Good morning. My name is Sylvie, 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 Q2 2022 results conference call. Note that 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 number one on your telephone keypad. If you would like to withdraw your question, please press star then number two. Thank you. 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 December 16th, 2021 or Cielo's Q2 2022 management discussion and analysis filed with the Canadian Securities Administrators 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. Mr. Gegunde, you may now begin. Please go ahead.
Thank you, Sylvie. Good morning, everyone, and thank you for joining us today. I am joined by my colleagues, Stephanie Li, Chief Financial Officer, and Chris Sabat, Chief Legal Officer and Corporate Secretary. We appreciate the opportunity to provide additional context regarding our operational and corporate update press release from December 16th, along with our Q2 2022 financial results. We are pleased to provide greater visibility to our shareholders as Cielo continues to advance the commercialization of our technology that transforms waste into fuel. As we move towards commercialization, Cielo continues to take steps towards the groundwork that is laid for long-term success and to reinforce our mission to create a cleaner energy future with a more responsible approach in addressing landfill waste.
In the December 16th press release, we shared updates on both the Aldersyde demonstration facility and the Fort Saskatchewan research and development facility. We continue to be on track with our schedule and commitments for both the Aldersyde continuous steady-state production and optimization project and the development of our Fort Saskatchewan 60 L per hour pilot. Earlier this year, we experienced several processing-related issues due to equipment reliability, performance, and plugging problems that contributed to extended periods of downtime at Aldersyde. One of the primary problems with maintaining steady-state production rates was the coking and mechanical plugging issues with our process. To better describe this, using your barbecue as an analogy, a fair comparison is the black material that forms on your grill. Over time, this coking can accumulate, and in our case, it plugs pipes, impacts reliability of heat exchangers, pumps, and other process equipment.
As I'm sure you can imagine, that were cracking, pardon me. Where coking causes an issue, it takes significant time and effort and cost to clean out our equipment. As I described previously, we have committed engineering resources and time over the past two fiscal quarters to assess and diagnose the performance deficiencies and impediments to flow at a much deeper level. I am pleased to say that we have identified several design changes, equipment modifications, and operational philosophy changes that are necessary to achieve the desired outcome. That is, to achieve steady- state production of distillate, further improving the overall quality of the diesel and naphtha we produce from wood waste utilizing used motor oil as a carrier fluid.
We are confident that these design changes to our process will result in a significant improvement in the quality of our distillate and minimize the stress on equipment and consequential maintenance on reliability issues that we have had, which we have experienced. In our September 29th conference call, I discussed the changes that we made to the organization. We have bolstered our internal engineering strength with the implementation of internal experienced engineering team and strong leadership. We've implemented stronger control systems for managing our workflows and external engineering services, focused on delivering on our timelines and commitments. At the operational level, we have strong leadership and have invoked key measures and controls for improving health and safety standards and management. We've implemented standards that improve operator accountabilities, operating cost controls, plant maintenance programs, and reporting.
We have been focusing on improving all aspects of our business performance metrics, and we are committed to continuously strive towards operational excellence and best practices across all aspects of our organization. At Aldersyde, we remain on track with our plan in executing the work required to achieve a steady- state mode of production. Engineering design has been completed for our first phase, equipment procurement in progress, and we plan to commence fabrication and construction next month in January 2022.
We are anticipating startup and commissioning in April of 2022, and after tuning the process, we expect to be in a production mode where downtime has been greatly reduced. We are excited about the anticipated positive impacts to the facility with the work that we are undertaking, which includes an optimized inlet feed system, a drastically improved waste management system, and greater control over process and improved product distillation. As we continue to improve our process, the initial plans also included modifications and retrofits to the existing reactor. But, after greater consideration to costs and functionality, we concluded that the best solution is to replace the existing reactor with a new reactor, implementing the design criteria learned and studied. Installation of the reactor will be scheduled to coincide with a planned maintenance plant turnaround currently scheduled for July of 2022.
I want to emphasize that this will not impact the anticipated April 2022 operational timeline, nor will it prevent us from operating the process to establish steady- state production flow. The new reactor will optimize our existing process by permitting a wider range of operating parameters and conditions as we continue to streamline the process. With these design and construction enhancements, we are aiming to achieve improved reliability, steady- state production, and potential throughput increases, all of which are expected to drive revenue generation and bring per unit costs down. We are committed to continuously improve, optimize, and build our learnings on what will contribute to the inputs towards commercialization. In parallel with this work on the Aldersyde facility, we are also making progress on development of the Fort Saskatchewan research and development facility.
