Cielo Waste Solutions Corp. ( TSXV: CMC) Q3 2022 earnings call dated Mar. 22, 2022
Corporate Participants:
Chris Sabat — Chief Legal Officer & Corporate Secretary
Gregg Gegunde — Chief Executive Officer
Stephanie Li — Chief Financial Officer
Analysts:
Gary Defore — — Analyst
George Bacogianis — — Analyst
Troy Bradley — — Analyst
Presentation:
Operator
Good morning. My name is Anas, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cielo Waste Solutions operational update and Q3 2022 results conference call.
[Operator Instructions] Thank you. I will now hand over to Mr. Chris Sabat, Chief Legal Officer and Corporate Secretary of Cielo Waste Solutions. Mr. Sabat?
Chris Sabat — Chief Legal Officer & Corporate Secretary
Thank you, Anas. Some of the statements on today’s call might contain forward-looking information. Listeners are cautioned not to place undue reliance on these forward-looking statements since a number of factors could cause the actual future results to differ materially from the targets and expectations expressed. The company undertakes no obligation to update or revise any forward-looking statement whether as a result of new information, future events or otherwise, unless expressly required by applicable securities laws. For further information on risk factors, please see the company’s press release dated March 21, 2022, and Cielo’s Q3 2022 management’s discussion and analysis filed with the Canadian securities regulatory authorities and available on the Company’s website, on SEDAR or by contacting Cielo directly. All amounts discussed today are in Canadian dollars, unless otherwise stated.
With that, I’d like to now welcome our Chief Executive Officer and Chief Operations Officer, Mr. Gregg Gegunde. Greg, please go ahead.
Gregg Gegunde — Chief Executive Officer
Thank you, Chris. Good morning, everyone, and thank you for joining us today. We appreciate the opportunity and we are pleased to provide our shareholders with additional context regarding our March 21 Q3 2022 financial results and operational update.
Joining me on the call this morning. in addition to Chris Sabat is Stephanie Li, our Chief Financial Officer.
Before we begin, I would like to take a moment. On behalf of all of us at Cielo, our hearts, our minds, our thoughts are with the people of the Ukraine as they witness the brutal realities of war that has brought catastrophic loss of life and human suffering. We remain hopeful that a swift and peaceful conclusion is possible.
As it concerns the operational update for today, I intend to discuss the level of detail that may not typically be communicated in the conference call, but I think it is necessary to provide a wholesome update to the work that is underway and the prospects the company has going forward.
I’m going to address this morning’s comments in two parts. First, a strategy overview, and then an operational update.
As a strategic overview, our long-term corporate goals remain unchanged. Cielo is focused on its objectives to build state-of-the-art commercial facilities for the conversion of multiple forms of waste materials into fuels. The strategy for executing our plan was set out in on November 12 press release and we remain on-track to deliver the milestones announced.
The plan to achieve our goal focus is primarily on two foundational elements, our Aldersyde demonstration facility and the Fort Saskatchewan research and development facility.
The first element of our strategy is the Aldersyde demonstration facility. It was developed for the purpose of demonstrating proof of concept that Cielo can, at a commercial scale, transform waste wood to fuel. Further, once commercial production of distillate on a steady state basis is achieved, is intended that the Aldersyde facility will produce naphtha and highway grade diesel.
We have made recent improvements and are in the throes of achieving these objectives. We completed ahead of schedule, Phase 1 of the Aldersyde project announced in our November 12 press release. Right now, the facility has been commissioned and we are encouraged by the initial results. The distillate being produced is visibly improved. Initial observations indicate that there is less particulate in the distillate. It was this particulate that was leading to the plugging and other process issues historically.
We are very excited, but it is very early days and we will not declared that we have achieved our goal of steady state production until the facility operates for an extended duration such that steady state production is fully validated.
The second part of our strategy is our research and development facility to be located at Fort Saskatchewan site. It is currently under construction at ARJAE Design Solutions in Nisku, Alberta, Canada. As I have described previously, the facilities being built to be a lab grade skid mounted 60-liter per hour scale-down version of our process. This facility will have the flexibility to enable the testing and experimentation with multiple types of waste feed catalysts, alternative carrier fluids and many other operating parameters. This will provide the detailed scientific and engineering data needed to take the concept, state-of-the-art production we intend to demonstrate at Aldersyde and to design larger full scale processing facilities.
