SusGlobal Energy Corp. - Quarter Report: 2018 September (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

or

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________to ________________

Commission file number 333-209143

SUSGLOBAL ENERGY CORP.
(Exact name of registrant as specified in its charter)

416-223-8500
(Registrant’s telephone number, including area code)

Not applicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [   ]      No [X] *

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [X]      No [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided to Section 7(a)(2)(B) of the Securities Act. [X]

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act).
Yes [   ]      No [X]

The number of shares of the registrant’s common stock outstanding as of November 13, 2018 was 40,247,531 shares.

*Explanatory Note: The Company is not required to file reports under Section 13 or 15(d) of the Securities Exchange Act of 1934.

The accompanying notes are an integral part of these interim condensed consolidated financial statements.

The accompanying notes are an integral part of these interim condensed consolidated financial statements.

The accompanying notes are an integral part of these interim condensed consolidated financial statements.

The accompanying notes are an integral part of these interim condensed consolidated financial statements.

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.

SusGlobal is a renewable energy company focused on acquiring, developing and monetizing a global portfolio of proprietary technologies in the waste to energy application.

These interim condensed consolidated financial statements of SusGlobal and its wholly-owned subsidiaries, SusGlobal Energy Canada Corp., SusGlobal Energy Canada I Ltd. (“SGECI”) and SusGlobal Energy Belleville Ltd. (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, 2018, the Company had a working capital deficit of $4,978,453 (December 31, 2017-$2,238,911), incurred a net loss of $3,141,825 (2017-$1,756,945) for the nine months ended September 30, 2018 and had an accumulated deficit of $7,802,121 (December 31, 2017-$4,660,296) and expects to incur further losses in the development of its business. These factors cast substantial doubt as to the Company’s ability to continue as a going concern, which is dependent upon its ability to obtain the necessary financing to further the development of its business, satisfy its obligations to PACE Savings & Credit Union Limited (“PACE”) 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, 2017 and 2016 and their accompanying notes.

Recently Adopted Accounting Pronouncements:

On January 1, 2018, the Company adopted accounting standards (“ASU”) update No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash”. The Company now includes restricted cash as part of cash and cash equivalents. The Company has adopted this policy on a retrospective basis. The reference to restricted cash included in the interim condensed consolidated statements of cash flow for the three-month period ended March 31, 2017, has been reclassified to cash and cash equivalents at the end of this prior period.

On January 1 2018, the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers, which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers that supersedes most current revenue recognition guidance. The updated guidance, and subsequent clarifications, collectively referred to as accounting standards codification (“ASC”) 606, require an entity to recognize revenue when it transfers control of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. In addition, the guidance requires the disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company adopted this standard, utilizing the modified retrospective approach, with the cumulative effect of initially applying the new standard recognized in deficit. Accordingly, comparative prior period information has not been restated and continues to be reported under that accounting standard. The adoption of ASC 606 had no impact on the Company’s interim condensed consolidated balance sheets as of January 1, 2018.

On January 1, 2018, the Company adopted ASU No. 2017, Compensation-Stock Compensation: Topic 718: Scope of Modification Accounting (ASU 2017-09) to provide clarity and reduce both the (1) diversity in practice and (2) cost and complexity when changing the terms or conditions of share-based payment awards. Under ASU 2017-09, modification accounting is required to be applied unless all of the following are the same immediately before and after the change:

The adoption of this pronouncement had no impact on the Company’s interim condensed consolidated balance sheets as of January 1, 2018.

4. Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by 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 will not have a material impact on the Company’s financial position, results of operations or cash flows.

4. Recent Accounting Pronouncements, (continued)

In February 2016, the FASB issued ASU No. 2016-02, “Leases” (Topic 842). The standard requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. ASU 2016-02 requires the recognition on the balance sheet of a lease liability to make lease payments by lessees and a right-of-use asset representing its right to use the underlying asset for the lease term. The new guidance will also require significant additional disclosure about the amount, timing and uncertainty of cash flows from leases. The new guidance is effective for annual and interim reporting periods beginning after December 15, 2018 (January 1, 2019 for the Company). The amendments should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period. In March 2018, the FASB approved a new, optional transition method that will give companies the option to use the effective date as the date of initial application on transition. The Company plans to elect this transition method, and as a result, the Company will not adjust the comparative financial information or make the new required lease disclosures for periods before the effective date. The Company anticipates the adoption of this new standard will result in a significant increase in lease-related assets and liabilities in the consolidated balance sheet. As the impact of this standard is non-cash in nature, the Company does not anticipate its adoption having an impact on the Company’s consolidated statement of cash flows. The Company is currently evaluating the impact of adopting ASU No. 2016-02 on the consolidated statement of income.

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.

5. Financial Instruments

The carrying value of cash and cash equivalents, trade receivables, certain deposits under prepaid expenses and deposits, bank indebtedness, accounts payable and accrued liabilities approximated their fair values as of September 30, 2018 and December 31, 2017 due to their short-term nature. The carrying value of the long-term debt, obligations under capital lease 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 $3,949,053 ($5,112,043 CAD) (December 31, 2017-$4,161,435; $5,220,719 CAD). As at September 30, 2018, the Company is exposed to concentration risk as it had four customers (December 31, 2017-four customers) each representing greater than 5% of total trade receivables that add to 88% (December 31, 2017-91%) in total. The Company had certain customers whose revenue individually represented 10% or more of the Company’s total revenue. These customers accounted for 67% (10%, 26% and 31%) (September 30, 2017-78%) 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.

5. Financial Instruments, (continued)

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. There is no assurance of funding being available or available on acceptable terms. Realization values may be substantially different from carrying values as shown.

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, 2018, $35,034 (2017-$6,057) 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. Intangible Assets

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 September 15, 2017, the Company acquired the environmental approvals on the purchase of certain assets of Astoria from BDO Canada Limited (‘BDO”) under an asset purchase agreement (the “APA”).

7. Long-lived Assets, net

7. Long-lived Assets, net, continued

Included above are certain assets of Astoria acquired from BDO under the APA, which closed on September 15, 2017. The purchase price for the purchased assets, described as an organic composting facility, including composting buildings, gore cover system, driveway and paving, certain machinery and equipment, an office trailer, certain computer equipment and computer software consisted of cash of $3,026,114 ($3,917,300 CAD) and 529,970 restricted common shares of the Company, determined to be valued at $529,970 ($700,000 CAD), based on recent private placement pricing. In addition, legal costs in connection with acquiring the assets of $22,598 ($29,253 CAD), are included in the cost of the composting buildings. The purchase price was allocated to the assets acquired based on their estimated relative fair value as at the date the assets were acquired.

