
|
|
Stock compensation expensed on
vesting of stock awards
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
332,500 -
|
|
|
-
|
|
|
-
|
|
|
332,500
|
|
Other comprehensive loss
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(27,505
|
)
|
|
(27,505
|
)
|
Net loss
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,080,544
|
)
|
|
-
|
|
|
(1,080,544
|
)
|
Balance-March
31, 2019
|
|
41,404,531
|
|
$
|
4,142
|
|
$
|
6,811,749
|
|
$
|
-
|
|
$
|
662,500
|
|
$
|
(9,634,856
|
)
|
$
|
(108,332
|
)
|
$
|
(2,264,797
|
)
|
Shares issued on vesting of
2018 stock award
|
|
1,000,000
|
|
|
100
|
|
|
329,900
|
|
|
-
|
|
|
(330,000
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Shares issued to directors
|
|
80,000
|
|
|
8
|
|
|
39,192
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
39,200
|
|
Stock compensation expensed on
vesting of stock awards
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
332,500
|
|
|
-
|
|
|
-
|
|
|
332,500
|
|
Other comprehensive loss
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(49,972
|
)
|
|
(49,972
|
)
|
Net loss
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(702,951
|
)
|
|
-
|
|
|
(702,951
|
)
|
Balance-June
30, 2019
|
|
42,484,531
|
|
$
|
4,250
|
|
$
|
7,180,841
|
|
$
|
-
|
|
$
|
665,000
|
|
$
|
(10,337,807
|
)
|
$
|
(158,304
|
)
|
$
|
(2,646,020
|
)
|
Shares issued on conversion of debt to equity
|
|
1,892,185
|
|
|
189
|
|
|
93,608
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
93,797
|
|
Stock
compensation expensed on vesting of stock awards
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
85,000
|
|
|
-
|
|
|
-
|
|
|
85,000
|
|
Other comprehensive income
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
25,828
|
|
|
25,828
|
|
Net loss
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(428,405
|
)
|
|
-
|
|
|
(428,405
|
)
|
Balance-September 30, 2019
|
|
44,376,716
|
|
$
|
$ 4,439
|
|
$
|
7,274,449
|
|
$
|
-
|
|
$
|
750,000
|
|
$
|
(10,766,212
|
)
|
$
|
(132,476
|
)
|
$
|
(2,869,800
|
)
|
The accompanying notes are an integral part of these interim
condensed consolidated financial statements.
7
SusGlobal Energy Corp.
|
Interim Condensed Consolidated Statements of Changes
in Stockholders' Deficiency
|
For the three and nine-month periods ended September
30, 2019 and 2018
|
(Expressed in United States Dollars)
|
(unaudited)
|
|
|
Number of
Shares
|
|
|
Common
Shares
|
|
|
Additional
Paid-
in
Capital
|
|
|
Share
Subscriptions
Payable
|
|
|
Stock
Compensation
Reserve
|
|
|
Accumulated
Deficit
|
|
|
Accumulated Other
Comprehensive
Loss
|
|
|
Stockholders'
Deficiency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2017
|
37,393,031
|
|
$
|
3,740
|
|
$
|
3,576,111
|
|
$
|
178,200
|
|
$
|
330,000
|
|
$
|
(4,660,296
|
)
|
$
|
(148,093
|
)
|
$
|
(720,338
|
)
|
Shares issued for proceeds previously received
|
190,000
|
|
|
19
|
|
|
178,181
|
|
|
(178,200
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Shares issued on vesting of stock award
|
1,000,000
|
|
|
100
|
|
|
329,900
|
|
|
-
|
|
|
(330,000
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Shares issued for private placement, net of share issue
costs
|
50,000
|
|
|
5
|
|
|
44,995
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
45,000
|
|
Stock compensation expensed on vesting of
stock award
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
82,500
|
|
|
-
|
|
|
-
|
|
|
82,500
|
|
Other comprehensive income
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
28,314
|
|
|
28,314
|
|
Net loss
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(483,617
|
)
|
|
-
|
|
|
(483,617
|
)
|
Balance-March 31, 2018
|
38,633,031
|
|
$
|
3,864
|
|
$
|
4,129,187
|
|
$
|
-
|
|
$
|
82,500
|
|
$
|
(5,143,913
|
)
|
$
|
(119,779
|
)
|
$
|
(1,048,141
|
)
|
Shares issued on vesting of 2017 stock
award
|
1,000,000
|
|
|
100
|
|
|
999,900
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,000,000
|
|
Shares issued for private placement, net of share issue
costs
|
280,000
|
|
|
28
|
|
|
259,472
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
259,500
|
|
Stock compensation expensed on vesting of
stock award
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
582,500
|
|
|
-
|
|
|
-
|
|
|
582,500
|
|
Other comprehensive income
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(7,300
|
)
|
|
(7,300
|
)
|
Net loss
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,826,935
|
)
|
|
-
|
|
|
(1,826,935
|
)
|
Balance-June 30, 2018
|
39,913,031
|
|
$
|
3,992
|
|
$
|
5,388,559
|
|
$
|
-
|
|
$
|
665,000
|
|
$
|
(6,970,848
|
)
|
$
|
(127,079
|
)
|
$
|
(1,040,376
|
)
|
Shares issued for private placement, net of
share issue costs
|
137,000
|
|
|
14
|
|
|
132,026
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
132,040
|
|
Stock compensation expensed on vesting of stock award
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
332,500
|
|
|
-
|
|
|
-
|
|
|
332,500
|
|
Other comprehensive loss
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(27,107
|
)
|
|
(27,107
|
)
|
Net loss
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(831,273
|
)
|
|
-
|
|
|
(831,273
|
)
|
Balance-September 30, 2018
|
40,050,031
|
|
$
|
4,006
|
|
$
|
5,520,585
|
|
$
|
-
|
|
$
|
997,500
|
|
$
|
(7,802,121
|
)
|
$
|
(154,186
|
)
|
$
|
(1,434,216
|
)
|
The accompanying notes are an integral part of these interim
condensed consolidated financial statements.
8
SusGlobal Energy Corp.
|
Interim Condensed Consolidated Statements of Cash
Flows
|
For the three and nine-month periods ended September
30, 2019 and 2018
|
(Expressed in United States Dollars)
|
(unaudited)
|
|
|
|
For the nine-month
period ended
|
|
|
For the nine-month
period ended
|
|
|
|
September 30, 2019
|
|
|
September 30, 2018
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
Net loss
|
$
|
(2,211,900
|
)
|
$
|
(3,141,825
|
)
|
Adjustments for:
|
|
|
|
|
|
|
Depreciation
|
|
308,588
|
|
|
297,294
|
|
Amortization of intangible asset
|
|
832
|
|
|
150
|
|
Amortization of operating right-of-use asset
|
|
6,107
|
|
|
-
|
|
Amortization of financing fees
|
|
154,721
|
|
|
-
|
|
Stock-based compensation
|
|
750,000
|
|
|
1,997,500
|
|
Shares issued for professional services
|
|
53,000
|
|
|
-
|
|
Shares issued to directors
|
|
39,200
|
|
|
-
|
|
Interest capitalized
|
|
-
|
|
|
53,873
|
|
Changes in non-cash working capital:
|
|
|
|
|
|
|
Trade receivables
|
|
(10,279
|
)
|
|
40,282
|
|
Government remittances receivable
|
|
-
|
|
|
3,578
|
|
Inventory
|
|
(8,399
|
)
|
|
(21,620
|
)
|
Prepaid expenses and deposits
|
|
5,484
|
|
|
36,829
|
|
Accounts payable
|
|
335,056
|
|
|
1,186
|
|
Government remittances payable
|
|
(12,656
|
)
|
|
22,470
|
|
Accrued liabilities
|
|
(62,340
|
)
|
|
196,276
|
|
Net cash used
in operating activities
|
|
(652,586
|
)
|
|
(514,007
|
)
|
Cash flows from investing activities
|
|
|
|
|
|
|
Business acquisition
|
|
(1,468,226
|
)
|
|
-
|
|
Purchase of intangible assets
|
|
(11,149
|
)
|
|
-
|
|
Purchase of
long-lived assets
|
|
(199,434
|
)
|
|
(1,553
|
)
|
Net cash used in investing activities
|
|
(1,678,809
|
)
|
|
(1,553
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
Bank indebtedness
|
|
7,323
|
|
|
820
|
|
Advance
|
|
30,096
|
|
|
-
|
|
Repayments of advance
|
|
(9,006
|
)
|
|
-
|
|
Repayment of long-term debt
|
|
(54,764
|
)
|
|
(138,303
|
)
|
Repayments of obligations under capital
lease
|
|
(61,967
|
)
|
|
(71,970
|
)
|
Advances of convertible promissory notes
|
|
1,328,975
|
|
|
-
|
|
Repayments of operating lease liability
|
|
(1,864
|
)
|
|
-
|
|
Advance of mortgage payable
|
|
1,272,993
|
|
|
-
|
|
Repayments of loans payable to related
parties
|
|
(206,910
|
)
|
|
(15,538
|
)
|
Advances of loans payable to related parties
|
|
-
|
|
|
213,648
|
|
Private placement proceeds (net of share issue costs)
|
|
-
|
|
|
436,540
|
|
Net cash
provided by financing activities
|
|
2,304,876
|
|
|
425,197
|
|
Effect of exchange rate on cash
|
|
(16,192
|
)
|
|
(35,754
|
)
|
Decrease in cash
|
|
(42,711
|
)
|
|
(126,117
|
)
|
Cash and cash equivalents-beginning of period
|
|
42,711
|
|
|
126,117
|
|
Cash and cash
equivalents-end of period
|
$
|
-
|
|
$
|
-
|
|
Supplemental Cash Flow Disclosures:
|
|
|
|
|
|
|
Interest
paid
|
$
|
171,675
|
|
$
|
279,320
|
|
Income taxes paid
|
|
-
|
|
|
-
|
|
(i)
|
Refer to note 14 for obligations under capital lease,
note 13 for details on the non-cash purchase of certain long-lived assets
and note 18 on the issuance of shares on the conversion of
debt.
|
The accompanying notes are an integral part of these interim
condensed consolidated financial statements.
9
SusGlobal Energy Corp.
|
Notes to the Interim Condensed Consolidated Financial
Statements
|
September 30, 2019 and 2018
|
(Expressed in United States Dollars)
|
(unaudited)
|
1. Nature of Business and Basis of Presentation
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. SusGlobal, 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, 23, 2017.
On December 11, 2018, the Company began trading on the Over the
Counter QB venture market exchange, under the ticker symbol SNRG.
SusGlobal is a renewable energy company focused on acquiring,
developing and monetizing a global portfolio of proprietary technologies in the
waste to energy and regenerative products application.
These interim condensed consolidated financial statements of
SusGlobal and its wholly-owned subsidiaries, SusGlobal Energy Canada Corp.,
SusGlobal Energy Canada I Ltd. ("SGECI"), SusGlobal Energy Belleville Ltd.
("SGEBL") and 1684567 Ontario Inc. ("1684567") (together, the "Company"), have
been prepared following generally accepted accounting principles in the United
States ("US GAAP") for interim financial information and the Securities Exchange
Commission ("SEC") instructions to Form 10-Q and Article 8 of SEC Regulation
S-X, and are expressed in United States Dollars. The Company's functional
currency is the Canadian Dollar ("CAD"). In the opinion of management, all
adjustments necessary for a fair presentation have been included.
2. Going Concern
The interim condensed 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 September 30, 2019, the Company had a working capital deficit of $7,865,585 (December 31, 2018-$4,830,948), incurred a net loss of $2,211,900 (2018-$3,141,825) for the nine months ended September 30, 2019 and had an accumulated deficit of $10,766,212 (December 31, 2018-$8,554,312) and expects to incur further losses in the development of its business.
10
SusGlobal Energy Corp.
|
Notes to the Interim Condensed Consolidated Financial
Statements
|
September 30, 2019 and 2018
|
(Expressed in United States Dollars)
|
(unaudited)
|
2. Going Concern, (continued)
On August 28, 2019, Pace Savings & Credit Union Limited
(PACE) informed the Company via letter that the credit facilities and
corporate term loan (the Debt) was in default due to the Companys going
concern disclosure in the Companys consolidated financial statements for the
years ended December 31, 2018 and 2017 and as a result of the Companys failure
to respond to an e-mail request from PACE with respect to the Companys efforts
to arrange for a payout. As a result, PACE was not agreeable to continue with
the Debt and had requested that the Companys indebtedness to PACE be paid in
full on or before December 31, 2019. PACE requested that their letter be fully
executed by September 5, 2019. On September 3, 2019, PACE informed the Company
via letter that the interest rates on the Debt be increased effective September
15, 2019, by 0.50%, and each month thereafter by a further 0.50%. On September
5, 2019, management arranged to meet with PACE to discuss their demands and to
discuss the Companys refinancing efforts. Management expressed their concerns
over PACEs actions in describing the details of the default and in increasing
the interest rates as per their written communication. Management indicated to
PACE that it was agreeable to a partial paydown of the Debt, as management was
in discussions with obtaining a first mortgage over the Companys property which
included their organic composting facilities, from a chartered bank. PACE
requested management to continue to update PACE on managements refinancing
plans. Management did not fully execute the September 5, 2019 letter from PACE
nor any future letters from PACE. The Company stopped payments on the
September and October instalments on the Debt with PACE. On September 11, 2019,
PACE informed the Company that it failed to execute the new terms by September
5, 2019 and that it failed to make the required September payments on two of the
three credit facilities that are part of the Debt, which were due on September
2, 2019. PACE also requested payments for the September monthly instalment
payment on each of the two credit facilities, not sufficient fund fees and
default and administrative fees totaling $1,978 ($2,620 CAD) and the letter of
credit fee in the amount of $1,888 ($2,500 CAD). The letter of credit fee was paid
and the letter of credit was extended to December 31, 2019. PACE also requested
that the Company provide cash collateral to PACE for the letter of credit, in
the amount of $209,035 ($276,831 CAD). PACE requested the consent of management to
have PACE appoint a financial advisor to inspect and assess the assets and
operations of the Company and requested that the letter be executed and returned
to PACE by September 12, 2019. In a letter to PACE, management noted that the
companys financial report due by November 14, 2019, will be provided to PACE
subsequent to the filing of the financial report and that no further payments
will be made to PACE pending resolution of a paydown schedule to facilitate the
principal reduction required by PACE on or before December 31, 2019. In a letter
from PACE on September 13, 2019, they agreed to renew the letter of credit to
December 31, 2019 but still consider the Debt in default. In a letter from PACE
on October 9, 2019, PACE confirmed that the letter of credit was renewed to
December 31, 2019 and noted further instalments payments returned stop payment,
which were due on September 13, 2019 and October 2 and 4, 2019. PACE reiterated
that they did not want to continue to be the Companys banker and that it did
not agree to any partial reduction of the Debt and requested that the Company
provide a written repayment plan to have the credit facilities permanently
retired. On November 1, 2019, the Company responded to PACEs demands to repay
all Debt by offering to repay
two credit facilities totaling $460,413 ($609,738 CAD) on or before December 31,
2019, in return for a forbearance to December 31, 2020 and repayment of the
remaining credit facility and corporate term loan no later than December 31,
2020 or upon the completion of the refinancing with the Canadian chartered bank.
On November 12, 2019, PACE responded to the Company accepting the repayment of
the two noted credit facilities, but, in addition, required that all the Debt be made
current, that the Company provide written reports to PACE on its refinancing
with the Canadian chartered bank on a monthly basis commencing December 15,
2019, that all remaining debt be repaid by June 30, 2020 and that PACE be
permitted to appoint a financial advisor to inspect the assets and operations of
the Company. In addition, the Companys letter of credit with PACE is expected
to be
renewed to June 30, 2020. All terms are subject to credit approval.
As a result of the PACE default, the advance is also in default
(refer to advance, note 12), the obligations under capital lease are also in
default (refer to obligations under capital lease, note 14) and the convertible
promissory notes are also in default (refer to convertible promissory notes,
note 15).
11
SusGlobal Energy Corp.
|
Notes to the Interim Condensed Consolidated Financial
Statements
|
September 30, 2019 and 2018
|
(Expressed in United States Dollars)
|
(unaudited)
|
2. Going Concern, (continued)
Further, on September 25, 2019, the Companys chief executive
officer (the CEO), resigned as a member of the Board of Directors (the Board)
and ceased providing his services as CEO. On November 6, 2019, by resolution of
the Board, the president of the Company (the President), was appointed CEO.
These factors cast substantial doubt as to the Company's
ability to continue as a going concern, which is dependent upon its ability to
obtain the necessary financing to further the development of its business,
satisfy its obligations to PACE and its other creditors, whose debt is also
in default and upon achieving
profitable operations. There is no assurance of funding being available or
available on acceptable terms. Realization values may be substantially different
from carrying values as shown.