Here our intentions are to conduct in-depth testing of multiple feedstocks, including plastics, rubber, rail ties and many other organic materials to collect the necessary data required for large-scale commercial processing facilities and determining the corresponding economic thresholds.
I think it’s worth repeating at this stage that the combined elements of the strategy, commercial production and revenue generation at Aldersyde and the generation of detailed engineering and scientific data through the R&D facility will firstly support the design of our first full-scale facility at Fort Saskatchewan, and secondly permit the detailed analysis of the commercial viability for the conversion of different waste feedstocks.
The management team views 2022 as an exciting and transformational period for Cielo, one in which we will begin the process for the design of our first full-scale facility.
Looking now to our Q3 2022 operational update. It is important to frame our progress relative to historical challenges, which we believe we are overcoming on our path to achieving steady state commercial production at Aldersyde.
Cielo has always had the goal of continuous production with commercial volumes of distillate generated from waste. The complexity of this task, especially with wood waste cannot be understated.
In approximately June of 2021, Cielo believed that it had successfully attained a score. However, it was premature. The system modifications introduced in the late 2020 and early 2021 resulted in stressing system components, including pumps and heaters, the generation of coking material and the plugging of pipes and other critical process components.
During the summer of 2021, we attempted to address these issues at Aldersyde. Work was time consuming and costly as the facility had to be restarted, taken down and cleaned between each trial. In September 2021, we recognized a more detailed analysis was required to better understand the system limitations creating these bottlenecks. A technical audit and a deep understanding of the organizational processes were the catalyst for many changes made to the organization.
Firstly, we quickly built and established a strong internal engineering and leadership team comprised of experienced chemical engineers with strong facility and process engineering skills. Our internal engineering team quickly began to study the conditions and the performance of the process and established what the limiting factors contributing to the bottlenecking issues were, and the root cause of the steady state production problem.
The team also had greater oversight and control over consulting engineering firms employed and accordingly, adjusted the consulting firms and technical support to ensure compatibility and the performance necessary to achieve the outcomes required.
We then sought out enhanced external engineering and technical support. Currently, Cielo has partnered with both ARJAE Design Solutions for the fabrication and installation of the R&D facility at Fort Saskatchewan and Stantec Consulting Limited in relation to the engineering enhancements for Phase 2 at Aldersyde.
ARJAE is a leading engineering and fabrication firm, while Stantec is a leading global engineering consulting firm with a wealth of professional designers, engineers, scientists and project managers. We have confidence that our internal teams and external support will continue to meet the goals we set, against which our shareholders should measure Cielo.
At an operational level, we installed new leadership with strong technical and operational knowledge, supported by an enhanced operations team with relevant skills and experience. Our clear strategy has created a culture of engagement and enthusiasm.
Clarity enrolls responsibilities and accountabilities and significant efficiencies in the results. Standards have now been established for safe operating practices, improved maintenance programs, operating cost controls and production reporting. Additionally, Cielo now has a wholesome health, safety and regulatory management system in place to ensure that everyone on our sites follow safe practices. This is one of the metrics by which we will measure our performance.
These changes are material to the progress made over the last two quarters. They have allowed us to design and execute our strategy with the goal of constructing Cielo’s first state-of-the-art facility.
In this quarter, at Aldersyde, Phase 1 modifications made to the facility include various process control system modifications, the fabrication and installation of a new reactor waste management system, new circulation pumps, a new recycle loop heater, inlet feed system modifications, just to name a few. The expected results from these changes are extended process run times due to reduce plugging in coking problems as observed historically and validation of the mechanics of flow.
Our goal is to have consistent steady state production. We will operate the facility for a significant period of time, testing the limits of the current configuration. The facility was commissioned on March 14, ahead of our April guidance, and we are now in the start-up phase as we calibrate the facility.
As the system stabilizes and the facility begins to produce consistently, we will share the results from Phase 1. But as I mentioned earlier, the initial test runs look very promising.