8. Related Party Transactions

During the nine-month period ended September 30, 2018, the Company incurred $104,881 ($135,000 CAD) (2017-$34,434; $45,000 CAD) in management fees expense with Travellers International Inc. (“Travellers”), an Ontario company controlled by a director and president of the Company (the “President”); $104,881 ($135,000 CAD) (2017-$34,434; $45,000 CAD) in management fees expense with Landfill Gas Canada Ltd. (“LFGC”), an Ontario company controlled by a director and chief executive officer of the Company (the “CEO”); $37,291 ($48,000 CAD) (2017-$27,547; $36,000 CAD) in management fees expense with the Company’s chief financial officer (the “CFO”); and $9,324 ($12,000 CAD) (2017-$27,547; $36,000 CAD) in management fees expense with the Company’s vice-president of corporate development (the “VPCD”). As at September 30, 2018, unpaid remuneration and unpaid expenses in the amount of $109,075 ($141,198 CAD) (December 31, 2017-$111,426; $139,789 CAD) is included in accounts payable and $166,860 ($216,000 CAD) (December 31, 2017-$102,935; $129,137 CAD) is included in accrued liabilities.

In addition, during the nine-month period ended September 30, 2018, the Company incurred interest expense of $9,482 ($12,205 CAD) (2017-$14,052; $18,363 CAD) on the outstanding loans from Travellers and $3,295 ($4,241 CAD) (2017-$nil; $nil CAD) on the outstanding loans from the directors. As at September 30, 2018, interest of $12,419 ($16,077 CAD) (December 31, 2017-$22,120; $27,750 CAD) on these loans is included in accrued liabilities.

During the nine-month period ended September 30, 2018, the Company incurred $53,565 ($68,947 CAD) (2017-$50,348; $65,797 CAD) in rent paid under a rental agreement to Haute Inc. (“Haute”), an Ontario company controlled by the President.

During the nine-month period ended September 30, 2018, the Company sold $15,612 ($20,095 CAD) of compost product to LFGC.

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 recent private placement. On January 1, 2018, 1,000,000 RSUs were exchanged into 1,000,000 common stock. The RSUs for the remaining two installments are to vest annually on January 1, 2019 and 2020. On May 17, 2018, the board of directors (the “Board”) approved an amendment to the President’s consulting agreement to include the granting of 3,000,000 RSUs on the same terms and conditions as those granted to the CEO. This grant was valued at $3,000,000 based on recent private placement pricing. Effective May 17, 2018, 1,000,000 RSUs vested immediately and were exchanged into 1,000,000 common stock. The cost of both RSU grants is presented as management compensation expense.

For the nine-month period ended September 30, 2018, the Company recognized management compensation expense of $997,500 (2017-$247,500) on these awards, representing one quarter of the total value of the awards of $3,990,000.

9. Long-Term Debt

Repayments are as follows:

For the nine-month period ended September 30, 2018, $241,153 ($310,403 CAD) (2017-$68,997; $90,169 CAD) in interest was charged.

10. Obligations under Capital Lease

The lease liabilities are secured by the equipment under capital lease as described in note 7.

Minimum lease payments are as follows:

For the nine-month period ended September 30, 2018, $14,028 ($18,056 CAD) (2017-$nil; ($nil CAD)) in interest was charged.

11. Loans Payable to Related Parties

Loan payable in the amount of $154,500 ($200,000 CAD) (December 31, 2017-$15,942; $20,000 CAD), owing to Travellers and bears interest at the rate of 12% per annum, is due on demand and is unsecured. As at September 30, 2018, $9,143 ($11,836 CAD) (December 31, 2017-$22,120; $27,750 CAD) in interest is included in accrued liabilities.

11. Loans Payable to Related Parties, continued

During the nine-month period ended September 30, 2018, three directors each loaned the Company $19,313 ($25,000 CAD). The loans bear interest at the rate of 12% per annum, are due on demand and unsecured. As at September 30, 2018, $3,276 ($4,241 CAD) (December 31, 2017-$nil; $nil CAD) in interest is included in accrued liabilities.

During the nine-month period ended September 30, 2018, $12,777 ($16,446 CAD) (2017-$10,154; $13,548 CAD) in interest was charged on the loans payable to related parties.

12. Capital Stock

At September 30, 2018, the Company had 150,000,000 of common shares authorized with a par value of $.0001 per share and 40,050,031 (2017-37,393,031) common shares issued and outstanding.

During the nine-month period ended September 30, 2018, the Company raised $436,540 (December 31, 2017-$497,374) cash on a private placement, net of share issue costs of $30,460 (2017-$48,100), on the issuance of 467,000 (December 31, 2017-850,151) common shares of the Company. In addition, during the nine-month period ended September 30, 2018, the Company issued 190,000 common shares of the Company, in regard to $178,200 cash received on a private placement received prior to December 31, 2017, net of share issue costs of $11,800.

During the prior year, on January 5, 2017 and January 30, 2017, the Company issued, in total, 1,620,000 common shares of the Company, determined to be valued at $469,800, based on recent private placement pricing, to agents for their services in assisting in establishing the first credit facility with PACE. On each of January 30, 2017 and June 8, 2017, the Company issued a total of 40,000 common shares to two new directors, determined to be valued at $11,600 and $13,200 respectively, based on recent private placement pricing. For the nine-month period ended September 30, 2018, the services provided by the directors was disclosed under directors’ compensation in the interim condensed consolidated statements of operations and comprehensive loss.

On February 6, 2017, the Company issued 5,000 common shares and on August 23, 2017, the Company issued 4,000 common shares to a current employee for services and a new employee as an incentive to join the Company, respectively, determined to be valued at $1,450 and $4,000, respectively, based on recent private placement pricing and disclosed under office and administration in the interim condensed consolidated statements of operations and comprehensive loss. On May 9, 2017, the Company issued 15,000 common shares, on June 8, 2017, another 20,000 common shares and then on August 23, 2017, a further 20,000 common shares to consultants for their services, determined to be valued at $4,950, $6,600 and $20,000 respectively, based on recent private placement pricing. These services were disclosed under professional fees in the interim condensed consolidated statements of operations and comprehensive loss. On May 9, 2017, the Company issued 115,000 common shares on the exercise of the offer to acquire common shares at a price of $0.10 per common share by the VPCD. On September 5, 2017, the Company issued 5,000 common shares as compensation for a private placement, determined to be valued at $5,000. In addition, on September 11, 2017, the Company issued 529,970 common shares on the acquisition of assets, determined to be valued at $529,970 ($700,000 CAD), based on recent private placement pricing (see note 7).

All non-cash transactions were valued based on the proceeds of a recent private placement.

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 recent private placement. On January 1, 2018, 1,000,000 RSUs were exchanged into 1,000,000 common stock. The RSUs for the remaining two installments are to vest annually on January 1, 2019 and 2020. On May 17, 2018, the Board approved an amendment to the President’s consulting agreement to include the granting of 3,000,000 RSUs on the same terms and conditions as those granted to the CEO. This grant was valued at $3,000,000 based on recent private placement pricing. Effective May 17, 2018, 1,000,000 RSUs vested immediately and were exchanged into 1,000,000 common stock. The cost of both RSU grants is presented as management compensation expense.