These interim condensed consolidated financial statements do
not include any adjustments to reflect the future effects on the recoverability
and classification of assets or the amounts and classification of liabilities
that may result if the Company was unable to continue as a going concern.
3. Significant Accounting Policies
These interim condensed consolidated financial statements do
not include all of the information and footnotes required by US GAAP for
complete financial statements and should be read in conjunction with the
consolidated financial statements of the Company for the years ended December
31, 2018 and 2017 and their accompanying notes.
Recently Adopted Accounting Pronouncements:
On January 1, 2019, the Company adopted Accounting Standards
Update ("ASU") No. 2016-02, Leases which is also known as Accounting Standard Codification ("ASC") Topic
842, that requires lessees to recognize for all operating leases a right-of-use
asset and a lease obligation in the interim condensed consolidated balance
sheets. Expenses are recognized in the interim condensed consolidated statements
of operations and comprehensive loss in a manner similar to previous accounting
guidance. Lessor accounting under the new standard is substantially unchanged
and is not relevant to the Company. The Company adopted the accounting standard
using a prospective transition approach, which applies the provisions of the new
guidance at the effective date without adjusting the comparative periods
presented, with certain practical expedients available to ease the burden of
adoption.
12
SusGlobal Energy Corp.
|
Notes to the Interim Condensed Consolidated Financial
Statements
|
September 30, 2019 and 2018
|
(Expressed in United States Dollars)
|
(unaudited)
|
3. Significant Accounting Policies, (continued)
The Company elected the following practical expedients upon
adoption: not to reassess whether any expired or existing contracts are or
contain leases, not to reassess the lease classification for any expired or
existing leases, not to reassess initial direct costs for any existing leases,
not to separately identify lease and non-lease components (i.e. maintenance
costs) except for fleet vehicles and real estate, and not to evaluate historical
land easements under the new guidance. Additionally, the Company elected the
short-term lease exemption policy, applying the requirements of ASC 842 to
long-term leases (leases greater than 1 year) for which it only has one.
Adoption of the new standard resulted in $217,755 ($297,074
CAD) of additional right-of-use lease asset and lease liability as of January 1,
2019. The new standard did not have a significant impact on the interim
condensed consolidated statements of operations and comprehensive loss. See note
9, operating lease right-of-use asset and operating lease liability, for
additional information.
4. Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by
the financial accounting standards board (the "FASB") or other standard setting
bodies and adopted by the Company as of the specified effective date or possibly
early adopted, where permitted. Unless otherwise discussed, the impact of
recently issued standards that are not yet effective are not expected to have a
material impact on the Company's financial position, results of operations or
cash flows.
In August 2018, the FASB issued an update, ASU No. 2018-13,
Disclosure Framework-Changes to the Disclosure Requirements for Fair Value
Measurements to ASC Topic 820, Fair Value Movement. ASU No. 2018-13 modifies the
disclosure requirements for fair value measurements by removing, modifying,
and/or adding certain disclosures. ASU No. 2018-13 is effective for interim and
annual reporting periods in fiscal years beginning after December 15, 2019. The
Company is currently evaluating the impact of adopting ASU No. 2018-13.
In January 2017, the FASB issued ASU No. 2017-04,
"Intangibles-Goodwill and Other (Topic 350) - Simplifying the Test for
Goodwill Impairment". The new standard simplifies the accounting for
goodwill impairments by eliminating step 2 from the goodwill quantitative
impairment test. Instead, if the carrying amount of a reporting unit exceeds its
fair value, an impairment loss is to be recognized in an amount equal to that
excess, limited to the total amount of goodwill allocated to that reporting
unit. The standard is to be effective for interim and annual periods beginning
after December 15, 2019 and early adoption is permitted. The Company is
currently evaluating the impact of adopting ASU No. 2017-04.
13
SusGlobal Energy Corp.
|
Notes to the Interim Condensed Consolidated Financial
Statements
|
September 30, 2019 and 2018
|
(Expressed in United States Dollars)
|
(unaudited)
|
4. Recent Accounting Pronouncements, (continued)
In June 2016, the FASB issued ASU 2016-13, Measurement of
Credit Losses on Financial Instruments (Topic 326), which replaces the
incurred-loss impairment methodology and requires immediate recognition of
estimated credit losses expected to occur for most financial assets, including
trade receivables. Credit losses on available-for-sale debt securities with
unrealized losses will be recognized as allowances for credit losses limited to
the amount by which fair value is below amortized cost. ASU 2016-13 is effective
for the Company beginning January 1, 2020 and early adoption is permitted. The
Company does not believe the potential impact of the new guidance and related
codification improvements will be material to its financial position, results of
operations and cash flows.
5. Financial Instruments
The carrying value of cash and cash equivalents, trade
receivables, bank indebtedness, accounts payable, and accrued liabilities approximated their fair
values as of September 30, 2019 due to their short-term nature. The carrying
value of the advance, long-term debt, obligations under capital lease,
convertible promissory notes, mortgage payable and loans payable to related
parties approximated their fair values due to their market interest rates.
Interest, Credit and Concentration Risk
In the opinion of management, the Company is exposed to
significant interest rate risk on its long-term debt of $3,785,210 ($5,012,859
CAD) (December 31, 2018-$3,727,778; $5,085,645 CAD) and on its convertible
promissory notes, should the Company repay all or some of these convertible
promissory notes within the stipulated time period.
With regards to credit risk with customers, the customers
credit evaluation is reviewed by management and account monitoring procedures
are used to minimize the risk of loss. The Company believes that no additional
credit risk beyond amounts provided for by the allowance for doubtful accounts
are inherent in accounts receivable. As at September 30, 2019, the allowance for doubtful accounts was $nil (December 31, 2018-$nil).
As at September 30, 2019, the Company is exposed to
concentration risk as it had three customers (December 31, 2018-five customers)
representing greater than 5% of total trade receivables and these three
customers (December 31, 2018-five customers) represented 73% (2018-90%) of trade
receivables. The Company had certain customers whose revenue individually
represented 10% or more of the Company's total revenue. These customers
accounted for 71% (37%, 21%, and 13%) (September 30, 2018-67%; 31%, 26% and 10%)
of total revenue.
Liquidity Risk
Liquidity risk is the risk that the Company is unable to meet
its obligations as they fall due. The Company takes steps to ensure it has
sufficient working capital and available sources of financing to meet future
cash requirements for capital programs and operations. The Company is in
discussions with a Canadian chartered bank to refinance its obligations to PACE and to
another creditor. Refer also to going concern, note 2.
The Company actively monitors its liquidity to ensure that its
cash flows and working capital are adequate to support its financial obligations
and the Company's capital programs. In order to continue operations, the Company will need to raise capital, repay PACE for all or a
portion of its credit facilities and complete the refinancing of its real
property and organic composting facility. There is no assurance of funding being
available or available on acceptable terms. Realization values may be
substantially different from carrying values as shown. Refer also to going
concern, note 2.
14
SusGlobal Energy Corp.
|
Notes to the Interim Condensed Consolidated Financial
Statements
|
September 30, 2019 and 2018
|
(Expressed in United States Dollars)
|
(unaudited)
|
5. Financial Instruments, (continued)
Currency Risk
Although the Company's functional currency is the CAD, the
Company realizes a portion of its expenses in USD. Consequently, certain assets
and liabilities are exposed to foreign currency fluctuations. As at September
30, 2019, $169,249 (December 31, 2018-$68,393) of the Company's net monetary
liabilities were denominated in USD. The Company has not entered into any
hedging transactions to reduce the exposure to currency risk.
6. Business Acquisition
Effective May 24, 2019, the Company purchased all the issued
and outstanding shares of 1684567. The acquisition was accounted for as a
business combination using the acquisition method of accounting. The purchase
price paid in the acquisition has been preliminarily allocated to record the
assets acquired and liabilities assumed based on their estimated fair value.
When determining the fair values of assets acquired and liabilities assumed,
management made significant estimates. The transaction closed on May 28, 2019.
The purchase consideration consisted of cash from working capital of $209,952
($282,308 CAD) and cash from a third-party mortgage obtained in the amount of
$1,258,273 ($1,691,910 CAD, net of financing fees of $80,387 ($108,090 CAD)).
The total purchase price includes the original offer of $1,314,304 ($1,767,250
CAD) and acquisition costs of $153,922 ($206,968 CAD).
The allocation of the purchase price is as follows:
|
|
May 24, 2019
|
|
Purchase consideration
|
|
|
|
Cash ($1,974,218 CAD)
|
$
|
1,468,225
|
|
Assets acquired
|
|
|
|
Accounts receivable ($ 7,573 CAD)
|
|
5,632
|
|
Land
($1,850,892 CAD)
|
|
1,376,508
|
|
Automotive equipment and machinery ($16,525 CAD)
|
|
12,290
|
|
Customer list ($10,205 CAD)
|
|
7,589
|
|
Environmental compliance approval ($100,000 CAD)
|
|
74,370
|
|
Liabilities assumed
|
|
|
|
Accounts payable ($10,977 CAD)
|
|
8,164
|
|
|
|
|
|
Net assets acquired
($1,974,218 CAD)
|
$
|
1,468,225
|
|
15
SusGlobal Energy Corp.
|
Notes to the Interim Condensed Consolidated Financial
Statements
|
September 30, 2019 and 2018
|
(Expressed in United States Dollars)
|
(unaudited)
|
7. Trade Receivables
On December 17, 2017, the Company filed a motion record in the
Ontario Superior Court of Justice (the Court) against the Business Development
Bank of Canada and Astoria Organic Matters Ltd. and Astoria Organic Matters
Canada LP (Astoria), together, in the amount of $453,060 ($600,000 CAD), in
connection with the Companys purchase of certain assets from the court
appointed receiver for Astoria, BDO Canada Limited. (BDO). The basis for the
claim is for the Companys costs to process biosolids stored onsite in an amount
that was approximately ten times the amount permitted to be stored by conditions
set in the Environmental Compliance Approval (the ECA) for the Companys
organic composting facility. The Court dismissed each of the Companys motions,
including on November 13, 2019, the Court dismissed the final motion and stayed the private prosecution.
A further court date is set for November 4, 2019. As a result of this legal
proceeding, BDO, through its legal representative, filed garnishment orders to
collect on its outstanding fees, expenses and court costs, with three of the
Companys current customers. The garnishment orders, dated August 16, 2019,
totaled $100,046 ($132,494 CAD) each. Since the garnishment orders were delivered to
several customers, the payments of the Companys accounts receivable to satisfy
the garnishment orders, exceeded the amount of the garnishment orders. As at
September 30, 2019, $114,284 ($151,350 CAD) had been collected, which
represented an amount of $14,238 ($18,856 CAD) over and above the garnishment
orders. The amounts collected as at September 30, 2019 have been applied against
the outstanding accruals for legal fees, expenses and court costs, included in
accrued liabilities, on this legal proceeding.
Refer also to subsequent events, note 21(c), for details on
garnishment orders issued subsequent to September 30, 2019.
8. Intangible Assets
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
Technology license (net of accumulated
amortization of $881 (2018- $731))
|
$
|
1,120
|
|
$
|
1,270
|
|
Customer list-limited life-$9,298 CAD (net of accumulated
amortization of $907)
|
|
7,021
|
|
|
-
|
|
Trademarks-indefinite life-$14,817 CAD
|
|
11,188
|
|
|
-
|
|
Environmental compliance approvals-indefinite life-
$282,700 CAD
|
|
213,467
|
|
|
133,919
|
|
|
$
|
232,796
|
|
$
|
135,189
|
|
On May 6, 2015, the Company acquired an exclusive license from
Syngas SDN BHD ("Syngas"), a Malaysian company to use Syngas intellectual
property within North America for a period of five years for $1 consideration,
renewable every five years upon written request. Syngas manufactures equipment
that produces liquid transportation fuel from plastic waste material. The
Company issued 20,000 common shares of the Company to an introducing party,
determined to be valued at $2,000.
On March 14, 2019, the Company incurred fees to register
various trademarks in the United States and Canada, in the amount $11,188
($14,817 CAD).
On September 15, 2017, the Company acquired the environmental
compliance approvals on the purchase of certain assets of Astoria from BDO
Canada Limited (BDO") under an asset purchase agreement (the "APA").
Effective May 24, 2019, the Company acquired an additional
environmental compliance approval of $75,510 ($100,000 CAD) and a customer list $7,021
($9,298 CAD), net of accumulated amortization of $685 ($907 CAD), relating to certain municipal contracts (forty-five-month life) on the purchase
of the shares of 1684567.
16
SusGlobal Energy Corp.
|
Notes to the Interim Condensed Consolidated Financial
Statements
|
September 30, 2019 and 2018
|
(Expressed in United States Dollars)
|
(unaudited)
|
9. Long-lived Assets, net
|
|
|
|
|
September 30,
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
2018
|
|
|
|
Cost
|
|
|
Accumulated
|
|
|
Net book value
|
|
|
Net book value
|
|
|
|
|
|
|
depreciation
|
|
|
|
|
|
|
|
Land
|
$
|
1,397,609
|
|
$
|
-
|
|
$
|
1,397,609
|
|
$
|
-
|
|
Composting buildings
|
|
2,220,563
|
|
|
272,402
|
|
|
1,948,161
|
|
|
1,988,144
|
|
Gore cover system
|
|
1,071,346
|
|
|
191,043
|
|
|
880,303
|
|
|
748,112
|
|
Driveway and paving
|
|
349,989
|
|
|
57,165
|
|
|
292,824
|
|
|
304,639
|
|
Machinery and equipment
|
|
62,806
|
|
|
36,252
|
|
|
26,554
|
|
|
27,661
|
|
Equipment under capital lease
|
|
408,774
|
|
|
213,759
|
|
|
195,015
|
|
|
280,323
|
|
Office trailer
|
|
9,061
|
|
|
4,195
|
|
|
4,866
|
|
|
3,817
|
|
Vacuum trailer
|
|
5,663
|
|
|
425
|
|
|
5,238
|
|
|
-
|
|
Computer equipment
|
|
6,673
|
|
|
4,483
|
|
|
2,190
|
|
|
3,186
|
|
Computer software
|
|
6,947
|
|
|
6,947
|
|
|
-
|
|
|
2,389
|
|
Automotive equipment
|
|
10,216
|
|
|
1,739
|
|
|
8,477
|
|
|
953
|
|
Signage
|
|
2,564
|
|
|
812
|
|
|
1,752
|
|
|
1,886
|
|
|
$
|
5,552,211
|
|
$
|
789,222
|
|
$
|
4,762,989
|
|
$
|
3,361,110
|
|
Included above are the long-lived assets acquired on the
business acquisition described under note 6.
10. Operating Lease Right-of-Use Asset and Operating Lease
Liability
The Company had one operating lease right-of-use asset and
related operating lease liability and had recognized as such, effective January
1, 2019, based on the present value of lease payments over the lease term that
expires on March 31, 2034, calculated to be $217,755 ($297,074 CAD). The Company
used its estimated secured incremental borrowing rate based on the information
available at the commencement date in determining the present value of lease
payments. The operating lease right-of-use asset was being amortized on a
straight-line basis over the lease term which expires March 31, 2034 and
amortization expense is included under office and administration expense in the
interim condensed consolidated statements of operations and comprehensive loss.
The Company does not act as a lessor nor does it have any leases classified as
financing leases.
The operating lease right-of-use asset was periodically
reviewed for impairment losses. The Company used the long-lived assets
impairment guidance in ASC Subtopic 360-10, Property, Plant and
Equipment-Overall, to determine whether the operating lease right-of-use asset
was impaired, and if so, the amount of the impairment loss to recognize.
The Company monitored for events or changes in circumstances
that required a reassessment of its operating lease right-of-use asset. When a
reassessment results in the remeasurement of a lease liability, a corresponding
adjustment is made to the carrying amount of the corresponding operating lease
right-of-use asset.
Effective May 24, 2019, the Company acquired the shares of
1684567, the company that owned the land upon which the right-of-use asset was
situated. As a result, the Company is both the tenant and the landlord and as
such, no longer recognizes an operating right-of-use asset and related operating
lease liability.
For the three and nine-month periods ended September 30, 2019,
the Company recorded $nil ($nil CAD) and $6,107 ($8,117 CAD (2018-$nil; $nil CAD
and $nil; $nil CAD) respectively, for the amortization of the operating lease
right-of-use asset.
For the three and nine-month periods ended September 30, 2019,
the Company incurred interest of $2,437 ($3,239 CAD) (2018-$nil; $nil CAD and $nil and $nil CAD)
respectively, on the operating lease liability.
