Northstar Clean Technologies Inc. (ROOF) Earnings Call Transcript & Summary

Hey now. I think it's 3:00. Is that good to go?

Yes, you're good to go.

Excellent. Well, thank you, and welcome, everyone, to NorthStar's Q3 results presentation. So I'm joined today by Rosemary Pritchard, our CFO; and by Carson Sedun, our Director of Corporate Development. And as always, thanks very much to the Kin team for hosting the webinar and helping us through this. So as always, kind of normal process that we've had for our quarterlies in the last year. So any questions, please post them on the Q&A. And then we -- Carson will be monitoring those and pick them up at the end of the presentation, and then we can cover those. I'm going to -- today, I'm going to run through the financials. They're in the simplified format that we've used before, so I'm just going to run through them. But of course, we've got Rosemary on the call, so if there's any detailed questions that have come around as a result of the filing or the MD&A or the detailed financials, please ask -- put that in the Q&A, and Rosemary can address it at the end. The other thing that we're going to do today is we are going to do an investor update, and we've been having a chunk of questions that have come in essentially since we did the announcements in Q3. And so the first question I'm going to answer today is what really happened in the Q3 funding. So of course, it was all interconnected and pretty complex, so I'm going to walk through that in a bit of detail this afternoon. The second question that we're getting is, well, listen, if Calgary is fully funded, why did you just launch a debenture? So what's that all about? And so I'll kind of do my best outline the kind of -- work how the resets, how all that funding comes together and where that also sits with Northstar. And then the last thing, and this is obviously a bit of shameless marketing on my behalf, but why should anybody think about investing in the debenture. And almost talking about where we think the company is at and why we think this is a good time to time to invest, which is, of course, not advice and related to our forward-looking statements. But just, of course, the [ CEO-arm ] with a view of where the company is at. We also are in engineering offices in Calgary, and there is some construction going on in the floor below, so apologies for the background noise. Okay. So let's have a quick chat about the financials. So look, as often as I chatted to investors, have said, the 2 things that are pre-revenue company and that everybody looks at is, number one, what's your cash balance; and number two, what are you spending. So if you look at the cash balance, of course, Q3 was buoyed by the $8.5 million or $8.48 million that came in from TAMKO, and this is obviously all reflected in the detailed financials that have just been posted. The second thing is spending. I can assure you, and I think I've chatted about this in the last quarters. We are very tight on cash management. We're very tight on spending. This -- none of this funding is doing anything other than going to build the Calgary facility, and we've been working extremely hard in managing expenses. The last thing I would add is the revenue side, which has grown, of course. That isn't $64, that's actually $64,000 in the top right-hand corner. And that's come from the shingle collection at Delta. And then obviously, the last thing is the net comprehensive loss, which is, of course, being reduced because of the reduced spending, et cetera. And all of this to say, obviously, we have Rosemary to answer any detailed questions, but on cash and expenses, cash is obviously helped with the investment and expenses are being, in my opinion, pretty tightly managed. So as we think about the Q3 perspective, and that's the kind of first question I threw out there to address today, look, as people heard me talk about this, I always talked about 3 legs of a stool in terms of the funding for Calgary. So project that government grants in strategic equity. Now the interesting thing about that for me is that's a great analogy because if you take any leg of the stool away, the stool falls over. And actually, that's exactly what -- that's the complexity of what this looks like because BDC, we'll get into a little bit more depth in a minute, but BDC needed $6.2 million worth of equity to come in before the loan agreement could go live. Emissions Reduction Alberta, although it was a government grant, wanted to see the funding from BDC and the funding from TAMKO to come in to make sure that all -- everything that we'd submitted to them as a budget was covered and recognized by both the BDC and the TAMKO rolling. And TAMKO, similarly, although they were coming in with equity, almost first, wanted to concurrently see the loan agreement go into place and the contribution agreement from Emissions Reduction Alberta. So all of this closed simultaneously. So that's why the slew of PRs with the information came out almost at the same time because this all happened -- or happened simultaneously. So the one thing that's really important about this was these weren't checks that were written that we currently have in our bank account, so a lot of this is staged. A lot of it is conditional on meeting milestones. And so one of the things that we have to do in Calgary, which is really, really important, is manage working capital, manage capital spend, manage the funds that we're receiving from BDC and Emissions Reduction Alberta. And I'll talk through the complexity of that a little bit. But just to say this is the level of detail underneath this that says this isn't why we have $25 million sitting in our bank. So Emission Reduction Alberta, you've seen -- we presented the stuff on the left-hand side, which is kind of what we are awarded, the percentage and the quotes, et cetera. On the right-hand side is what's actually happening. So the Emission Reduction Alberta award is milestone-based. So after