13. Commitments

In addition, the Company was recently 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 $7,725 ($10,000 CAD). The payments are due each September 30^th. The Company’s portion for the year ended September 30, 2017, would be equal to the 15 days, as the Company owned the organic composting facility since September 15, 2017. Included in accrued liabilities, is the balance owing to September 30, 2018, totaling $8,043 ($10,411).

13. Commitments, (continued)

14. Economic Dependence

The Company generated 67% of its revenue from three customers. The Company’s ability to continue operations is dependent on continuing to generate a similar amount of revenue from these customers.

15. 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:

16. Comparative Figures

Certain of the prior period’s comparative figures have been reclassified to conform to the current period’s presentation.

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, 2017 filed with the Securities and Exchange Commission on April 16, 2018.

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, 2018 compared with the nine-month period ended September 30, 2017 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, 2017 AND 2016. 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:

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.

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 application.

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. The portfolio will be comprised of four distinct types of technologies: (a) Process Source Separated Organics (“SSO”) in anaerobic digesters to divert from landfills and recover biogas. This biogas can be converted to gaseous fuel for industrial processes, electricity to the grid or cleaned for compressed renewable gas. (b) Increasing the capacity of existing infrastructure (anaerobic digesters) to allow processing of SSO to increase biogas yield. (c) Utilize recycled plastics to produce liquid fuels and (d) process digestate to produce a pathogen free organic fertilizer.

The convertibility of organic material into valuable end products such as biogas, liquid biofuels, organic fertilizers and compost shows the utility of renewable energy. These products can be converted into electricity, 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.

The project and services offered can benefit 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. Much of the research and development that has been carried out has been completed by our CEO through multiple projects carried out on projects prior to the formation of SusGlobal. Where necessary, to be in compliance with provincial and local environmental laws and regulations, SusGlobal submits applications to the respective authorities for approval prior to any necessary engineering being carried out.

RECENT BUSINESS DEVELOPMENTS

Asset Purchase

On September 15, 2017, the Company closed the purchase of certain assets from Astoria Organic Matters Ltd., and Astoria Organic Matters Canada LP (“Astoria”), under the asset purchase agreement (the “APA”) from the court appointed receiver of Astoria, BDO Canada Limited (“BDO”). 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 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 recent private placement pricing. In addition, legal costs in connection with acquiring the assets of $22,598 ($29,253 CAD) 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).

Financing Agreement with PACE

Effective January 1, 2017, the Company obtained a Line of Credit of up to $4,248,750 ($5,500,000 CAD) with PACE. On February 2, 2017, the company received the first and only advance in the amount of $1,236,000 ($1,600,000 CAD). The 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 this Line of Credit of $1,236,000 ($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 Line of Credit is secured by a business loan general security agreement, a $1,236,000 ($1,600,000 CAD) personal guarantee from the president of the Company (the “President”) and a charge against the Company’s premises lease. Also pledged as security are the shares of the wholly-owned subsidiaries and a pledge of 3,300,000 shares 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 the Company held by the chief financial officer (the “CFO”) and 2,000,000 shares of the Company held by a director’s company, and a limited recourse guarantee by each. The Line of Credit is fully open for prepayment at any time without notice or bonus. A total commitment fee of $84,975 ($110,000 CAD) was paid to PACE. In addition, the agents who assisted in establishing the Line of Credit received 1,620,000 common shares of the Company determined to be valued at $469,800, based on recent private placement pricing and cash of $300,000, on closing, for their services. Other closing costs in connection with the Line of Credit included legal fees of $29,906 ($38,713 CAD). As at September 30, 2018, $790,151 ($1,022,849 CAD) remains outstanding (December 31, 2017-$817,932; $1,026,135 CAD). During the nine months ended September 30, 2018, the Company incurred interest charges of $48,043 ($61,840 CAD) (2017-$47,463; $62,027 CAD) on this Line of Credit.

On July 27, 2018, the Company refinanced this credit facility at the PACE base rate of 7% plus 1.25% per annum, currently 8.25%. The credit facility is due on demand, but until a demand is made, is payable in monthly blended installments of principal and interest of $6,770 ($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 $463,500 ($600,000 CAD) under a variable rate business loan agreement, for its bid for the purchase of certain assets of Astoria on the same terms and conditions to the Line of Credit above. As at September 30, 2018, $441,891 ($572,027 CAD) (December 31, 2017-$457,428; $573,865 CAD) remains outstanding. During the nine months ended September 30, 2018, the Company incurred interest charges of $26,883 ($34,602 CAD) (2017-$10,438; $13,641 CAD) on this credit facility.

On July 27, 2018, the Company refinanced this credit facility at the PACE base rate of 7% plus 1.25% per annum, currently 8.25%. The credit facility is due on demand, but until a demand is made, is payable in monthly blended installments of principal and interest of $3,786 ($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 $38,625 ($50,000 CAD) under a variable business loan agreement, to satisfy an outstanding liability on the same terms and conditions to the Line of Credit above, except that the loan was due February 4, 2019. As at September 30, 2018, $38,502 ($49,841 CAD) (December 31, 2017-$39,855; $50,000 CAD) remains outstanding. During the nine months ended September 30, 2018, the Company incurred interest charges of $2,342 ($3,015 CAD) (2017-$478; $625 CAD) on this credit facility.

On July 27, 2018, the Company refinanced this credit facility at the PACE base rate of 7% plus 1.25% per annum, currently 8.25%. The credit facility is payable on demand, but until a demand is made, is payable in monthly blended installments of principal and interest of $330 ($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 $2,876,904 ($3,724,147 CAD) under a 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 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 $58,373 ($75,564 CAD), and matures on 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 Securities Act in the amount of $3,090,756 ($4,000,978 CAD) against the assets, including accounts receivable, inventory and equipment. PACE has also provided the Company with a letter of credit in the favor of the Ministry of the Environment and Climate Change (“MOECC”) in the amount of $213,852 ($276,831 CAD) and, as security, has registered a charge of lease over the premises, located at 704 Phillipston Road, Roslin, Ontario, Canada. As of September 30, 2018, and the date of this filing, the MOECC has not drawn on the letter of credit. The corporate term loan also includes an assignment of existing contracts included in the APA. On June 13, 2018, the unpaid and previously deferred interest on the corporate term loan for the period from March 13, 2018 to June 13, 2018, in the amount of $53,873 ($69,343 CAD), was capitalized and included in the principal balance of the corporate term loan. As at September 30, 2018, $2,678,509 ($3,467,326 CAD) remains outstanding. During the nine months ended September 30, 2018, the Company incurred interest charges of $163,884 ($210,946 CAD) (2017-$10,618; $13,876 CAD) on this 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 this corporate term loan. The first and only blended installment of principal and interest of $22,529 ($29,164 CAD) was due August 1, 2018 at the rate of 8% per annum, and amortized over a twenty-year period. The corporate term loan is due on demand, but until a demand is made, is payable in monthly blended installments of principal and interest of $22,952 ($29,711 CAD), commencing August 13, 2018, at the PACE base rate of 7% plus 1.25% per annum, currently 8.25%. The corporate term loan continues to be amortized over a twenty-year period and matures on September 13, 2022.

