• PUREVAP™ related sales decreased by $0.2 million due to the completion of the project and initial phase of testing,
• DROSRITE™ related sales decreased by $1.1 million due to the impact of the continued customer delays in funding for the construction of the onsite facility,
• Development and support related to systems supplied to the U.S Navy decreased by $0.2 million due to remaining project milestones mainly related to inspection, packaging and shipment of the equipment to our customer in order to move forward with installation and commissioning,
• Torch-related products and services decreased by $0.9 million, due to the final phase of the project being completed with the installation and commissioning at the customers facility. Three-month onsite support currently ongoing and scheduled to be completed by the end of the third quarter, with an option to extend to six and nine-month support at the discretion of the customer,
• Biogas upgrading and pollution controls related sales decrease of $2.5 million is due to continuous testing to achieve desired results and due to the Company’s Italian subsidiary and a customer who both agreed on the completion of the project during the first quarter of 2023, with no additional revenues recorded by the Company’s Italian subsidiary for the six-month period ended June 30, 2023 ($1.2 million – six-month period ended June 30, 2022),
  
  

As of August 10, 2023, revenue expected to be recognized in the future related to backlog of signed and/or awarded contracts is $33.9 million. Revenue will be recognized as the Company satisfies its performance obligations under long-term contracts, which is expected to occur over a maximum period of approximately 3 years.

Cost of Sales and Services and Gross Margins

Cost of sales and services were $1.9 million in Q2 2023, representing a decrease of $1.4 million compared to $3.3 million in Q2, 2022, primarily due to a decrease of $0.1 million in subcontracting (Q2, 2022 - $0.4 million), attributed to additional work being completed in-house, a decrease in direct materials and manufacturing overhead & other of $1.3 million and $0.4 million, respectively (Q2, 2022 - $1.6 million and $0.7 million), due to lower levels of material required based on the decrease in product and service-related revenues.

The gross margin for Q2, 2023 was $1.1 million or 37% of revenue compared to a gross margin of $2.5 million or 43% of revenue for Q2 2022, the decrease in gross margin was mainly attributable to the impact on foreign exchange charge on materials.

During the six-month period ended June 30, 2023, cost of sales and services were $4.0 million compared to $6.5 million for the same period in the prior year, the $2.5 million decrease is primarily due to a decrease of $0.8 million in subcontracting (six-month period ended June 30, 2022 - $1.0 million), attributed to additional work being completed in-house, a decrease in direct materials and manufacturing overhead & other of $1.8 million and $0.3 million respectively (six-month period ended June 30, 2022 - $2.7 million and $0.9 million respectively), due to lower levels of material required based on the decrease in product and service-related revenues and the negative impact of the foreign exchange charge on material of $0.2 million.

The amortization of intangible assets for Q2, 2023 was $0.2 million compared to $0.2 million for Q2, 2022, and during the six-month period ended June 30, 2023, was $0.4 million compared to $0.4 million for the same period in the prior year. This expense relates mainly to the intangible assets in connection with the Pyro Green-Gas acquisition, patents and deferred development costs. These expenses are non-cash items, and the intangible assets will be amortized over the expected useful lives.

As a result of the type of contracts being executed, the nature of the project activity, as well as the composition of the cost of sales and services, as the mix between labour, materials and subcontracts may be significantly different. In addition, due to the nature of these long-term contracts, the Company has not necessarily passed on to the customer, the increased cost of sales which was attributable to inflation, if any. The costs of sales and services are in line with management’s expectations and with the nature of the revenue.

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 Q2, 2023 were $6.4 million, representing a decrease of $0.7 million compared to $7.1 million for Q2, 2022. The decrease is mainly a result of share-based compensation expense decreased by $0.9 million (Q2, 2022 - $1.6 million), which is a non-cash item and relates mainly to a Q4 2021, and 2022 grants not repeated in 2023. Professional fees are $1.0 million which decreased by $0.8 million (Q2, 2022 - $1.7 million), due to reduction in accounting fees, legal and investor relation expenses. Other expenses were favourable by $0.5 million (Q2, 2022 - $1.3 million) due to a net reduction of insurance expenses, interest and bank charges. Government grants are $0.2 million which increased by $0.2 million ($Q2, 2022 – $0.06 million) due to higher levels of activities supported by such grants. The expected credit loss & bad debt increased to $0.7 million in Q2, 2023 and is due to an increase in the allowance for expected credit loss, whereby no such expense was recorded in the comparable period.

During the six-month period ended June 30, 2023, SG&A expenses were $14.0 million, representing an increase of $1.3 million compared to $12.7 million for the same period in the prior year. The increase is mainly a result of employee compensation increasing to $5.1 million (six-month period ended June 30, 2022 - $3.5 million) mainly caused by additional headcount. Expected credit loss & bad debt increased to $2.1 million and is due to an increase in the allowance for expected credit loss increase of $2.1 million and the increase of the impact on foreign exchange charge on materials of $0.3 million, offset by the decreases of $0.2 million in professional fees which are $2.2 million, compared to $2.4 million in the comparable period, and the decrease in other expenses to $1.6 million from $2.4 million, a variation of $0.7 million, compared to the six-month period ended June 30, 2022.

Share-based compensation expense for the three and six-month periods ended June 30, 2023, was $0.7 million and $1.7 million, respectively (six-month period ended June 30, 2022 - $1.6 million and $3.3 million, respectively), a decrease of $0.9 million and $1.6 million respectively, which is a non-cash item and relates mainly to a Q4 2021, and 2022 grants not repeated in 2023.

Share-based payments expenses as explained above, are non-cash expenses and are directly impacted by the vesting structure of the stock option plan whereby options vest between 10% and up to 100% on the grant date and may require an immediate recognition of that cost.

Depreciation on Property and Equipment

The depreciation on property and equipment for the three and six-month periods ended June 30, 2023, increased to $0.2 million and $0.3 million, respectively, compared with $0.1 million and $0.3 million for the same periods in the prior year. The expense is comparable to the same quarters last year and the increase is primarily due to nature and useful lives of the property and equipment being depreciated.

Research and Development (“R&D”) Expenses

During the three-months ended June 30, 2023, the Company incurred $0.7 million of R&D costs on internal projects, a decrease of $0.06 million as compared with $0.8 million in Q2, 2022. The decrease in Q2, 2023 is primarily related to a decrease in subcontracting and materials and equipment to $0.1 million (Q2, 2022 - $0.5 million), which is also attributable to the increase in employee compensation to $0.4 million (Q2, 2022 - $0.2 million) due to an increase in R&D activities which required additional labour resources and other expenses of $0.2 million related to equipment rentals compared to $0.1 million in Q2, 2022, an increase of $0.1 million.