Cielo Waste Solutions Corp. (CMC.V) Earnings Call Transcript & Summary

Good morning. My name is Deborah, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Cielo Waste Solutions 2022 Fiscal Q4 Quarterly Conference Call. [Operator Instructions] I will now hand it over to Mr. Ryan Jackson, Interim Chief Executive Officer; and Ms. Jasdeep Dhaliwal, Interim Chief Financial Officer of Cielo Waste Solutions. Go ahead. Thank you.

Thanks, Deborah, and thank you, everyone, for joining us today. I just wanted to also mention a quick shout out to those who had joined us on the webinar for last month and -- or earlier this month, rather through rbmilestone, and we had a lot of positive feedback and, of course, some good questions developed from that as well. So I didn't want to take up too much time. This is Jas' show. So I just wanted to let you know that we're going to report the financial results for 3 months and year-ended April 30, 2022, and all amounts in this news release are in Canadian dollars unless otherwise indicated. So without further ado, I'll turn it over to Jasdeep.

Good morning, everyone. As Ryan mentioned, my name is Jasdeep Dhaliwal, the Interim CFO. Here with the support of our Controller -- Controller Ms. Anna Cheong; supported also by our Audit Committee, our Audit Chair, Sheila Leggett. Happy to be here to share the financial results for fiscal year-end, April 30, 2022. How I'd like to start is just with sharing the numeric values as you read in the PR that was released on August 25. Subsequently, as Ryan and I have been part of the Board during the last fiscal year, and we are now in interim position. We'd like to shed some light on the strategy and the internal approach that we've taken. So as far as the financial results, the total assets increased at April 30, 2022 by $8.3 million compared to April 30, 2021. The main increase is related to our PP&E, property, plant and equipment. Assets were purchased at Saskatchewan for $13 million. There was additional construction activities at Aldersyde and the R&D facility. Also, as many of you know, we purchased our IP, the intangible asset of $2 million. Our total liabilities decreased by $0.7 million as of April 30, 2022, in comparison to prior year. This was due to the exercise of our liability, which were -- or warrants that were classified as liabilities also a conversion of our convertible debentures. And in addition, a repayment of deferred revenue. There was also an increase in noncurrent liabilities as there was a reclass for the renewable MOUs from current to noncurrent. The net loss for the company for the fourth quarter of 2022 was $2.2 million, a decrease of $31.7 million from $33.9 million for the quarter ended April 30, 2021. The net loss for the company in the current year was $14.4 million, a decrease of $25.3 million from the $39.7 million for the prior year. Working capital deficiency in prior year was $0.6 million, working capital of approximately $1.2 million was noted at April 30, 2022. Other values that were highlighted in the financial information that was provided were financing costs of $1.1 million for the year ended 2022, which in the prior year were $5 million. G&A was $6.6 million for 2022. And in the prior year, it was $2.6 million. Research and development expense was $5.4 million, and in the prior year, it was $2 million. So those are the numeric values in the financial results that were highlighted in the PR and that are applicable in understanding the business and the financial results of Cielo. However, this doesn't explain the story of what was happening from a strategy or the approach or the plan of Cielo internally. So I'd like to take this opportunity to provide what we internally call as the bird's eye view of what was happening at Cielo at this time. So the best approach is to start right at the beginning of this fiscal year. So if we go back to approximately last summer, August 2021, there was -- it was self-evident, as mentioned, for those of you who joined the webinar that an ad hoc problem-solving approach was no longer reasonable. This is the approach that was taking almost an entrepreneurial approach at Cielo. So the transition that was occurring internally at Cielo was the creation of key roles at the management level to ensure we could formalize an approach to allow Cielo to be successful. At the same time, there was purchase of land as there was an opportunity for future development and that is where you see an increase in debt for the purchase of land. So what -- as you would note, as you probably had noticed in the November 12 press release, what had happened in August 2021 is various process modifications resulted in unintended system bottlenecks and flooding issues. And what that means is the ad hoc approach of troubleshooting and problem solving with creating the need for more formalized processes at Cielo. So what you would note -- what you had noted in the November 12 press release was a comprehensive analysis at Aldersyde. It is our opinion that the comprehensive analysis wasn't