Other

On April 11, 2018, three directors each loaned the Company $19,313 ($25,000 CAD) for working capital purposes. The loans bear interest at the rate of 12% per annum, are due on demand and unsecured. There are no written agreements evidencing these loans. During the nine-month period ended September 30, 2018, $3,295 ($4,241 CAD) of interest was charged on these loans. As at September 30, 2018, $3,276 ($4,241 CAD) (December 31, 2017-$nil; $nil CAD) in interest is included in accrued liabilities and the loans remain outstanding.

On April 3, 2018, a new loan was provided by Travellers International Inc. (“Travellers”), an Ontario company controlled by the Executive Chairman and President (the “President”), who is also a director of the Company, in the amount of $154,500 ($200,000 CAD). A portion of the funds, $116,746 ($151,128 CAD), was used to pay two overdue monthly principal and interest instalments on the Company’s corporate term loan with PACE. This new loan is due on demand, unsecured and bears interest at the rate of 12% per annum. There is no written agreement evidencing this loan. During the nine-month period ended September 30, 2018, $9,482 ($12,205 CAD) of interest was charged on this loan and other loans repaid to Travellers during the nine-months ended September 30, 2018. As at September 30, 2018, $9,143 ($11,836 CAD) (December 31, 2017-$nil; $nil CAD) in interest is included in accrued liabilities and the loan remains outstanding.

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 $191,155 ($247,450 CAD). The lease is for a period of forty-eight months, with two initial monthly installments of $7,725 ($10,000 CAD) each, plus the applicable harmonized sales taxes, followed by forty-six monthly blended installments of principal and interest of $3,954 ($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 $19,065 ($24,680 CAD), plus the applicable harmonized sales taxes. The leasing agreement bears interest at the rate of 6.15% annually, compounded monthly, due January 27, 2022.

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 $221,437 ($286,650 CAD). The lease agreement requires monthly blended installments of principal and interest of $4,511 ($5,840 CAD), plus applicable harmonized sales taxes and a final balloon payment of $22,094 ($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.

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 $13,272 ($17,180 CAD). The lease agreement requires monthly blended installments of principal and interest of $980 ($1,268 CAD) at a monthly interest rate of 5.95%, due November 10, 2018.

During the nine months ended September 30, 2018, the Company incurred interest charges of $14,028 ($18,056 CAD) (2017-$nil; $nil CAD) on these leases.

On May 11, 2017, the Company signed a posting agreement with CrowdVest, a Tennessee limited liability company to act as the Company’s online intermediary technology platform in connection with the Company’s offering of common stock under Rule 506 of Regulation D under the Securities Act of 1933. As compensation, CrowdVest received 20,000 restricted common shares of the Company, based on an issue 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 (the “Agreement”) with Kentech, a corporation existing under the laws of the province of Ontario, Canada. The 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 Agreement is for a period of five years, commencing on the date of the Agreement. The Agreement may be terminated by either party on providing six months’ notice.

Effective January 1, 2017, new consulting agreements were finalized for the services of the “President” and for the chief executive officer (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 to be as follows: $3,863 ($5,000 CAD) plus applicable taxes for 2017 and $11,588 ($15,000 CAD) plus applicable taxes for 2018 and 2019. In addition, the CEO was granted 3,000,000 Restricted Stock Units (“RSU”). The RSUs are to vest in three equal installments annually on January 1, 2018, 2019 and 2020. On May 17, 2018, the board of directors (the “Board”)  approved an amendment to the President’s consulting agreement, to include the granting of 3,000,000 RSUs on the same terms and conditions as those granted to the CEO.

On December 7, 2016, the Company was awarded funding for the Advanced Water Technologies (“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 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 program budget was for $618,000 ($800,000 CAD), of which the Company contributes 50% in cash and in-kind contributions and CAWT contributes 50%. The academic institution revised its budget for the second and third years of the AWT Program. As a result, the cash commitments for the second year of the AWT Program, previously noted as $19,947 ($25,217 CAD) and for the third year, were cancelled.

The Company has already completed and provided its commitment for the first year of the 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 Fleming College, the academic institution.

On October 21, 2016, the Company hired the services of a contractor to assume the role of vice-president of corporate development (“VPCD”), effective November 1, 2016, for a period of fourteen months, at the rate of $3,090 ($4,000 CAD) per month, plus applicable taxes. In addition, the contractor was offered up to 115,000 common shares of the Company, at a price of $0.10 per common share, exercisable within 180 days of the effective date of the contract. On April 30, 2017, the contractor exercised the offer to purchase 115,000 common shares of the Company. Effective January 1, 2018, the VPCD performed her services on a month to month basis, at the same monthly rate and completed her services on March 31, 2018.

On August 19, 2016, Travellers, provided a further loan in the amount of 162,225 ($210,000 CAD) which was required to initiate a letter of credit in the amount of $154,500 ($200,000 CAD). This loan was repaid in full, with accrued interest, on April 3, 2018. Fees for the letter of credit included $7,725 ($10,000 CAD) incurred and charged by Travellers and $2,318 ($3,000 CAD) charged by the Company’s chartered bank. There is no written agreement evidencing this loan or the previous loan with Travellers. Any outstanding interest-bearing loans with Travellers are due on demand and were approved by the Board of Directors of the Company.

On August 3, 2016, the Company signed an agreement with Grimsby Energy Inc. from Grimsby, Ontario, Canada, to allow hydrolyzed and pasteurized organic wastes to be processed at their Anaerobic Biodigester. The agreement commenced November 1, 2016 and can be terminated by either party within three hundred and sixty-five days minimum written notice. Up to the date of this filing, there has been no activity under this agreement.

On May 14, 2015, the Ontario Ministry of Environment and Climate Change announced formal targets to be met to satisfy a commitment necessary to join the WCI along with Quebec and California, who are in the WCI with Cap and Trade commitments since 2014. The Ontario targets are very ambitious, with greenhouse gas (“GHG”) emission reductions of 15% by 2020, 37% by 2030 and 80% by 2050, all from a 1990 baseline. Ontario achieved a 6% reduction in GHG emissions from 1990 levels in 2014, mainly by closing all coal-fired power plants. The targets announced will require a focused program to reduce GHG emissions. The Company’s activities all contribute to GHG reductions, so 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. The new Cap and Trade regulations were effective January 2017. Subsequently, on July 3, 2018, the new premier of the Province of Ontario announced the end of the Cap and Trade program in Ontario.

On May 6, 2015, the Company finalized an agreement with Syngas, a company incorporated under the laws of Malaysia, 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 $1 consideration, renewable every five years upon written request. Syngas produces equipment that uses an innovative process to produce 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. The technology license is being amortized on a straight-line basis, over a period of 10 years. There are no other obligations under this agreement.

