Mr. P. Peter Pascali reports

PYROGENESIS ANNOUNCES Q3, 2016 RESULTS

PyroGenesis Canada Inc. has released its financial and operational results for the third quarter of fiscal year 2016.

Second quarter highlights

In third quarter of fiscal 2016:

• Revenues increased 40 per cent over the same period in 2015.
• Gross margins before amortization of intangible assets increased to 64.2 per cent over the same period in 2015.
• Adjusted EBITDA (earnings from operations before interest, taxes, depreciation and amortization) increased 138 per cent to $253,574 over the same period in 2015.

Financial summary

The third quarter has been positively impacted by the increase in business as over $11.5-million in contracts has been signed by the company since June 30, 2016.

Gross margins before and after amortization of intangible assets, for both the third quarter and nine months, have shown significant improvement over comparable periods in 2015. Cash flow, as measured by EBITDA (adjusted), is positive for the quarter ended Sept. 30, 2016.

Operations for the periods under review reflect a significant improvement over the first half of the year, which saw the company transition from selling systems that make powders for additive manufacturing to actually making and selling these same powders.

The first six months of 2016, and as such the nine months under review here, were negatively impacted by this decision as work stopped on a previously announced contract to deliver powder-producing systems for approximately $10-million, and as such, significant pressure was placed on revenues and margins during this period. The strategic decision to produce powders for additive manufacturing (3-D printing) was made once it was demonstrated to the board that the revenues and profits from selling powders from one system alone far exceeded, on an annual basis, the one-time profit from selling 10 systems, and as such, the company announced on Oct. 26, 2015, the strategy to move into this potentially lucrative market of producing powders for the additive manufacturing industry (3-D printing).

Revenues

PyroGenesis recorded revenue of $1,902,748 in the third quarter of 2016, representing an increase of 40 per cent compared with $1,363,077 recorded in the third quarter of 2015. Revenues for the nine first months of fiscal 2016 were $3,738,590, a decrease of 7 per cent over revenues of $4,013,221 reported during the same period in 2015.

Revenues recorded in third quarter 2016 and the nine months of fiscal 2016 were generated primarily from: (i) the intellectual property and development of a vacuum arc-reducing process to convert silica into high-purity silicon metal; (ii) 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; (iii) the demonstration of the viability of PyroGenesis's existing plasma chemical warfare agent destruction platform with locally available materials, for the complete eradication of chemical warfare agents without creating hazardous byproducts; (iv) support services related to PAWDS-Marine systems supplied to the U.S. Navy; and (v) Drosrite sales.

Cost of sales and services and gross margins

Cost of sales and services before amortization of intangible assets of $682,105 in third quarter 2016 represented a decrease of 31 per cent as compared with $989,362 in third quarter 2015.

In third quarter 2016, the gross margin before amortization of intangible assets was $1,220,643, or 64.2 per cent of revenue. This compares with a gross margin before amortization of intangible assets of $373,715 (27.4 per cent of revenue) for third quarter 2015.

The amortization of intangible assets of $349,268 in third quarter 2016 and third quarter 2015 relates to the licences 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 will be fully amortized by Dec. 31, 2016.

Investment tax credits recorded against cost of sales are primarily related to client-financed projects that qualify for tax credits from the provincial government of Quebec. Qualifying tax credits increased slightly to $16,354 in third quarter 2016, compared with $7,488 in third quarter 2015. This represents an increase of 17 per cent year over year. The company continues to make investments in research and development projects involving strategic partners and government bodies.

Selling, general and administrative expenses

Selling, general and administrative expenses incorporate costs associated with corporate administration, business development, project proposals, operations administration, investor relations and employee training.

SG&A expenses for third quarter 2016 excluding the costs associated with share-based compensation (a non-cash item in which options vest over a four-year period) were $967,811, representing a decrease of 8 per cent compared with $1,048,489 reported for third quarter 2015.

The decrease in SG&A expenses in third quarter 2016 over the same period in 2015 is attributable to the net effect of:

• An increase of 2 per cent in employee compensation, a decrease of 23 per cent in office and general expenses, and a decrease of 4 per cent for professional fees;
• Travel costs decreased by 69 per cent;
• Depreciation on property and equipment decreased by 24 per cent due to a reduced level of investment in machinery and equipment since 2010, when major acquisitions were made;
• Government grants decreased by 100 per cent due to lower level of activities supported by such grants;
• Other expenses decreased by 15 per cent, primarily due to the reduced cost of freight and shipping.

Separately, share-based payments increased significantly in third quarter 2016 over the same period in 2015 as a result of the vesting structure of the stock option plan and the re-evaluation of options as at Sept. 30, 2016, including the stock options offered on Sept. 25, 2016. On a year-to-date basis, share-based payments expense (a non-cash item) increased by 488 per cent.

Net loss and comprehensive loss

The net loss and comprehensive loss for third quarter 2016 were $717,041 compared with a loss of $1,267,748, in third quarter 2015, representing a decrease in loss of 43 per cent year over year.

EBITDA

EBITDA loss in third quarter 2016 was $176,553 compared with an EBITDA loss of $739,370 for the same period last year, representing a decrease of 76 per cent. The decrease of $562,817 in the EBITDA loss in third quarter 2016 compared with third quarter 2015 is primarily attributable to the decrease in net loss and comprehensive loss of $550,707, less increased finance costs of $22,002.

