SUSGLOBAL ENERGY CORP. This section includes a discussion of our results of operations for the years endedDecember 31, 2022 and 2021. This discussion may contain forward-looking statements that anticipate results based on management's plans that are subject to uncertainty. We discuss in more detail various factors that could cause actual results to differ materially from expectations in Item 1A. Risk Factors. The following discussion should be read considering those disclosures and together with the Consolidated Financial Statements and the notes thereto.
Overview
Our Company's goals are targeted at serving our customers, our employees, the
environment, the communities in which we work and our stockholders.
Increasingly, customers want more of their waste materials recovered, while
waste streams are becoming more complex, and our aim is to address the current
needs, while anticipating the expanding and evolving needs of our customers.
[[Image Removed]]
23
--------------------------------------------------------------------------------
CONSOLIDATED RESULTS OF OPERATIONS - FOR THE YEAR ENDED
2022 2021
Revenue $ 589,035 $ 754,334
Cost of sales 1,171,481 1,254,150
Gross loss (582,446 ) (499,816 )
Operating expenses
Management compensation-stock-based compensation 240,450 217,035
Management compensation-fees 461,520 284,088
Professional fees 900,458 684,757
Marketing 991,383 298,417
Interest expenses 799,716 753,057
Office and administration 338,136 335,062
Rent and occupancy 215,482 160,019
Insurance 79,158 81,338
Filing fees 80,926 122,408
Amortization of financing costs 109,765 101,431
Repairs and maintenance (5,895 ) 42,183
Director compensation 57,690 53,136
Stock-based compensation 2,092,230 162,187
Foreign exchange loss 971,641 39,191
Total operating expenses 7,332,660 3,334,309
Net Loss before Other Expenses and Income Taxes
Recovery (7,915,100 ) (3,834,125 )
Other Expenses (4,167,530 ) (1,067,272 )
Income Taxes Recovery 72,088 35,542
Net loss $ (12,010,548 ) $ (4,865,855 ) RESULTS OF OPERATIONS FOR THE YEARS ENDED
During the year, the Company generated$589,035 (2021-$754,334) of revenue from its organic composting facility and the garbage collection services, a decrease of$165,299 over the prior year. The majority of the revenue from the organic composting facility relates to revenue from tipping fees charged for organic and other waste accepted at the facility and a lesser portion relating to the sale of organic compost processed at the facility. The Company also earned revenue from its garbage collection services of$26,886 (2021-$154,882), which it acquired effectiveMay 24, 2019 on the purchase of 1684567. Up until earlyJanuary 2021 , the Company was also providing landfill management services, which are now handled by the individual townships. And, during the current, the Company ceased the garbage collection services to focus on its organic composting facility.
The reduction in revenue is primarily due to the Company no longer providing garbage collection services, offset by an increase in tipping fees from new business from an existing customer group.