17
SusGlobal Energy Corp.
|
Notes to the Interim Condensed Consolidated Financial
Statements
|
September 30, 2019 and 2018
|
(Expressed in United States Dollars)
|
(unaudited)
|
11. Related Party Transactions
During the three and nine-month periods ended September 30,
2019, the Company incurred $34,083 ($45,000 CAD) and $101,574 ($135,000 CAD)
(2018-$34,425; $45,000 CAD and $104,881; $135,000 CAD) respectively, in
management fees expense with Travellers International Inc. ("Travellers"), an
Ontario company controlled by a director and the President; $34,083 ($45,000 CAD)
and $101,574 ($135,000 CAD) (2018-$34,425; $45,000 CAD and $104,881; $135,000
CAD) respectively, in management fees expense with Landfill Gas Canada Ltd.
("LFGC"), an Ontario company controlled by a previous director and CEO; $13,634
($18,000 CAD) and $40,630 ($54,000 CAD) (2018-$13,769; $18,000 CAD and $37,291;
$48,000 CAD) respectively, in management fees expense with the Company's chief
financial officer (the "CFO"); and $nil ($nil CAD) and $nil ($nil CAD)
(2018-$nil; $nil CAD and $9,324; $12,000 CAD) respectively, in management fees
expense with the Company's vice-president of corporate development (the "VPCD").
As at September 30, 2019, unpaid remuneration and unpaid expenses in the amount
of $72,062 ($95,434 CAD) (December 31, 2018-$48,691; $66,426 CAD) is included in
accounts payable and $242,387 ($321,000 CAD) (December 31, 2018-$184,714;
$251,997 CAD) is included in accrued liabilities.
On September 25, 2019, the CEO resigned from the Board and
ceased providing his services as CEO.
In addition, during the three and nine-month periods ended
September 30, 2019, the Company incurred interest expense of $150 ($180 CAD) and
$4,631 ($6,155 CAD) (2018-$4,664; $6,049 CAD and $9,482; $12,205 CAD)
respectively, on the outstanding loan from Travellers and $364 ($469 CAD) and
$3,711 ($4,932 CAD) (2018-$1,751; $2,268 CAD and $3,295; $4,241 CAD)
respectively, on the outstanding loans from the directors. As at September 30,
2019, interest of $nil ($nil CAD) (December 31, 2018-$17,882; $24,395 CAD) on
these loans is included in accrued liabilities.
During the three and nine-month periods ended September 30,
2019, the Company incurred $23,382 ($30,934 CAD) and $55,678 ($74,001 CAD)
(2018-$21,066; $27,426 CAD and $53,565; $68,947 CAD) respectively, in rent paid
under a rental agreement to Haute Inc. ("Haute"), an Ontario company controlled
by the President.
The Company recorded directors' compensation for its five
independent directors for services provided based on the share price at the end
of each period and for the three and nine-month periods
ended September 30, 2019, including the audit committee chairman's fees, in the
amount of ($14,648) and ($1,948) (2018-$766 and $2,331) respectively. As at
September 30, 2019, $2,560 ($3,390 CAD) (December 31, 2018-$nil) of outstanding
fees to the directors is included in accounts payable and $7,133 (December 31,
2018-$52,000) of outstanding fees to the directors is included in accrued
liabilities.
Furthermore, the Company granted the CEO 3,000,000 restricted
stock units ("RSU"), under a consulting agreement effective January 1, 2017,
determined to be valued at $990,000 based on private placement pricing at the
time. On each of February 25, 2018 and April 2, 2019, 1,000,000 RSUs were
exchanged into 1,000,000 common stock of the Company. The RSUs for the remaining
installment which were expected to vest on January 1, 2020, subject to meeting
certain performance objectives, have been forfeited by the CEO on his
resignation in September 2019. On May 17, 2018, at a meeting of the board of
directors (the "Board"), approved an amendment to the President's consulting
agreement, to include the granting of 3,000,000 RSUs to the President,
determined to be valued at $3,000,000, based on private placement pricing at the
time, on the same terms and conditions as those granted to the CEO. Immediately
thereafter, 1,000,000 of the President's RSUs were exchanged into 1,000,000
common stock of the Company. On January 8, 2019, 1,000,000 of the President's
RSUs were exchanged into 1,000,000 common stock of the Company. Based on private
placement pricing at the time, the common stock issued to the President on each exchange of the
RSUs, was determined to be valued at $1,000,000. The RSUs for the remaining
installment are expected to vest on January 1, 2020, subject to meeting certain
performance objectives. For the three and nine-month periods ended September 30,
2019, the Company recognized management compensation expense of $85,000 and
$750,000 (2018-$332,500 and $1,997,500) respectively, on the awards to the
President and the CEO) on the award to the President, representing one-quarter
of the total value of the award of $3,000,000, based on private placement
pricing at the time. In the three and nine-month periods ended September 30,
2018, the Company recognized management compensation expense of $332,500 and
$1,997,500 on the awards to the President and the CEO, representing one-quarter
of the total value of the awards of $3,990,000 and the award granted to the
President in the amount of $1,000,000, as noted above, based on private
placement pricing at the time.
18
SusGlobal Energy Corp.
|
Notes to the Interim Condensed Consolidated Financial
Statements
|
September 30, 2019 and 2018
|
(Expressed in United States Dollars)
|
(unaudited)
|
11. Related Party Transactions, (continued)
Refer also to subsequent events, note 21(g).
12. Advance
On July 29, 2019, the Company received an advance in the amount of $30,204 ($40,000 CAD) from a private lender. The advance is repayable at an amount of $368 ($488 CAD) every business day until repaid in full on January 13, 2020. Transaction related expenses in connection with this advance totaled $4,213 ($5,600 CAD) and included
an interest expense in the interim condensed consolidated statements of operations and comprehensive loss. For the three and nine-month periods ended September 30, 2019, the Company incurred interest charges of $6,773 ($9,002 CAD) and $6,773 ($9,002 CAD) respectively. Total interest on the advance to January 13, 2020 is $11,737 ($15,600 CAD). The advance is guaranteed by the President. As a result of the PACE default, this
advance is also in default. The lender may demand full repayment.
Refer also to going concern, note 2 and subsequent events, note 21(f).
13. Long-Term Debt
|
|
Credit
|
|
|
Credit
|
|
|
Credit
|
|
|
Corporate
|
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
|
|
Facility
|
|
|
Facility
|
|
|
Facility
|
|
|
Term Loan
|
|
|
Total
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt
|
$
|
757,406
|
|
$
|
423,573
|
|
$
|
36,840
|
|
$
|
2,567,391
|
|
$
|
3,785,210
|
|
$
|
3,727,778
|
|
Current portion
|
|
(757,406
|
)
|
|
(423,573
|
)
|
|
(36,840
|
)
|
|
(2,567,391
|
)
|
|
(3,785,210
|
)
|
|
(3,727,778
|
)
|
Long-term portion
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
The credit facilities and corporate term loan (the “Debt”) described below in paragraphs (a) to (d) are due on demand. On August 28, 2019, PACE demanded repayment on or before December 31, 2019. Management met with PACE on September 5, 2019, to resolve the matters and offered a paydown of the Debt. Management is also in discussions with a Canadian chartered bank to refinance the PACE Debt and
the mortgage payable and formulate a paydown.
The Company was informed on September 3, 2019, that effective September 15,
2019, the interest rate on the credit facilities and corporate term loan
increased by 0.50% to the PACE base rate of 7.00% plus 1.75% per annum. Discussions are ongoing.
Refer also to going concern, note 2 and subsequent events note 21(f).
The Debt is otherwise payable as noted below.
(a)
|
The credit facility bears interest at the PACE base rate of 7.00% plus 1.25% per annum, currently 8.25%, is payable in monthly blended installments of principal and interest of $6,697 ($8,764 CAD), and matures on September 2, 2022. The first and only advance on the credit facility on February 2, 2017, in the amount of $1,197,280 ($1,600,000 CAD), is secured by a business loan general security agreement, a $1,197,280 ($1,600,000 CAD) personal guarantee from the President and a charge against the Company's premises lease. Also pledged as security are the shares of the wholly-owned subsidiaries, a pledge of 3,300,000 of the Company's shares held by LFGC, 500,000 of the Company's shares held by the CFO, 2,000,000 of the Company's shares held by a director's company and a limited recourse guarantee against each of these parties. The credit facility is fully open for prepayment at any time without notice or bonus.
|
,
|
|
(b)
|
The credit facility advanced on June 15, 2017, in the amount of $448,980 ($600,000 CAD), bears interest at the PACE base of 7.00% plus 1.25% per annum, currently 8.25%, is payable in monthly blended installments of principal and interest of $3,745 ($4,901 CAD), and matures on September 2, 2022. The credit facility is secured by a variable rate business loan agreement on the same terms, conditions and security as noted above.
|
|
|
(c)
|
The credit facility advanced on August 4, 2017, in the amount of $37,415 ($50,000 CAD), bears interest at the PACE base of 7.00% plus 1.25% per annum, currently 8.25%, is payable in monthly blended installments of principal and interest of $326 ($427 CAD), and matures on September 4, 2022. The credit facility is secured by a variable rate business loan agreement on the same terms, conditions and security as noted above.
|
|
|
(d)
|
The corporate term loan advanced on September 13, 2017, in the amount of $2,786,779 ($3,724,147 CAD), bears interest at PACE base rate of 7.00% plus 1.25% per annum, currently 8.25%, is payable in monthly blended installments of principal and interest of $22,702 ($29,711 CAD), and matures September 13, 2022. The corporate term loan is secured by a business loan general security agreement representing a floating charge over the assets and undertakings of the Company, a first priority charge under a registered debenture and a lien registered under the Personal Property Security Act in the amount of $2,993,932 ($4,000,978 CAD) against the assets including inventory, accounts receivable and equipment. The corporate term loan also included an assignment of existing contracts included in the APA.
|
|
|
|
The shares of the wholly-owned subsidiaries and those shares held by the companies and the CFO noted under (a) above, represent security for the corporate term loan.
|
For the three and nine-month periods
ended September 30, 2019, $78,919 ($104,202 CAD) and $234,441 ($311,592 CAD)
(2018-$82,720; $107,984 CAD and $241,153; $310,403 CAD) respectively, in
interest was incurred.
19
SusGlobal Energy Corp.
|
Notes to the Interim Condensed Consolidated Financial
Statements
|
September 30, 2019 and 2018
|
(Expressed in United States Dollars)
|
(unaudited)
|
14. Obligations under Capital
Lease
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
(a)
|
|
|
(b)
|
|
|
Total
|
|
|
Total
|
|
|
Obligations under Capital Lease
|
$
|
118,591
|
|
$
|
116,631
|
|
$
|
235,222
|
|
$
|
288,708
|
|
|
Less: current portion
|
|
(118,591
|
)
|
|
(116,631
|
)
|
|
(235,222
|
)
|
|
(81,109
|
)
|
|
Long-term portion
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
207,599
|
|
As a result of the PACE default, these leases are also in default. The lessor may demand full repayment of these obligations under capital lease. And, as a result, the obligations under capital lease have been presented as current liabilities. The original terms of the obligations under capital lease are noted below under paragraphs (a) and (b). Also refer to going concern, note 2 and subsequent events, note 21(f).
|
(a)
|
The lease agreement for certain equipment for the
Company's organic composting facility at a cost of $219,029 ($286,650
CAD), is payable in monthly blended installments of principal and interest
of $4,462 ($5,840 CAD), plus applicable harmonized sales taxes and an
option to purchase the equipment for a final payment of $21,853 ($28,600
CAD), plus applicable harmonized sales taxes on October 31, 2021. The
lease agreement bears interest at the rate of 5.982% annually, compounded
monthly, due September 30, 2021.
|
|
|
|
|
(b)
|
The lease agreement for certain equipment for the
Company's organic composting facility at a cost of $189,077 ($247,450
CAD), is payable in monthly blended installments of principal and interest
of $3,911 ($5,118 CAD), plus applicable harmonized sales taxes for a
period of forty-six months plus the first two monthly blended installments
of $7,641 ($10,000 CAD) plus applicable harmonized sales taxes and an
option to purchase the equipment for a final payment of $ 18,858 ($24,680
CAD) plus applicable harmonized sales taxes on February 27, 2022. The
leasing agreement bears interest at the rate of 6.15% annually, compounded
monthly, due January 27, 2022.
|
The lease liabilities are secured by the equipment under
capital lease as described in note 9.
Refer also to going concern, note 2 and subsequent events, note 21(f).
Minimum lease payments as per the original terms of the obligations under capital lease are as follows:
In the three-month period ending
December 31, 2019
|
$
|
24,824
|
|
In the year ending December 31, 2020
|
|
99,295
|
|
In the year ending December 31, 2021
|
|
107,661
|
|
In the year ending December 31, 2022
|
|
22,500
|
|
|
|
254,280
|
|
Less: imputed interest
|
|
(19,058
|
)
|
Total
|
$
|
235,222
|
|
For the three and nine-month periods ended September 30, 2019,
$3,682 ($4,856 CAD) and $12,237 ($16,264 CAD) (2018-$4,290; $5,615 CAD and
$14,028; $18,056 CAD) respectively, in interest was incurred.
20
SusGlobal Energy Corp.
|
Notes to the Interim Condensed Consolidated Financial
Statements
|
September 30, 2019 and 2018
|
(Expressed in United States Dollars)
|
(unaudited)
|
15. Convertible Promissory Notes
|
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
(a)
|
Convertible promissory
notes-January 28, 2019 (net of unamortized financing
costs of $11,507 (2018- $nil))
|
$
|
261,723
|
|
$
|
-
|
|
(b)
|
Convertible promissory notes-March 7
and March 8, 2019 (net of unamortized financing costs of
$61,165) (2018- $nil))
|
|
743,835
|
|
|
-
|
|
(c)
|
Convertible promissory
note-May 23, 2019 (net of unamortized financing costs of
$29,455 (2018-$nil))
|
|
220,545
|
|
|
-
|
|
(d)
|
Convertible promissory note-July 19,
2019 (net of unamortized financing costs of $25,420
(2018-$nil))
|
|
144,580
|
|
|
-
|
|
|
|
$
|
1,370,683
|
|
$
|
-
|
|
(a)
|
On January 28, 2019, the Company entered into securities
purchase agreements (the "January 2019 SPAs") with three investors (the
"January 2019 Investors") pursuant to which the Company issued to the
January 2019 Investors 12% unsecured convertible promissory notes (the
"January 2019 Notes") in the aggregate principal amount of $337,500, with
such principal and the interest thereon convertible into shares of the
Company's common stock (the "Common Stock") at the January 2019 Investors'
option. Although the January 2019 SPAs are dated January 28, 2019 (the
"January 2019 Effective Date"), they became effective upon the receipt in
cash of the issue price by the January 2019 Investors.
|
|
|
|
The amounts of $102,500, $100,000, and $100,000, totaling
$302,500, represented the proceeds to the Company, net of
transaction-related expenses, for the January 2019 Notes from the January
2019 Investors and were received in cash from February 1 through February
4, 2019.
|
|
|
|
The maturity date of each of the January 2019 Notes is
January 28, 2020 (the "January 2019 Maturity Dates"). The Notes bear
interest at a rate of twelve percent (12%) per annum (the "January 2019
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 January 2019 Notes) of the Common Stock
as reported on the National Quotations Bureau OTC Marketplace exchange
upon which the Company's shares are traded during the twenty (20)
consecutive Trading Day period immediately preceding (i) the January 2019
Effective Date; or (ii) the conversion date.
|
|
|
|
The Company has reserved a minimum of eight (8) times the
number of its authorized and unissued Common Stock (the "January 2019
Reserved Amounts"), free from preemptive rights, to provide for the
issuance of Common Stock upon the full conversion of the January 2019
Notes. Upon full conversion of the January 2019 Notes, any shares
remaining in such reserve shall be cancelled. The Company increases the
January 2019 Reserved Amount in accordance with the Company's obligations
under the January 2019 Notes.
During the three and nine-month periods ended September
30, 2019, the January 2019 Investors converted a total of $64,270 and
$64,270 respectively, of their January 2019 Notes.
|
|
|
(b)
|
On March 7 and March 8, 2019, the Company entered into
two securities purchase agreements (the "March 2019 SPAs") with two
investors (the "March 2019 Investors") pursuant to which the Company
issued to each March 2019 Investor 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, with such
principal and the interest thereon convertible into Common Stock at the
March 2019 Investors' option. Each First Note contains a $25,000 Original
Issue Discount such that the issue price of each First Note was $250,000.