milestone 1, completing of detailed design, what we actually do is we -- say the milestone's had been completed -- and these milestones have already been pre-agreed. So we don't have to go into any more detail on -- while we think we've met milestone 1 as part of the contribution with ERA, the milestones and the criteria have been laid out for hitting the milestone. So there's an uptick -- milestone one, for example, detailed design. There are 3 or 4 criteria that we need to say we've now completed a detailed design. And we send that to Emission Reduction Alberta. They do the review. They do the audit and then they pay. But just to be clear, they pay kind of -- probably in our estimates, kind of 2 to 3 months after the milestone has been completed. Now for something like a detailed design or something like operations and testing, that's relatively straightforward to do and doesn't have a big cash flow effect. But if you think about construction, when you bought all your equipment and you put it on site and you spent all the capital and you don't get -- you hit the construction milestone, you submit it, and then a couple of months later, the Emissions Reduction Alberta funding comes in, you have to manage that cash flow. And again, that's not to say that there are insufficient funds in the project. That's to say that the project and the cash flow and the funding for the project needs to really manage how we look after cash. BDC is somewhat similar, but -- and the draws, again, are based on how far you've completed the project. So when the BDC loan comes in, it doesn't come in as $8.75 million. $6.2 million worth of equity and the project needs to be drawn down the first, then the BDC loan will start. But again, it will start based on how we're performing with the capital spend and how far we're going through on the project. I mean, obviously, the one thing that -- or the 2 things that are kind of important from a commercial point of view, and we've talked about this before, is that the loan is amortized over 15 years. Two years interest only from signing the agreement. So that's interest only until June 2025 at a fixed 5-year rate at 8.35%. There is upside to that rate, i.e., there's -- we have the ability to bring that down on performance on the loan, but headline rate at 8.35%. And then the strategic investment from TAMKO -- so the headline figure is completely right. So the USD $10 million is what the strategic investment is, but it's split into 2 phases. So the first phase was the USD 6.4 million or the $8.48 million that came in July. And that, of course, secured BDC and ERA as we talked about the legs of the stool for Calgary. Phase 2 is conditional, and it's conditional on us achieving ERA milestone 3. So commissioning the Calgary facility, and then moving into operations and testing on the Calgary facility. So in a sense, if you think about the 2024 and into '25 as we think about commissioning and operations and testing in the second half and -- second half of 2024 and into 2025, that's when this funding comes in, not only from ERA, but also from TAMKO. Now as we said, as you can see on the other slides, we talk about it, that is -- that's a binding term. So it's exactly same as ERA, it's binding as long as we hit those milestones. But again, comes down to cash flow management and making sure that we -- that we're managing the working capital in the project and in the company. And you can see that the pro forma ownership from Phase 1 only was 18.75% for the pref shares. And obviously, that would increase with debentures if those get exercised as we move into Phase 2. And just to be clear, when we talk about the debenture offer, know that we're in the marketplace with those debentures from TAMKO are a 10% interest, $0.29 convert on a $0.50 half mark. Okay. So why -- so let's also chat a little bit about why TAMKO, our strategic partner, and as I talk about the strategic partnerships that we have within Northstar, I mean #1, of course, is McAsphalt. They were our first when they came across the line, and then second one coming in, but obviously, super-important, our TAMKO. If you think about, and I'll talk a little bit about it later, but if you think about asphalt production out of the Northstar facility and if you think about the circular economy, it can literally go into -- we believe it can go into 3 industries. So it can go into the paving industry. They can go into the shingle industry, and it can go into the flat roof industry. The offtake from McAsphalt for Calgary demonstrates that a multibillion-dollar company has done R&D and it can go into the paving industry. The offtake agreements for the 3 sites in the U.S. and the strategic relationship with TAMKO demonstrate that exactly in exactly the same way. And then the last one we're working on with respect to flat roofing. But those 2 clear strategic partners absolutely demonstrate the proof of the technology and our ability to use it in those industries. And our ability to use it in the shingle industry is full circularity. So a shingle tile comes in, the oil comes out and that oil can go back into making shingle. That's full circularity. And so this strategic alliance with a roofing partner is absolutely critical to us. The exclusivity that we have is the first 3 plants in the U.S. and that's -- we're working on that now. And in the nonbinding terms, the site selection criteria. So we came up with a confidential list with TAMKO on what the selection criteria would be. And we've already gone through that list and started to narrow down the potential locations for the U.S. The other thing that we did was we already have indicative terms for volume, price, commitment level and quality and QA, et cetera. That's already been agreed. So the ability for us to move both locations and offtake agreement, we believe, is achievable in first half of next year, and I'll talk about that in a little bit. Because that, to me, is a really good kind of catalyst as we think about where