I have spoken about Phase II for Aldersyde in the past. One of the key drivers for a second phase of improvement at Aldersyde is the reactor. In our initial design, we contemplated modifying the existing reactor and radically reconfiguring the inlet mixing system. However, we concluded that the most effective and efficient solution was to replace the reactor completely.
Since we will require significant changes to the overall system for the reactor upgrade, the final inlet feed mixing system and other equipment will also be installed during Phase 2 construction. We are very pleased to be working with Stantec consulting on the final design details. We began procuring equipment and we will be commencing fabrication in early June 2022. Our plan is to shut the facility down from July to August for construction and installation and we anticipate commissioning of the new system to start in September 2022.
Upon completion of this properly designed and constructed facility, we expect to achieve a steady-state commercial production rate of approximately 1,000 liters per hour. We’re very excited to complete this work as we strongly believe our efforts will solve the commercialization issue and result in a predictable production rate as designed.
At Fort Saskatchewan, we began fabrication of our 60-liter per hour research and development skid mounted facility. Final designed details are in progress and we project commissioning the facility at Fort Saskatchewan in August 2022. We are very excited for the data to be generated through the R&D facility as it will form the basis for the design of our first full-scale facility and allow us to determine the economics and processing for the conversion of additional waste feedstocks to fuel.
I will now hand the call over to Stephanie Li, our Chief Financial Officer to discuss highlights of Cielo’s Q3 2022 financial results and outlook. Stephanie?
Stephanie Li — Chief Financial Officer
Thank you, Gregg. Cielo filed the financial statement and MD&A for the three and nine months ended January 31, 2022 on March 21, 2022. I’m pleased to report significant improvement in our cash balance, working capital and balance sheet after the closing of the $11 million loan and early extension of the [Technical Issues]
Operator
Ladies and gentlemen, please stand-by while we connect to our hosts.
Ms. Li, your line is now open. Please proceed.
Stephanie Li — Chief Financial Officer
Sorry. Do you guys remember where you lost me?
Gregg Gegunde — Chief Executive Officer
I think you should start from the beginning, Stephanie.
Stephanie Li — Chief Financial Officer
Thank you, Gregg. Cielo filed the financial statements and MD&A for the three and nine months ended January 31, 2022 on March 21, 2022. I’m pleased to report significant improvement in our cash balance, working capital and balance sheet after the closing of the $11 million loan and early extension of the $12 million loan, with the remaining principal balance of $6.5 million now maturing on September 1, 2023.
Working capital deficiency as at January 31, 2022 was $10.2 million compared to $0.7 million deficiency as at April 30, 2021. The increase in working capital deficiency of $9.5 million was mainly due to the decrease in cash balances, which was used to fund research, development and corporate activities. The addition of existing loan for the asset purchase in Fort Saskatchewan, Alberta, and partially offset by the decrease in short-term warrant liability upon the exercise of warrants.
On February 18, 2022, the company closed $11 million additional mortgage loan with First Choice Financial, the new loan and utilized $5.5 million of the net proceeds to repay a portion of the existing loan. The remaining outstanding principal balance of the existing loan is $6.5 million after the partial repayment.
In addition, on March 18, 2022, the company completed the extension of the term of the existing loan from 12 months to 24 months, now maturing of September 1, 2023 after the closing of the new loan and extension of the existing loan.
The company’s working capital deficiency of $10.2 million was improved by approximately $16.7 million to a working capital surplus of $6.5 million. Total asset increased by $6.7 million as at January 31, 2022 compared to April 30, 2021 mainly due to the increase in property, plant and equipment related to the asset purchase in Fort Saskatchewan, Alberta for $13 million, the construction activities at the Aldersyde facility and R&D facility, the addition of an intangible asset of $2 million for the IP purchase from 1888711 Alberta, Inc., partially offset by the decrease in cash related to the continuous research and development activities and G&A expenditures.
Total liabilities decreased by $2.6 million as at January 31, 2022 compared to April 30, 2021 due to the exercise of liability classified warrants, the conversion of convertible debentures, and a decrease in accounts payable and accrued liabilities, partially offset by the mortgage loan with First Choice Financial and KB Capital, the existing loan.