The proceeds on the issuance of the First Notes were received from the
March 2019 Investors upon the signing of the March 2019 SPAs. The proceeds
on the issuance of the Back-End Notes were initially received by the
issuance of two offsetting $250,000 secured notes to the Company by the
March 2019 Investors (the "Buyer Notes"), provided that prior to
conversion of the Back-End Notes, the March 2019 Investors must have paid
back the Back-End Notes in cash.
|
21
SusGlobal Energy Corp.
|
Notes to the Interim Condensed Consolidated Financial
Statements
|
September 30, 2019 and 2018
|
(Expressed in United States Dollars)
|
(unaudited)
|
15. Convertible Promissory Notes,
(continued)
|
|
|
|
Although the March 2019 SPAs are dated March 7,
2019 and March 8, 2019 (each, a "March 2019 Effective Date"), they became
effective upon the receipt in cash of the issue price by the March 2019
Investors. On March 11, 2019, the Company received cash of $456,000, net
of transaction-related expenses, for the First Notes from the March 2019
Investors.
|
|
|
|
On April 24, 2019, the Company received one of
the Back-End Notes from the March 2019 Investors in the face value amount
of $275,000. The proceeds received by the Company was $228,000, net of
$25,000 discount and financing costs. The maturity dates of the March 2019
Investor Notes are March 7, 2020 and March 8, 2020. The March 2019
Investor Notes bear interest at a rate of twelve percent (12%) per annum
(the "March 2019 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 Investor 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
Company's shares are traded during the twenty (20) consecutive Trading Day
period immediately preceding (i) the applicable March 2019 Effective Date;
or (ii) the conversion date.
|
|
|
|
The Company reserved a minimum of eight (8)
times the number of its authorized and unissued Common Stock (the "March
2019 Reserved Amounts"), free from preemptive rights, to provide for the
issuance of Common Stock upon the full conversion of the March 2019
Investor Notes. Upon full conversion of the March 2019 Investor Notes, any
shares remaining in such reserve shall be cancelled. The Company increases
the March 2019 Reserved Amount in accordance with the Company's
obligations under the March 2019 Investor Notes.
During the three and nine-month periods ended September 30, 2019, the
March 2019 Investors converted a total of $20,00 and $20,00 respectively, of
their March 2019 Notes.
|
|
|
(c)
|
On May 23, 2019, the Company entered into a
securities purchase agreement (the "May 2019 SPA") with one investor (the
"May 2019 Investor") pursuant to which the Company issued to the May 2019
Investor one 12% unsecured convertible promissory note (the "May 2019
Investor Note") in the principal amount of $250,000. On this date, the
Company received proceeds of $204,250, net of transaction related expenses
of $45,750.
|
22
SusGlobal Energy Corp.
|
Notes to the Interim Condensed Consolidated Financial
Statements
|
September 30, 2019 and 2018
|
(Expressed in United States Dollars)
|
(unaudited)
|
15. Convertible Promissory
Notes, (continued)
|
|
|
|
The maturity date of the May 2019 Investor note
is May 23, 2020. The May 2019 Investor Note bears interest at a rate of
twelve percent (12%) per annum (the "May 2019 Interest Rate"), which
interest shall be paid by the Company to the May 2019 Investor in Common
Stock at any time the May 2019 Investor sends a notice of conversion to
the Company. The May 2019 Investor is entitled to, at its option, convert
all or any amount of the principal amount and any accrued but unpaid
interest of the May 2019 Investor Note 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 Note) of the Common Stock
as reported on the National Quotations Bureau OTC Marketplace exchange
upon which the Company's shares are traded during the twenty (20)
consecutive Trading Day period immediately preceding (i) the applicable
May 2019 Effective Date; or (ii) the conversion date.
|
|
|
|
The Company initially reserved 10,937,000 of its
authorized and unissued Common Stock (the "May 2019 Reserved Amount"),
free from preemptive rights, to provide for the issuance of Common Stock
upon the full conversion of the May 2019 Investor Note. Upon full
conversion of the May 2019 Investor note, any shares remaining in such
reserve shall be cancelled. The Company increases the May 2019 Reserved
Amount in accordance with the Company's obligations under the May 2019
Investor note.
|
|
|
(d)
|
On July 19, 2019, the Company entered into a
securities purchase agreement (the "July 2019 SPA") with one investor (the
"July 2019 Investor") pursuant to which the Company issued to the July
2019 Investor one 12% unsecured convertible promissory note (the "July
2019 Investor Note") in the principal amount of $170,000. On this date,
the Company received proceeds of $138,225, net of transaction related
expenses of $31,775.
|
|
|
|
The maturity date of the July 2019 Investor
note is July 19, 2020. The July 2019 Investor Note bears interest at a
rate of twelve percent (12%) per annum (the "July 2019 Interest Rate"),
which interest shall be paid by the Company to the July 2019 Investor in
Common Stock at any time the July 2019 Investor sends a notice of
conversion to the Company. The July 2019 Investor is entitled to, at its
option, convert all or any amount of the principal amount and any accrued
but unpaid interest of the July 2019 Investor Note 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 Note) of the
Common Stock as reported on the National Quotations Bureau OTC Marketplace
exchange upon which the Company's shares are traded during the twenty (20)
consecutive Trading Day period immediately preceding (i) the applicable
July 2019 Effective Date; or (ii) the conversion date.
|
|
|
|
The Company initially reserved 5,604,000 of its
authorized and unissued Common Stock (the "July 2019 Reserved Amount"),
free from preemptive rights, to provide for the issuance of Common Stock
upon the full conversion of the July 2019 Investor Note. Upon full
conversion of the July 2019 Investor note, any shares remaining in such
reserve shall be cancelled. The Company increases the July 2019 Reserved
Amount in accordance with the Company's obligations under the July 2019
Investor note.
|
The convertible promissory notes described above may be prepaid
until 180 days from their applicable effective date with the following
penalties: (i) if any of the convertible promissory notes are prepaid within
sixty (60) days following their applicable effective date, then the prepayment
premium shall be 125% of the face amount plus any accrued interest; (ii) if any
of the convertible promissory notes are prepaid during the period beginning
on the date which is sixty-one (61) days following their
applicable effective date, and ending on the date which is ninety (90) days
following their applicable effective date, then the prepayment premium shall be
135% of the face amount plus any accrued interest; (iii) if any of the
convertible promissory notes are prepaid during the period beginning on the date
which is ninety-one (91) days following their applicable effective date, and
ending on the date which is one hundred eighty (180) days following their
applicable effective date, then the prepayment premium shall be 145% of the face
amount plus any accrued interest. Such prepayment redemptions must be closed and
funded within three days of giving notice of prepayment or the right to prepay
shall be forfeited.
23
SusGlobal Energy Corp.
|
Notes to the Interim Condensed Consolidated Financial
Statements
|
September 30, 2019 and 2018
|
(Expressed in United States Dollars)
|
(unaudited)
|
15. Convertible Promissory Notes, (continued)
Pursuant to the terms of the security purchase agreements for
the convertible promissory notes described above, for so long as the noted
investors own any shares of Common Stock issued upon the conversion of the
applicable investor notes, the Company has covenanted to secure and maintain the
listing of such shares of Common Stock. The Company is also subject to certain
customary negative covenants under the investor notes and the security purchase
agreements, including but not limited to the requirement to maintain its
corporate existence and assets, require registration of or stockholder approval
for the investor notes or the Common Stock upon the conversion of the applicable
investor notes.
The convertible promissory notes described above contain
certain representations, warranties, covenants and events of default including
if the Company is delinquent in its periodic report filings with the Securities
and Exchange Commission which would increase the amount of the principal and
interest rates under the convertible promissory notes in the event of such
defaults. In the event of a default, at the option of the applicable investor
and in their sole discretion, the applicable investor may consider any of their
convertible promissory notes immediately due and payable.
For the three and nine-month periods ended September 30, 2019,
the Company accrued interest of $21,490 and $88,721 (2018-$ nil and $nil)
respectively, on the outstanding promissory notes, included in accrued
liabilities.
As a result of the PACE default, these convertible promissory notes are also in default. The investors may demand full repayment with accrued interest and further penalties that they are entitled to.
Refer also to going concern, note 2 and subsequent events, note 21(f).
16. Mortgage Payable
The Company obtained a mortgage provided by private lenders to
finance the acquisition of the shares of 1684567, as noted under note 6,
business acquisition. The mortgage has a principal amount of $1,359,180
($1,800,000 CAD), is repayable interest only on a monthly basis at an annual
rate of 10% per annum and is due May 24, 2020. The mortgage payable is secured
by way of shares for 1684567, a first mortgage on the premises, a general
assignment of rents, a fire insurance policy and is guaranteed by the Company.
Financing fees on the mortgage totaled $81,619 ($108,090 CAD).
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Mortgage payable, net of unamortized
finance fees of $52,773 ($69,888 CAD)
|
$
|
1,306,407
|
|
$
|
-
|
|
For the three and nine-month periods ended September 30, 2019,
$34,162 ($45,343 CAD) and $47,845 ($63,590 CAD) (2018-$nil; $nil CAD and $nil;
$nil CAD respectively, in interest was incurred.
24
SusGlobal Energy Corp.
|
Notes to the Interim Condensed Consolidated Financial
Statements
|
September 30, 2019 and 2018
|
(Expressed in United States Dollars)
|
(unaudited)
|
17. Loans Payable to Related Parties
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Travellers International Inc.
|
$
|
-
|
|
$
|
146,600
|
|
Directors
|
|
-
|
|
|
54,975
|
|
|
$
|
-
|
|
$
|
201,575
|
|
Loan payable in the amount of $nil ($nil CAD) (December 31,
2018-$146,600; $200,000 CAD), owing to Travellers bears interest at the rate of
12% per annum, was due on demand and was unsecured. The loan and related accrued
interest were repaid on June 24, 2019. As at September 30, 2019 $nil ($nil CAD)
(December 31, 2018-$13,110; $17,885 CAD) in interest was included in accrued
liabilities.
Loans payable to directors in the amount of $nil ($nil CAD)
(December 31, 2018-$54,975; $75,000 CAD), owing to three directors bear interest
at the rate of 12% per annum, is due on demand and is unsecured. The loans and
related accrued interest were repaid on July 19, 2019.
As at September 30, 2019, $nil ($nil CAD) (December 31,
2018-$4,772; $6,510 CAD) in interest is included in accrued liabilities.
For the three-month period ended September 30, 2019, $353 ($469
CAD) (2018-$6,072; $7,758 CAD) in interest was incurred on the loans to related
parties. And, for the nine-month period ended September 30, 2019, $8,342
($11,087 CAD) (2018-$12,777; $16,446 CAD) in interest was incurred on the loans
payable to related parties.
18. Capital Stock
As at September 30, 2019, the Company had 150,000,000 common
shares authorized with a par value of $.0001 per share and 44,376,716 (December
31, 2018-40,299,531) common shares issued and outstanding. During the nine-month
period ended September 30, 2019, the Company raised $nil (December 31,
2018-$650,240) cash on a private placement, net of share issue costs of $nil
(2018-$46,260), on the issuance of nil (December 31, 2018-696,500) common shares
of the Company. The Company issued 2,000,000 common shares on the exchange each
of the President's and the CEO's 1,000,000 2018 RSUs; 5,000 common shares for
proceeds received prior to December 31, 2018 of $4,600, net of share issue costs
of $400; 100,000 common shares for professional services in the amount of
$53,000, based on the closing trading price on the day immediately prior to
issuance and 80,000 common shares to the directors determined to be valued at
$39,200 based on the trading price of the stock at the close of the day
immediately prior to issuance.
During the nine-month period ended September 30, 2019, the
January Investors and the March Investors converted a portion of their unsecured
convertible promissory notes, including accrued interest, a total of $93,797 for
1,892,185 common shares at per share conversion prices ranging from $0.0371 to
$0.091 per share.
In addition, during the prior year, the Company issued 190,000
common shares of the Company, in regard to the $178,200 proceeds received from a
private placement prior to December 31, 2017, net of share issue costs of
$11,800 and issued 20,000 common shares of the Company to a new director,
determined to be valued at $20,000, based on private placement pricing at the
time.
All non-cash transactions were valued based on the proceeds of
a recent private placement.
25
SusGlobal Energy Corp.
|
Notes to the Interim Condensed Consolidated Financial
Statements
|
September 30, 2019 and 2018
|
(Expressed in United States Dollars)
|
(unaudited)
|
18. Capital Stock, (continued)
The Company also granted the CEO 3,000,000 RSUs under a new
consulting agreement effective January 1, 2017. The RSUs are expected to vest in
three equal installments annually on each of January 1, 2018, 2019 and 2020. The
CEO has forfeited his 2019 RSUs, as a result of his ceasing in providing his
services as a CEO in September 2019. On February 25, 2018, the Company issued
1,000,000 common shares in exchange for 1,000,000 RSUs to the CEO. In addition,
on May 17, 2018, at a meeting of the Board, the Board approved an amendment to
the President's consulting agreement, to include the granting of 3,000,000 RSUs
to the President, determined to be valued at $3,000,000, on the same terms and
conditions as those granted to the CEO. Effective May 17, 2018, 1,000,000 RSUs
were exchanged into 1,000,000 common stock. Based on private placement pricing
at the time, the common stock issued in exchange for the President's RSUs, was
determined to be valued at $1,000,000.
19. Commitments
a)
|
Effective January 1, 2017, new consulting agreements were
finalized for the services of the President and for the CEO. The
consulting agreements are for a period of three years, commencing January
1, 2017. For each of these two executive officers, the monthly fees are as
follows: $3,776 ($5,000 CAD) for 2017 and $11,327 ($15,000 CAD) for 2018
and 2019. The future minimum commitment under these consulting agreements,
is as follows:
|
|
For the three-month period ending
December 31, 2019
|
$
|
33,980
|
|
The CFO is currently consulting on a month to month basis at
$4,531 ($6,000 CAD) per month, on the same terms and conditions as his
consulting agreement, which expired March 31, 2019.
Refer also to subsequent events, note 21(g).
b)
|
Effective January 1, 2017, the Company entered into a new
three-year premises lease agreement with Haute at a monthly amount of
$3,020 ($4,000 CAD) for 2017, $ 3,776 ($5,000 CAD) for 2018 and $4,531
($6,000 CAD) for 2019. The Company is also responsible for all expenses
and outlays in connection with its occupancy of the leased premises,
including, but not limited to utilities, realty taxes and maintenance. The
future minimum commitment under this premises lease agreement is as
follows:
|
|
For the three-month period ending
December 31, 2019
|
$
|
13,592
|
|
c)
|
The Company was assigned the land lease on the purchase
of certain assets of Astoria. The land lease, which comprises 13.88 acres
in Roslin, Ontario, Canada, has a term expiring March 31, 2034. The basic
monthly rent on the net lease is $2,265 ($3,000 CAD) and is subject to
adjustment based on the consumer price index as published by Statistics
Canada ("CPI"). No adjustment for CPI had been charged by the previous
landlord. The Company is also responsible for any property taxes,
maintenance, insurance and utilities. In addition, the Company has the
right to extend the lease for five further terms of five years each and
one further term of five years less one day. Effective January 1, 2019,
this right-of-use operating lease has been reported as an operating lease
right-of-use asset and an operating lease liability on the interim
condensed consolidated balance sheets as at March 31, 2019 and 2018.
Subsequently, effective May 24, 2019, the Company
acquired the shares of 1684567, the company that owned the land
upon which the right-of-use asset was situated. As a result, the Company
is currently both the tenant and the landlord and as such, no longer
recognizes an operating right-of-use asset and related operating lease
liability.
|
26
SusGlobal Energy Corp.
|
Notes to the Interim Condensed Consolidated Financial
Statements
|
September 30, 2019 and 2018
|
(Expressed in United States Dollars)
|
(unaudited)
|
19. Commitments, (continued)
|
|
|
|
|
In addition, the Company was informed that,
through a special provision of the site plan agreement with the City of
Belleville (the "City"), Ontario, the Company is required to fund certain
road maintenance required by the City for the years 2017 through to 2025
at an annual rate of $7,551 ($10,000 CAD). The first year of the special
provision was 2016, approximately one year before the Company acquired
certain assets of Astoria. This special provision was not addressed in the APA and as a result, the Company may be liable for both the 2016 and 2017
assessments.
|
|
|
|
|
The payments are due each September 30th. The
Company's estimates that its portion for the year ended September 30,
2017, would be equal to the 15 days the Company owned the organic
composting facility, after it was acquired on September 15, 2017. The
amounts for 2016 and 2017 have not been paid and unless this can be
resolved with the operator for the period prior to September 15, 2017, the
Company may be liable for both these years. The Company paid the amount
due on September 30, 2018, in the amount of $7,551 ($10,000 CAD) and has
recorded an accrual for the balance owing from October 1, 2018 to
September 30, 2019.
|
|
|
|
d)
|
PACE has provided the Company a letter of credit in favor
of the Ministry of the Environment, Conservation and Parks (the "MOECP"),
(formerly the Ministry of the Environment and Climate Change) in the
amount of $209,035 ($276,831 CAD) and, as security, has registered a
charge of lease over the premises, located at 704 Phillipston Road,
Roslin, Ontario, Canada. The Company is required to provide for
environmental remediation and clean-up costs for its organic composting
facility. The letter of credit is a requirement of the MOECP and is in
connection with the financial assurance provided by the Company for it to
be in compliance with the MOECPs environmental objectives. The MOECP
regularly evaluates the Company's organic composting facility to ensure
compliance is adhered to and the letter of credit is subject to change by
the MOECP. Since the fair value of the environmental remediation costs
cannot be determined at this time, no estimate of such costs has been
recorded in the accounts. As of September 30, 2019, the MOECC has not
drawn on the letter of credit. The Company renewed the letter of credit to
December 31, 2019. Refer also to going concern, note 2 and subsequent
events, note 21(f).
|
20. Economic Dependence
The Company generated 63% and 71% of its revenue from three
customers during the three and nine-month periods ended September 30, 2019,
respectively (2018-73% and 67% from three customers, respectively).