we're going in the first half of next year. So that's Q3 with the 3 legs. So how does it all fit together? And look, I think this is where we answer the question about how does this fit together and where does the debenture work. So a bit of a complicated slide. But basically, on the left-hand side, this demonstrates the Calgary facility and everything I've just talked about, and then on the right-hand side of the debenture offering. So Calgary's a wholly owned sub of Northstar. So as money comes into Northstar, it can get lent down to the project. As we manage working capital, the same thing can happen. So if there's working capital at NorthStar, if there is, for example, a delay in ERA funding coming in and there, a lot of CapEx is being spent, again, working capital could be loaned down to Calgary and then back up to Northstar. So there's an ability to manage working capital. If you look at those 4 things out and up, the number is massive, right? So $24.35 million. But as I talked about before, it's the staging of this number that is really, really important. And so although it's fully funded, it requires careful cash flow management based on both the capital spend and the funds that are coming in. So all to say that in that box, there is enough cash, but it needs to be cash flow managed. So if you think about Northstar, then NorthStar has obviously general corporate costs, working capital. We have the cost still ongoing, of course, of the Delta pilot facility. And as we think about catalysts and we think about where we are going next, we need to think about funding for the Toronto facility and funding for the U.S. facility, one with TAMKO. Now that's not millions of dollars of development costs that we're going to be throwing into that, but that is the understanding and working with -- on those facilities with respect to land, with respect to offtake agreements, et cetera. We'll talk about that a little bit in a minute with respect to catalysts. But ultimately, that's what's in here for -- with respect to the debenture. And then also the added contingency -- to provide contingency for Calgary as well around the working capital management, as we've talked about. So as we think about -- so then as we think about, all right, well, look, why then, with the debenture offering that -- supporting Northstar, what's our view on why people should invest in this? And where do we think we are with respect to the company? So I think this is probably the most -- one of the most important slides we have ever created, because it describes the 2-year journey or just over 2 years that we've been on since the IPO. I'll talk about the market cap last, but let's step through where this company is. And this is one of -- this is kind of -- this is one of the clear reasons I believe that the debenture is attractive, is because of where the company is from where it came. So the patents we have, a U.S. patent granted for the front end with the 2 follow-ons; Canada has got a green technology fast track, and we filed the international PCT patent. In strategic customers, I talk about it, we have a multibillion-dollar company buying the output from Calgary. And we have a 3-plan exclusivity deal with a multibillion-dollar U.S. shingle manufacturer. When we have -- when the idea was launched, there were no customers. There were no patents. The technology was unproven. I mean, the plant had run, but what we have done in the operation of the Delta pilot plant last year was derisk that operation, both from a plant operation perspective, but also from the customer feedback, which of course, is reflected in the offtake agreements and the vendor feedback. So we've ordered the long lead -- and I'll talk about it in a minute, but we ordered the long-lead items for the Calgary facility. We have a set of PFDs and we have set of up P&IDs. So we have a derisked operation. Have -- has anybody built one of these before? No. Is there still risk to a new technology? There is. But I think it is significantly derisked by the plant operation, the customer feedback and the vendor back. When the IPO-ed, the commercial facility was unfunded. As we've talked about earlier, it's not only fully funded, we have government support from Alberta. We have debt support from BDC and now we have a strategic investor. So all of that comes together to reassure, to provide reassurance for investors to a certain degree that we've got a box that has the funding in it to deliver the project. And the additional ask now, of course, around the debenture is funding for Northstar. And from an environmental benefits perspective, there was a view that this had good environmental benefits with respect to the repurposing of shingles. But now we're pretty clear. Every municipality we talk to, we talk about diverting 40,000 tonnes per annum from landfill for each facility. And if you look at facilities that have more than 40,000 tonnes, remember, the commercial -- the commercial model that we're running at the minute has the Northstar facility running 6 days a week and 10 hours a day. So if we put this in a study that had 250,000 tonnes of shingles, do we have the capacity to move the running time up? Absolutely, we do. We've been fairly conservative with respect to the commercial model. We've estimated a 60% reduction in the carbon footprint versus the base case. The detail design work we're doing now will recalculate that, so we'll have a better idea of what that looks like. And as I said earlier, diverting shingle waste into new shingles is fully circular. So we arm -- I [ CEO-arm raved ] about this being a circular economy solution. We suggested to ERA it was a circular economy solution. But the TAMKO R&D and the TAMKO agreements actually fully improved that. So if you look at where we were in 2021 and if you look at where we are now, that's, in my opinion, significant derisking. The market cap, of course, is not lost to us, right? So the market cap of $37 million, all that delivered, on the right-hand