Cielo Waste Solutions Corp.

Good morning. My name is Anas, and I'll 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. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, please press star 2. Thank you. I will now hand over to Mr. Chris Sabat, Chief Legal Officer and Corporate Secretary of Shell Waste Solutions. Mr. Sabat.

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 law. For further information on risk factors, please see the company's press release dated March 21, 2022, and Cielo's Q3 2022 management discussion and analysis filed with the Canadian Securities Regulatory Authorities and available on the company's website, on CDAR, 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. Greg Gagund. Greg, please go ahead. Thank you, Chris.

Good morning. Good morning, everyone, and thank you for joining us today. We appreciate the opportunity, and we are pleased to provide our shareholders with additional contacts 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 Lee, 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 a level of detail that may not typically be communicated in a 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 to the 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 our November 12 press release, and we remain on track to deliver the milestones announced. The plan to achieve our goal focuses primarily on two foundational elements, our Alderside Demonstration Facility and the Fort Saskatchewan and Development Facility. The first element of our strategy is the Alderside 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, it is intended that the Alderside 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 one of the Alderside project announced in our November 12th press release. Right now the facility is being 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 declare 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 RGA Design Solutions in Nisku, Alberta, Canada. As I have described previously, the facility is being built to be a lab grade skid-mounted 60 liter per hour scaled-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 Alderside 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 Alderside, 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 CLO, 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 Alderside. 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 his goal. 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 cooking material and the plugging of pipes and other critical process components. During the summer of 2021, we attempted to address these issues at Alderside. Work was time consuming and costly as a facility had to be restarted, taken down and clean between each trial. In September 2021, we recognize that 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 catalysts 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 establish 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 to 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 RJ 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 two at Alderside. RJ 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 CLO. 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 in roles, responsibilities, and accountabilities ensure significant efficiencies and 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 follows 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 Alderside, phase one 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 runtimes due to reduced plugging and 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 significant periods of time, testing the limits of the current configuration. The facility was commissioned on March 14th, ahead of our April guidance, and we are now in the startup phase as we calibrate the facility. As the system stabilizes and the facility begins to produce consistently, we will share the results from phase one. But as I mentioned earlier, the initial test runs look very promising. I have spoken about phase two for Alderside in the past. One of the key drivers for a second phase of improvement at Alderside 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 a 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 two 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 a thousand 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 a 60 liter per hour research and development skid mounted facility. Final design 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 Lee, our Chief Financial Officer, to discuss highlights of Cielo's Q3 2022 financial results and outlook. Stephanie?

Thank you, Greg. Cielo filed a financial statement and MD&A for the three and nine months ended January 31, 2022, on March 21, 2022. I am pleased to report significant improvements in our cash balance, Working capital and balance sheet after the closing of the $11 million loan and the early extension of the $12 million loan, with 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 balance, 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 an $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 on 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 of 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 Elderside Facility and R&D Facility, the addition of an intangible asset of $2 million for the IP purchase from 1-888-711, 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 of January 31, 2022, compared to April 30, 2021, due to the exercise of liability classified warrants, the conversion of convertible debentures, and the 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 31st, 2021. There have been significant improvements in our cash balance, working capital and balance sheet after the closing of the 11 million loan and the early extension of the 12 million loan. with remaining balance of $6.5 million, now maturing on September 1st, 2023. The company filed the annual information form for the most recent fiscal year-end, and the 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 Greg to provide his insights on Cielo's outlook and activities for the remainder of 2022. 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 summer, we believe Alderside 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 Alderside can't? Well, the R&D facility will allow us to gain valuable data that is otherwise impossible to get from Alderside. Alderside 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 catalysts, and much more. The critical piece to 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 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 assists 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 the blueprints for any size facility needed for the specific and feed 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?