In order to design and construct a full-scale, state-of-the-art waste-to-fuel facility at our Fort Saskatchewan site, we must complete the R&D facility, which represents a scaled down version that will be equipped with the latest process control technology for data trending, system automation, remote monitoring, and process analytics. You know, we are frequently asked why the R&D facility is a necessary step in the evolution of Cielo. There are three primary reasons for this. One, Aldersyde is intended to produce revenue for Cielo. If we are using it as an extensive experimentation, we cannot use it to its full capability to generate revenue. Two, the size of the Aldersyde facility is cost prohibitive. The reactor is 10 m tall, the equipment is full size, and there are hundreds of meters of piping.
It would be cost prohibitive to make incremental changes to test alternative designs. Three, Aldersyde was designed with the limited capital available to Cielo through its history. It lacks some of the automation and measurement necessary to generate the material balance and energy balance calculations necessary to complete the engineering of a full-scale facility. We cannot responsibly use Aldersyde as the basis for design for the next facility. We would likely leave significant value on the table. When Cielo commits to building its next facility, it needs to clearly justify its, to its shareholders the benefit from the capital commitment that the Fort Saskatchewan full-scale facility entails. The R&D facility objectives include determining optimal reactor design for various biomass inputs and catalyst combinations that can maximize distillation production, improve its carbon intensity, and establish stringent operational practices at Fort Saskatchewan.
All critical information that cannot be obtained from Aldersyde, given its size and scope. Thus far, in 2021, we have completed the detailed engineering design, procured the necessary equipment, and commenced construction preparation for the 60-L-per-hour R&D facility at Fort Saskatchewan. During the first quarter of 2022, Cielo intends to commence vessel and equipment fabrication along with structural fabrication. In the latter half of 2022, we expect to commission and start up the R&D facility along with pilot testing and controlled experimentation. We remain on track with our previously communicated milestones announced in our November 12th press release. While taking these initiatives, we remain focused on health and safety measures that protect our people and the planet.
As a responsible and trustworthy organization, Cielo is committed to ensuring our employees, contractors, and partners stay safe while also striving to minimize the environmental footprint of our operations. With our release last week, we also confirmed that Cielo has successfully eliminated all future royalty and refinery fees that would have been paid to 1888711 Alberta Inc, referred to as 1888, a firm from whom Cielo received an exclusive global license for the waste-to-fuel conversion technology. Consideration for this transaction included the issuance of 10 million common shares of Cielo to 1888. We now have full rights to and ownership of our proprietary and game-changing technology, and the transfer of all intellectual property from 1888 to Cielo is also underway. By eliminating third-party fees with this closing, we expect to realize improved earnings potential going forward.
I will now hand the call over to Chris Sabat, the Chief Legal Officer and Corporate Secretary, to provide additional context on the announced board changes.
Thanks, Gregg. In prior press releases, webinars, and quarterly calls, we have discussed many of the changes to the Cielo organization. From the board and executive team to the field, there have been many changes. The Calgary office has enabled Cielo to attract the necessary professionals to support new processes to manage costs, devise and execute the capital strategies necessary to support Cielo's growth for 2022, and to ensure that the organization is ready to realize its full potential once Cielo attains steady- state production at Aldersyde and begins to move forward with the design of its first full-scale facility at Fort Saskatchewan. We believe that 2022 will be the pivotal year for Cielo, and the organization will be ready.
This month, we announced that Don Allan, Cielo's founder, President, and Board Chair, intends to retire as President in February 2022, and that he tendered his resignation as Board Chair. For continuity, Don will continue to serve as President until his retirement and will continue on as a member of the Cielo board. Cielo is grateful for Don's contributions and commitment to building the company, and we wish him the best in his retirement. Greg, Stephanie, and I expect to jointly assume Don's responsibilities as President, and as such, we do not expect to replace this role. Mr. Larry Schafran, a current board member, has assumed Don's duties as Board Chair. Concurrent with these changes, we also announced the appointment of Ms. Sheila Leggett to our board. Sheila is a strategic leader.
She has extensive experience with corporate governance matters, and Sheila has a background in sustainable resource development. Sheila's skill set is expected to be one of great benefit to Cielo in this pivotal growth stage. As Cielo progresses forward towards the Annual General Meeting, Cielo intends to identify additional members or additional individuals for appointment to the Cielo Board in order to provide additional expertise and oversight for the benefit of Cielo stakeholders. Shareholders will then have the opportunity to vote at the AGM in relation to the final composition of the Board. With the exception of the identification of additional members of the Board, we are very comfortable that the recent enhancements and streamlining of internal processes and structure will enable the company to advance to commercial production at an accelerated pace with improved internal controls.