side, a nonmarket cap of $20 million. I mean, that is clearly not lost on the Board or management of this company. But if you go back to the slide in Calgary where we added BDC, ERA and not even the TAMKO investment, but the TAMKO money to come in the debenture, that's $20 million, which is the same as the market cap of the company today. So my view is that our commitment and our commitment from the Board and -- from management is, we've really focused very hard on maximizing nondilutive funding. That does not change. We've tried as we've done deals, as you've seen us do deals, that we have a premium in those deals that reflects our view of the strategic value of this company. And that strategy has not changed at all. The third one is all around managing costs. So it's the cash on one hand and the cost management on the other one. And then the fourth one that I think we are going to do and continue to do is deliver on that strategy. We've repeatedly said to the market and on the right-hand side of this slide, we deliver on our strategy, and I think we've done that. And let me tell you what 2024 looks like. So the first thing that we need to do is clearly deliver on Calgary. So -- I had Board meeting yesterday, and I can tell you that the focus of delivering Calgary on budget and on time is absolutely clear. It's very clear in my mind. It's very clear on the Board's mind. And you can see, even since the announcement of the funding, how far we've come. So the site is ready to go. It's ready to collect shingles. It's ready for the plinths, et cetera, et cetera, to be installed. We started detailed design and we did a processual diagram design review. And the good thing is our peers came to that. So McAsphalt sent their engineering team and TAMKO sent their senior engineer to it as well. We've now ordered the long-lead items, so 3 long-lead items we identified that had the biggest effect on, I mean, cost, but most importantly, schedule. So those have already been ordered. And you saw the PR that a few weeks ago. And the P&IDs are now not under review, but they're complete, so that's the processual instrumentation diagrams or having an instrumentation diagrams. And they are literally -- they're now locked down. And so what that means is that for each one of the modules that we have, that, that can be packaged together and can go out for quotation for fabrication. So all of this to say that the ruthless focus in Calgary, as what I describe it, is absolutely in place. And then I've been asked the question, well, okay, well, that's good. Well, why don't we just wait until Calgary is built? Well, not only will you see catalysts that describe where we are on the project, but you'll also see the catalyst on the expansion. Look, I mean, people are kind of like, why don't you just build Calgary and then wait and then start to develop this? Well, as most of you guys know, development, permitting in major locations can take from 18 to 24 months. The Alberta funding, Emissions Reduction Alberta funding process took nearly a year. So all of these things have to be laid in place and -- so that they're ready to go when Calgary is up and operating. And so my view is that, that is Toronto. And so in the first half of next year, I expect us to be able to outline to the market where we are on land, where we are in the offtake agreement, potentially where we are on a shingle supply agreement. And one of the things that was in the TAMKO slide was that we would work on them with development for the plant location in the U.S. And I can tell you, the U.S. plant one for TAMKO, we have identified a kind of prioritized area and are looking into that. And so I suspect that, that will be another strong catalyst in the first half of the year. And as we said, we already have a nonbinding heads of terms agreement with -- for the offtake. So I think that will look exactly the same as the kind of first off-take agreements that we did with McAsphalt out of Toronto, and that will be ready to go in the first half of the year as well. So I think all of this to say what -- when we get to Calgary commissioning and operation, this will not be a single-asset business. This will be a business that has a single asset operating and clear direction for where we're going as a business next. So, I mean, the debenture pack has been out. We'll obviously put this up on the website. Conversion price, sorry, interest at 12.5%, conversion price at $0.20 a share, full warranted at $0.30 a share. And importantly as well, TAMKO are a lead order for this debenture. That's really important. And I just want to point out the importance of that with respect to this business and them as a strategic partner. So TAMKO has no contractual obligation for this debenture. They have contractual obligations for the debentures whenever we hit commissioning and operations milestones, but absolutely no contractual obligation to this. So them leaning into this as a lead order isn't about -- is all about them supporting this business on our funding. And is -- to me, is a clear demonstration that they're here as a strategic partner. So taking away from all of this and the questions that we answered, we chatted about the financials, we chatted about the details of Q3. I think the -- how far this business has come and how much we've derisked it has transformed where we were. When we -- when I came into the business as the IPO to where we sit today, I think the risk of the business is significantly lower. I think you can be assured that in 2024, not only is this about actively managing cash and actively managing expenses, it's also about the ruthless execution of the Calgary facility, which includes budget, but also includes time. And I -- on completion of Calgary, I want a clear plan that can point to our next facility in Toronto and our first U.S. facility with our partners in TAMKO. Jeff, I think those are my answers to the 3 questions that we've been getting and I hand it back over to the Kin Team.

