Mr. P. Peter Pascali reports

PYROGENESIS ANNOUNCES Q3 2014 ACTIVITIES AND FINANCIAL RESULTS

PyroGenesis Canada Inc. has released its financial and operational results for the third quarter and nine months, of fiscal 2014, ended Sept. 30, 2014.

Third quarter highlights

During the third quarter of 2014, PyroGenesis has:

• Backlog of $16.4-million or more than 280 per cent of 2013 annual revenues;
• Gross margin of 40.5 per cent continuing to exceed targets;
• Strong progress achieved on a $12.5-million contract to design and manufacture first of 10 plasma-based powder production systems for 3-D printing industry;
• Continues to reposition the company by supplying plasma processes to an expanded client base, which includes oil and gas, mining and metallurgical, and 3-D printing industries.

PyroGenesis's entry into new high-margin market niches is translating into significant orders for its plasma processes and engineering services as evidenced by the level of new business activity and historical backlog. These results validate management's decision to reposition the company by introducing its plasma processes into new high-margin markets and embarking on the largest business development push in the company's history.

                                            FINANCIAL HIGHLIGHTS              
                                                                              
                                                          Three months ended Sept. 30,   Nine months ended Sept. 30,
                                                                  2014           2013           2014           2013

Revenue                                                    $ 1,215,261     $1,394,255   $  3,980,220    $ 3,877,216
Gross margin before amortization of intangible assets          492,401        575,462      1,940,519      1,630,711
Gross margin before amortization of intangible assets %           40.5%          41.3%          48.8%          42.1%
Gross margin                                                   143,133        226,194        892,714        582,906
Gross margin %                                                    11.8%          16.2%          22.4%          15.0%
(Loss) from operations                                        (995,742)      (916,604)    (2,578,724)    (2,847,637)
Comprehensive (loss)                                       $  (995,695)    $ (915,156)  $ (2,577,576)   $(2,844,768)
Basic and diluted (loss) per share                            $  (0.01)       $ (0.01)       $ (0.04)        $(0.05)
EBIDTA (loss)                                                 (531,629)    $ (275,859)  $ (1,024,660)   $  (932,160)
Adjusted EBITDA (loss)                                     $  (531,629)    $ (275,859)  $ (1,024,660)   $  (932,160)

Revenues

Revenues for third quarter 2014 were $1,215,261, a decrease of 13 per cent over revenues of $1,394,255 reported during the same period in fiscal 2013. On a year-to-date basis, revenues for fiscal year 2014 increased by 3 per cent to $3,980,220 (nine months 2013: $3,877,216). Revenues in third quarter 2014 are positively impacted by progress achieved on: (i) the plasma system being built for the U.S. Navy, (ii) phase 1 of a tactical mobile plasma system for destruction of chemical warfare agents, (iii) on research and development projects using novel plasma-based technologies in the oil and gas industrial sector, and (iii) work on the recently signed contract to manufacture 10 plasma-based powder production systems for 3-D printing. Revenues for 2014 and 2015 are projected to increase significantly based on a strong backlog ($16.4-million) of signed contracts combined with a significant pipeline of future projects identified and under discussion.

Cost of sales and services

Cost of sales and services before amortization of intangible assets for third quarter 2014 was $722,860 ($818,793: third quarter 2013), a decrease of 12 per cent. On a year-to-date basis, cost of sales before amortization of licences decreased by 9 per cent to $2,039,701 as compared with $2,246,505 for the same period the prior year. Building on the improvements in gross margins (before amortization of intangible assets) started in late 2012, third quarter 2014 strong gross margins of 40.5 per cent (41.3 per cent: third quarter 2013) exceeded the company's business plan for the period. On a year-to-date basis, gross margins (before amortization of intangible assets) increased by 19.0 per cent to $1,940,519 as compared with $1,630,711 for the same period the prior year. The company is targeting gross margins more consistent with those it has realized previously of approximately 40 per cent.

The strong level of gross margin in third quarter 2014 was achieved through controlled project management, tight control over technical resources employed on projects and favourable pricing on equipment purchases.

Management is confident that with an increased focus on operations and project execution, PyroGenesis will continue to post strong gross margins on its projects notwithstanding the natural fluctuations that may occur from quarter to quarter.

Selling, general and administrative expenses

Selling, general and administrative expenses increased 7 per cent to $1,082,803 ($1,013,214: third quarter 2013) for third quarter 2014 primarily reflecting management's decision to increase investment in business development. Year-to-date SG&A increased 3 per cent over that posted for the same period in 2013 (third quarter 2014: $3,109,362 and third quarter 2013: $3,021,782).

Net loss

Loss from operations and comprehensive loss for third quarter 2014 both increased 9 per cent to $995,742 and $995,695, respectively, as compared with a loss from operations and a comprehensive loss of $916,604 and $915,156 reported for the same period during third quarter 2013. On a year-to-date basis, loss from operations and comprehensive loss decreased by 9 per cent.