21. Subsequent Events
The Company's management has evaluated subsequent events up to
the date the interim condensed consolidated financial statements were issued,
pursuant to the requirements of ASC 855 and has determined the following to be
material subsequent events:
27
SusGlobal Energy Corp.
|
Notes to the Interim Condensed Consolidated Financial
Statements
|
September 30, 2019 and 2018
|
(Expressed in United States Dollars)
|
(unaudited)
|
21.
|
Subsequent Events, (continued)
|
|
|
|
|
|
(a)
|
On October 2, 3, 30 and November 11 of 2019, the January 2019
Investors and the March 2019 Investors converted a portion of their
unsecured convertible promissory notes, including a portion of the accrued
interest, in total $95,397, for 3,456,685 common shares at per share
conversion prices ranging from $0.02015 to $0.0371.
|
|
|
|
|
|
(b)
|
On October 18, 2019, the Company entered into a
securities purchase agreement (the "October 2019 SPA") with one investor
(the "October 2019 Investor") pursuant to which the Company issued to the
October 2019 Investor one 12% unsecured convertible promissory note (the
"October 2019 Investor Note") in the principal amount of $156,000, due
October 18, 2020. On this date the Company received proceeds of $129,600,
net of transaction related expenses of $26,400.
|
|
|
|
|
|
(c)
|
On October 18 and October 28, 2019, BDOs legal
representative delivered to two of our customers, further garnishments
totaling $31,717 ($42,004 CAD) each, to collect additional fees, expenses and
court costs. Management is in discussions with its legal counsel to
request cease garnishment orders be issued to prevent the collection on
amounts over and above the garnishment orders. These garnishment demands
were satisfied on November 1, 2019.
|
|
|
|
|
|
(d)
|
In connection with the Companys business acquisition of
1684567, which closed on May 28, 2019, as disclosed in business
acquisition, note 6, the Company intends to exercise the option to
purchase certain additional lands described in the share purchase
agreement with the previous owners of 1684567. The option to purchase the additional lands from
the previous owners of 1684567, is in the amount of $158,571 ($210,000
CAD). This option closes on November 28, 2019.
|
|
|
|
|
|
(e)
|
On October 31, 2019, the Company received a proposal to
acquire certain equipment to be used in its organic composting operation.
The cost of the equipment is $547,842 with a 50% deposit ($273,921), on
acceptance.
|
|
|
|
|
|
(f)
|
On November 1, 2019, the Company responded to PACEs
demands for repayment of all Debt by offering to repay two credit facilities totaling $460,413 ($609,738 CAD) on or before December 31, 2019, in return for a forbearance to December 31, 2020 and repayment of the remaining credit facility and corporate term loan no later than December 31, 2020 or upon the completion of the refinancing with the Canadian chartered bank. On November 12, 2019, PACE responded to the Company accepting the payment of the two noted credit facilities, but, in addition, required that all the Debt be made current, that the Company provide written reports to PACE on its refinancing with the Canadian chartered bank on a monthly basis commencing December 15, 2019, that all remaining Debt be repaid by June 30, 2020 and that PACE be permitted to appoint a financial advisor to inspect the assets and operations of the Company. In addition, the Company’s letter of credit with PACE
is expected to be renewed to June 30, 2020.
All terms are subject to credit approval.
|
|
|
|
|
|
(g)
|
On November 6, 2019, by resolution of the Board, the
contracts for the President and the CFO were each renewed for a one-year
period, commencing January 1, 2020. For the President, as the same monthly
amount and on the same terms and conditions as his previous contract. And,
for the CFO, at a monthly amount of $6,041 ($8,000 CAD), an increase of
$1,510 ($2,000 CAD) over his previous contact and on the same terms and
conditions as his previous contract.
|
|
|
|
|
|
|
In addition, on November 6, 2019, by resolution of the
Board, the President was appointed CEO.
|
|
|
28
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Certain statements in this Management's Discussion and
Analysis ("MD&A"), other than purely historical information, including
estimates, projections, statements relating to our business plans, objectives
and expected operating results, and the assumptions upon which those statements
are based, are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking
statements generally can be identified by the use of forward-looking terminology
such as "may," "would," "expect," "intend," "could," "estimate," "should,"
"anticipate," or "believe," and similar expressions. Forward-looking statements
are based on current expectations and assumptions that are subject to risks and
uncertainties which may cause actual results to differ materially from the
forward-looking statements. We undertake no obligation to update or revise
publicly any forward-looking statements, whether as a result of new information,
future events, or otherwise. Readers should carefully review the risk factors in
our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 filed
with the Securities and Exchange Commission on April 1, 2019.
The following MD&A is intended to help readers
understand the results of our operation and financial condition, and is provided
as a supplement to, and should be read in conjunction with, our Interim
Unaudited Financial Statements and the accompanying Notes to Interim Unaudited
Financial Statements under Part 1, Item 1 of this Quarterly Report on Form
10-Q.
Growth and percentage comparisons made herein generally
refer to the nine-month period ended September 30, 2019 compared with the
nine-month period ended September 30, 2018 unless otherwise noted. Unless
otherwise indicated or unless the context otherwise requires, all references in
this document to "we, "us, "our," the "Company," and similar expressions refer
to SusGlobal Energy Corp., and depending on the context, its subsidiaries.
SPECIAL NOTICE ABOUT GOING CONCERN AUDIT OPINION
OUR AUDITOR ISSUED AN OPINION EXPRESSING SUBSTANTIAL
DOUBT AS TO OUR ABILITY TO CONTINUE IN BUSINESS AS A GOING CONCERN FOR THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2018 AND
2017. YOU SHOULD READ THIS QUARTERLY REPORT ON FORM 10-Q WITH THE "GOING
CONCERN" ISSUES IN MIND.
This Management's Discussion and Analysis should be read in
conjunction with the unaudited interim condensed consolidated financial
statements included in this Quarterly Report on Form 10-Q (the "Financial
Statements"). The financial statements have been prepared in accordance with
generally accepted accounting policies in the United States ("GAAP"). Except as
otherwise disclosed, all dollar figures included therein and in the following
management discussion and analysis are quoted in United States dollars.
OVERVIEW
The following organization chart sets forth our wholly-owned
subsidiaries:
29
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. SusGlobal, 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, 23, 2017.
On December 11, 2018, the Company began trading on the Over the
Counter QB venture market exchange, under the ticker symbol SNRG.
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 global portfolio of proprietary technologies in the
waste to energy and regenerative products application.
30
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 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 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 liquid 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, 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 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.
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 organic fertilizer,
considered Class AA organic fertilizer.
Currently, the primary customers are municipalities in both
rural and urban centers throughout southern and central 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.
31
RECENT BUSINESS DEVELOPMENTS
Business Acquisition
In connection with the Companys business acquisition of
1684567 Ontario Inc. (1684567), which closed on May 28, 2019, as noted below,
the Company intends to exercise the option to purchase certain additional
lands described in the share purchase agreement from the previous owners of 1684567. The option to
purchase the additional lands from the previous owner of 1684567, is in the
amount of $158,571 ($210,000 CAD). This option closes on November 28, 2019.
Effective May 24, 2019, the Company purchased all the issued
and outstanding shares of 1684567. The transaction closed on May 28, 2019. The
purchase consideration consisted of cash from working capital of $209,952
($282,308 CAD) and cash from a third-party mortgage obtained in the amount of
$1,258,273 ($1,691,910 CAD, net of financing fees of $80,387 ($108,090 CAD)).
The total purchase price includes the original offer of $1,314,304 ($1,767,250
CAD) and acquisition costs of $153,922 ($206,968 CAD). The principal asset of
this acquired company was the land upon which the Company's organic composting
facility is situated. The Company continues to operate the garbage collection
and landfill management operations that it acquired under this transaction.
Financings
On November 12, 2019, Pace Savings & Credit Union Limited
(PACE) responded to the Company and accepted the payment of the two noted
credit facilities, but, in addition, that all the Debt be made current, that the
Company provide written reports to PACE on its refinancing with the Canadian
chartered bank on a monthly basis commencing December 15, 2019, that all
remaining debt be repaid by June 30, 2020 and that PACE be permitted to appoint
a financial advisor to inspect the assets and operations of the Company. In
addition, the Companys letter of credit with PACE is expected to be renewed to June 30,
2020. All terms are subject to credit approval.
On October 18, 2019, the Company entered into a securities purchase agreement (the "October 2019 SPA") with one investor (the "October 2019 Investor") pursuant to which the Company issued to the October 2019 Investor one 12% unsecured convertible promissory note (the "October 2019 Investor Note") in the principal amount of $156,000, due October 18, 2020. On this date the Company received proceeds of $129,600, net of transaction related expenses of $26,400. As a result of the PACE default, this convertible promissory note is also in default. The investor may demand full repayment with accrued interest and further penalties that the October 2019 Investor is entitled to.
On July 29, 2019, the Company received an advance in the amount of $30,204 ($40,000 CAD) from a private lender. The advance is repayable at an amount of $368 ($488 CAD) every business day until repaid in full on January 13, 2020. Transaction related expenses in connection with this advance totaled $4,213 ($5,600 CAD) and included in the interim condensed consolidated statements of operations and comprehensive loss. For the three and nine-month periods ended September 30, 2019, the Company incurred interest charges of $6,773 ($9,002 CAD) and $6,773 ($9,002 CAD) respectively. Total interest on the advance to January 13, 2020 is $11,737 ($15,600 CAD). The advance is guaranteed by the President. As a result of the PACE default, this
advance is also in default. The lender may demand full repayment.
Trademark Applications
On March 13, 2019, the Company filed trademark applications
with the Canadian and US trademark offices to register the SusGlobal logo,
Earth's Journey, SusGro, Leaders in the Circular Economy and Caring for Earth's
Journey.
New and Renewed Contracts
On November 6, 2019, by resolution of the Board, the contracts
for the President and the CFO were renewed for a one-year period, commencing
January 1, 2020. For the President, at the same monthly amount and on the same
terms and conditions, as his previous contract. And for the CFO, at a monthly
amount of $6,141 ($8,000 CAD), an increase of $1,510 ($2,000 CAD) over his previous contract
and on the same terms and conditions as his previous contract.
32
In addition, on November 6, 2019, by resolution of the Board,
the President was appointed CEO.
On October 15, 2019, the Company was awarded an organic
processing contract, in connection with a recently submitted bid, for a local
municipality. This organic processing contract is in conjunction with the local
municipalitys green bin program. The tipping fee for this organic processing
contract has been set at $83 per metric tonne (MT) ($110/MT CAD).
The Company has also secured an organic processing arrangement
with another local municipality, in conjunction with their green bin program,
with a tipping fee set at $98/MT ($130/MT).
In addition, several other contracts have been renewed, one, a
municipality and another a private composting operation to December 31, 2020 and
November 18, 2020, respectively.
On July 22, 2019, the council for one of the Company's
customers, a local township, approved an extension of contracts for the services
provided by the Company for garbage collection and for the operation and
maintenance of the township's two waste disposal sites. The new contracts expire
on February 28, 2023 and amount to $135,163 ($179,000 CAD) annually.
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.
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 $3,167,250 ($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 $22,598
($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 $134,529
($174,147 CAD) and a deposit with a local municipality in the amount of $38,625
($50,000 CAD).
Other
On October 31, 2019, the Company received a proposal to acquire
certain equipment to be used in its organic composting operation. The cost of
the equipment is $547,842 with a 50% deposit ($273,921), on acceptance.
33
As a result of the PACE default, various indebtedness held by a private lender, a lessor and convertible note holders are also in default. Any or all of these parties may demand full repayment with accrued interest and further penalties that they may be entitled to.
Refer to going concern, note 2 and subsequent events note 21(f) in the interim condensed consolidated financial statements.
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 $186,849 ($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 $7,551 ($10,000
CAD) each, plus the applicable harmonized sales taxes, followed by forty-six
monthly blended installments of principal and interest of $3,865 ($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 $18,636
($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 nine-month period ended September 30,
2019 $6,140 ($8,160 CAD) (2018-$5,403 $6,955 CAD) of interest was charged on the
2018 Equipment Lease Agreement.
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 $216,449 ($286,650 CAD) (the "October 2017
Equipment Lease Agreement"). The October 2017 Equipment Lease Agreement requires
monthly blended installments of principal and interest of $4,410 ($5,840 CAD),
plus applicable harmonized sales taxes and a final balloon payment of $21,596
($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 nine-month
period ended September 30, 2019, $6,097 ($8,104 CAD) (2018-$8,309; $10,695 CAD)
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 $12,973 ($17,180 CAD) (the "September 2017 Equipment Lease
Agreement"). The September 2017 Equipment Lease Agreement requires monthly
blended installments of principal and interest of $957 ($1,268 CAD) at a monthly
interest rate of 5.95%, due and fully paid on November 10, 2018. During the
nine-month period ended September 30, 2019, $nil ($nil CAD) (2018-$316; $406
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
Company's online intermediary technology platform in connection with the
Company's 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: $3,776 ($5,000 CAD) for 2017 and $11,327 ($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 each of February 25, 2018 and April 2, 2019, 1,000,000 RSUs were
exchanged into 1,000,000 shares of common stock of the Company. The RSUs of the
remaining installment were expected to vest on January 1, 2020, upon meeting
certain performance objectives, have been forfeited by the CEO on his ceasing to
provide his services as the CEO, in September 2019. On May 17, 2018, the
President's 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. On January 8, 2019, 1,000,000 RSUs were exchanged
for 1,000,000 common stock of the Company. The RSUs of the remaining installment
are expected to vest on January 1, 2020, upon meeting certain performance
objectives.
34
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 Ontario's reputation for water excellence around the world.
The Company's academic partner is the CAWT at Fleming College in Lindsay,
Ontario, Canada. The original AWT Program budget was for $611,280 ($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 November 4, 2016, the Company's 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 158,571 ($210,000
CAD) which was required to initiate a letter of credit in the amount of $151,020
($200,000 CAD). This loan was repaid in full, with accrued interest on April 3,
2018. Fees for the letter of credit included $7,551 ($10,000 CAD) incurred and
charged by Travellers and $2,257 ($3,000 CAD) charged by the Company's chartered
bank. There is no written agreement evidencing this loan and the loan was
approved by the Board of Directors of the Company.
On May 14, 2015, the Ontario Ministry of the Environment,
Conservation and Parks (the "MOECP") formerly the Ontario Ministry of the
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 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 Company's activities all contribute to GHG reductions, so
we will be a key part of Ontario's 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 January 2017. 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.
35
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 MOECP, from the Province of Ontario, in place to accept up
to 70,000 MT of waste annually from the provinces of Ontario and Quebec and from
New York state, and to operate a waste transfer station with the capacity to
process up to 50,000 MT 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
stations 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. The Company's organic
composting facility, located near 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 composting facility, including the ECAs for the
waste transfer station, were acquired by the Company on September 15, 2017, from
the court appointed receiver, BDO, 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 nine-month period
ended September 30, 2019, tipping fees ranged from $19 ($25 CAD) to $64 ($85
CAD) per MT.
Compost Sales. The Company also sells organic compost
(screened and unscreened) to local customers. During the nine-month period ended
September 30, 2019, the average selling price of the compost per MT was
approximately $15 ($20 CAD).
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2019, the Company had a bank overdraft balance of $7,350 (December 31, 2018-$42,711) and current debt obligations and other current liabilities in the amount of $8,061,423 (December 31, 2018-$5,045,362). As at September 30, 2019, the Company had a working capital deficit of $7,865,585 (December 31, 2018-$4,830,948). The Company does not currently have sufficient funds to satisfy the current debt obligations.