Okay. Thanks, Aidan. A few questions coming in. First question is when can we expect an update on supply? And how are discussions going with municipalities around Calgary?

Yes. So that's a really good question. We've been -- so one of the things that we have been doing in -- since kind of October here is engaging the municipalities recovery and talking to them about what their plans are for 2024, how we can work with them with respect to the band -- with respect to diversion programs. And there are other businesses in this area, too, who use shingles, so engaging with those guys to see how we can optimize. And that's also going to be a point where we engage with the Alberta government, too. So those have been very interesting conversations where people are -- I mean, I would say there's probably a couple of takeaways. Number one, I think municipalities and landfills are really happy to see a diversion alternative. And I actually think -- we also had engagement with kind of roofing contractors and contractors in the local area, and they, too, are very, very keen to see a circular economy solution. I think it's been a bit of -- I mean, it probably should be a bit of a surprise, but to me -- but people really do not -- contractors, municipalities, landfills, even homeowners do not like putting shingles into landfill. And so the question that we have been working on and the plan that we're working on for Q1 is, okay, well, that's all very good, but what does it mean? So what is the diversion program for Cal --what could the diversion program look like? How do we work with local contractors who are coming with roofing shingles? How do we work with local contractors who are currently working with kind of managing shingles as well? And all of that to come together in Q1. I think we will likely consider about when we open the site to industrial providers, and then when we open the site to domestic and to roofing providers, et cetera. My view is that we will collect -- I mean, when I've talked about steady state operation, and I've talked about -- how -- when I've been asked the question how much inventory would you have on a site when you're running 40,000 tonnes a year, and I've always said, probably about a quarter's worth. I think we -- that's our objective ahead of Calgary commissioning next year is to collect that, probably as a minimum, through 2024. And that's -- yes, I would say that's how we're going to work with the contractors and the municipalities to try and get that volume secured.