The net loss for the three months ended January 31, 2022 increased by $2.7 million compared to the same period in the prior year, mainly due to the increase of $1.3 million in G&A expenses related to salaries and benefits for additional employees hired to facilitate the growth of the company, professional fees for securities and TSX V filings, financing activities, external audit and tax-compliance services, the increase of $1.2 million in share-based compensation due to the vesting of restricted share units, deferred share units and stock options on December 31, 2021.
There have been significant improvements in our cash balance, working capital and balance sheet after the closing of the $11 million loan and early extension of the $12 million loan, with the remaining balance of $6.5 million now maturing on September 1, 2023.
The company filed annual information form for the most recent fiscal year-end and notice declared intention to be qualified for short-form prospectus distributions in January 2022. The company is currently in the process of generating additional financing, which may include raising additional equity, debt or entering strategic partnerships.
With our current liquidity and plans for additional financing, we believe that Cielo is well positioned to deliver our strategic growth and commercialization plan in 2022.
With that, I will now pass back to Gregg, to provide his insights on Cielo’s outlook and activities for the remainder of 2022.
Gregg Gegunde — Chief Executive Officer
Thank you, Stephanie. To summarize our discussion here today, I would like to recap the progress and plans that we believe will redefine Cielo by the end of this current year. We are very excited about the work we are doing and that we believe will transform the organization to a different future.
By the end of the summer, we believe Aldersyde will have been transformed into a reliable commercial scale processing facility, a facility that will have the capability of truly producing at a rate of 1,000 liters per hour, because that is what we designed it to do. It took some time to understand the shortfalls and to design a solution, but we did, and we did this through making material changes to our technical expertise, both internally and externally.
Fort Saskatchewan, why do we need this and what can it do that Aldersyde can’t? Well, the R&D facility will allow us to gain valuable data that is otherwise impossible to get from Aldersyde. Aldersyde operates at specific temperatures and pressures and can only accept wood biomass as an infeed. The R&D facility gives us the flexibility to adjust multiple parameters that include operating temperatures and pressures, the ability to study multiple reactor configurations, test variations to our catalyst and much more. The critical piece of all this is that it will provide digital output of every part of the process.
I can’t stress enough how critical this data is, because it gives us insight into how we design the most efficient system possible to ensure the economics of constructing large-scale capital-intensive plants are fully understood.
The plan is that by the end of this year we will be at this point, working with our engineering partners on a design basis for a full-scale facility, efficient facility.
The other very important reason related to the next turn and the future of this organization is the ability to develop facilities that have the capability of converting not just wood, but plastics, rubber, railway ties and other materials into fuel. The R&D facility will give us that opportunity. Because of its size and the way that it is designed, we will have the ability to make cost effective adjustments to it to accommodate the testing of multiple feedstocks properly.
We are very excited to commence this level of testing with a goal in mind for the construction of full-scale facilities. I talk a lot about producing data and why it’s important. So just to be clear, I want to describe to you the general flow of how this data produced from the R&D facility will be used.
Firstly, experimental run data is recorded and analyzed. What we’re looking for is best system configurations and the best results. From this, the data is validated and put into an engineering model. Mass balance, material balance and energy balance amongst others are now fully understood at this point.
Thirdly, the engineering model now assist in the scale up and sizing of pipes, vessels and critical equipment. Since equipment sizing is now known, cost estimates can now be performed. We now have sufficient data at this point to produce economic models that will define the justification for investment and can build a blueprint for any sized facility needed for the specific infeed materials.
We anticipate that the balance of 2022 and beyond will be an exciting time for Cielo. I see an engaged workforce comprised of individuals who I am proud to consider my colleagues in a developing corporate culture with a focus on safe, efficient execution. We are primed for a busy, exciting year and we look forward to sharing updates with you on our next earnings call.
And I want to apologize about the disruption. We had in our call. We just lost the line. So our deepest apologies for that.
With that operator, that concludes our prepared remarks for the day. Would you please guide us to the Q&A?
Questions and Answers:
Operator
Thank you, sir. [Operator Instructions] Your first question comes from Gary Defore [Phonetic], who’s an investor. Please go ahead.