In the operation of the organic composting facility, the Company processes the organic and other waste received and produces the end product, organic compost. The cost of producing the organic compost totaled$1,171,481 for the current year endedDecember 31, 2022 compared to$1,254,150 for the prior year endedDecember 31, 2021 . The costs include equipment rental, deliver, fuel, repairs and maintenance, direct wages and benefits, depreciation, utilities and outside contractors. In addition, the Company calculated the inventory on hand at the end of the year for its organic compost to be$58,695 (2022-$20,582). These costs also include an estimate for the clean-up of certain waste as ordered by the MECP. This estimate and the significant reduction in revenue, significantly increased the gross loss during the year, compared to the prior year an increase of$82,630 . Operating expenses increased significantly by$3,998,351 from$3,334,309 for the year endedDecember 31, 2021 to$7,383,660 for the year endedDecember 31, 2022 . The increase was primarily the result of increases in management compensation, professional fees, marketing expenses, professional fees, stock-based compensation and foreign exchange loss. explained in greater detail below. During the year, the Company incurred management compensation expense in the form of fees$461,520 compared to$284,088 in the prior year endedDecember 31, 2021 , an increase of$177,432 , primarily due to the increase in the officers' compensation for the year endedDecember 31, 2022 . The lower figure for the year endedDecember 31, 2021 included a settlement amount for the former chief executive officer, lowering the fees by$79,800 . The management compensation in the form of stock-based compensation totaled$240,450 (2021-$217,035) during the year-endedDecember 31, 2022 relating to the Common Stock issued to the CEO and the CFO who were issued 1,000,000 and 50,000, respectively, for each year pursuant to their consulting agreements. Professional fees increased by$215,701 from$684,757 in the year endedDecember 31, 2021 to$900 , 458 in the year endedDecember 31, 2022 , primarily due to increased estimated costs for the 2022 audit, review and tax related services including additional costs for certain 2021 services. In addition, the Company had engaged the services of a chartered professional accounting firm in 2021 for services in both 2021 and 2022 to assist management with various documentation and reporting matters and the valuation of the convertible promissory notes both in 2021 and for two quarters in 2022 along with engaging the services of a corporate valuation services firm in 2022 to assist management in the valuation of the convertible promissory notes for Q3 and for the year-end. In addition, the Company incurred additional professional fees in connection with its S-1/A registration statement. [[Image Removed]] 24
--------------------------------------------------------------------------------
Marketing expenses increased by
During the year, the Company incurred interest expense of$799,716 , an increase of$46,659 over the prior year amount of$753,057 . The increase is primarily due to the interest on the 1st mortgage inHamilton , outstanding for a full year in 2022 versus 136 days in the prior year. In addition, the interest incurred on the outstanding obligations to PACE increased based on the increased prime rate of interest during the current year by 4%. This increased interest was offset by lower interest on other long-term debt as the principal balance decreased and lower interest on the obligations under capital lease from payments during the year and the full repayment of one of the remaining obligations. Further, there is an absence of interest on the 2019 convertible notes which totaled$90,906 in the prior year. And, as a result of the Company's fair value option election, all interest incurred on the 2021 and 2022 convertible promissory notes was included in the fair value of the notes outstanding onDecember 31, 2021 andDecember 31, 2022 .
Office and administration expenses were flat with a small increase of
Rent and occupancy expense increased by$55,463 from$160,019 in the prior year to$215,482 in the current year, primarily due to an increase in the monthly rental on the Company'sToronto, Ontario, Canada office and additional realty taxes incurred on the newHamilton, Ontario, Canada property, a full year in the current year versus 136 days in the prior year.
Insurance expense was flat with a small decrease of
Filing fees decreased by$41,482 from$122,408 in the prior year to$80,926 in the current year, primarily due to the absence of investor relations activities carried out in the prior year and not in the current year and the absence of the fee for the Company's application to the Nasdaq, offset by costs associated with the special meeting of the shareholders onMarch 24, 2022 , administrative costs incurred in the filing of the S-1 (and S-1/A) registration statement. During the year, the amortization of financing costs increased by$8,334 from$101,431 in the prior year to$109,765 in the current year due primarily to the amortization of an additional financing cost in connection with the extension of the maturity date for the 1st mortgage on the Company'sBelleville, Ontario, Canada facility fromSeptember 1, 2021 toDecember 1, 2023 . Repairs and maintenance decreased by$48,078 from$42,183 in the prior year to a credit of$5,895 in the current year primarily due to a credit on roof repairs incurred in the prior year at the Company'sToronto, Ontario, Canada