On August 28, 2019, the Companys current creditor, PACE,
demanded repayment of all the credit facilities and corporate term loan on or
before December 31, 2019. Management has been in discussions with a Canadian
chartered bank to obtain the necessary funding to satisfy PACEs demands. In
addition, on November 1, 2019, the Company communicated with PACE and offered to
paydown two of the credit facilities, totaling $460,413 ($609,738 CAD) on or
before December 31, 2019 and has requested a forbearance to December 31, 2020,
in return for the payment of the remaining credit facility and the
corporate term loan no later than December 31, 2020, or upon obtaining the
financing from the Canadian chartered bank. On November 12, 2019, PACE responded to the Company and accepted the payment of the two noted credit facilities, but, in addition, that all the Debt be made current, that the Company provide written reports to PACE on its refinancing with the Canadian chartered bank on a monthly basis commencing December 15, 2019, that all remaining debt be repaid by June 30, 2020 and that PACE be permitted to appoint a financial advisor to inspect the assets and operations of the Company. In addition, the Company’s letter of credit with PACE
is expected to be renewed to June 30, 2020.
All terms are subject to credit approval.
36
The Company's total assets at September 30, 2019 were $5,191,623 (December 31, 2018-$3,710,713) and total current liabilities were $8,061,423 (December 31, 2018-$5,045,362). Significant losses from operations have been incurred since inception and there is an accumulated deficit of $10,766,212 as at September 30, 2019 (December 31, 2018 -$8,554,312). Continuation as a going concern is dependent upon generating significant new revenue and generating external capital and securing debt to satisfy its creditor’s demands and to achieve profitable operations while maintaining current fixed expense levels.
To pay current liabilities and to fund any future operations, the Company requires significant new funds, which the Company may not be able to obtain. In addition to the funds required to liquidate the $8,061,423 in current debt obligations and other current liabilities, the Company estimates that approximately $3,000,000 must be raised to fund capital requirements and general corporate expenses for the next 12 months.
In the normal course of business, we are exposed to market
risks, including changes in interest rates, certain commodity prices and
Canadian currency rates. The Company does not use derivatives to manage these
risks.
During the nine-month period ended September 30, 2019 and up to
the date of this filing, the investors of the unsecured convertible promissory
notes, converted a total of $142,944 of their unsecured convertible promissory
notes, including a portion of their accrued interest for 4,567,233 common shares
at prices ranging from $0.02015 to $0.091 per share.
On July 19, 2019, the Company entered into a securities
purchase agreement (the "July 2019 SPA") with one investor (the "July 2019
Investor") pursuant to which the Company issued to the July 2019 Investor one
12% unsecured convertible promissory note (the "July 2019 Investor Note") in the
principal amount of $170,000. On this date, the Company received proceeds of
$138,225, net of transaction related expenses of $31,775.
The maturity date of the July 2019 Investor note is July 19,
2020. The July 2019 Investor Note bears interest at a rate of twelve percent
(12%) per annum (the "July 2019 Interest Rate"), which interest shall be paid by
the Company to the July 2019 Investor in Common Stock at any time the July 2019
Investor sends a notice of conversion to the Company. The July 2019 Investor is
entitled to, at its option, convert all or any amount of the principal amount
and any accrued but unpaid interest of the July 2019 Investor Note 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 Note) of the
Common Stock as reported on the National Quotations Bureau OTC Marketplace
exchange upon which the Company's shares are traded during the twenty (20)
consecutive Trading Day period immediately preceding (i) the applicable July
2019 Effective Date; or (ii) the conversion date.
The Company initially reserved 5,604,000 of its authorized and unissued
Common Stock (the "July 2019 Reserved Amount"), free from preemptive rights, to
provide for the issuance of Common Stock upon the full conversion of the July
2019 Investor Note. Upon full conversion of the July 2019 Investor note, any
shares remaining in such reserve shall be cancelled. The Company increases the
July 2019 Reserved Amount in accordance with the Company's obligations under the
July 2019 Investor note.
On May 23, 2019, the Company entered into a securities purchase
agreement (the "May 2019 SPA") with one investor (the "May 2019 Investor")
pursuant to which the Company issued to the May 2019 Investor one 12% unsecured
convertible promissory note (the "May 2019 Investor Note") in the principal
amount of $250,000. On this date, the Company received proceeds of $204,250, net
of transaction related expenses of $45,750.
37
The maturity date of the May 2019 Investor note is May 23,
2020. The May 2019 Investor Note bears interest at a rate of twelve percent
(12%) per annum (the "May 2019 Interest Rate"), which interest shall be paid by
the Company to the May 2019 Investor in Common Stock at any time the May 2019
Investor sends a notice of conversion to the Company. The May 2019 Investor is
entitled to, at its option, convert all or any amount of the principal amount
and any accrued but unpaid interest of the May 2019 Investor Note 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 Note) of the
Common Stock as reported on the National Quotations Bureau OTC Marketplace
exchange upon which the Company's shares are traded during the twenty (20)
consecutive Trading Day period immediately preceding (i) the applicable May 2019
Effective Date; or (ii) the conversion date.
The Company initially reserved 10,937,000 of its authorized and unissued
Common Stock (the "May 2019 Reserved Amount"), free from preemptive rights, to
provide for the issuance of Common Stock upon the full conversion of the May
2019 Investor Note. Upon full conversion of the May 2019 Investor note, any
shares remaining in such reserve shall be cancelled. The Company increases the
May 2019 Reserved Amount in accordance with the Company's obligations under the
May 2019 Investor note.
On March 7 and March 8, 2019, the Company entered into two
securities purchase agreements (the "March 2019 SPAs") with two investors (the
"March 2019 Investors") pursuant to which the Company issued to each March 2019
Investor 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, with such principal and the interest thereon
convertible into Common Stock at the March 2019 Investors' option. Each First
Note contains a $25,000 Original Issue Discount such that the issue price of
each First Note was $250,000. The proceeds on the issuance of the First Notes
were received from the March 2019 Investors upon the signing of the March 2019
SPAs. The proceeds on the issuance of the Back-End Notes were initially received
by the issuance of two offsetting $250,000 secured notes to the Company by the
March 2019 Investors (the "Buyer Notes"), provided that prior to conversion of
the Back-End Notes, the March 2019 Investors must have paid back the Back-End
Notes in cash.
Although the March 2019 SPAs are dated March 7, 2019 and March
8, 2019 (each, a "March 2019 Effective Date"), they became effective upon the
receipt in cash of the issue price by the March 2019 Investors. On March 11,
2019, the Company received cash of $456,000, net of transaction-related
expenses, for the First Notes from the March 2019 Investors.
On April 24, 2019, the Company received one of the Back-End
Notes from the March 2019 Investors in the face value amount of $275,000. The
proceeds received by the Company was $228,000, net of $25,000 discount and
financing costs.
The maturity dates of the March 2019 Investor Notes are March
7, 2020 and March 8, 2020. The March 2019 Investor Notes bear interest at a rate
of twelve percent (12%) per annum (the "March 2019 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 Investor 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 Company's
shares are traded during the twenty (20) consecutive Trading Day period
immediately preceding (i) the applicable March 2019 Effective Date; or (ii) the
conversion date.
38
The Company reserved a minimum of eight (8) times the number of
its authorized and unissued Common Stock (the "March 2019 Reserved Amounts"),
free from preemptive rights, to provide for the issuance of Common Stock upon
the full conversion of the March 2019 Investor Notes. Upon full conversion of
the March 2019 Investor Notes, any shares remaining in such reserve shall be
cancelled. The Company increases the March 2019 Reserved Amount in accordance
with the Company's obligations under the March 2019 Investor Notes.
On January 28, 2019, the Company entered into securities
purchase agreements (the "January 2019 SPAs") with three investors (the "January
2019 Investors") pursuant to which the Company issued to the January 2019
Investors 12% unsecured convertible promissory notes (the "January 2019 Notes")
in the aggregate principal amount of $337,500, with such principal and the
interest thereon convertible into shares of the Company's common stock (the
"Common Stock") at the January 2019 Investors' option. Although the January 2019
SPAs are dated January 28, 2019 (the "January 2019 Effective Date"), they became
effective upon the receipt in cash of the issue price by the January 2019
Investors.
The amounts of $102,500, $100,000, and $100,000, totaling
$302,500, represented the proceeds to the Company, net of transaction-related
expenses, for the January 2019 Notes from the January 2019 Investors and were
received in cash from February 1 through February 4, 2019.
The maturity date of each of the January 2019 Notes is January
28, 2020 (the "January 2019 Maturity Dates"). The Notes bear interest at a rate
of twelve percent (12%) per annum (the "January 2019 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 January 2019 Notes) of the Common Stock
as reported on the National Quotations Bureau OTC Marketplace exchange upon
which the Company's shares are traded during the twenty (20) consecutive Trading
Day period immediately preceding (i) the January 2019 Effective Date; or (ii)
the conversion date.
The Company has reserved a minimum of eight (8) times the
number of its authorized and unissued Common Stock (the "January 2019 Reserved
Amounts"), free from preemptive rights, to provide for the issuance of Common
Stock upon the full conversion of the January 2019 Notes. Upon full conversion
of the January 2019 Notes, any shares remaining in such reserve shall be
cancelled. The Company increases the January 2019 Reserved Amount in accordance
with the Company's obligations under the January 2019 Notes.
The convertible promissory notes described above may be prepaid
until 180 days from their applicable effective date with the following
penalties: (i) if any of the convertible promissory notes are prepaid within
sixty (60) days following their applicable effective date, then the prepayment
premium shall be 125% of the face amount plus any accrued interest; (ii) if any
of the convertible promissory notes are prepaid during the period beginning on
the date which is sixty-one (61) days following their applicable effective date,
and ending on the date which is ninety (90) days following their applicable
effective date, then the prepayment premium shall be 135% of the face amount
plus any accrued interest; (iii) if any of the convertible promissory notes are
prepaid during the period beginning on the date which is ninety-one (91) days
following their applicable effective date, and ending on the date which is one
hundred eighty (180) days following their applicable effective date, then the
prepayment premium shall be 145% of the face amount plus any accrued interest.
Such prepayment redemptions must be closed and funded within three days of
giving notice of prepayment or the right to prepay shall be forfeited. Pursuant
to the terms of the security purchase agreements for the convertible promissory
notes described above, for so long as the noted investors own any shares of
Common Stock issued upon the conversion of the applicable investor notes, the
Company has covenanted to secure and maintain the listing of such shares of
Common Stock. The Company is also subject to certain customary negative
covenants under the investor notes and the security purchase agreements,
including but not limited to the requirement to maintain its corporate existence
and assets, require registration of or stockholder approval for the
investor notes or the Common Stock upon the conversion of the applicable
investor notes.
39
The convertible promissory notes described above contain
certain representations, warranties, covenants and events of default including
if the Company is delinquent in its periodic report filings with the Securities
and Exchange Commission which would increase the amount of the principal and
interest rates under the convertible promissory notes in the event of such
defaults. In the event of a default, at the option of the applicable investor
and in their sole discretion, the applicable investor may consider any of their
convertible promissory notes immediately due and payable.
During the three and nine-month periods ended September 30,
2019, the January 2019 Investors converted a total of $64,270 and $64,270
respectively, of their January 2019 Notes and during the three and nine-month
periods ended September 30, 2019, the March 2019 Investors converted a total of
$20,00 and $20,00 respectively, of their March 2019 Notes.
For the nine-month period ended September 30, 2019, the Company
accrued interest of $88,721 (2018-$nil) on the outstanding promissory notes,
included in accrued liabilities.
Subsequent to September 30, 2019 to the date of this filing, the January 2019
Investors and the March 2019 Investors converted a portion of their unsecured
convertible promissory notes, including a portion of the accrued interest, in
total $95,397, for 3,456,685 common shares at per share conversion prices
ranging from $0.02015 to $0.0371.
On April 11, 2018, three directors each loaned the Company
$18,878 ($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 nine-month period ended September 30, 2019 $3,347 ($4,463 CAD) (2018-$3,295;
$4,241 CAD) of interest was charged on the Director Loans. As at September 30,
2019, $nil ($nil CAD) (December 31, 2018-$4,772; $6,510 CAD) in interest is
included in accrued liabilities. As at September 30, 2019, $nil ($nil CAD)
(December 31, 2018-$54,975; $75,000 CAD). The Director Loans were repaid in full
on July 19, 2019 with accrued interest.
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 $151,020 ($200,000 CAD) (the "Travellers Loan"). A portion of the
funds, $114,117 ($151,128 CAD), was used to pay two overdue monthly principal
and interest instalments on the Company's 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
nine-month period ended September 30, 2019, $4,631 ($6,155 CAD) (2018-$9,482;
$12,205 CAD) in interest was charged on the Travellers Loan and other loans
repaid to Travellers during the period. As at September 30, 2019, $nil ($nil
CAD) (December 31, 2018-$13,110; $17,885 CAD) in interest was included in
accrued liabilities. This new Travellers Loan was repaid in full on June 24,
2019, with accrued interest.
As at September 30, 2019, the current and long-term portions of our debt obligations were $6,718,688 ($8,702,020 CAD) and $nil ($195,726 CAD) respectively of $6,718,688 ($8,897,746 CAD) in total.
In addition, at September 30, 2019, the Company had an
outstanding letter of credit provided by PACE, in the amount of $209,035
($276,831 CAD), in favor of the MOECP. The letter of credit is a requirement of
the MOECP and is in connection with the financial assurance provided by the
Company, for it to be in compliance with the MOECPs environmental objectives.
The MOECP regularly evaluates the Company's organic composting facility to
ensure compliance is adhered to and the letter of credit is subject to change by
the MOECP. As at September 30, 2019, and the date of this filing, the MOECP has
not drawn on this letter of credit. The Company has renewed this letter of
credit to December 31, 2019.
As noted above, on August 28, 2019, the Companys current
creditor, PACE, demanded repayment of all the credit facilities and corporate
term loan on or before December 31, 2019. Management has been in discussions
with a Canadian chartered bank to obtain the necessary funding to satisfy PACEs
demands. In addition, on November 1, 2019, the Company communicated with PACE
and offered to paydown two of the credit facilities, totaling $460,413 ($609,738
CAD) on or before December 31, 2019 and has requested a forbearance to December
31, 2020, in return for the payment of the remaining credit facility and the
corporate term loan no later than December 31, 2020, or upon obtaining the
financing from the Canadian chartered bank. On November 12, 2019, PACE responded to the Company accepting the
repayment of the two noted credit facilities, but, in addition, that all the Debt be made current, that the Company provide written reports to PACE on its refinancing with the Canadian chartered bank on a monthly basis commencing December 15, 2019, that all remaining debt be repaid by June 30, 2020 and that PACE be permitted to appoint a financial advisor to inspect the assets and operations of the Company. In addition, the Company’s letter of credit with PACE
is expected to be renewed to June 30, 2020.
All subject to credit approval.
40
Below are details of the Companys indebtedness to PACE, based on the original terms.
Effective January 1, 2017, the Company obtained a Line of
Credit of up to $4,153,050 ($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 $1,208,160 ($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 $1,208,160 ($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 $1,208,160 ($1,600,000
CAD) personal guarantee from the president of the Company (the "President") and
a charge against the Company's 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 director's 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 $83,061 ($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 $29,232 ($38,713 CAD). As at
September 30, 2019, $757,406 ($1,003,054 CAD) (December 31, 2018-$745,897;
$1,017,595 CAD) remains outstanding. During the nine-month period ended
September 30, 2019, the Company incurred interest charges of $46,835 ($62,248
CAD) (2018-$48,043; $61,840 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%. Prior to the
demand by PACE, the credit facility was payable in monthly blended installments
of principal and interest of $6,618 ($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 $453,060 ($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
September 30, 2019, $423,573 ($560,949 CAD) (December 31, 2018-$417,137;
$559,081 CAD) remains outstanding under the PACE Business Loan Agreement. During
the nine-month period ended September 30, 2019, the Company incurred interest
charges of $26,192 ($34,811 CAD) (2018-$26,883; $34,602 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%. Prior to the
demand by PACE, the credit facility was payable in monthly blended installments
of principal and interest of $3,701 ($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 $37,755 ($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 September 30, 2019,
$36,840 ($48,788 CAD) (December 31, 2018-$36,344; $49,583 CAD) remains
outstanding. During the nine-month period ended September 30 2019, the Company
incurred interest charges of $2,539 ($3,375 CAD) (2018-$2,342; $3,015 CAD) on
this credit facility.