We are all excited for all of the activity planned for Q1 and to the results of that work. Stephanie Li, our Chief Financial Officer, will now discuss the highlights of Cielo's fiscal Q2 2022 financial results.
Thank you, Chris. Cielo filed the financial statement and MD&A for the three and six months ended October 31st, 2021 after market closed yesterday on December 21st, 2021. Total assets increased by CAD 8.5 million as at October 31st, 2021 compared to April 30th, 2021. This is mainly due to the increase in property, plant, and equipment related to the asset purchase in Fort Saskatchewan, Alberta for CAD 13 million and the construction activity at Aldersyde facility. These increases in assets were partially offset by the decrease in cash related to the continuous research and development activities and also G&A expenditures. Total liability decreased by CAD 1.9 million as at October 31st, 2021 compared to April 30th, 2021 due to the exercise of liability classified warrants, the conversion of convertible debentures, and the decrease in accounts payable and accrued liabilities.
These decreases in liabilities were partially offset by the mortgage loan for the asset purchase in Fort Saskatchewan, Alberta. The net loss for the three months ended October 31st, 2021 increased by CAD 1.9 million compared to the same period in the prior year. This is mainly due to the increase of CAD 1.7 million in research and development expenses, mainly related to the Aldersyde facility. The increase of CAD 1.2 million in G&A expenses related to the salary and benefits for additional employees hired to facilitate the growth of the company, professional fees for TSXV filing, external audit, and tax compliance services. These increases in expenses were partially offset by the decrease of CAD 0.9 million in fair value loss of warrant liability.
As at October 31st, 2021, the company had CAD 7.3 million cash and a working capital deficiency of CAD 8.2 million, compared to CAD 0.7 million deficiency as at April 30th, 2021. The increase in working capital deficiency of CAD 7.5 million was mainly due to the decrease in cash balance, which was used to fund research, development, and corporate activities for the six months ended October 31st, 2021. The addition of the mortgage loan for the asset purchase in Fort Saskatchewan, Alberta, and this is partially offset by the decrease in short-term warrant liability upon the exercise of warrants. The initial term of the mortgage loan will end in August 2022, and Cielo has the option to renew the loan for a further period of six months.
Cielo is planning to either renew or replace the mortgage loan by the end of the initial term in August 2022. The company is currently in the process to generate additional financing, which may include raising capital, additional capital through equity or debt, or enter into strategic partnership. With our current liquidity and the go forward plan, we believe that Cielo is well positioned to deliver our strategic growth and commercialization plan. With that, I'll hand it back to Gregg.
Once again, thank you for joining us on the call today and for your continued support of our progress. On behalf of our executive team, I would like to reiterate our appreciation for Don Allan's contributions to Cielo over the past 17 years, and to remind shareholders that we remain true and committed to Cielo's vision and strategy moving forward. Our staff, the management team, and I look forward to an exciting new year in 2022 as we plan to achieve our goals and plans at Aldersyde and Fort Saskatchewan. We wish everyone a very safe and wonderful Christmas holiday and all the best in 2022. With that, we will now take questions. Operator?
Thank you, sir. Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your touch-tone phone. You will then hear a three-tone prompt acknowledging your request. If you would like to withdraw your question, simply press star followed by two. If you're using a speakerphone, we do ask that you please lift the handset before pressing any keys. Please go ahead and press star one now if you have a question. Your first question will be from Ernie, private investor. Please go ahead.
Hey, guys. I was just wondering, do you guys have to do a new research and development plant or training for each different feedstock? Or will the feedstock be able to be processed through the same reactors and the handling system?
Hi, Ernie. Hey, thanks for the question. It's a good question. No, what we intend to do is, with the research pilot that we're building, initially we're designing it to process wood waste. But we do have, in our budget, once we're done with the wood waste experimentation, our plan is to move into the plastics area. And for that, we might make some minor modifications to the unit, not to the entire system, but basically to the waste management side off of the reactors and on the inlet feed system.
When you think of, you know, the engine room or the heart of the machine, the reactors, the type of catalysts that we use, heat exchangers, pumps for circulating product through, that all remains the same. It's minor modifications that we would add to the pilot on the front end and on the waste management side of it.
Perfect. Thank you.
Thank you for your question, Ernie.
Thank you. Next question will be from Jerry. Please go ahead.
I think this must be Gary. Is that right, operator?
Mr. DeFore?
Yes. Gary DeFore.
Thank you.