office and an overall decrease in repairs and maintenance. Director compensation decreased by$4,554 from$53,136 in the prior year to$57,690 in the current year. The increase is partially due to a new independent director appointed in Q2 of 2021 and thus did not serve as a director for the entire 2021 year. Each independent director is entitled to a fee of$19,230 (C$25,000 ) annually. ByDecember 31, 2022 and 2021, the Company had three independent directors for whom the Company has accrued their annual fees. In addition, during the year, one of the independent directors was awarded stock-based compensation consisting of 750,000 common shares of the Company, valued at$105,750 , based on the trading price on commencement of the consulting agreement, for services provided in developing certain contacts to further the Company's business opportunities. This amount is disclosed as stock-based compensation in the consolidated statements of operations and comprehensive loss. Stock-based compensation increased by$1,930,043 from a balance of$162,187 in the prior year to$2,092,230 in the year as a result of consulting agreements with several new service providers to provide general business consulting services whose services expire at various periods through toOctober 2023 . A total of 6,655,000 common shares were issued in connection with the new consulting agreements. Also included is$1,919 related to the issuance of 10,000 common shares to an employee during the year. The foreign exchange loss increased by$932,450 from$39,191 in the prior year to$971,641 in the current year due to losses incurred on the translation and settlement of expenses and balances denominated in US dollars, primarily the convertible promissory notes. The other expenses increased by$3,100,258 from$1,067,272 in the prior year to$4,167,530 in the current year. In the current year, the adjustment for the revaluation of the convertible promissory notes totaled$8,323,370 (2021-$1,018,825), the gain of extinguishment of convertible promissory notes totaled$4,274,820 (2021-$nil), an accrual for a break fee for a previous banker in the amount of$250,000 (2021-$nil) and revenue from proceeds earned on the sale of carbon credits on the Greenhouse Gas Clean Projects® Registry, in the amount of$131,020 . In the prior year, the Company recorded various impairment losses on intangible assets totaling$513,254 , gains of$420,216 on the forgiveness of the 2019 convertible promissory notes, including accrued interest and net gains on the disposal of long-lived assets in the amount of$44,591 . [[Image Removed]] 25
--------------------------------------------------------------------------------
Critical Accounting Estimates and Assumptions
Use of estimates
The preparation of the Company's consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are based on management's best knowledge of current events and actions the Company may undertake in the future. The Company regularly evaluates estimates and assumptions. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgements about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. Areas involving significant estimates and assumptions include: the allowance for doubtful accounts, inventory valuation, useful lives of long-lived and intangible assets, impairment of long-lived assets and intangible assets, valuation of asset acquisition, accruals, the fair value of convertible promissory notes, deferred income tax assets and related valuation allowance, environmental remediation costs, stock-based compensation and going concern. Actual results could differ from these estimates. These estimates are reviewed periodically and as adjustments become necessary, they are reported in earnings in the period in which they become available.
Stock-based compensation
The Company records compensation costs related to stock-based awards in accordance with ASC 718, Compensation-Stock Compensation, whereby the Company measures stock-based compensation cost at the grant date based on the estimated fair value of the award. Compensation cost is recognized on a straight-line basis over the requisite service period of the award. Where necessary, the Company utilizes the Black-Scholes option-pricing model to estimate the fair value of stock options granted, which requires the input of highly subjective assumptions including: the expected option life, the risk-free rate, the dividend yield, the volatility of the Company's stock price and an assumption for employee forfeitures. The risk-free rate is based on theU.S. Treasury bill rate at the date of the grant with maturity dates approximately equal to the expected term of the option. The Company has not historically issued any dividends and does not expect to in the near future. Changes in any of these subjective input assumptions can materially affect the fair value estimates and the resulting stock- based compensation recognized. The Company has not issued any stock options and has no stock options outstanding atDecember 31, 2022 .
Indefinite Asset Impairments
The Company evaluates the intangible assets for impairment annually in the fourth quarter or when triggering events are identified and whether events and circumstances continue to support the indefinite useful life using Level 3 inputs.
For the year endedDecember 31, 2022 , an impairment loss of $nil (C$nil) (2021-$513,254;C$643,175 ) was recorded and included under other expenses in the consolidated statements of operations and comprehensive loss. Refer also to note 17, other expenses, to the consolidated financial statements.