The adjusted EBITDA in third quarter 2016 was a positive $253,274 compared with an adjusted EBITDA loss of $666,314 for the same period last year, representing a significant improvement of 138 per cent. The increase of $967,323 in the adjusted EBITDA in 2016 is attributable to the decrease in EBITDA loss of $691,388 for the period, less increased cost of other non-cash items, specifically share-based payments of $275,935.

Liquidity

On July 26, 2016, the company announced the completion of a shares-for-debt transaction whereby the company settled outstanding debt by the issuance of 2,060,126 common shares of the company from treasury at a deemed price of 20 cents per common share in the aggregate amount of $412,025. The company also completed at this time a private placement offering, whereby the company issued and sold an aggregate amount of 6,131,579 units of the company at a price of 19 cents per unit for gross proceeds of $1,165,000 (see subsequent events section for further details).

As at Sept. 30, 2016, the company had cash on hand of $206,153 and negative working capital of $412,142 compared with a cash balance of $767,368 and positive working capital of $166,095 as at Dec. 31, 2015.

Subsequent events

Subsequent to third quarter 2016, the total number of options issued by the company decreased by two million as a director refused two million options granted to him by the company, with an additional 180,000 options granted to certain employees, for a total of 9,911,000 outstanding options issued.

Outlook

The third quarter has been positively impacted by the increase in business as over $11.5-million in contracts has been signed by the company since June 30, 2016. Gross margins before and after amortization of intangible assets, for both the third quarter and nine months, have shown significant improvement over comparable periods in 2015. Cash flow, as measured by EBITDA (adjusted), is positive for the quarter ended Sept. 30, 2016.

Two thousand seventeen now looks like a breakout year for many of the company's product lines, some of which are already taking place:

• The company is on schedule to produce powders for additive manufacturing (3-D printing) this first quarter 2017. Until this decision was made, PyroGenesis had been a fabricator of plasma-based systems that produced unique titanium powders which are greatly sought after by the additive manufacturing industry. These powders are unique in that they are small, spherical and uniform, allowing them to flow like water, a characteristic that is extremely important in industries such as 3-D printing. According to Wohler's report (2015), the demand created by the additive manufacturing (3-D printing) industry for metal powders, such as those produced by PyroGenesis, will be in excess of $3.4-billion by 2020.
• The Drosrite furnace system was proved out at an American customer's Mexican facility during the first half of 2016. Soon thereafter, a successful demonstration of the Drosrite system in the Middle East took place, following which an unsolicited request to exclusively market the process in the region was received and is currently being discussed. Management's belief that the supply and installation of the first commercial sale in North America would enable the company to leverage this success to generate a continued flow of orders for additional Drosrite systems is being borne out. This recent flurry of activity and interest for the Drosrite system bodes well for 2017, where the company now expects to have at least three orders placed and delivered. The market potential for PyroGenesis's Drosrite system, from aluminum dross alone, exceeds $400-million.
• On Aug. 2, 2016, Pyrogenesis announced that it had signed a contract for $8.26-million with HPQ Silicon Resources Inc., formally Uragold Bay Resources Inc., to provide a 200-metric-tonne-per-year Purevap pilot system to produce silicon metal directly from quartz. This system will for the most part be constructed in 2017. If successful, PyroGenesis benefits from a 10-per-cent royalty on all revenues derived from the use of this system.
• Last but not least is the testing of PyroGenesis's chemical warfare destruction unit by its customer for a cost to the customer of over $100-million (of note, PyroGenesis is not contracted for any of this $100-million). This will happen in 2017, and, upon successful testing, a procurement order would be expected. No indication has been given as to the size, if any, that such procurement would entail.

Management remains focused on reducing PyroGenesis's 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 solutions to industries that have yet had the opportunity to consider such solutions.

At the same time, management is actively targeting recurring revenue opportunities that will generate a growing, and profitable, regular cash flow to the company.

Examples of recurring revenue streams being pursued by PyroGenesis include, but are not limited to:

• The supply of consumables and spare parts necessary to support the operation of systems once delivered and operational at PyroGenesis's clients;
• Royalties generated from the sale of metals refined from ore through utilization of PyroGenesis's technologies;
• Royalties generated from the recovery of valuable metals from waste streams;
• The creation of joint ventures, and/or other forms of partnership, that would utilize PyroGenesis technology to generate substantial cost savings.

The fact that PyroGenesis has one of the largest concentrations of plasma expertise in the world, with over 250 years of accumulated technical experience and 59 patents, combined with unique relationships with major universities performing cutting-edge plasma research and development, positions the company well to execute this strategy.

In conclusion, 2017 looks like it will be a breakout year for more than one of the company's product lines. The company's focus will continue to be to generate an improved mix of short- and longer-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 certain manufacturing processes that are expected to yield higher gross margins.

About PyroGenesis Canada

PyroGenesis Canada is the world leader in the design, development, manufacture and commercialization of advanced plasma processes. It provides engineering and manufacturing expertise and cutting-edge contract research, as well as turnkey process equipment packages, to the defence, metallurgical, mining, advanced materials (including 3-D printing), oil and gas, and environmental industries. With a team of experienced engineers, scientists and technicians working out of a Montreal office and the company's 3,800-square-metre manufacturing facility, PyroGenesis maintains its competitive advantage by remaining at the forefront of technology development and commercialization. Its operations are ISO 9001:2008 certified, and have been ISO certified since 1997.

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