Revenues from military contracts in 2017 were over $4,300,000, mainly related to providing technical support, training services and sale of spare parts.  Over the past three years, revenues from military contracts have typically represented more than $2,000,000 per year of PyroGenesis’ revenues.  As the PAWDS technology becomes fully operational on US Navy ships, management expects the level of recurring revenues from the sale of parts and services to increase over the next 2 to 5 years.

     D)  HPQ:

On August 2, 2016, PyroGenesis announced that it had signed contracts totalling $8,260,000 with HPQ Silicon Resources Inc., formally Uragold Bay Resources Inc. (“HPQ”) for the sale of IP and to provide a pilot system to produce silicon metal directly from quartz. Of particular note, if successful, PyroGenesis benefits from a 10% royalty on all revenues derived from the use of this system by HPQ, subject to annual minimums.

Management remains focused on reducing PyroGenesis’ dependency on long-cycle projects by developing a strategic portfolio of volume driven, high margin/low risk products that resolve specific problems within niche markets and doing so by introducing these plasma-based technologies to industries that have yet to consider such solutions.

Management is also actively targeting recurring revenue opportunities that will generate a growing, and profitable, regular cash flow to the Company.

PyroGenesis has one of the largest concentrations of plasma expertise in the world, with over 250 years of accumulated technical experience and supporting patents, combined with unique relationships with major Universities performing cutting edge plasma research and development, positions the Company well to execute its strategies.

Management’s focus will continue to be to generate an improved mix of short and long-term projects that will, in turn, facilitate operational and financial planning. Repeat orders for the same, or similar, products will further result in the standardization of manufacturing processes which will lead to improved gross margins.

All indications are that 2018 should be a profitable year for the Company given that business lines, other than non-additive manufacturing, continue to contribute significantly to Pyrogenesis’ revenues.  Management expects that the Corporation’s non-additive manufacturing business lines will generate enough revenues, on their own in 2018, to make PyroGenesis profitable overall.

Financial Summary

Revenue

PyroGenesis recorded revenue of $7,192,861 in the year of 2017, representing an increase of 38% compared with $5,222,133 recorded in the year of 2016.

Revenues recorded in fiscal 2017 were generated primarily from:

1. the development of a vacuum arc reducing process to convert Silica into high purity Silicon metal,
2. the manufacture and further field testing of Tactical PACWADS, the first mobile plasma system for destruction of chemical warfare agents under contract with an international military consortium,
3. the demonstration of the viability of PyroGenesis’ existing plasma chemical warfare agent destruction platform with locally available materials, for the complete eradication of chemical warfare agents without creating hazardous by-products,
4. support services related to PAWDS-Marine systems supplied to the US Navy.

Cost of Sales and Services and Gross Margin

Cost of sales and services before amortization of intangible assets was $4,065,894 in 2017, representing an increase of 33% compared with $3,051,356 in 2016.

In 2017 employee compensation, subcontracting costs, direct materials and manufacturing overhead increased to $4,436,508 (2016 - $3,277,813) as a result of increased volumes during the year.  The cost of sales and services for 2017 and 2016 are in line with management’s expectations. The type of contracts being executed, and the nature of the project activity has a significant impact on both the overall level of cost of sales and services reported in a period, as well as the composition of the cost of sales and services, as the mix between labour, materials and subcontracts may be significantly different. The cost of sales and services for 2017 and 2016 are in line with management’s expectations

Investment tax credits recorded against cost of sales are primarily related to client funded projects that qualify for tax credits from the provincial government of Quebec. Qualifying tax credits increased to $367,342 in 2017, compared with $249,550 in 2016. This represents an increase of 47% year-over-year. The increase is primarily due to a higher amount of these costs being eligible for tax credits.

The gross margin before amortization of intangible assets for 2017 was $3,126,967 or 43.5% of revenue compare to a gross margin of $2,170,777 or 41.6% of revenue for 2016 before amortization of intangible assets and write-offs of inventories and costs and profits in excess of billings on uncompleted contracts. The inventory write-off in 2016 was comprised of the Transportable Waste to Energy system ($147,774) and the CFC destruction system ($846,241). The write-off of costs and profits in excess of billings on uncompleted contracts ($1,760,423) was related to the Company no longer expecting to recover the full amounts owed from a customer for a contract. 

The amortization of intangible assets of $Nil in 2017 and $1,396,675 for 2016 relates to the licenses and know-how purchased in 2011 from a company under common control. Of note, this expense is a non-cash item and the underlying asset was fully amortized by December 31, 2016. 

Selling, General and Administrative Expenses

Included within Selling, General and Administrative expenses (“SG&A”) are costs associated with corporate administration, business development, project proposals, operations administration, investor relations and employee training.

SG&A expenses for 2017 excluding the costs associated with share-based compensation (a non-cash item in which options vest principally over a two-year period), were $4,394,837, representing an increase of 10% compared with $3,990,837 reported for 2016. 

The increase in SG&A expenses in 2017 over the same period in 2016 is mainly attributable to the net effect of:

• an increase of 11% in employee compensation due primarily to additional headcount,
• a decrease of 11% for professional fees, primarily due to a decrease in investor relations expense and patent expenses,
• an increase of 27% in office and general expenses, due to an increase in computers and internet expenses,
• travel costs increased by 29%, due to an increase in travel abroad,
• depreciation on property and equipment decreased by 12% due to a lower amount of property and equipment being depreciated. In 2017, the Company had $1,879,455 of assets under development, which will begin to be depreciated when these assets are available or ready for use (expected in 2018),
• government grants decreased by 11% due to a decreased level of activities supported by such grants and,
• other expenses increased by 61%, primarily due to an increase in promotion and advertising expenses, an increase in marketing expenses, and an increase in insurance expense.

Separately, share based payments increased by 107% in 2017 over the same period in 2016 as a result of the vesting structure of the stock option plan including the stock options granted on November 3, 2017.

Net Comprehensive Loss

The net comprehensive loss for 2017 of $6,174,303 compared to a loss of $6,952,219, in 2016, represents a decrease of 11% year-over-year.

The decrease of $777,916 in the comprehensive loss in 2017 is primarily attributable to the factors described above, which have been summarized as follows:

1. an increase in product and service related revenue of $1,970,728 arising in 2017,
2. an increase in cost of sales and services totaling $1,014,538, primarily due to the concentration of engineering on material purchases, and due to the increase in product and service revenue,
3. a decrease in amortization of intangible assets of $1,396,675,
4. a decrease in impairment loss in 2017 of $2,754,438 recorded in 2016 for a write-off of inventories and costs and profits in excess of billings on uncompleted contracts,
5. an increase in SG&A expenses of $796,988 arising in 2017 primarily due to an increase in employee compensation and office and general expenses,
6. an increase in R&D expenses of $197,672 primarily due to the increase in development expenditures relating to the asset under construction in 2017,
7. an increase in the settlement of the IP debt balance of $3,215,643,
8. an increase in net finance costs of $119,084 in 2017 primarily due to an increase in the adjustment in fair value of investments.

EBITDA, Adjusted and Modified