Long-Lived Asset Impairments
In accordance with ASC 360, "Property, Plant and Equipment", long-lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. The Company evaluates at each balance sheet date whether events or circumstances have occurred that indicate possible impairment. If there are indications of impairment, the Company uses future undiscounted cash flows of the related asset or asset grouping over the remaining life in measuring whether the carrying amounts are recoverable. In the event that such cash flows are not expected to be sufficient to recover the recorded asset values, the assets are written down to their estimated fair value. AtDecember 31, 2022 , the Company tested the long-lived assets for impairment to determine whether the carrying value exceeded the fair value. The Company used quoted market values and independent appraisals of its long-lived assets and determined that no impairment loss was required to be recognized.
[[Image Removed]]
26
--------------------------------------------------------------------------------
Liquidity and Capital Resources
As atDecember 31, 2022 , the Company had a cash balance of$42,900 (2021-$36,033) and current liabilities in the amount of$22,339,175 (2021-$13,944,507). As atDecember 31, 2022 , the Company had a working capital deficit of$21,580,552 (2021-$13,651,619). The Company does not currently have sufficient funds to satisfy the current debt obligations. Should the Company's creditors seek or demand payment, the Company does not have the resources to pay or satisfy any such claims currently. The Company has been in discussions with other creditors and equity investors for new financing options to repay or re-finance certain current debt obligations. The Company's total assets atDecember 31, 2022 were$9,865,775 (2021-$8,571,721) and total current liabilities were$22,339,175 (2021-$13,944,507). Significant losses from operations have been incurred since inception and there is an accumulated deficit of$30,345,197 as ofDecember 31, 2022 (2021-$18,334,649). Continuation as a going concern is dependent upon generating significant new revenue, raising external capital and refinancing certain current debt. whilst achieving profitable operations and maintaining current fixed expense levels. To pay current debt obligations and to fund any future operations, the Company requires significant new funds, which the Company may not be able to obtain. In addition to the funds required to liquidate the$22,339,175 in current liabilities, the Company estimates that approximately$25,500,000 in additional funds must be raised to fund capital requirements and general corporate expenses for the next 12 months.
In the normal course of business, we are exposed to market risks, including changes in interest rates, certain commodity prices and Canadian currency rates. The Company does not use derivatives to manage these risks.
Interest Rate Exposure - Interest rate risk is the risk borne by an interest-bearing asset or liability as a result of fluctuations in interest rates. Financial assets and financial liabilities with variable interest rates expose the Company to cash flow interest rate risk.
Our exposure to market risk for changes in interest rates relates primarily to our financing activities. We have$7,285,747 (C$9,868,274 ) (2021-$7,727,628;C$9,796,689 ) of debt that is exposed to changes in market interest rates within the next 12 months. We currently estimate that a 100-basis point increase in the interest rates of our outstanding variable-rate debt obligations would increase our 2022 interest expense by approximately$72,900 (2021-$77,300).
Our remaining outstanding debt obligations have fixed interest rates through the scheduled maturity of the debt. The fair value of our fixed-rate debt obligations would not be expected to increase or decrease significantly if market interest rates change.
Credit Risk Exposure - is the risk of loss associated with a counterparty's inability to perform its payment obligations. As atDecember 31, 2022 , the Company's credit risk is primarily attributable to cash and trade receivables. As atDecember 31, 2022 , the Company's cash was held with reputable Canadian chartered banks, a US banks and a credit union. Commodity Price Exposure - In the normal course of our business, we are subject to operating agreements that expose us to market risks arising from changes in the prices for commodities such as diesel fuel, propane, and electricity. We attempt to manage these risks through operational strategies that focus on capturing our costs in the prices we charge our customers for the services provided. Accordingly, as the market prices for these commodities increase or decrease, our revenues may also increase or decrease. Currency Rate Exposure - Our operations are currently inOntario, Canada . Where significant, we have quantified and described the impact of foreign currency translation on components of income, including operating revenue and operating expenses. However, the impact of foreign currency has not materially affected our results of operations.