The Company and Syngas intend to collaborate and cooperate with a view to achieving economic and financial success for their respective businesses. The Company will continue to pursue other similar intellectual property around the world as we combine this and other technologies in innovative configurations to monetize the portfolio of proprietary technologies and processes to deliver value to our customers and shareholders.

Operations

Waste Transfer Station: The Company owns the Environmental Compliance Approvals (the “ECAs”) issued by the Ministry of the Environment and Climate Change (the “MOECC”), from the Province of Ontario, in place to operate a waste transfer station with the capacity to process up to 50,000 metric tonnes of waste annually. The Company is reviewing plans to construct and equip the waste transfer station. The location of the waste transfer station, once built, will be alongside the organic composting facility, noted below, near Belleville, Ontario, Canada.

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 metric tonnes of waste annually and is currently in operation. Certain assets of the organic composting facility, including the ECAs for the waste transfer station, were acquired by the Company on September 15, 2017, from the 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, 2018, tipping fees ranged from $19 ($25 CAD) to $66 ($85 CAD) per metric tonne.

Compost Sales. The Company also sells organic compost (screened and unscreened) to local customers. During the nine-month period ended September 30 2018, the average selling price of the compost per metric tonne was approximately $13 ($17 CAD).

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2018, the Company had bank indebtedness of $820 (December 31, 2017-cash balance of $126,117) and current debt obligations in the amount of $5,205,234 (December 31, 2017-$2,659,636). As at September 30, 2018, the Company had a working capital deficit of $4,978,453 (December 31, 2017-$2,238,911). 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 credit facilities and corporate term loan with PACE are due on demand, and as such, are disclosed as current liabilities, but each of the credit facilities and corporate term loan are repayable in monthly blended instalments of principal and interest, mature in September 2022 and are amortized over a twenty-year period.

The Company’s total assets at September 30, 2018 were $4,011,645 and total current liabilities were $5,205,234. Significant losses from operations have been incurred since inception and there is an accumulated deficit of $7,802,121 as of September 30, 2018. Continuation as a going concern is dependent upon generating significant new revenue and generating external capital and securing debt to achieve profitable operations while 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 $5,205,234 in current liabilities, which includes all the credit facilities and corporate term loan with PACE, the Company estimates that approximately $5,000,000 must be raised to fund capital requirements and general corporate expenses for the next 12 months.

Effective January 1, 2017, the Company obtained a Line of Credit of up to $4,248,750 ($5,500,000 CAD) with PACE. On February 2, 2017, the company received the first and only advance in the amount of $1,236,000 ($1,600,000 CAD). The Line of Credit was due February 2, 2019 and is now one of multiple credit facilities with PACE.

The funds advanced on this Line of Credit of $1,236,000 ($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 Line of Credit is secured by a business loan general security agreement, a $1,236,000 ($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 and a pledge of 3,300,000 shares 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 the Company held by the chief financial officer (the “CFO”) and 2,000,000 shares of the Company held by a director’s company, and a limited recourse guarantee by each. The Line of Credit is fully open for prepayment at any time without notice or bonus. A total commitment fee of $84,975 ($110,000 CAD) was paid to PACE. In addition, the agents who assisted in establishing the Line of Credit received 1,620,000 common shares of the Company determined to be valued at $469,800, based on recent private placement pricing and cash of $300,000, on closing, for their services. Other closing costs in connection with the Line of Credit included legal fees of $29,906 ($38,713 CAD). As at September 30, 2018, $790,151 ($1,022,849 CAD) remains outstanding (December 31, 2017-$817,932; $1,026,135 CAD). During the nine months ended September 30, 2018, the Company incurred interest charges of $48,043 ($61,840 CAD) (2017-$47,463; $62,027 CAD) on this Line of Credit.

On July 27, 2018, the Company refinanced this credit facility at the PACE base rate of 7% plus 1.25% per annum, currently 8.25%. The credit facility is due on demand, but until a demand is made, is payable in monthly blended installments of principal and interest of $6,770 ($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 $463,500 ($600,000 CAD) under a variable rate business loan agreement, for its bid for the purchase of certain assets of Astoria on the same terms and conditions to the Line of Credit above. As at September 30, 2018, $441,891 ($572,027 CAD) (December 31, 2017-$457,428; $573,865 CAD) remains outstanding. During the nine months ended September 30, 2018, the Company incurred interest charges of $26,883 ($34,602 CAD) (2017-$10,438; $13,641 CAD) on this credit facility.

On July 27, 2018, the Company refinanced this credit facility at the PACE base rate of 7% plus 1.25% per annum, currently 8.25%. The credit facility is due on demand, but until a demand is made, is payable in monthly blended installments of principal and interest of $3,786 ($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 $38,625 ($50,000 CAD) under a variable business loan agreement, to satisfy an outstanding liability on the same terms and conditions to the Line of Credit above, except that the loan was due February 4, 2019. As at September 30, 2018, $38,502 ($49,841 CAD) (December 31, 2017-$39,855; $50,000 CAD) remains outstanding. During the nine months ended September 30, 2018, the Company incurred interest charges of $2,342 ($3,015 CAD) (2017-$478; $625 CAD) on this credit facility.

On July 27, 2018, the Company refinanced this credit facility at the PACE base rate of 7% plus 1.25% per annum, currently 8.25%. The credit facility is payable on demand, but until a demand is made, is payable in monthly blended installments of principal and interest of $330 ($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 $2,876,904 ($3,724,147 CAD) under a 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 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 $58,373 ($75,564 CAD), due 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 Securities Act in the amount of $3,090,756 ($4,000,978 CAD) against the assets, including accounts receivable, inventory and equipment. PACE has also provided the Company with a letter of credit in the favor of the Ministry of the Environment and Climate Change (“MOECC”) in the amount of $213,852 ($276,831 CAD) and, as security, has registered a charge of lease over the premises, located at 704 Phillipston Road, Roslin, Ontario, Canada. As of September 30, 2018, and the date of this filing, the MOECC has not drawn on the letter of credit. The corporate term loan also includes an assignment of existing contracts included in the APA. On June 13, 2018, the unpaid and previously deferred interest on the corporate term loan for the period from March 13, 2018 to June 13, 2018, in the amount of $53,873 ($69,343 CAD), was capitalized and included in the principal balance of the corporate term loan. As at September 30, 2018, $2,678,509 ($3,467,326 CAD) remains outstanding. During the nine months ended September 30, 2018, the Company incurred interest charges of $163,884 ($210,946 CAD) (2017-$10,618; $13,876 CAD) on this 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 this corporate term loan. The first and only blended installment of principal and interest of $22,529 ($29,164 CAD) was due August 1, 2018 at the rate of 8% per annum, and amortized over a twenty-year period. The corporate term loan is due on demand, but until a demand is made, is payable in monthly blended installments of principal and interest of $22,952 ($29,711 CAD), commencing August 13, 2018, at the PACE base rate of 7% plus 1.25% per annum, currently 8.25%. The corporate term loan continues to be amortized over a twenty-year period and matures on September 13, 2022.