Gary Defore — — Analyst
Thank you, operator. Gregg, first of all, I want to initial comment and a couple of questions, commend you and the team on increased transparency and disclosure. I think you’re providing a breath of fresh air in terms of the kind of information that’s been provided to the retail community. Subsequent to your taking over as CEO. So first of all, that’s great.
Obviously, there was information that was provided with your predecessor that may have put some of the retail investors on the wrong track. But I think you and the team are definitely doing the right thing in terms of transparency.
Having said that, I do pick up a point that you talked about in your press release. It says if the company is unable to raise sufficient funds on acceptable terms, then the Aldersyde will be prioritized over the Fort Saskatchewan R&D facility.
So my question is really with the debt-equity that Stephanie just spoke to, how much new debt or equity is being planned for 2022 to get both Aldersyde and Fort Saskatchewan R&D facility fully built out?
Stephanie Li — Chief Financial Officer
Thank you for your question, Gary. As disclosed in our MD&A, we anticipate the remaining cost requirement for Aldersyde is $7.7 million until the end of 2022 and $9.5 million until the end of 2022 for the R&D facility. I hope that answers your question.
Gary Defore — — Analyst
So approximately, just so I’m clear, approximately $17 million of additional capital is required in 2022 to get both facilities up to what you anticipate to be fully operational. Is that correct?
Gregg Gegunde — Chief Executive Officer
Yes, that’s correct, Gary.
Gary Defore — — Analyst
Okay. Thank you.
Gregg Gegunde — Chief Executive Officer
Thanks for the question, Gary.
Operator
Thank you. [Operator Instructions] We have a follow-up from Gary Defore. Please go ahead.
Gary Defore — — Analyst
Thanks, operator. I know this is still early stages, but I’m trying to financially model what the company can represent in a couple of years time, once you’ve got all the sort of buns ironed out of your process. What target gross margin percentage, Gregg, do you envision? If we looked at the waste biomass distillate that’s being produced, and I appreciate you’re trying to get all the particulate out etc. I guess the first question is, what price per liter is currently available in the market for that product, assuming you had a clean slate where there is no particulate in it? And what would you envision being the target gross margin percentage once you get up to a full-scale facility producing 1,000 liters per hour in Aldersyde?
Gregg Gegunde — Chief Executive Officer
Thanks for the questions again, Gary. So in terms of — I guess there is two pieces to your question. Number one is what is the value of the product that we can get when we get the system lined out as we expect to. And the second piece of that was what is the percentage of gross margin.
In terms of the pricing per liter, that’s got quite a wide range. If you think just a pure distillate, that is essentially trading relative to what WTI is. I mean it’s a useful product that is used for diluting heavy oil. So that — again, that is essentially floats on whatever the WTI pricing is, of course, less a differential here in Alberta.
Once we get to a state, which is our end goal, where we are producing a good high quality diesel and we remove the sulfur out of it, at this point, since we are not producing obviously biodiesel, we will be fetching prices that would be commensurate with what you would pay at the pump, essentially for road worthy diesel. A good, high-quality naphtha, again that — its materiality in terms of its value would float again on what commercial prices are, again relative to what WTI pricing is at. That is the best answer I can give you at this point in terms of what the product sales would look like.
In terms of percentage of gross margin, I can honestly tell you those are still early days for us. You know, a lot of the, what I’m really looking forward to is when we get that R&D facility built, we’ll be able to study this at a much granular basis. What I mean by that is fully understanding what the true conversion is of the current biomass feed that we use, which is waste wood. Once we fully understand what the conversion looks like, we will have better understanding on the ratios we can use.
I firmly believe that there’ll be another turn to this in terms of how efficient the current process that we have will be. And at that point, Gary, that’s when we’ll be able to really address these questions. So I’m very much looking forward to getting to that state where I can build some models that we can actually discuss in a more meaningful fashion.
I hope that answers your question.
Gary Defore — — Analyst
Yes, I guess it does. I appreciate the candor that right now, you’re still trying to wrestle the distillate or sort of the particulate issues to the ground and obviously still require additional capital.
I think in the past, investors were kind of led to believe that this thing was going to be commercialized last year and we are going to start generating revenue and obviously, hopefully some positive gross margin. I was just trying to get a sense of where that margin may come into. So as we start scaling up these facilities, we could sort of put a cash flow number behind it, at least proxy cash flow. And I guess what you’re indicating right now is that you still don’t have a good grasp on that, on that visibility. Is that a fair statement?