41
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%. Prior to the
demand by PACE, the credit facility was payable in monthly blended installments
of principal and interest of $322 ($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 $2,812,103
($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
$57,058 ($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 $3,021,138 ($4,000,978 CAD)
against the Company's assets, including accounts receivable, inventory and
equipment. PACE has also provided the Company with a letter of credit in the
favor of the MOECP in the amount of $209,035 ($276,831 CAD) and, as security,
has registered a charge of lease over the premises, located at 704 Phillipston
Road, Roslin (near Belleville), Ontario, Canada. As at September 30, 2019, and the
date of this filing, the MOECC has not drawn on this letter of credit. The
letter of credit was renewed to December 31, 2019. 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 $52,361 ($69,343 CAD), was capitalized
and included in the principal balance of the PACE Corporate Term Loan. As at
September 30, 2019 $2,567,391 ($3,400,068 CAD) (December 31, 2018-$2,528,400;
$3,449,387 CAD) remains outstanding under the PACE Corporate Term Loan. During
the nine-month period ended September 30, 2019, the Company incurred interest
charges of $158,875 ($211,158 CAD) (2018-$163,884; $210,946 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
$22,022 ($29,164 CAD) was due August 1, 2018 at the rate of 8% per annum, and
amortized over a twenty-year period. Prior to the demand by PACE, the credit
facility the Corporate Term Loan was due on demand, but until a demand is made,
is payable in monthly blended installments of principal and interest of $22,435
($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.
Refer to notes 12, 13, 14, 15 16 and 17 to the interim
condensed consolidated financial statements for details on the advance,
long-term debt, obligations under capital lease, convertible promissory notes,
mortgage payable and loans payable to related parties, as at September 30, 2019.
42
CONSOLIDATED RESULTS OF OPERATIONS -
FOR THE THREE-MONTH PERIOD ENDED SEPTEMBER 30,
2019 COMPARED TO THE THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2018
|
|
|
|
|
|
For
the three-month periods ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
390,723
|
|
$
|
279,394
|
|
|
|
|
|
|
|
|
Cost of Sales
|
|
|
|
|
|
|
Opening inventory
|
|
24,738
|
|
|
115,733
|
|
Depreciation
|
|
105,990
|
|
|
98,823
|
|
Direct wages and benefits
|
|
71,347
|
|
|
41,526
|
|
Equipment rental, delivery,
fuel and
|
|
|
|
|
|
|
repairs and maintenance
|
|
24,053
|
|
|
41,354
|
|
Utilities
|
|
19,309
|
|
|
22,755
|
|
Outside contractors
|
|
17,824
|
|
|
(27
|
)
|
|
|
263,261
|
|
|
320,164
|
|
Less: closing inventory
|
|
(27,538
|
)
|
|
(73,795
|
)
|
Total cost of sales
|
|
235,723
|
|
|
246,369
|
|
|
|
|
|
|
|
|
Gross profit
|
|
155,000
|
|
|
33,025
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
Management compensation-stock- based
|
|
|
|
|
|
|
compensation
|
|
85,000
|
|
|
332,500
|
|
Management compensation-fees
|
|
81,800
|
|
|
82,619
|
|
Marketing
|
|
5,785
|
|
|
-
|
|
Professional fees
|
|
63,357
|
|
|
246,245
|
|
Interest expense
|
|
152,952
|
|
|
90,939
|
|
Office and administration
|
|
62,906
|
|
|
39,182
|
|
Rent and occupancy
|
|
33,024
|
|
|
54,925
|
|
Insurance
|
|
17,508
|
|
|
14,172
|
|
Filing fees
|
|
2,546
|
|
|
1,479
|
|
Amortization of financing costs
|
|
88,956
|
|
|
-
|
|
Directors' compensation
|
|
(14,648
|
)
|
|
766
|
|
Repairs and maintenance
|
|
4,219
|
|
|
1,471
|
|
Total operating expenses
|
|
583,405
|
|
|
864,298
|
|
|
|
|
|
|
|
|
Net loss
|
$
|
(428,405
|
)
|
$
|
(831,273
|
)
|
During the three-month period ended September 30, 2019, the
Company generated $390,723 of revenue from its organic composting facility
compared to $279,394 in the three-month period ended September 30, 2018. The
Company's cost of sales in connection with this revenue totaled $235,723 in the
three-month period ended September 30, 2019 compared to $246,369 in the
three-month period ended September 30, 2018. These costs consisted of
depreciation, direct wages and benefits, equipment rental, delivery, fuel,
repairs and maintenance, utilities and outside contractors. The significant
increase in revenue in the current period was primarily due to new business. The
current period's revenue also includes garbage collection and landfill
maintenance revenue of $53,896, resulting from the business acquisition of
1684567, effective May 24, 2019.
The net loss for the three-month period ended September 30,
2019 was $428,405, significantly lower than the net loss of $831,273 in the
three-month period ended September 30, 2018, primarily due to the reduction in
management compensation relating to stock-based compensation and professional
fees offset by increases in interest expense, office and administration and
amortization of financing fees.
43
Operating expenses were reduced by $280,893, from $864,298 in
the three-month period ended September 30, 2018 to $583,405 in the three-month
period ended September 30, 2019, explained further below.
Management compensation related to stock-based compensation
reduced by $247,500, from $332,500 in the three-month period ended September 30,
2018 to $85,000 in the three-month period ended September 30, 2019. The
reduction was due to the adjustment to the vesting of the former CEOs 2019
RSUs, as a result of his ceasing to provide CEO services in September 2019. On
September 25, 2019, the former CEO resigned from the Board.
Marketing costs increased by $5,785 during the three-month
period ended September 30, 2019, compared to $nil in the three-month period
ended September 30, 2018, as no marketing plan was in place in the prior years
comparable quarter.
Professional fees for the three-month period ended September
30, 2019 in the amount of $63,357, were significantly lower than the
professional fees in the three-month period ended September 30, 2018, primarily
as a result of the absence of legal services on the Company's claim against a
third party represented by BDO.
Interest expense increased by $62,013 from $90,939 in the
three-month period ended September 30, 2018 to $152,952 for the three-month
period ended September 30, 2019, primarily as a result of the interest expense
on the advance in the amount of $6,773,
on the convertible promissory notes in the amount of $29,516 and the new
mortgage interest of $34,162 on the business acquisition, offset by reductions
in interest expense on the various term loans and capital leases.
Office and administration increased by $23,724, from $39,182 in
the three-month period ended September 30, 2018 to $62,906 for the three-month
period ended September 30, 2019, as a result of an increase in various expenses
including laboratory testing, automotive expenses, letter of credit renewal and
various other administrative costs.
Rent and occupancy for the three-month period ended September
30, 2019 reduced by $21,901 compared to the three-month period ended September
30, 2018, primarily due to the elimination of any rental costs relating to the
Companys composting premises, as it is now also the landlord.
Insurance increased by $3,336 from $14,172 in the three-month
period ended September 30, 2018 to $17,508 in the three-month period ended
September 30, 2019, primarily due to an increase in premiums for the Companys
composting operations.
Filing fees for the three-month period ended September 30, 2019
in the amount of $2,546 were comparable to those for the three-month period
ended September 30, 2018 in the amount of $1,479.
The amortization of financing costs incurred during the
three-month period ended September 30, 2019, resulted from the financing costs
incurred on the SPAs in the amount of $68,406 and the amortization of the
financing fees in connection with the mortgage payable on the business
acquisition of $20,550. The financing costs are being amortized over the terms
of the SPAs and the mortgage payable which are both one year in duration. There
were no comparable amounts in the prior year's period.
A portion of the directors' compensation for 2019 is based on
an accrual of fees for services payable in shares, determined using the trading
price at the end of each reporting period. Since the trading price has dropped
during the year, the resulting expense is a credit of $15,400 in the three-month
period ended September 30, 2019 offset by the directors compensation for the
audit committee chairmans fees. The directors compensation expense for the
audit committee chairmans fees in the three-month period ended September 30,
2019 totaled $752 compared to $766 in the three-month period ended September 30,
2018.
44
Repairs and maintenance expenses increased by $2,748 in the
three-month period ended September 30, 2019 compared to the three-month period
ended September 30, 2018, as a result of additional repairs and maintenance at
the Companys organic composting facility.
CONSOLIDATED RESULTS OF OPERATIONS -
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30,
2019 COMPARED TO THE NINE-MONTH PERIOD ENDED SEPTEMBER 30,
2018
|
|
|
|
|
|
|
|
|
|
For the nine-month
periods ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
1,025,695
|
|
$
|
639,538
|
|
|
|
|
|
|
|
|
Cost of Sales
|
|
|
|
|
|
|
Opening inventory
|
|
18,550
|
|
|
53,964
|
|
Depreciation
|
|
302,816
|
|
|
291,134
|
|
Direct wages and benefits
|
|
180,379
|
|
|
125,634
|
|
Equipment rental, delivery, fuel and
|
|
|
|
|
|
|
repairs and maintenance
|
|
228,535
|
|
|
102,552
|
|
Utilities
|
|
79,535
|
|
|
54,643
|
|
Outside
contractors
|
|
22,526
|
|
|
16,654
|
|
|
|
832,341
|
|
|
644,581
|
|
Less: closing
inventory
|
|
(27,538
|
)
|
|
(73,795
|
)
|
Total cost of sales
|
|
804,803
|
|
|
570,786
|
|
|
|
|
|
|
|
|
Gross profit
|
|
220,892
|
|
|
68,752
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
Management compensation-stock- based
|
|
|
|
|
|
|
compensation
|
|
750,000
|
|
|
1,997,500
|
|
Management compensation-fees
|
|
243,778
|
|
|
256,377
|
|
Marketing
|
|
252,462
|
|
|
-
|
|
Professional fees
|
|
270,328
|
|
|
383,287
|
|
Interest expense
|
|
408,382
|
|
|
267,958
|
|
Office and administration
|
|
176,850
|
|
|
102,767
|
|
Rent and occupancy
|
|
92,085
|
|
|
123,842
|
|
Insurance
|
|
45,518
|
|
|
44,757
|
|
Filing fees
|
|
31,643
|
|
|
11,518
|
|
Amortization of financing costs
|
|
154,721
|
|
|
-
|
|
Directors' compensation
|
|
(1,948
|
)
|
|
2,331
|
|
Repairs and
maintenance
|
|
8,973
|
|
|
20,240
|
|
Total operating expenses
|
|
2,432,792
|
|
|
3,210,577
|
|
|
|
|
|
|
|
|
Net loss
|
$
|
(2,211,900
|
)
|
$
|
(3,141,825
|
)
|
During the nine-month period ended September 30, 2019, the
Company generated $1,025,695 of revenue from its organic composting facility
compared to $639,538 for the nine-month period ended September 30, 2018. The
Company's cost of sales in connection with this revenue totaled $804,803 in the
nine-month period ended September 30, 2019 compared to $570,786 for the
nine-month period ended September 30, 2018. These costs consisted of
depreciation, direct wages and benefits, equipment rental, delivery, fuel,
repairs and maintenance, utilities and outside contractors. The significant
increase in both the revenue and the cost of sales in the current period was
primarily due to new business, including the cost of processing the waste from
this new business. The current period's revenue also includes garbage collection
and landfill maintenance revenue of $77,048, resulting from the business
acquisition of 1684567, effective May 24, 2019.
45
The net loss for the nine-month period ended September 30, 2019
was $2,211,900, significantly lower than the net loss of $3,141,825 in the
nine-month period ended September 30, 2018, explained further below.
Operating expenses were reduced by $777,785, from $3,210,577 in
the nine-month period ended September 30, 2018 to $2,432,792 in the nine-month
period ended September 30, 2019, explained further below.
Management compensation related to stock-based compensation
reduced by $1,247,500, from $1,997,500 in the nine-month period ended September
30, 2018 to $750,000 in the nine-month period ended September 30, 2019. The
reduction was due to the adjustment to the vesting of the former CEOs 2019
RSUs, as a result of his ceasing to provide CEO services in September 2019. On
September 25, 2019, the former CEO resigned from the Board. In addition, in the
prior years period, the Company recorded $1,000,000 as stock-based compensation
for the President on the exchange of his 2017 RSUs into common stock of the
Company. Further, the reduction in the management compensation in the form of
fees is primarily the result of the absence of fees incurred for the position
held by the Vice President of Corporate Development, who's services ended on
March 31, 2018.
During the nine-month period ended September 30, 2019, the
Company incurred marketing fees for its marketing campaign in the amount of
$252,462, with no comparable amount in the prior year's period.
Professional fees decreased by $112,959, from $383,287 in the
nine-month period ended September 30, 2018 to $270,328 in the nine-month period
ended September 30, 2019, primarily due to a decrease in legal services on the
Company's claim against a third party represented by BDO, including the costs
awarded BDO on the Court's dismissal of the Company's motions and the Company's
Canadian counsel's fees offset by the issuance of shares for legal services
provided by the Company's legal counsel determined to be valued at $53,000 based
on the closing trading price on the day prior to issuance and other legal and
property appraisal expenses incurred.
Interest expense increased by $140,424 from $267,958 in the
nine-month period ended September 30, 2018 to $408,382 in the nine-month period
ended September 30, 2019, primarily as a result of the interest expense on the
advance in the amount of $6,773, on the
convertible promissory notes in the amount of $96,747 and the interest on the
new mortgage of $47,845 on the business acquisition, offset by reductions in
interest expense on the various term loans and capital leases.
Office and administration increased by $74,083, from $102,767
in the nine-month period ended September 30, 2018 to $176,850 in the nine-month
period ended September 30, 2019, as a result of an increase in various expenses
including laboratory testing, automotive expenses, letter of credit renewal and
various other administrative costs, offset by a reduction in foreign exchange
gains.
Rent and occupancy cost decreased by $31,757 from $123,842 in
the nine-month period ended September 30, 2018 to $92,085 in the nine-month
period ended September 30, 2019, primarily due to the presentation of the
operating lease liability and related interest expense for a portion of the
nine-month period ended September 30, 2019 to the date the Company also became
the landlord of the organic composting facility, as opposed to rent expense of a
similar amount and the absence of the apartment and trailer rentals incurred
during the prior year's period.
Insurance expense increased by $761 from $44,757 in the
nine-month period ended September 30, 2018 to $45,518 in the nine-month period
ended September 30, 2019, primarily due to overall higher premiums and
coverages.
Filing fees increased by $20,125, from $11,518 in the
nine-month period ended September 30, 2018 compared to $31,643 in the nine-month
period ended September 30, 2019, primarily as a result of fees for an investor
communications service and various other communications and mailings for the
annual general meeting totaling $21,286.
46
The amortization of financing costs incurred during the
nine-month period ended September 30, 2019, resulted from the financing costs
incurred on the new SPAs in the amount of $125,978 and the amortization of the
financing fees in the amount of $28,743 in connection with the mortgage payable
on the business acquisition. The financing costs are being amortized over the
terms of the SPAs and the mortgage payable which are one year in duration. There
were no comparable amounts in the prior years period.
A portion of the directors' compensation for 2019 is based on
an accrual of fees for services payable in shares, determined using the trading
price at the end of each reporting period. Since the trading price has dropped
during the year, the resulting expense is a credit of $4,205 in the nine-month
period ended September 30, 2019 offset by the directors compensation for the
audit committee chairmans fees. The directors compensation expense for the
audit committee chairmans fees in the nine-month period ended September 30,
2019 totaled $2,257 compared to $2,331 in the nine-month period ended September
30, 2018.
Repairs and maintenance expenses were lower by $11,267 in the
current nine-month period ended September 30, 2019 compared to the nine-month
period ended September 30, 2018, due to lower overall expenses incurred at the
Company's organic composting facility and the Toronto office location.
As at September 30, 2019, the Company had a working capital deficit of $7,865,585 (December 31, 2018-$4,830,948), incurred a net loss of $2,211,900 (2018-$483,617) for the nine-month period ended September 30, 2019 and had an accumulated deficit of $10,766,212 (December 31, 2018-$8,554,312) and expects to incur further losses in the development of its business.
On August 28, 2019, Pace Savings & Credit Union Limited
(PACE) informed the Company via letter that the credit facilities and
corporate term loan (the Debt) was in default due to the Companys going
concern disclosure in the Companys consolidated financial statements for the
years ended December 31, 2018 and 2017 and as a result of the Companys failure
to respond to an e-mail request from PACE with respect to the Companys efforts
to arrange for a payout. As a result, PACE was not agreeable to continue with
the Debt and had requested that the Companys indebtedness to PACE be paid in
full on or before December 31, 2019. PACE requested that their letter be fully
executed by September 5, 2019. On September 3, 2019, PACE informed the Company
via letter that the interest rates on the Debt be increased effective September
15, 2019, by 0.50%, and each month thereafter by a further 0.50%. On September
5, 2019, management arranged to meet with PACE to discuss their demands and to
discuss the Companys refinancing efforts. Management expressed their concerns
over PACEs actions in describing the details of the default and in increasing
the interest rates as per their written communication. Management indicated to
PACE that it was agreeable to a partial paydown of the Debt, as management was
in discussions with obtaining a first mortgage over the Companys property which
included their organic composting facilities, from a chartered bank. PACE
requested management to continue to update PACE on managements refinancing
plans. Management did not fully execute the September 5, 2019 letter from PACE
nor any future letters from PACE. The Company stopped payments on the
September and October instalments on the Debt with PACE. On September 11, 2019,
PACE informed the Company that it failed to execute the new terms by September
5, 2019 and that it failed to make the required September payments on two of the
three credit facilities that are part of the Debt, which were due on September
2, 2019. PACE also requested payments for the September monthly instalment
payment on each of the two credit facilities, not sufficient fund fees and
default and administrative fees totaling $1,978 ($2,620 CAD) and the letter of
credit fee in the amount of $1,888 ($2,500). The letter of credit fee was paid
and the letter of credit was extended to December 31, 2019. PACE also requested
that the Company provide cash collateral to PACE for the letter of credit, in
the amount of $209,035 ($276,831). PACE requested the consent of management to
have PACE appoint a financial advisor to inspect and assess the assets and
operations of the Company and requested that the letter be executed and returned
to PACE by September 12, 2019. In a letter to PACE, management noted that the
companys financial report due by November 14, 2019, will be provided to PACE
subsequent to the filing of the financial report and that no further payments
will be made to PACE pending resolution of a paydown schedule to facilitate the
principal reduction required by PACE on or before December 31, 2019. In a
letter from PACE on September 13, 2019, they agreed to renew the letter of
credit to December 31, 2019 but still consider the Debt in default. In a letter
from PACE on October 9, 2019, PACE confirmed that the letter of credit was
renewed to December 31, 2019 and noted further instalments payments returned
stop payment, which were due on September 13, 2019 and October 2 and 4, 2019.