On April 11, 2018, three directors each loaned the Company $19,313 ($25,000 CAD) for working capital purposes. The loans bear interest at the rate of 12% per annum, are due on demand and unsecured. There are no written agreements evidencing these loans During the nine-month period ended September 30, 2018, $3,295 ($4,241 CAD) of interest was charged on these loans. As at September 30, 2018, $3,276 ($4,241 CAD) (December 31, 2017-$nil; $nil CAD) in interest is included in accrued liabilities and the loans remain outstanding.

On April 3, 2018, a new loan was provided by Travellers International Inc. (“Travellers”), an Ontario company controlled by the Executive Chairman and President (the “President”), who is also a director of the Company, in the amount of $154,500 ($200,000 CAD). A portion of the funds, $116,746 ($151,128 CAD), was used to pay two overdue monthly principal and interest instalments on the Company’s corporate term loan with PACE. This new loan is due on demand, unsecured and bears interest at the rate of 12% per annum. There are no written agreements evidencing this loan. During the nine-month period ended September 30, 2018, $9,482 ($12,205 CAD) of interest was charged on this loan and other loans repaid to Travellers during the nine-months ended September 30, 2018. As at September 30, 2018, $9,143 ($11,836 CAD) (December 31, 2017-$nil; $nil CAD) in interest is included in accrued liabilities and the loan remains outstanding.

Refer to notes 9, 10 and 13 to the interim condensed consolidated financial statements for details on the long-term debt, obligations under capital lease and commitments respectively, as at September 30, 2018.

CONSOLIDATED RESULTS OF OPERATIONS – FOR THE THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2018 COMPARED TO THE THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2017

During the three-month period ended September 30, 2018, the Company generated $279,394 of revenue from its organic composting facility compared to $25,608 for the three-month period ended September 30, 2017. The Company’s cost of sales in connection with this revenue totaled $246,369 in the three-month period ended September 30, 2018 compared to 43,925 for the three-month period ended September 30, 2017. These costs consisted of depreciation, direct wages and benefits, equipment rental, delivery and repairs and maintenance, utilities and outside contractors. The significant increase in both the revenue and the cost of sales in the current period was due to the fact that the organic composting facility was only in operation for fifteen days in the period September 30, 2017, after having acquired the facility on September 15, 2017. The opening inventory for the three months ended September 30, 2018 in the amount of $115,733 was significantly higher than the closing inventory of $73,795 due to primarily to a drop in inventory costing.

The net loss after other income for the three-month period ended September 30, 2018 was $831,273, significantly higher than the net loss after other income of $297,559 in the three-month period ended September 30, 2017, primarily due to the increase in management compensation and the impact of operating the organic composting facility for only fifteen days in the prior year’s period compared to three months in the current year’s period.

Operating expenses increased by $536,848, from $327,450 in the three-month period ended September 30, 2017 to $864,298 for the three-month period ended September 30, 2018. This was primarily due to the increase in various expenses, explained further below.

Management compensation increased by $289,603, from $125,516 in the three-month period ended September 30, 2017 to $415,119 in the three-month period ended September 30, 2018, primarily, as a result of both an increase in the management compensation charged by the President and the CEO, beginning January 1, 2018, along with the recognition of the executive compensation for the President on the vesting of his RSUs, totaling $250,000.

Professional fees increased by $153,811, from $92,434 in the three-month period ended September 30, 2017 to $246,245 in the three-month period ended September 30, 2018, primarily due to an increase in legal services on the Company’s claim against a third party represented by BDO in the amount of $60,296 related to the purchase of certain assets of the organic composting facility on September 15, 2017 and the costs awarded BDO on the Court’s dismissal of the Company’s motion, totaling $154,350. These costs were offset by a reduction in consulting fees of $21,495 for various services, the cancellation of the professional fees estimate of $7,941 for the Advanced Water Technology Program and the absence of certain legal fees incurred by the Company in the three-month period ended September 30, 2017.

Interest expense increased by $50,576 from $40,363 in the three-month period ended September 30, 2017 to $90,939 for the three-month period ended September 30, 2018, primarily as a result of the new corporate term loan obtained by the Company on September 15, 2017, for its organic composting facility, being in place for the entire period in the current year’s period and the increase in the borrowing rate from 8% to 8.25%.

Rent and occupancy increased by $29,755, from $25,170 in the three-month period ended September 30, 2017 to $54,925 for the three-month period ended September 30, 2018, primarily due to the new rent and occupancy costs associated with the Company’s organic composting facility which operated for three months in the current three-month period versus only fifteen days in the prior year’s three-month period. Also included is an estimate of the additional rent for road maintenance levied by the City of Belleville at the Company’s organic composting facility.

Office and administration increased by $17,431, from $21,751 in the three-month period ended September 30, 2017 to $39,182 for the three-month period ended September 30, 2018, primarily as a result of the additional expenses incurred relating to the operation of the organic composting facility for a full three-month period ended September 30, 2018 compared to fifteen days in the three-month period ended September 30, 2017. The increases included administrative wages and benefits of $9,966 and bank charges of $5,117, which included the renewal fee for the Company’s letter of credit provided by PACE.

Insurance decreased by $2,545 from $16,717 in the three-month period ended September 30, 2017 to $14,172 for the three-month period ended September 30, 2018, primarily due to a lower premium for directors’ and officers’ insurance.

Filing fees were lower by $4,020 in the current three-month period versus the prior year’s three-month period as a result of fewer filings.

Repairs and maintenance of $1,471 in the three-month period ended September 30, 2018, is primarily related to costs associated with the premises of the Company’s organic composting facility with no such costs in the three-month period ended September 30, 2017.

Director’s compensation increased by $766 in the three-month period ended September 30, 2018 compared to the three-month period ended September 30, 2017, and was the result of fees charged by the Company’s audit committee chairman.

CONSOLIDATED RESULTS OF OPERATIONS – FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2018 COMPARED TO THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2017

During the nine-month period ended September 30, 2018, the Company generated $639,538 of revenue from its organic composting facility compared to $25,608 for the nine-month period ended September 30, 2017. The Company’s cost of sales in connection with this revenue totaled $570,786 in the nine-month period ended September 30, 2018 compared to 43,925 for the nine-month period ended September 30, 2017. These costs consisted of depreciation, direct wages and benefits, equipment rental, delivery and repairs and maintenance, utilities and outside contractors. The significant increase in both the revenue and the cost of sales in the current period was due to the fact that the organic composting facility was only in operation for fifteen days in the nine-month period ended September 30, 2017, after having acquired the facility on September 15, 2017. The closing inventory for the nine-month period ended September 30, 2018 in the amount of $73,795 was significantly higher than the opening inventory of $53,964 due to a higher quantity of inventory.

The net loss after other income for the nine-month period ended September 30, 2018 was $3,141,825, significantly higher than the net loss after other income of $1,756,945 in the nine-month period ended September 30, 2017, primarily due to the increase in management compensation and increases in most of the other components of operating expenses, offset by the absence of financing costs, the contribution to the advanced water technology program and insurance proceeds.