Gregg Gegunde — Chief Executive Officer
Yes, that’s a very fair statement for certain. Just reflecting back to the earlier days that you just described, like as I mentioned in the call here, this company back early part of last year, believe that it was there. And when you look at the changes that were made from a mechanical perspective, I can see why that was believed to be true. But what wasn’t expected, like I said, is a lot of the system issues that we encountered, a lot of coking and plugging issues. That’s really been the kind of the thorn in the side. And I had, as I stated in the call, we took a year a completely different approach. Back in September, we did a complete pause to fully understand, first of all, like why is this thing plugging up, why are these conditions in the fashion that they are.
And in order to do that, we really built up a very good technical team in turning the — we got some very talented engineers. We got some fantastic leadership at the plant level, and we’ve been troubleshooting since then. I feel very comfortable that we are now at a state where we understand what the issues are. And as I mentioned, our Phase 1, we just — we’re in the throes of firing that thing up right now. But I can tell you what I’ve seen in terms of the visibility of the product, it is materially different than what we were processing in the past.
And the other thing I didn’t really dwell too much on, but the waste management system on the reactor, we’ve made a lot of modifications too with this turnaround here, and the initial results on that too look very promising.
So I am very much looking forward to this summer when we have that new reactor installed, because that is really the root cause of a lot of the issues that we were having. All the equipment will be properly sized, so we can say this does flow at 1,000 liters per hour. And the data that we will get even from at Aldersyde at that point will give us even a better reflection as to where the numbers lie in terms of what are input costs, what are our output yields and what is the cost is truly to run this operation.
So I appreciate everybody’s patience. But we truly believe that by the end of this year, middle of summer, to the end of this year, we’ll be in a completely different realm of this organization.
Gary Defore — — Analyst
Okay. Well thank you, Gregg, and team for bringing an engineering angle to the story. I mean, the strategy is great. Obviously, the overall mission is wonderful. And if you guys can execute and actually start delivering operationally to get these things working, where it’s profitably — sustainably and profitably, then that would be just great for all the investors who I think of them, as you mentioned, are quite patient. So thank you for that.
Gregg Gegunde — Chief Executive Officer
Thank you. Appreciate your comments.
Operator
Thank you. Your next question comes from George Bacogianis [Phonetic], who’s an investor. Please go ahead.
George Bacogianis — — Analyst
Hi. I think my question was answered. I was going to ask if it was premature to ask what would the cost be per liter to create from start to finish. And I think you answered that question, we’re just a little too premature for that, unless you have the answer.
Gregg Gegunde — Chief Executive Officer
Yes.
George Bacogianis — — Analyst
A round about figure.
Gregg Gegunde — Chief Executive Officer
Yes. You know what, George, I don’t like giving roundabout figures because they’ll be wrong. They’ll be wrong, I know that for sure. But like I just mentioned to Gary here, I think that over the span over the next several months when we get more meaningful data, we’ll be able to kind of narrow win on the answer to that question.
George Bacogianis — — Analyst
Thank you.
Operator
Thank you. Your next question comes from Troy Bradley [Phonetic], who’s an investor. Please go ahead.
Troy Bradley — — Analyst
Hi. Yes, I’ve been a shareholder for a year now. And I’ve seen this company get too far ahead and promoted way too early. And I’m just wondering if you’re going to roll back shares, say 10:1, would that make sense?
Gregg Gegunde — Chief Executive Officer
Hi, Troy. At this point in time, no, that’s something that we are not contemplating at this point in time right now from our perspective. So it’s not anything that’s in our radar screen at the moment.
Troy Bradley — — Analyst
Okay. Thank you.
Gregg Gegunde — Chief Executive Officer
Thank you.
Operator
Thank you. There are no further questions at this time. Mr. Gegunde, you may proceed.
Gregg Gegunde — Chief Executive Officer
Great. Well, thank you, everybody, for attending our call this morning. We appreciate the questions and we look forward again in next quarter to update you on our earnings results. Thank you very much and bye for now.
Operator
[Operator Closing Remarks]