just at Aldersyde, it was a strategic analysis internally of the improvements that need to happen at very level -- at various levels. So we're talking operationally and operationally, it was data collection, data analysis, formalization of various process flows. There was a focus on ensuring that the spending we were doing at an operational level was effective and efficient. There was also an enhancement of our health and safety standards that was happening. At a corporate level, this is when the transition happened as Cielo became more sophisticated to ensure we had the expertise at the auditor level, KPMG was engaged. Other policies and procedures were developed. Some of the other strategies that were in place at this time as we purchased the IP company -- purchased the IP technology from 1888 as a company always referred to. And what this did is this -- in the life cycle of Cielo, it is -- it has created a launch pad for Cielo to be more successful. This, in our mind, was an investment -- a onetime investment, ensuring that not only is the data collection and the analysis is there, but also the key individuals, the likes of Mr. Ryan Carruthers who at the time was a consultant during early 2021 came on, on a full-time capacity role. So again, the strategy there was to ensure that our human capital, our investments in our individuals is also in-house. So again, the strategy being operational, corporate and even at the governance level. There was an increase in the oversight, but there was an increase in developing formal strategies and processes at that level. And with the addition of key individuals that came on at the tail end of 2021, such as our Board Chair, Larry Schafran and our current audit Chair Sheila Leggett, we have enhanced governance significantly. But we did not expect what happened in 2022 as there was a change in the marketplace. There was a change in the inflationary conditions. So what we have to do is not change our strategy. We do not change our strategy as it remains the same. We are still on the path to commercialization, and we continue to be on that path. What we had to do is take a fiscally prudent measure as noted in our May 2022 press release is we hit a pause on Aldersyde Phase 2. And because this was -- this was due to the fact there's a 50% increase in the costs and the investment required for Aldersyde Phase 2. In line with this revised strategy, again, at the overall strategy, we're still in the path to commercialization, but the pause on Aldersyde Phase 2 allowed us to reallocate capital to the R&D facility. In our minds, what we needed to do is ensure that our capital raise was in line and it's favorable to Cielo, but in line with the strategy. So what you note for those of you who participated in the short-form perspective, the capital raise that happened in July 2022, subsequent to year-end, it was noted that the intention of the capital raise is on the R&D with a reduced amount of G&A in our opinion, to support operations. And most recently, what we've done is we've completed our learnings from Aldersyde. We are now decommissioning the facility and those learnings will be applied to this R&D facility. And the R&D facility's sole purpose is to look at -- for those of you who attended the webinar, input reaction output. What we're analyzing is various feedstock and driving economic data, not just to measure of revenue or hit an operational target, but to be able to position ourselves looking at gross margin, looking at our profitability as a whole of the process. So in summary, for us, we believe, Ryan and I, that this has been a year of internal growth at Cielo. We are now positioned after investing very necessary costs into the development of Cielo in its life cycle for future success and for a future full-scale facility. In my opinion, if we could, not that we ever would, these costs could be capitalized because they're investments. Under IFRS, they will not be. They are G&A and expense and other aspects of our business has allowed us to grow and evolve as a corporation in the life cycle of Cielo. This also -- I also take this opportunity to say that these costs -- I know there's a desire to compare to prior year or future years. Next year will look different than prior year and the 2022 fiscal -- April 30 fiscal year looks very different from the year prior. And as we grow along our growth curve and our company's life cycle, we will be sure to provide insight as we are today on the decision management making with the support of the Board, but it's very important to understand that we are at trajectory of growth, and our financial statements reflect the best decisions we're making in our capacity for the company. Ryan, do you have anything further to add to the strategy point or the lands especially as a Board member in the last year?

Thanks, Jas. That was very well presented. No, I don't have anything further to add. Just want to open it up now to questions for the audience.

[Operator Instructions] Your first question is coming from Gary Defore, Investor.