Okay. Next question is with regards to the McAsphalt, how is the relationship so far at this point in time? And any updates to speak to?

Yes. I mean, I think really good. I mean, we've spent a chunk of time on is call talking about how TAMKO's a partner. McAsphalt have been excellent. So one of the parts of the design of the -- or design, obviously, for the back end of the Calgary facility is, of course, the asphalt storage and also transloading from our asphalt storage onto the McAsphalt trucks. We've got a detailed design that literally includes the detailed design as supplied by McAsphalt for the storage. They are world-class -- sorry, they're a world-class operation, but they operate storage facilities -- asphalt storage facilities across the world. As you know, they are the Canadian sub of Colas, who are a multibillion-dollar asphalt -- global asphalt company. And so they have facilities everywhere, and we have their detail design for that. So that's a really good example of them just saying, well, like, this is what we do. Here you go. You can incorporate this into your design. And they were in the processual diagram review. They were in the P&ID review, so all steps of the way as we're doing design reviews. We have the expertise here from the McAsphalt. And as we look at optimizing production flow and all that kind of stuff, we've started those conversations already about what that's going to look like through 2024. So great support from them yet on a technical side and kind of logistics -- determining the logistics options, too.

Okay. Our next question is on ERA. Is there anything left for NorthStar to fulfill on the ERA grants?

So the contribution agreement is done. That has been established. Each milestone has criteria that needs to be met, so whether it's number of drawings done, whether it's percentage of equipment on site, whether it's level of -- each milestone, we have been through an agreed set of criteria for that milestone. When that milestone is reached, then we send in the paperwork, and then ERA sends us the money. But nothing -- those are all locked down. Those are all in the contribution agreement that we signed in July, so we know exactly what they are. We know exactly how to meet them and, yes, it's just a matter of process now to meet those milestones and write them up and send them to ERA. Is that good?

Yes. Thank you. Next question. Any updates on the Toronto facility? And any idea of what areas you might be looking at?

I mean, we -- obviously, we can't discuss areas that we're looking at. But as you know, I've said often, Toronto could probably have 4 facilities, North, Southeast and West. It's also about collection. If you build a facility in the West, you're not getting anything from these 2 [ GTAs ], because it takes you 3 hours to drive across it. So it is all about optimal deployment. We -- I believe that in the first half of next year, that we will have -- that will be a catalyst, whereby we can describe, not only where our first plant is going, but also what the offtake agreement looks like, and potentially what the supply agreement looks like for the front end as well. So discussions are ongoing on all of that, and I think that's an important catalyst in exactly the same way that I think the U.S. plant one is an important catalyst, too. I think it's important for us in this company to absolutely deliver on Calgary. Of course, that's an absolutely no-brainer. But as I said, the -- having a clear path to what comes next, number one being Toronto and number two, the U.S. facility with TAMKO, I think, are critical. So yes, first half of the year is when I think we can be more clear, but lots of discussions for Toronto on location, on offtake and on supply.

Okay. Thank you. Next question. Have there been any talks of global licensing agreements?

No. I mean, I actually -- I actually think that we will have real understanding and interest in licensing agreements once Calgary is built and operating. I think if you think of trigger points where people want to think about licensing, I also suspect that we would probably want to see 3 to 5 facilities built before we would think about licensing. Because I think process improvement plant 5 will -- sorry, I mean, plant 2 will be better than plant 1. Plant 5 will be better than plant 4. In my kind of estimation, that's probably 3 to 5 plants worth of operations so that somebody can come in and say, "Well, listen, how did you improve Calgary and where are you at with the kind of the performance improvement curve, which kind of jumps as you go and then starts to round off probably around plant 4 or 5. So no discussions as yet, but something that is clearly in our business model, whether North America or globally. I will say that if you look at the statistics from last year, 16.5 million tons into landfill. We've heard from one of our kind of close industry partners that, that could be higher again, is estimated to end higher again in 2023. But even at 16.5 million tons, that's over 400 NorthStar facilities in North America alone. So if you look at what ARMA have come out and said the shingle manufacturers, so they have come out to say they want to divert 50% of all shingles away from landfill by 2035 and they want to divert 100% away by 2050. So 2035, 12 years away, we would have to build over 200 NorthStar facilities to meet that ARMA build. So there's a real premise to focus on North America. But I do think licensing is part of that solution. And I think global licensing will come into that frame as well.

Okay. Next question. When do you expect tipping fees to start in Calgary?

So as I said, I think we will be engaging externally to be ready for the roofing season, which is --everybody in Calgary knows this is kind of Q2 on. If we have any other agreements ahead of that, we would likely -- so we -- sorry, I should say 100%, we can receive shingles on the site today. So we have the capability to bring shingles in today. And so any contracts ahead of that would -- could access the site. So I think Q2 on, as a firm number with potential upside earlier than that.

Okay. That wraps up our list of questions for today.

Perfect. Well, thank you all for attending. And as you know, we can be reached through Kin Communications. Carson's details are up there, too. Yes, and I think this company is in an awesome position. It would be great to secure with a successful commission of the debenture, of course. And I think that'll take us handily into next year and get Calgary built.