The 9-per-cent increase in the comprehensive loss in third quarter 2014, versus the comparable 2013 period, is primarily due to a 3-per-cent decrease in revenues and a 7-per-cent increase in SG&A, offset in part by a 79-per-cent reduction in financing charges due to the $6-million conversion of debt to equity in May, 2014. The company continues to maintain strong control over its spending while increasing resources allocated to business development, proposals, investor relations, and research and development.

EBITDA (earnings from operations before interest, taxes, depreciation and amortization)

EBITDA for third quarter 2014 was negative $581,629, as compared with negative EBITDA of $425,642 reported during third quarter 2013. On a year-to-date basis, EBITDA for fiscal 2014 was negative $1,203,160, a 13-per-cent improvement over the negative EBITDA of $1,377,568 reported during the same period in fiscal 2013.

Adjusted EBITDA (EBITDA adjusted for share-based payments) for third quarter 2014 was negative $531,629, an increase of 93 per cent over the negative adjusted EBITDA of $275,859 reported during third quarter 2013. On a year-to-date basis, adjusted EBITDA for fiscal 2014 was negative $1,024,660, a 10-per-cent increase over the negative adjusted EBITDA of $932,160 reported during the same period in fiscal 2013.

Balance sheet and liquidity

At Sept. 30, 2014, PyroGenesis had cash on hand of $78,003 and negative working capital of $191,679 (negative $1,373,763 at Dec. 31, 2013). As disclosed in the subsequent events section, on Nov. 26, 2014, the company closed a private placement of $1.5-million, which significantly strengthens its working capital position.

Of note, the company has no bank debt, nor any debt owing to unrelated parties.

Subsequent events

During October, 2014, the company announced that Pope & Company and Pollitt & Co. Inc. commenced research coverage on PyroGenesis Canada.

On Oct. 28, 2014, the company announced that it had passed initial inspection and had received the second payment in regard to the sale and delivery of the first of 10 powder production systems for 3-D printing.

On Nov. 18, 2014, the company announced that it was awarded an additional study under a master service agreement with a global oil and gas company for $788,300. This contract involves the adaption of an existing plant at the company's facility, which will be used to test and further demonstrate the economics of the company's proprietary technology. It is expected that this project will be completed in the second half of 2015.

On Nov. 26, 2014, the company announced the closing of a private placement of $1.5-million of units of PyroGenesis at 35 cents per unit, each unit consisting of one common share and one-half of one common share purchase warrant of PyroGenesis. Each warrant entitles its holder to acquire an additional common share at an exercise price of 55 cents per warrant share for a period of 24 months following the closing of the private placement.

The common shares constituted qualifying shares for the purposes of the Quebec stock savings plan II. The company intends to use the net proceeds from the private placement for general corporate purposes and working capital.

Outlook

Although third quarter results are not in line with what one may have expected, given recent press releases, the company is happy to report that this was due to certain revenues, which were expected to be posted in third quarter and will be accounted for in fourth quarter 2014 and first quarter 2015, and was not due to any deterioration in company prospects or backlog. Results were further exasperated by delays in the signing of two key contracts from third quarter to fourth quarter 2014. These revenues would have contributed a minimum of $400,000 to profitability in the quarter for a loss of approximately $595,000 as compared with that posted of $995,000 (versus loss posted same quarter 2013 of $916,000). Notwithstanding this, PyroGenesis still posted 3-per-cent gains in revenues and a 10-per-cent improvement in profitability for year-over-year nine-month comparison. Notwithstanding the above, 2014 continues to prove itself to be the tipping point year for PyroGenesis as the full effects of the company's plan to position itself in new high-margin niche markets are being realized. Management believes that based on the contracts in hand, PyroGenesis will be profitable in 2015.

As noted, nine-month revenues to date, 3 per cent higher than the same period last year, are supported by a record backlog of signed contracts, which are already more than 280 per cent of 2013 revenues (which already were a 175-per-cent increase over 2012 revenues) and which are all expected to be completed over the next 15 months. Despite recent delays associated with certain project commencements, management still expects to post strong year-over-year results while maintaining its historical strong gross margins.

This progress has largely been due to the company's successful repositioning itself in answer to the fiscal crisis confronting its largest client at the time: the U.S. military. Under the direction of the board, the company has transitioned from being a company predominantly supplying waste management plasma processes to the U.S. military to one that is supplying plasma processes to not only the military, but also to the oil and gas, as well as the mining and metallurgical and 3-D printing, industries. In each case, the company has targeted high-margin niche businesses with the potential for significant repeat orders. PyroGenesis's recent success within the 3-D printing industry, wherein the company announced that it had signed a $12.5-million contract to provide 10 plasma-based systems to produce the smallest, and most uniform, spherical titanium powders to the industry, is just one of the many successes of this repositioning strategy. The company expects many more of such contracts to be signed over the near term.

The company continues to implement measures to strengthen and focus its business development department, which includes, amongst other measures, hiring additional professionals. The company continues to derisk its business model by starting to require recurring revenue features within sales agreements. Management has targeted 2016 to 2017 as the time frame, in which the company will be profitable from recurring revenues alone.

We seek Safe Harbor.