First of all, Jas and Ryan, I want to commend you on the webinar presentation that you put on a couple of weeks ago. I was actually out of the country, but I was able to listen in on the replay, thought you both presented yourself exceedingly well. So I was appreciative of that and the explanations. I will open up by saying I have a number of questions here. I'm going to ask 1 or 2 and then I'll turn it over back to the operator, but I would like to circle back at the end because I have a few more questions that have been presented to me from various shareholders who may not want to participate on the call themselves. I think it's a fair statement to say that the credibility of the Board and management right now is very low. There were statements that were made by previous CEOs publicly and press releases, et cetera, that clearly have not come to fruition. So I think we really expect to have 100% transparency. On the first call that Ryan introduced himself after Greg and Chris left, his opening comments -- or not his opening comment but one of his comment was about the share price, of course, and very undervalued. Lo and behold, 2 weeks later, a financing through FCF is done at about a 30% discount from that time when the call was on. I understand as a former CFO that those things happen and the marketplace is dynamic. But what I don't understand is how -- so to date, unless I've missed it, I have not seen any of the CMC Board or management with the exception of Ryan, who put in, I believe, about $80,000 of his own cash back in CMC. Where is the skin in the game kind of walk the talk when we don't see management putting money back in and believing in this new strategy, a new process that's been laid out. I would like to see that. Any comment, please?

Sorry, I assume Ryan was disconnected. As far as -- sorry, I'll take one piece at a time. Yes, we do believe our share price is undervalued because we haven't been communicating to -- in our opinion, we haven't communicated to the marketplace the successes that we are attaining and the growth that we are experiencing. That's why at the request of the Board, we are here because there has been a communications gap. That isn't to say that the missed milestones were a result of misrepresentation in our opinion. In our opinion, inflationary conditions and various other factors played into meeting those milestones. As far as getting in the game, I personally participated in the last raise that occurred in July as the other Board members and so did Ryan himself. And all of this is reflected on SEDAR, my apologies, I don't have SEDAR pulled up right now, but that information is available online for you.

Sorry, I got disconnected. Gary, that was perfect timing, too, I might add.

No problem. No problem. Well, I mean, that's fine. I haven't gone at SEDAR, I guess I will to see how much has actually been put in by each of the board members as well as the management. I look at this company right now and truthfully, and Jas, as you can speak to this, CMC is effectively controlled by FCS. They basically dictate the terms of their financing and the fees that they get, the upfront fees, the warrants, et cetera, and any pop. So I guess as my follow-up question then with respect to the financing and the control, first of all, who is FCF? I've not been able to dig up any information on them specifically. And I guess as a follow-up, you've indicated that next year, you'll require incremental capital to complete the project, the R&D testing, et cetera, what are their interests? Has there been from other financial institutions other than FCF to put money into CMC? And approximately how much extra capital do you believe you'll have to raise in 2023?

Jas, do you want to -- I'll take the first half and you can take -- you can follow up with the capital then, how does that sound?

Sounds good, Ryan. Thank you.

Okay. So Gary, around the -- so FCF is a syndicate of investors, right? And they're through the -- and in press releases we've mentioned and he's been quoted Vikas Sharma has the -- we'll call it the President or the CEO of FCF. They're certainly not a controlling shareholder. They're below the threshold of that by a significant margin, actually. So the financings that we have and that have occurred over the past quite frankly, without FCS support, Cielo probably isn't here today. So there has been a balanced approach with respect to the amount of debt and the equity that FCF has made and invested in over the course of the last number of years. And we work with them. They are very much a stakeholder, shareholder in the company. They certainly, though, have an equal voice to yours or to anyone else's as it relates to any operations of the company. They don't have a board seat. They don't -- they're not on the board or have observer status. So with respect to the interest of the company, they're not from a matter of influence or questions or anything of that nature, it's all still very much the Board and, of course, executive management that has the rudder and the engine room, so to speak. So as it relates to the future financing, certainly, if they want to take part in anything that we're going to be doing through whether it's a rights offering as we discussed earlier, you and I, or whether it's through short-form prospectus raise or one of the types of things we're doing, whether it's debt, any of those instruments or any of the structures that we're going to do, we're going to do what's best for the company. We're not going to [indiscernible] to any investor or anything of that nature. We're going to certainly make sure that we do what's best for the company and the company's interests. Jas?