Good afternoon, gentlemen and Stephanie. I'm a retail investor here in Toronto. I have a fairly substantial position in CMC, and I'm also a former CFO. I understand the transparency and the governance that you've now brought to the corporation, and I applaud you for that. I think there's definitely been a change in the last couple of months at least. I would say that I think there's a lot of individuals that have been dismayed at some of the previous comments that were made in terms of the commercialization process, and timelines, as well as the continuous flow process. I think you've sort of reset the bar in that respect. My question to you is, looking out sort of on a two-year basis, what amount of incremental capital do you foresee that needs to be raised, either through debt or equity, to execute prudently and conservatively on your plans?
Thank you, Gary. This is.
Sure.
Sorry. Greg, do you wanna take this question?
Sure. Go ahead and I can follow up, Stephanie.
Okay. Thank you, Gary. This is Stephanie. To answer your question, our major plan up until the end of 2022 is mainly focused on the R&D facility in Fort Saskatchewan and also the Aldersyde facility to achieve steady- state production in order to generate revenue. Without considering the revenue to be generated from the Aldersyde facility, from a capital requirement perspective, we anticipate somewhere between CAD 50 million-CAD 70 million requirement. Beyond 2022, we're still in the process of finalizing the budget and also decide what will be the cost requirement for the full-scale facility that needs to be built for Fort Saskatchewan site. I hope that answered your question.
Yes.
Did you have any further questions, sir?
I have a follow-up, but I'll let others go first, if you don't mind.
Gary, do you have a follow-up question?
With respect to the recent stock option plan that was approved, have there been, since October 31st, any management or executive stock options been granted? If so, how many and at what strike price? Thank you.
Nothing has been granted at this time to management or the board or any employees of Cielo. Cielo has the responsibility to make that announcement to the public and to the investment community if any equity compensation is issued or rewarded to managing teams, the board, or employees. At this point, the answer is none.
Okay. Thank you.
Thank you. Once again, as a reminder, ladies and gentlemen, if you do have any questions, please press star followed by one on your touch-tone phone. At this time. Oh, I'm sorry. We do have a question from Seren Bonju. Please go ahead.
Hi. I'm calling from Toronto. My name is Seren, and thank you for the transparency here. I'm an individual investor as well. Well, I just wanted to get an idea about, you know, I know, you know, you shared and on the website we have, you know, the board of directors, we have the management team, but in terms of, actual staff, you know, including all the engineers, how many are there right now? Your total staff, and we've been told about, you know, your Calgary office opening up and all of that. Just wanted to get an idea about the total staff now, and if there are any plans in 2022 in expanding that and bringing in more staff.
Seren, thank you for the question. Our current headcounts for it, we're at 23 employees across the organization. That is a combination that encompasses the management team, and our Calgary staff, and our field or plant operators. In that composition of staff, we've got an engineering team that we've built over the last two quarters really. We've got an engineering manager that oversees all engineering activity. We've got a plant superintendent as well. We've got another skilled process engineer that actually has an office right at our facility. Looking into the future here, we're looking at hiring another three to four more engineers and technical support experts.
The other thing that I should say as well, other than the individuals that are directly employed by Cielo, is we do have an extensive support group, which is three Ph.D.-level individuals that consult to us on technical advice. We're also engaged with a local engineering firm in Calgary as well. Yeah, you know, going into the next year, like I said, we're gonna add several more technical experts and other folks that we need support with as the company continues to move forward here.
All right. Thank you.
Thank you. Again, ladies and gentlemen, if you do have any questions, please press star followed by one on your touch-tone phone. Next, we do have a follow-up from Gary. Please go ahead.
Oh, hi. Thank you for taking this last call. Last question. With respect to the CAD 12 million mortgage that's outstanding, and it's coming due in the not too distant future, could you give me a little bit of a reflection, I guess, in terms of why you would've put in special covenants or would've allowed special covenants that would be tied to the, effectively the share price on a fairly thinly traded stock of a company that's, you know, obviously pre commercialization and pre monetization. It seems to be that that is a little bit of an issue now in terms of you guys having to be paid back CAD 1 million and now you're in discussions about another CAD 2 million payment because the market capitalization of the company has dropped.
I'd like to understand the thought processes to why you agreed to that and how you can extricate yourself from that kind of situation.
Okay. Thank you, Gary. That's a great question. The first thing I'd like to mention is the current management team, Gregg, myself, and Chris. We were not part of the decision process. We're in the process right now to negotiate with lenders to either modify or get rid of that special loan covenant. Potentially we also have the option to replace that mortgage loan of CAD 12 million with other debt. To answer your question, in short, we're in the process of try to minimize the impact of that special loan covenant to Cielo. As of today, our lenders have been very open and very cooperative.
