• PUREVAP™ related sales decreased by $4.2 million due to the completion of the project and initial phase of testing and one-time $3.6 million sale of IP, in 2022, which was not repeated in the current fiscal year,
• 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,
• Torch-related products and services decreased by $0.6 million, due to the final phase of the project being completed with the installation and commissioning at the customers facility. Three-month onsite support was extended by an additional three months,
• Biogas upgrading and pollution controls related sales decrease of $1.8 million is due to the delivery of and agreed completion of projects during the comparable period of the previous year.

As of November 9, 2023, revenue expected to be recognized in the future related to backlog of signed and/or awarded contracts is $35 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.

2. Cost of Sales and Services and Gross Margins

Cost of sales and services were $2.6 million in Q3 2023, representing an increase of $1.0 million compared to $1.5 million in Q3, 2022, primarily due to a decrease of $0.1 million in employee compensation, a decrease of $0.3 million in subcontracting, attributed to additional work being completed in-house and the reversal of subcontracting related to our work completed in Italy with our Italian subsidiary, an increase in direct materials of $0.5 million due to the purchasing of material related to newly awarded contract/projects, a decrease in manufacturing overhead & other and investment tax credits of $0.02 million and $0.01 million, respectively, and a decrease in foreign exchange on materials due to the reclassification of the expense from Cost of Sales and Services to Selling, General and Administrative expenses.

The gross margin for Q3, 2023 was $1.1 million or 30% of revenue compared to a gross margin of $4.1 million or 73% of revenue for Q3 2022, the decrease in gross margin was mainly attributable to the reduced sales volume generating less gross profit and to the impact on foreign exchange charge on materials, and more significantly, the $3.6 million sale of IP in 2022 which was not repeated in the current quarter, and had 100% gross margin profit.

During the nine-month period ended September 30, 2023, cost of sales and services were $6.6 million compared to $8.0 million for the same period in the prior year, the $1.5 million decrease is primarily due to a decrease of $1.1 million in subcontracting (nine-month period ended September 30, 2022 - $1.2 million), attributed to additional work being completed in-house, a decrease in direct materials and manufacturing overhead & other of $1.2 million and $0.3 million respectively (nine-month period ended September 30, 2022 - $3.7 million and $1.1 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 $1.2 million.

The amortization of intangible assets for Q3, 2023 was $0.2 million compared to $0.2 million for Q3, 2022, and during the nine-month period ended September 30, 2023, was $0.7 million compared to $0.7 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.

3.  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 Q3, 2023 were $7.6 million, representing an increase of $1.7 million compared to $5.9 million for Q3, 2022. The variation is mainly a result of the expected credit loss & bad debt provision increasing to $2.8 million in Q3, 2023, whereby no such expense was recorded in the comparable period. Furthermore, this was offset by a decrease in professional fees which are $0.8 million, thereby a decrease of $0.4 million (Q3, 2022 - $1.3 million), due to reduction in accounting fees, legal and investor relation, and patent expenses. Other expenses also decreased by $0.2 million (Q3, 2022 - $1.0 million) due to a net reduction of insurance expenses, and a favourable impact of $0.2 million on the foreign exchange charge on materials.

During the nine-month period ended September 30, 2023, SG&A expenses were $21.6 million, representing an increase of $2.9 million compared to $18.6 million for the same period in the prior year. The increase is mainly a result of employee compensation increasing to $7.2 million (nine-month period ended September 30, 2022 - $5.6 million) mainly caused by additional headcount. Expected credit loss & bad debt increased to $4.8 million and is due to an increase in the allowance for expected credit losses recognized in 2023, and the increase of the impact on foreign exchange charge on materials of $0.09 million, offset by the decreases of $0.6 million in professional fees, due to less legal, accounting and investor relation expenses, which are $3.1 million, compared to $3.7 million in the comparable period, and the decrease in other expenses, mainly related to the decrease of subcontracting and insurance expenses, to $2.5 million from $3.4 million, a variation of $0.9 million, compared to the nine-month period ended September 30, 2022.

Share-based compensation expense for the three and nine-month periods ended September 30, 2023, was $0.7 million and $2.4 million, respectively (three and nine-month period ended September 30, 2022 - $0.9 million and $4.2 million, respectively), a decrease of $0.3 million and $1.8 million respectively, which is a non-cash item and relates mainly to 2021, 2022 and 2023 grants.

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.

4.  Depreciation on Property and Equipment

The depreciation on property and equipment for the three and nine-month periods ended September 30, 2023 remained stable at $0.2 million and $0.5 million, respectively, compared with $0.2 million and $0.4 million for the same periods in the prior year. The expense is determined by the nature and useful lives of the property and equipment being depreciated.

5.  Research and Development (“R&D”) Expenses

During the three-months ended September 30, 2023, the Company incurred $0.7 million of R&D costs on internal projects, an increase of $0.4 million as compared with $0.3 million in Q3, 2022. The increase in Q3, 2023 is primarily related to an increase of $0.2 million in employee compensation to $0.4 million, due to an increase in R&D activities which required additional labour resources, compared to $0.2 million for the same period in the prior year, an increase in materials and equipment and other expenses, to $0.3 million (Q3, 2022 - $0.1 million), which is also attributable to the increase in employee compensation.

During the nine-months ended September 30, 2023, the Company incurred $1.7 million of R&D costs on internal projects, compared to $1.6 million for the same period in the prior year. The increase is mainly due to higher levels of R&D activities requiring additional resources and other expenses, increasing to $1.3 million as compared with $0.8 million, an increase of $0.5 million, which is offset by the decrease in material and equipment to $0.4 million compared to $0.7 million for the same period in the prior year.