Thank you, Ryan. And as far as future capital, as noted in the short-form perspective, the $9.775 million that was raised is for the fabrication and the operations of the R&D facility. Subsequent to that, it is reasonable in our mind and for shareholders to understand that we will need additional funding. What that looks like is dependent on various factors. So we are pulling the economic data, anticipating a full-scale facility. We're always assessing it's a fluid analysis as you can appreciate, Gary, once the economic data is coming in, once we're setting up and understanding the full scale facility, what those numbers and those values look like. And in our mind, we are constantly working to figure out what the best approach is. As Ryan has mentioned, and I know in discussions that have been had with you, carrying debt pre-revenue, preproduction isn't reasonable, so we have to figure out a strategy around that. At the same time, we do under understand the amount of outstanding shares. So it's a balanced approach. It's constantly analyzing to figure out what will be the best approach for the next tranche or the next milestones that arise for our financing.

Okay. So can you not just give a broad stroke range then? Do you anticipate that for 2023, you may not have it finalized, obviously, as you're starting to lay out the R&D facility and do some various testing. But you must have a sense, are we talking an additional raise of $10 million of capital? Or are we talking a larger number than that or something smaller to that? It gives the shareholder at least a sense if you're right, and I do agree with you that pre-revenue taking on debt is a full barren. Approximately how much more dilution is going to occur? That's really what I think most shareholders are looking at now and why the stock is probably sitting at $0.07 or $0.075?

I understand that. So the $9.775, if you look at, I believe it's Page 10 of the recent MD&A, that is documenting all the R&D activities and that is until we're looking into 2023. Our fiscal year-end is until April 30. It's once we have the economic data and once we have a sense of what the economic data represents in our opinion, we're able to assess what the budget for the next stage of growth looks like? Because at this point, it's the fabrication of the R&D facility. It's the modifications and the economic data that needs to come in. Once that information is available as a foundation, then we can assess the subsequent year's budget in our opinion.

Okay. I'll let other shareholders ask their questions, and then I'll come back at the end because I have a few more.

Thank you, Gary. Thank you for your continued support.

Your next question comes from Carmen Calderon, Private Investor.

I got a question regarding the direction it has to take the company and now as to what we were told a year ago or even before that, that all these products that you guys had testing worked. Now do they work is one thing because it seems like you guys went back to research and development, like it's nothing has worked. And what's the big pivot away from plastic right? This is what we were sold on was plastic, and that's why everybody has locked to this company was because of the plastic. That was going to be our big seller. And your big money of investors was going to come in with plastic. And now it seems like you guys are putting it on the shelf. Is it on the shelf? Or is it going to be off the shelf? Or like what's going on with that?

Thanks, Carmen. So I'll take a step back. So we're the varying different feedstocks have been tested bench scale, right? So there's a number of feedstocks that have been done over the course of the last number of months, years that have been at a very small scale. So from understanding proof of concept has been achieved. And as we go forward, we have to work within, of course, the guidelines that we have with our license with the AEP and part of the license process is going through and applying for testing the different feedstocks that we have. So the lowest-hanging fruit for us, interestingly enough is actually railroad ties given that we have the feedstock agreement with CP Rail already without feedstock for plastics formally. We have to take it in order of, I guess, we'll say, from a business perspective, the railroad ties versus plastics and or -- and with pen shavings was another one that is very, very close to the wood waste that the railroad ties will do. So that was a natural fit. And from an application standpoint, it was the most -- the quickest way that we felt we could get AEP approval, which is still -- we're still waiting for, and it takes a little while to get. As we move forward, plastics and rubber are very much on the list. And we have to be mindful, though, from a feedstock standpoint with respect to plastics that it is from a carbon intensity standpoint, it is a very high carbon intensity score versus wood waste and rubber, right? So because it's a petroleum-based product. We have a higher carbon intensity score, which is going to affect the renewable status of the fuel. So we've talked about waste to fuels as a result of it and whether or not the plastics, which we understand and we'll be able to process still has a number of things, the number of variables that we still have to sort out. But plastics is very much on the list, but it's just not at the top of the list as a result of the feedstock agreement we have with CP Rail and the efforts that we're doing there. And also from a feedstock standpoint, plastics is a lot more complicated than just one kind. There's 7 kinds of plastics, right? So we have to work through a lot of that. And of course, I'm parroting a lot of what our folks in the engineering side of the house and the operations side of the house has told us. But it's very much still there.