Summary of Cash and Debt Obligations
The following is a summary of our cash and debt balances as of
2022 2021
Cash $ 42,900 $ 36,033 Debt:
Current portion
Long-term portion 116,978 1,882,357 Total debt$ 16,827,617 $ 13,537,341 [[Image Removed]] 27
--------------------------------------------------------------------------------
We use long-term borrowings in addition to the cash we are able to generate from operations as part of our overall financial strategy to support and grow our business. The components of our borrowings as ofDecember 31, 2022 are described in notes 10, 11, 12 and 14 to the consolidated financial statements. Changes in our outstanding debt balances fromDecember 31, 2021 toDecember 31, 2022 were primarily attributable to (i) increase in net debt borrowings of$1,865,681 and (ii) the impacts of other non-cash changes in our debt balances due to foreign currency translation and the loss on the revaluation of convertible promissory notes.
Refer to Security Purchase Agreements, Financing Agreements with PACE and Other financings noted above for details.
Summary of Cash Flow Activity
The following is a summary of our cash flows for the years ended
2022 2021
Net cash used in operating activities (a)
(a)
affecting the comparison of our operating cash flows in 2022 as compared
with 2021 are summarized below:
Increase in Net Loss - Our loss from operations, excluding depreciation
and amortization and other expenses increased by $4,127,315 in 2022,
principally driven by reduced revenue resulting in a gross loss, higher
marketing costs, professional fees, stock-based compensation and foreign
exchange loss.
Changes in Assets and Liabilities -Our net cash used in operating
activities was impacted by changes in assets and liabilities.
(b)
assets in 2022 in the amount of
2021. In addition, the Company purchased intangible assets totaling
(c) Net Cash Provided by Financing Activities - The most significant items
affecting the comparison of our financing cash flows for the periods
presented are summarized below:
Debt Borrowings (Repayments) - In the current year, the Company incurred
net debt borrowings of
prior year and an increase of
2022 from the prior year.
Refer to notes 10, 11, 12 and 14 to the consolidated financial statements for additional information related to our various borrowings.
Summary of Contractual Obligations and Commitments
The following table summarizes our contractual obligations of principal
payments as of December 31, 2022 and the anticipated effect of these obligations
on our liquidity in future years:
2023 2024 2025 2026 2027 Thereafter Total
Contractual
Obligations:
Long-term debt and
obligations under
capital lease (a) $ 8,933,451 $ 59,366 $ 5,117 $ - $ - $ - $ 8,997,934
Convertible
promissory notes 5,825,260 - - - - - 5,825,260
Management consulting
agreements 465,132 442,980 - - - - 908,112
Truck and trailer
financing (b) 37,164 39,046 13,449 - - - 89,659
Various third-party
consulting and other
agreements 700,000 125,000 125,000 - - - 950,000
Hamilton -construction
in progress
commitments 4,879,084 - - - - - 4,879,084
Road maintenance
obligation (c) 7,383 7,383 7,383 - - - 22,149
Anticipated liquidity
impact as of December31, 2022$ 20,847,474 $ 673,775 $ 150,949 $ - $ - $ -$ 21,672,198 [[Image Removed]] 28
--------------------------------------------------------------------------------
(a) These amounts represent the scheduled principal payments related to the
Company's long-term debt, obligations under capital lease, excluding
interest.
Refer to notes 10, 11 and 14 to the consolidated financial statements for
additional information on our long-term debt and our obligations under
capital lease.
(b) Truck and trailer financing
(c) The road maintenance obligation is invoiced annually by the City of
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Going Concern
The consolidated financial statements have been prepared in accordance with US GAAP, which assumes that the Company will be able to meet its obligations and continue its operations for the next twelve months.