PACE reiterated that they did not want to continue to be the Companys banker
and that it did not agree to any partial reduction of the Debt and requested
that the Company provide a written repayment plan to have the credit facilities
permanently retired. On November 1, 2019, the Company responded to PACEs
demands for the repayment of all Debt by
offering to pay two credit facilities totaling $460,413 ($609,738 CAD) on or
before December 31, 2019, in return for a forbearance to December 31, 2020 and
repayment of the remaining credit facility and corporate term loan no later than
December 31, 2020 or upon the completion of the refinancing with the Canadian
chartered bank. On November 12, 2019, PACE responded to the Company accepting the
repayment of the two noted credit facilities, but, in addition, demanded that all the Debt be made current, that the Company provide written reports to PACE on its refinancing with the Canadian chartered bank on a monthly basis commencing December 15, 2019, that all remaining debt be repaid by June 30, 2020 and that PACE be permitted to appoint a financial advisor to inspect the assets and operations of the Company. In addition, the Company’s letter of credit with PACE
is expected to be renewed to June 30, 2020.
All terms are subject to credit approval.
47
As a result of the PACE default, the advance, the obligations
under capital lease and the convertible promissory notes are also in default.
Further, on September 25, 2019, the Companys chief executive
officer (the CEO), resigned as a member of the Board of Directors (the Board)
and ceased providing his services as CEO. On November 6, 2019, by resolution of
the Board, the president of the Company (the President), was appointed CEO.
These factors cast substantial doubt as to the Company's
ability to continue as a going concern, which is dependent upon its ability to
obtain the necessary financing to further the development of its business,
satisfy its 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 shown.
The interim condensed consolidated financial statements do not
include any adjustments to reflect the future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result if the Company was unable to continue as a going concern.
48
CRITICAL ACCOUNTING ESTIMATES
Use of estimates
The preparation of the Company's consolidated financial
statements in conformity with US GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. These estimates are based on management's best knowledge of
current events and actions the Company may undertake in the future. The Company
regularly evaluates estimates and assumptions. The Company bases its estimates
and assumptions on current facts, historical experience and various other
factors that it believes to be reasonable under the circumstances, the results
of which form the basis for making judgments 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, valuation of asset
acquisition, deferred income tax assets and related valuation allowance,
accruals, environmental remediation costs and stock-based compensation. 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
From time to time the Company may grant options and/or warrants
to management, directors, employees and consultants. The Company recognizes
compensation expense at fair value. Under this method, the fair value of each
warrant is estimated on the date of the grant and amortized over the vesting
period, with the resulting amortization credited to paid in capital. The fair
value of each grant is determined using the Black-Scholes option-pricing model.
Consideration paid upon exercise of stock options and/or warrants is recorded in
equity as share capital.
Long-Lived Asset Impairments
We assess our long-lived assets for impairment as required
under the applicable accounting standards. If necessary, impairments are
recorded in (income) expense from divestitures, asset impairments and unusual
items, net in our Consolidated Statements of Operations and Comprehensive Loss.
Indefinite-Lived Intangible Assets - At least annually,
and more frequently if warranted, we assess the indefinite-lived intangible
assets, including the goodwill of our reporting units for impairment using Level
3 inputs.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
On January 1, 2019, the Company adopted Accounting Standards
Update ("ASU") No. 2016-02, Leases which is also known as Accounting Standard
Codification ("ASC") Topic 842, that requires lessees to recognize for all
operating leases a right-of-use asset and a lease obligation in the interim
condensed consolidated balance sheets. Expenses are recognized in the interim
condensed consolidated statements of operations and comprehensive loss in a
manner similar to previous accounting guidance. Lessor accounting under the new
standard is substantially unchanged and is not relevant to the Company. The
Company adopted the accounting standard using a prospective transition approach,
which applies the provisions of the new guidance at the effective date without
adjusting the comparative periods presented, with certain practical expedients
available to ease the burden of adoption.
The Company elected the following practical expedients upon
adoption: not to reassess whether any expired or existing contracts are or
contain leases, not to reassess the lease classification for any expired or
existing leases, not to reassess initial direct costs for any existing leases,
not to separately identify lease and non-lease components (i.e. maintenance
costs) except for fleet vehicles and real estate, and not to evaluate historical
land easements under the new guidance. Additionally, the Company elected the
short-term lease exemption policy, applying the requirements of ASC 842 to
long-term leases (leases greater than 1 year) for which it only has one.
49
Adoption of the new standard resulted in $217,755 ($297,074
CAD) of additional right-of-use lease asset and lease liability as of January 1,
2019. The new standard did not have a significant impact on the interim
condensed consolidated statements of operations and comprehensive loss. See note
9, operating lease right-of-use asset and operating lease liability, for
additional information.
RECENT ACCOUNTING PRONOUNCEMENTS
From time to time, new accounting pronouncements are issued by
FASB or other standard setting bodies and adopted by the Company as of the
specified effective date or possibly early adopted, where permitted. Unless
otherwise discussed, the impact of recently issued standards that are not yet
effective will not have a material impact on the Company's financial position,
results of operations or cash flows.
In August 2018, the FASB issued an update, ASU No. 2018-13,
Disclosure Framework-Changes to the Disclosure Requirements for Fair Value
Measurements to ASC Topic 820, Fair Value Movement. ASU No. 2018-13 modifies the
disclosure requirements for fair value measurements by removing, modifying,
and/or adding certain disclosures. ASU No. 2018-13 is effective for interim and
annual reporting periods in fiscal years beginning after December 15, 2019. The
Company is currently evaluating the impact of adopting ASU No. 2018-13.
In January 2017, the FASB issued ASU No. 2017-04,
"Intangibles-Goodwill and Other (Topic 350) - Simplifying the Test for
Goodwill Impairment". The new standard simplifies the accounting for
goodwill impairments by eliminating step 2 from the goodwill quantitative
impairment test. Instead, if the carrying amount of a reporting unit exceeds its
fair value, an impairment loss is to be recognized in an amount equal to that
excess, limited to the total amount of goodwill allocated to that reporting
unit. The standard is to be effective for interim and annual periods beginning
after December 15, 2019 and early adoption is permitted. The Company is
currently evaluating the impact of adopting ASU No. 2017-04.
In June 2016, the FASB issued ASU 2016-13, Measurement of
Credit Losses on Financial Instruments (Topic 326), which replaces the
incurred-loss impairment methodology and requires immediate recognition of
estimated credit losses expected to occur for most financial assets, including
trade receivables. Credit losses on available-for-sale debt securities with
unrealized losses will be recognized as allowances for credit losses limited to
the amount by which fair value is below amortized cost. ASU 2016-13 is effective
for the Company beginning January 1, 2020 and early adoption is permitted. The
Company does not believe the potential impact of the new guidance and related
codification improvements will be material to its financial position, results of
operations and cash flows.
EQUITY
As at September 30, 2019, the Company had 44,376,716 common
shares issued and outstanding. As at the date of this filing, the Company had
47,833,401 common shares issued and outstanding.
STOCK OPTIONS, WARRANTS AND RESTRICTED STOCK UNITS
Effective January 1, 2017, the Company granted the CEO
3,000,000 restricted stock units ("RSU"), under a consulting agreement effective
January 1, 2017, determined to be valued at $990,000 based on private placement pricing at the time. On each of February 25, 2018, and April 2,
2019, 1,000,000 RSUs were exchanged into 1,000,000 common stock of the Company.
The RSUs for the CEOs remaining installment were expected to vest on January 1,
2020, subject to meeting certain performance objectives, but, have been
forfeited by the CEO as he ceased to provide CEO services in September 2019. On
May 17, 2018, at a meeting of the Board, approved an amendment to the
President's consulting agreement, to include the granting of 3,000,000 RSUs to
the President, determined to be valued at $3,000,000, based on private placement
pricing at the time, on the same terms and conditions as those granted to the
former CEO. Immediately thereafter, 1,000,000 of the President's RSUs were
exchanged into1,000,000 common stock of the Company. On January 8, 2019
1,000,000 of the President's RSUs were exchanged into 1,000,000 common stock of
the Company. The RSUs for the President's remaining installment are expected to
vest on January 1, 2020, subject to meeting certain performance objectives.
50
The Company has no other stock options, warrants or restricted
stock units outstanding as at September 30, 2019 and as of the date of this
filing.
RELATED PARTY TRANSACTIONS
The Company transacts with related parties in the normal course
of business.
During the three and nine-month periods ended September 30,
2019, the Company incurred $34,083 ($45,000 CAD) and $101,574 ($135,000 CAD)
(2018-$34,425; $45,000 CAD and $104,881; $135,000 CAD) respectively, in
management fees expense with Travellers International Inc. ("Travellers"), an
Ontario company controlled by a director and the President; $34,083 ($45,000CAD)
and $101,574 ($135,000 CAD) (2018-$34,425; $45,000 CAD and $104,881; $135,000
CAD) respectively, in management fees expense with Landfill Gas Canada Ltd.
("LFGC"), an Ontario company controlled by a previous director and CEO; $13,634
($18,000 CAD) and $40,630 ($54,000 CAD) (2018-$13,769; $18,000 CAD and $37,291;
$48,000 CAD) respectively, in management fees expense with the Company's chief
financial officer (the "CFO"); and $nil ($nil CAD) and $nil ($nil CAD)
(2018-$nil; $nil CAD and $9,324; $12,000 CAD) respectively, in management fees
expense with the Company's vice-president of corporate development (the "VPCD").
As at September 30, 2019, unpaid remuneration and unpaid expenses in the amount
of $72,062 ($95,434 CAD) (December 31, 2018-$48,691; $66,426 CAD) is included in
accounts payable and $242,387 ($321,000 CAD) (December 31, 2018-$184,714;
$251,997 CAD) is included in accrued liabilities.
On September 25, 2019, the CEO resigned from the Board and
ceased providing his services as CEO.
In addition, during the three and nine-month periods ended
September 30, 2019, the Company incurred interest expense of $150 ($180 CAD) and
$4,631 ($6,155 CAD) (2018-$4,664; $6,049 CAD and $9,482; $12,205 CAD)
respectively, on the outstanding loan from Travellers and $364 ($469 CAD) and
$3,711 ($4,932 CAD) (2018-$1,751; $2,268 CAD and $3,295; $4,241 CAD)
respectively, on the outstanding loans from the directors. As at September 30,
2019, interest of $nil ($nil CAD) (December 31, 2018-$17,882; $24,395 CAD) on
these loans is included in accrued liabilities.
During the three and nine-month periods ended September 30,
2019, the Company incurred $23,382 ($30,934 CAD) and $55,678 ($74,001 CAD)
(2018-$21,066; $27,426 CAD and $53,565; $68,947 CAD) respectively, in rent paid
under a rental agreement to Haute Inc. ("Haute"), an Ontario company controlled
by the President.
The Company recorded directors' compensation for its five
independent directors for services provided for the three and nine-month periods
ended September 30, 2019, including the audit committee chairman's fees, in the
amount of ($14,648) and ($1,948) (2018-$766 and $2,331) respectively. As at
September 30, 2019, $2,560 ($3,390 CAD) (December 31, 2018-$nil) of outstanding
fees to the directors is included in accounts payable and $7,133 (December 31,
2018-$52,000) of outstanding fees to the directors is included in accrued
liabilities.
51
Furthermore, the Company granted the CEO 3,000,000 restricted
stock units ("RSU"), under a consulting agreement effective January 1, 2017,
determined to be valued at $990,000 based on private placement pricing at the
time. On each of February 25, 2018 and April 2, 2019, 1,000,000 RSUs were
exchanged into 1,000,000 common stock of the Company. The RSUs for the remaining
installment which were expected to vest on January 1, 2020, subject to meeting
certain performance objectives, have been forfeited by the CEO on his
resignation in September 2019. On May 17, 2018, at a meeting of the board of
directors (the "Board"), approved an amendment to the President's consulting
agreement, to include the granting of 3,000,000 RSUs to the President,
determined to be valued at $3,000,000, based on private placement pricing at the
time, on the same terms and conditions as those granted to the CEO. Immediately
thereafter, 1,000,000 of the President's RSUs were exchanged into1,000,000
common stock of the Company. On January 8, 2019, 1,000,000 of the President's
RSUs were exchanged into 1,000,000 common stock of the Company. Based on private
placement pricing at the time, the common stock issued to the President on each
exchange of the RSUs, was determined to be valued at $1,000,000. The RSUs for
the remaining installment are expected to vest on January 1, 2020, subject to
meeting certain performance objectives.
During the three and nine-month periods ended September 30,
2019, the Company incurred $34,083 ($45,000 CAD) and $101,574 ($135,000 CAD)
(2018-$34,425; $45,000 CAD and $104,881; $135,000 CAD) respectively, in
management fees expense with Travellers International Inc. ("Travellers"), an
Ontario company controlled by a director and the President; $34,083 ($45,000CAD)
and $101,574 ($135,000 CAD) (2018-$34,083; $45,000 CAD and $104,8813; $135,000
CAD) respectively, in management fees expense with Landfill Gas Canada Ltd.
("LFGC"), an Ontario company controlled by a previous director and CEO; $13,634
($18,000 CAD) and $40,630 ($54,000 CAD) (2018-$13,769; $18,000 CAD and $37,291;
$48,000 CAD) respectively, in management fees expense with the Company's chief
financial officer (the "CFO"); and $nil ($nil CAD) and $nil ($nil CAD)
(2018-$nil; $nil CAD and $9,324; $12,000 CAD) respectively in management fees
expense with the Company's vice-president of corporate development (the "VPCD").
As at September 30, 2019, unpaid remuneration and unpaid expenses in the amount
of $72,062 ($95,434 CAD) (December 31, 2018-$48,691; $66,426 CAD) is included in
accounts payable and $242,387 ($321,000 CAD) (December 31, 2018-$184,714;
$251,997 CAD) is included in accrued liabilities.
On September 25, 2019, the CEO resigned from the Board and
ceased providing his services as CEO.
In addition, during the three and nine-month periods ended
September 30, 2019, the Company incurred interest expense of $150 ($180 CAD) and
$4,631 ($6,155 CAD) (2018-$4,664; $6,049 CAD and $9,482; $12,205 CAD)
respectively, on the outstanding loan from Travellers and $364 ($469 CAD) and
$3,711 ($4,932 CAD) (2018-$ $1,751; $2,268 CAD and $3,295; $4,241 CAD)
respectively on the outstanding loans from the directors. As at September 30,
2019, interest of $nil ($nil CAD) (December 31, 2018-$17,882; $24,395 CAD) on
these loans is included in accrued liabilities.
During the three and nine-month periods ended September 30,
2019, the Company incurred $23,382 ($30,934 CAD) and $55,678 ($74,001 CAD)
(2018-$21,066; $27,426 CAD and $53,565; $68,947 CAD) respectively in rent paid
under a rental agreement to Haute Inc. ("Haute"), an Ontario company controlled
by the President.
The Company recorded directors' compensation for its five
independent directors for services provided for the three and nine-month periods
ended September 30, 2019, including the audit committee chairman's fees, in the
amount of ($14,648) and ($1,948) (2018-$766 and $2,331) respectively. As at
September 30, 2019, $2,560 ($3,390 CAD) (December 31, 2018-$nil) of outstanding
fees to the directors is included in accounts payable and $7,133 (December 31,
2018-$52,000) of outstanding fees to the directors is included in accrued
liabilities.
52
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements that are
reasonably likely to have a current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures, or capital resources that is material to
investors.