But do they -- still be able to get this thing to work like you're saying they're running so many problems with the plastics. Or do you think -- are the engineering saying that they should be able to get this thing to work and get it under scale you're saying?

There's -- they're very optimistic that plastics will be one of the things that is a very productive feedstock, a very efficient feedstock to process. The whole process though going through it is a lot more complex than the wood waste, and that's why -- we understand wood waste very, very well, and that's why we are doing what we're doing in the order we're doing it in. And Jas, you were going to say something to follow up.

Yes. Thank you, Ryan. Thank you for the question. As Ryan mentioned, the -- as is noted on Page 11 on the MD&A, what our research and development schedule as we noted in our webinar a couple of weeks ago, that we have provided proof of concept various times in 2021, which is we can take a feedstock and convert it into a distillate, and we established the desulfurization unit to take distillate at a certain point and refine it further by lowering the sulfur content into a diesel. What the targets were set last year were operational, certain liters per hour, those are operational targets. What is -- what we're referring to R&D is the research and development on the economic data. So revenue, OpEx, margins, figuring out the financial modeling around various feedstocks. So we've -- what we've recently done is applied for a permit with AEP for railroad ties and pen shavings. And we -- once that research is complete, the anticipation is we would complete further modifications, apply for further AEP permits to modify the unit and operate. And next on the line is rubbers and plastics. And so what we're -- it's not trying to provide proof of concept here. What we're trying to provide is economic data to figure out the metrics of the full-scale facility. So if you're looking at a pipe that's and I'm throwing numbers out there. My apologies to Mr. Ryan Carruthers, our EVP. But if in the R&D facility, a certain typing is 200 feet long, if it's a full-scale facility, what would be the percentage of the proration to a larger facility, ensuring all of our economic data on various pieces is available for the next stage of development. And that's where please do refer to our recently released MD&A, Page 11, that sets out the schedule of the economic data, not just simply the conversion of taking a feedstock and converting it into an output.

Okay. One more thing. You have to apply for these permits, am I correct?

Yes.

It takes very long to get. Am I correct?

It takes us -- takes longer than we'd like. That's for sure.

Okay. But why are we applying for the plastics and rubbers as well so that we have them in our back pocket ready once we're done with the railway ties and the straw so we're not waiting another 3 to 6 months or whatever it is, accepting the next permit and remains to get on the rubber and plastics.

We're way ahead of you.

So have you put them in?

So there...

We've discussed -- sorry, Jas, we've discussed it internally about proceeding with the application for the other feedstocks -- for additional feedstocks.

Okay. And...

And we plan on doing that.

Okay. Soon?

Yes.

But everybody is waiting for sort of plastics.

So are we, yes, no. Listen, we're certainly kind of you know to be -- it's -- the process is exhaustive, right? And it's just -- we only have a certain amount of internal resources for these applications to be done in addition to, of course, all of the other things that we're doing. So it's certainly not something that we have dismissed as I mentioned earlier, and we're making -- we have plans to do this well in advance of even receiving the last approval from AEP -- or sorry, I should say the next approval for AEP. Jas, you were going to -- I cut you off, sorry.

No, no, that's okay. I was just going to -- you covered my point. So good.

And your next question comes from Filipe Bonia, Private Retail Investor.

My name is Filipe. I'm a retail investor out of Nova Scotia. My question is -- some of my other fellow investors already covered them. But I want to ask, what is stopping you guys from going to a municipality and telling, hey, can we get an agreement on your recyclable -- recycle plastic, so we can also start testing that instead of I don't want to say wasting time but it seems like right now, we're wasting time with wood, processing wood, doing a process that is already being done by other companies. Taking biomass and converting it to fuel has already been done. I work in that area and it's something that many companies do, even hospitals do it to get some energy. So what is stopping us from skipping that step and just going straight to plastics. I know we have some permit issues, but can we start getting some agreements on securing some feedstock from several municipalities, from their waste departments?