Operating expenses increased by $1,423,741, from $1,786,836 in the nine-month period ended September 30, 2017 to $3,210,577 in the nine-month period ended September 30, 2018. This was primarily due to the increase in various expenses, explained further below.

Management compensation increased by $1,882,415, from $371,462 in the nine-month period ended September 30, 2017 to $2,253,877 in the nine-month period ended September 30, 2018, as a result of both an increase in the management compensation charged by the President and the CEO, beginning January 1, 2018, the recognition of the executive compensation for the President on the issuance of 1,000,000 common shares of the Company in exchange for 1,000,000 RSUs totaling $1,000,000, as approved by the Board on May 17, 2018 and the recognition of the executive compensation for the 1,000,000 RSUs which are to vest January 1, 2019, in the amount of $750,000.

Professional fees increased by $202,494, from $180,793 in the nine-month period ended September 30, 2017 to $383,287 in the nine-month period ended September 30, 2018, primarily from increases for legal fees of $94,885 incurred in connection with the Company’s claim it launched against a third party represented by BDO related to the purchase of certain assets of the organic composting facility on September 15, 2017 and the costs awarded BDO on the Court’s dismissal of the Company’s motion, totaling $154,350, increases in audit and accounting services of $33,810, the cancellation of the professional fees estimate of $7,941 in connection with the Advanced Water Technology Program, a decrease in consulting fees for various services of $31,491, the absence of legal fees for the BioGrid of $12,970 along with the absence of legal fees in connection with the Company’s Form S-4 filings and other.

Interest expense increased by $184,909 from $83,049 in the nine-month period ended September 30, 2017 to $267,958 in the nine-month period ended September 30, 2018, primarily as a result of the new corporate term loan obtained by the Company on September 15, 2017, for its organic composting facility.

Rent and occupancy increased by $73,494, from $50,348 in the nine-month period ended September 30, 2017 to $123,842 in the nine-month period ended September 30, 2018, primarily due to the new rent and occupancy costs associated with the Company’s organic composting facility in the amount of $70,277, with the balance of the increase of $3,217 for additional rent and occupancy costs for the Company’s Toronto, Ontario, Canada location.

Office and administration increased by $48,074 from $54,693 in the nine-month period ended September 30, 2017 to $102,767 in the nine-month period ended September 30, 2018. The increase is primarily the result of new expenses incurred at the Company’s organic composting facility, including administrative wages of $20,824, automotive expenses and travel of $13,279, depreciation of $6,148 and various other expenses.

Insurance decreased by $8,909, from $53,666 for the nine-month period ended September 30, 2017 to $44,757 in the nine-month period ended September 30, 2018, primarily due to a reduction in the premium for the Company’s directors’ and officers’ liability insurance in the amount of $12,890. In addition, the Company incurred general, equipment and pollution liability coverage for its new organic composting facility in the amount of $20,312 and an increase in premises liability coverage for its head office in the amount of $876. This was offset by the absence of general, equipment and pollution liability coverage in the amount of $17,207 for its BioGrid Project in the nine-month period ended September 30, 2017. The Company’s premiums for the pollution coverage and the general and equipment liability for the organic composting facility was comparable to the premium paid for similar coverage for the Company’s BioGrid Project which it continued to incur in the three-month period ended September 30, 2017.

Repairs and maintenance of $20,240 related primarily to costs associated with the premises of the Company’s organic composting facility. No similar expenditures were incurred in the nine-month period ended September 30, 2017.

Director’s compensation decreased by $22,469, from $24,800 in the nine-month period ended September 30, 2017 to $2,331 in the nine-month period ended September 30, 2018. The current expense relates to fees charged by the Company’s audit committee chairman and the charges for the nine-month period ended September 30, 2017 relate to the Company’s issuance of 20,000 common shares each to four new directors, determined to be valued at $24,800, based on recent private placement.

The financing fees incurred in the nine-month period ended September 30, 2017, in the amount of $882,153, for the establishment of the PACE financing did not occur in the nine-month period ended September 30, 2018.

The contribution to the Advanced Water Technology Program in the nine-month period ended September 30, 2017 was not repeated in the nine-month period ended September 30, 2018.

The Company’s 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, 2018, the Company had a working capital deficit of $4,978,453 (December 31, 2017-$2,238,911), incurred a net loss of $3,141,825 (2017-$1,756,945) for the nine months ended September 30, 2018 and had an accumulated deficit of $7,802,121 (December 31, 2017-$4,660,296) and expects to incur further losses in the development of its business. These factors cast substantial doubt as to the Company’s ability to continue as a going concern, which is dependent upon its ability to obtain the necessary financing to further the development of its business, satisfy its obligations to PACE 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.

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, impairments of long-lived and intangible assets, deferred income tax assets and related valuation allowance, 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, 2018, the Company adopted accounting standards (“ASU”) update No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash”. The Company now includes restricted cash as part of cash and cash equivalents. The Company has adopted this policy on a retrospective basis. The reference to restricted cash included in the interim condensed consolidated statements of cash flow for the three-month period ended March 31, 2017, has been reclassified to cash and cash equivalents at the end of this prior period.

On January 1 2018, the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers, which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers that supersedes most current revenue recognition guidance. The updated guidance, and subsequent clarifications, collectively referred to as accounting standards codification (“ASC”) 606, require an entity to recognize revenue when it transfers control of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. In addition, the guidance requires the disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company adopted this standard, utilizing the modified retrospective approach, with the cumulative effect of initially applying the new standard recognized in deficit. Accordingly, comparative prior period information has not been restated and continues to be reported under that accounting standards.

The adoption of ASC 606 had no impact on the Company’s interim condensed consolidated balance sheets as of January 1, 2018.

On January 1, 2018, the Company adopted ASU No. 2017, Compensation-Stock Compensation: Topic 718: Scope of Modification Accounting (ASU 2017-09) to provide clarity and reduce both the (1) diversity in practice and (2) cost and complexity when changing the terms or conditions of share-based payment awards. Under ASU 2017-09, modification accounting is required to be applied unless all of the following are the same immediately before and after the change:

The adoption of this pronouncement had no impact on the Company’s interim condensed consolidated balance sheets as of January 1, 2018.

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 February 2016, the FASB issued ASU No. 2016-02, “Leases” (Topic 842). The standard requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. ASU 2016-02 requires the recognition on the balance sheet of a lease liability to make lease payments by lessees and a right-of-use asset representing its right to use the underlying asset for the lease term. The new guidance will also require significant additional disclosure about the amount, timing and uncertainty of cash flows from leases. The new guidance is effective for annual and interim reporting periods beginning after December 15, 2018 (January 1, 2019 for the Company). The amendments should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period. In March 2018, the FASB approved a new, optional transition method that will give companies the option to use the effective date as the date of initial application on transition. The Company plans to elect this transition method, and as a result, the Company will not adjust the comparative financial information or make the new required lease disclosures for periods before the effective date. The Company anticipates the adoption of this new standard will result in a significant increase in lease-related assets and liabilities in the consolidated balance sheet. As the impact of this standard is non-cash in nature, the Company does not anticipate its adoption having an impact on the Company’s consolidated statement of cash flows. The Company is currently evaluating the impact of adopting ASU No. 2016-02.