As at
The Company incurred a net loss of$12,010,548 (2021-$4,865,855) for the year endedDecember 31, 2022 and as at that date had a working capital deficit of$21,580,552 (2021-$13,651,619) and an accumulated deficit of$30,345,197 (December 31 , 2021-$18,334,649) and expects to incur further losses in the development of its business. OnFebruary 18, 2021 , PACE and the Company reached a new agreement to repay all amounts owing to PACE on or beforeJuly 30, 2021 . Management was not able to meet theJuly 30, 2021 deadline. OnAugust 13, 2021 , PACE agreed to allow the Company untilAugust 31, 2021 to bring the arrears current and continue toSeptember 2022 , the original maturity date. Management was not able to meet theAugust 31, 2021 deadline. OnNovember 15, 2021 , the Company paid all arrears to PACE and PACE agreed to allow the Company to continue payments to the end of the terms of each obligation,September 2022 . Similarly, the Company paid all arrears to PACE onMarch 15, 2022 and PACE allowed the Company to continue payments to the end of the terms of each obligation,September 2022 . Management continues discussions with equity investors to raise the necessary funds and repay other creditors and with PACE to settle its overdue obligations. The Company was successful in extending the maturity date on one of its 1st mortgages, which had a maturity date ofSeptember 1, 2022 toDecember 1, 2023 . One of the Company's significant customer contracts expired at the end ofDecember 31, 2020 and one customer contract was terminated by the Company in September of 2021. The Company is also anticipating a successful underwritten offering in connection with its filed registration statement although there can be no assurance that the underwritten offering will be completed. Refer to note 22 (d), subsequent events, for details on a full and final mutual release of the Company's obligations to PACE. These factors cast substantial doubt as to the Company's ability to continue as a going concern, which is dependent upon its ability to obtain necessary financing to further the development of its business and satisfy its obligations to PACE and its other creditors, and upon achieving profitable operations. There is no assurance of funding being available, or available on acceptable terms. Realization values may be substantially different from carrying values as recorded on these consolidated financial statements. Beginning inMarch 2020 the Governments ofCanada andOntario , as well as foreign governments, instituted emergency measures as a result of the novel strain of coronavirus ("COVID-19"). The virus has had a major impact on Canadian and international securities and currency markets and consumer activity which may impact the Company's financial position, its results of operations and its cash flows significantly. The full extent to which the COVID-19 pandemic and the various responses to it might impact the Company's business, operations and financial results will depend on numerous evolving factors that are not subject to accurate prediction and that are beyond the Company's control. These consolidated financial statements do not include any adjustments to reflect the potential effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result if the Company was unable to continue as a going concern. Such adjustments could be material. [[Image Removed]] 29
--------------------------------------------------------------------------------
Recently Accounting Pronouncements
The following section provides a description of new accounting pronouncements
("Accounting Standard Update" or "ASU") issued by the
OnJanuary 1, 2021 , the Company early adopted ASU No. 2020-06, -Debt-"Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity": simplifies accounting for convertible instruments by removing major separation models required under current US GAAP. ASU 2020-06 reduces the number of models used to account for convertible instruments, amends diluted earnings per share "EPS" calculations for convertible instruments, and amends the requirements for a contract (or embedded derivative) that is potentially settled in an entity's own shares to be classified in equity. The ASU updates the guidance on certain embedded conversion features that are not required to be accounted for as derivatives under Topic 815, Derivatives, or Hedging, or that do not result in substantial premiums accounted for as paid-in capital, such that those features are no longer required to be separated from the host contract. The convertible debt instruments will be accounted for as a single liability measured at amortized cost. This will also result in the interest expense recognized for convertible debt instruments to be typically closer to the coupon interest rate when applying the guidance in Topic 835, Interest. The amendments add certain disclosure requirements to increase transparency and decision-usefulness about a convertible instrument's terms and features. Under ASU 2020-06, the Company must use the if-converted method for including convertible instruments in diluted EPS as opposed to the treasury stock method. ASU 2020-06 is effective for annual reporting periods beginning afterDecember 15, 2023 . Early adoption is allowed under the standard with either a modified retrospective or full retrospective method. There were no embedded conversion features accounted for as equity or derivatives in the convertible promissory notes outstanding onJanuary 1, 2021 The Company early adopted ASU 2020-06 onJanuary 1, 2021 using the modified retrospective method. As a result, the adoption of ASU 2020-06 did not have any impact on the opening balances in the annual consolidated financial statements.
© Edgar Online, source