Thank you, sir. Ladies and gentlemen, will we now conduct the question and answer session? If you'd like to ask a question, press star, then the number one on your telephone keypad. If you'd like to withdraw your question, press star, too. If you are using a speakerphone, please leave the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Gary D4. As an investor, please go ahead.

Thank you, operator. Greg, first of all, I want to initial comment on a couple of questions. I 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 the position of 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 a wrong track, but I think you and the team are definitely doing the right things 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 Alderside 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 Alderside and Fort Saskatchewan R&D facility fully built out?

Thank you for your question, Gary. As disclosed in our MD&A, we anticipate the remaining cost requirements for Elderside 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.

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?

Yes, that's correct, Gary. Okay, thank you. Thanks for the question, Gary.

Thank you. Ladies and gentlemen, as a reminder, if you have any questions, press star 1.

We have a follow-up from Gary D4.

Please go ahead.

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 bugs ironed out of your process. What target gross margin percentage, Greg, 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 was 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 Alderside?

Yeah, thanks for the question again, Gary. So, you know, in terms of, I guess there's 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? You know, in terms of the pricing per liter, That's got quite a wide range. If you think of just a pure distillate, that is essentially trading relative to what WTI is. I mean, it is a useful product that is used for diluting heavy oil. So, you know, again, that essentially floats on whatever the WTI pricing is. Of course, that's the 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, a biodiesel, we would be fetching prices that would be commensurate with what you would pay at the pump, essentially for roadworthy diesel. A good, high-quality NAPSA, 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 a percentage or gross margin, I can honestly tell you that those are still early days for us. 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'll have better understanding on the ratios we can use. I firmly believe that there will 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.

Yeah, I guess it does. I appreciate the candor that right now you're still trying to wrestle 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're going to start 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 the facilities, you know, we could sort of put a cash flow number behind it or 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 visibility. Is that a fair statement?

Yeah, that's a very fair statement for certain. You know, 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 believed that it was there. And, you know, 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 the coking and plugging issues, that's really been the kind of the thorn in the side. And I had, as I stated in our call, you know, we, we took a, a completely different approach, you know, back in September, we did a complete pause to fully understand. First of all, like, why is this thing plugging up? Why, why are these conditions in the fashion that they are? And in order to do that, we, we really built up a very good technical team internally. We've got some, some very talented engineers. We've got some fantastic leadership at the, at the plant level. And we've been troubleshooting since then. You know, I feel very comfortable that we are now at a state where we understand what the issues are. And, you know, as I mentioned, our phase one, 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, you know, dwell too much on, but the waste management system on the reactor, we've – We've made a lot of modifications to it 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 meters per hour. And the data that we will get even from Alderside at that point will give us even a better reflection as to where the numbers lie in terms of what are our input costs, what are our output yields, and what is the cost as truly to run this operation. So, you know, 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.

Okay, well, thank you, Greg 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 the thing working where it's profitably, sustainably and profitably, then that would be just great for all the investors who I think have been, as you mentioned, quite patient. So thank you for that.

Great. Thank you. Appreciate your comments.

Thank you. Your next question comes from George Bakogiannis as an investor. Please go ahead.

Hi. You know what? I think my question was answered. I was going to ask if it was premature to ask what would the cost be per leader to create from start to finish. And I think you answered that question where we're just a little too premature for that, unless you have the answer.

Yeah.

Or a roundabout figure.

Yeah, you know, 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 in on the answer to that question.

Thank you.

Thank you. Your next question comes from Troy Bradley as an investor. Please go ahead.

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 to 1. Would that make sense?

Troy, you know, 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.

Okay. Thank you.

Thank you.

Thank you. There are no further questions at this time, Mr. Guigan. You may proceed.

Great. Well, thank you, everybody, for attending our call this morning. We appreciate the questions, and we look forward again for next quarter to update you on our earnings results. Thank you very much, and bye for now.

Ladies and gentlemen, this concludes your conference call for today. We thank your participating and ask that you please disconnect your lines. Have a great day.