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.

EQUITY

As at September 30, 2018, the Company had 40,050,031 common shares issued and outstanding. At the date of this filing, the Company had 40,247,531 common shares issued and outstanding.

STOCK OPTIONS AND WARRANTS

Effective January 1, 2017, the Company’s CEO was granted 3,000,000 RSUs. On January 1, 2018, 1,000,000 RSUs were exchanged into 1,000,000 common stock. On May 17, 2018, the Board approved an amendment to the President’s consulting agreement, to include the granting of 3,000,000 RSUs on the same terms and conditions as those granted to the CEO. This grant was valued at $3,000,000 based on recent private placement pricing. Effective May 17, 2018, 1,000,000 RSUs vested immediately and were exchanged into 1,000,000 common stock.

The RSUs for the remaining two installments are to vest annually on January 1, 2019 and 2020. The Company has recorded a stock compensation reserve of $997,500 as at September 30, 2018, representing one quarter of the total value of the RSUs of $3,990,000, based on recent private placement pricing at the time of the grant for each of the RSUs.

The Company has no other stock options or warrants outstanding as at September 30, 2018 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 nine-month period ended September 30, 2018, the Company incurred $104,881 ($135,000 CAD) (2017-$34,434; $45,000 CAD) in management fees expense with Travellers International Inc. (“Travellers”), an Ontario company controlled by a director and president of the Company (the “President”); $104,881 ($135,000 CAD) (2017-$34,434; $45,000 CAD) in management fees expense with Landfill Gas Canada Ltd. (“LFGC”), an Ontario company controlled by a director and chief executive officer of the Company (the “CEO”); $37,291 ($48,000 CAD) (2017-$27,547; $36,000 CAD) in management fees expense with the Company’s chief financial officer (the “CFO”); and $9,324 ($12,000 CAD) (2017-$27,547; $36,000 CAD) in management fees expense with the Company’s vice-president of corporate development (the “VPCD”). As at September 30, 2018, unpaid remuneration and unpaid expenses in the amount of $109,075 ($141,198 CAD) (December 31, 2017-$111,426; $139,789 CAD) is included in accounts payable and $166,860 ($216,000 CAD) (December 31, 2017-$102,935; $129,137 CAD) is included in accrued liabilities.

In addition, during the nine-month period ended September 30, 2018, the Company incurred interest expense of $9,482 ($12,205 CAD) (2017-$14,052; $18,363 CAD) on the outstanding loans from Travellers and $3,295 ($4,241 CAD) (2017-$nil; $nil CAD) on the outstanding loans from the directors. As at September 30, 2018, interest of $12,419 ($16,077 CAD) (December 31, 2017-$22,120; $27,750 CAD) on these loans is included in accrued liabilities.

During the nine-month period ended September 30, 2018, the Company incurred $53,565 ($68,947 CAD) (2017-$50,348; $65,797 CAD) in rent paid under a rental agreement to Haute Inc. (“Haute”), an Ontario company controlled by the President.

During the nine-month period ended September 30, 2018, the Company sold $15,612 ($20,095 CAD) of compost product to LFGC.

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 recent private placement. On January 1, 2018, 1,000,000 RSUs were exchanged into 1,000,000 common stock. The RSUs for the remaining two installments are to vest annually on January 1, 2019 and 2020. On May 17, 2018, the Board approved an amendment to the President’s consulting agreement, to include the granting of 3,000,000 RSUs on the same terms and conditions as those granted to the CEO. This grant was valued at $3,000,000 based on recent private placement pricing. Effective May 17, 2018, 1,000,000 RSUs vested immediately and were exchanged into 1,000,000 common stock.The cost of both RSUs is presented as management compensation expense.

For the nine-month period ended September 30, 2018, the Company recognized management compensation expense of $997,500 (2017-$247,500) on these awards, representing one quarter of the total value of the awards of $3,990,000.

OFF-BALANCE SHEET ARRANGEMENTS

We do not have any off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

As a smaller reporting company, as that term is defined in Item 10(f)(1) of Regulation S-K, we are not required to provide information required by this Item.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our CEO and CFO, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this Quarterly Report on Form 10-Q.

Our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met. Due to inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. Based on our evaluation, our CEO and CFO have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were not effective due primarily to the small size of the Company and the lack of a segregation of duties.

Notwithstanding this material weakness, management has concluded that the unaudited interim condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q present fairly, in all material respects, the financial position, results of operations and cash flows in conformity with generally accepted accounting principles.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

PART II: OTHER INFORMATION

Item 1A. Legal Proceedings.

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. Except as set forth in this Form 10-Q, we are not currently aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition, or operating results.

On December 15, 2017, the Company filed a motion record in the Ontario Superior Court of Justice (the “Court”) against the Business Development Bank of Canada, the applicant and Astoria Organic Matters Ltd. and Astoria Organic Matters Canada LP, together, the respondents, in the amount of $583,647 ($755,400 CAD) in connection with the Company’s purchase of certain assets from the court appointed receiver for Astoria, BDO Canada Limited (“BDO”) on September 15, 2017. The basis for the claim is for the Company’s costs to process biosolids stored onsite that amounted to approximately more than 10 times the amount permitted to be stored by conditions in the Environmental Compliance Approval for the site. The processing costs are paid when the biosolids are received onsite. Costs to process are incurred over the 12 weeks it takes to incorporate the biosolids into a compost product. The Court’s judgement ruled against the Company’s motion and the Company subsequently, on unanimous approval by the Board on June 12, 2018, filed an appeal. The motion on the appeal was heard on September 21, 2018 and the Court’s decision was made on November 8, 2018. The Court dismissed the motion and awarded BDO its costs in the amount of $154,350.

Item 1B. Risk Factors.

As a smaller reporting company, we are not required to provide the information required by this item.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

During the nine months ended September 30, 2018, the Company issued 467,000 common shares for net proceeds of $436,540 and 190,000 common shares on a private placement received prior to December 31, 2017, for working capital purposes.

Subsequent to September 30, 2018 and up to the date of this filing, the Company issued 197,500 common shares for net proceeds of $181,700 on a private placement, for working capital purposes.

In addition, the Company issued a total of 2,000,000 common stock to executive officers on the exchange of 2,000,000 restricted stock units.

The securities above were offered and sold pursuant to an exemption from the registration requirements under Section 4(a)(2) of the Securities Act since, among other things, the transactions did not involve a public offering.

Item 3. Defaults upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not Applicable.

Item 5. Other Information.

On July 26, 2018 and July 27, 2018, the Company refinanced its credit facilities and corporate term loan with PACE.

Item 6. Exhibits.

The following exhibits are filed as part of this quarterly report on Form 10-Q:

*Filed herewith.
**Furnished herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.