We don't really have to pay back that CAD 2 million right away or anytime in the near future. That's as far as I can share. Once we have the signed agreement, then we will make an announcement to the investment community so that everybody is fully aware of the status.
Stephanie, if I might just follow up. Were you the CFO at the time when this loan was taken out? Would this loan, because of its materiality, not have had to been approved by the board of directors, back in, I guess it was August?
I was the CFO. The loan was approved by the board of directors, but in terms of negotiation of the loan, the discussion happened actually even before I joined Cielo. With respect to all the decisions, including the special loan covenant, unfortunately, I was not involved. I hope that answers your question.
Yes, well, you gave me an answer. Thank you very much for that.
Yeah. We're being very proactive working on this special loan covenant, and I'm pretty confident and have reasonable assurance that this is not a concern for Cielo.
Okay. Thank you.
Yeah. Thank you.
Your next question will be from Levi Phillips. Please go ahead.
Hi. I was wondering if we could get an update on the desulfurization process, if it's in operation?
Levi, the desulfurization process, I believe that the last update that we had on it was in late September when we commissioned the unit. Just taking you a little bit back in time, the organization that talked a lot about it coming online in summer of this current year, we initially had some issues with the catalyst not being sulfinated. We took care of that. We commissioned the unit. We test ran it, and we proved to ourselves that it does work and it meets all the standards and criterion that we anticipated it to do. Since then, we have not run it.
We have not had reason to run it at the time because as I stated in my discussion here and as we've talked about, we have had some issues with operating the facility on a steady- state continual flow basis. When you think back at the last two quarters of this year, we have been troubleshooting, trying to understand the mechanisms at play here as to why we're having the plugging issues, the coking issues, and other behavioral problems with our equipment. As I mentioned, we've got that under control now in terms of understanding what the issue is. We've got a plan in place.
We're taking the right steps to correcting the situation and getting the facility back up and running by the end of the first quarter of this upcoming year and continuing to tweak it and optimize it. We're not gonna run the desulfurization unit until we get into a continuous flow mode where we are producing diesel on a continual basis and we choose to remove the sulfur content out of it. While the desulfurization unit is an important part of our process, it is not the critical part for enabling us to produce in the process in the fashion that we intend to.
Okay. Thank you.
Thank you. Next question will be from Carmen Calderero. Please go ahead.
Hi, guys. How are ya? I just wanna find out.
Good. How are you?
Good. Good. I wanna find out, are you guys still running the plant in terms of trying to get continuous flow, and at what level are you at right now?
Okay. Carmen, good question. Currently as we sit, no, we are not running the plant. We were running it in kind of a limber mode over the last three months. Again, the reasons for that was we did not wanna open full throttle on the thing because we were getting those issues that I mentioned. It took us some time to really troubleshoot and understand what the mechanisms at play were that were causing the problems and the concerns that we had. We took the plant down just recently.
We put it into a safe, steady, suspended mode right now because as we speak, we are starting to unbolt parts and pieces and pipelines at the facility in preparation for the work that we intend to do here. So, no, at the moment, we're not currently running anything right now.
Okay.
Thank you. Your next question will be from Andrew Hakes. Please go ahead, Andrew.
Hi there. I'm Andrew. I'm a retail investor based in Toronto. My question is, what is the current state of the partner Renewable U? Thank you.
Hi, Andrew. Thanks for the question. It's Chris Sabat speaking. As it concerns Renewable U, you know, the status hasn't changed. Certainly, if it does change, we will address that through a press release. As things stand, there are memorandums of understanding that are in place in relation to nine different territories. We're focused primarily on the potential of a Dunmore location and negotiating with Renewable U the terms of any joint arrangement agreement that we might enter into. You know, as I'm sure you can appreciate, this is the first MOU that has proceeded through to a negotiation, and so there are a lot of items up for discussion.
At the end of the day, what we wanna do is make sure that we've extracted the best possible deal for Cielo shareholders. We're going to continue down that path as far as the negotiations, and when we have a resolution or a conclusion, we'll update the investing market through a press release. Thank you for the question, Andrew.
Thank you.
Any further questions, Andrew?
That's all. Thank you.
Thank you. At this time, Mr. Gegunde, we have no further questions registered. Please proceed.
Great. Well, thank you very much. I wanted to reiterate our appreciation of everybody joining us on the call today. We are very much looking forward to a new year in 2022. We're very excited about the projects that we have underway, and we feel that this company will be in a different state in this upcoming year. We really look forward to it. With that, I wanna wish again everybody a very merry Christmas and all the best in the new year. Thank you for now.
Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. At this time, we do ask that you please disconnect your lines.