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

Revenues

PyroGenesis recorded revenue of $2,060,602 in the first quarter of 2018 (“Q1, 2018”), representing an increase of 21% compared with $1,696,138 recorded in the first quarter of 2017 (“Q1, 2017”).

Revenues recorded in the first quarter of 2018 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 sale of a DROSRITE™ System,
3. support services related to PAWDS-Marine systems supplied to the US Navy,

Cost of Sales and Services and Gross Margins

Cost of sales and services before amortization of intangible assets was $1,354,696 in Q1, 2018, representing an increase of 65% compared with $820,264 in Q1, 2017.

In Q1, 2018 cost of direct materials increased to $699,215 (Q1, 2017: $315,721), while employee compensation, subcontracting and manufacturing overhead and other increased to, $542,541 (Q1, 2017 - $483,051), $37,478 (Q1, 2017 – $23,391), $141,394 (Q1, 2017 – $127,312), respectively.

The type of contracts being executed and the nature of the project activity during any given quarter 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.

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 decreased to $88,397 in Q1, 2018, compared with $132,246 in Q1, 2017. This represents a decrease of 33%. The Company continues to make investments in research and development projects involving strategic partners and government bodies.

The gross margin for Q1, 2018, was $705,906, or 34.3% of revenue. This compares with a gross margin of $875,874 (51.6% of revenue) for Q1, 2017.

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 Q1,2018 excluding the costs associated with share-based compensation (a non-cash item in which options vest over a four-year period), were $1,228,406, representing an increase of 22% compared with $1,010,765 reported for Q1, 2017.

The increase in SG&A expenses in Q1, 2018 over the same period in 2017 is attributable to the net effect of:

• an increase of 18% in employee compensation,
• a decrease of 9% for professional fees, primarily due to decrease in investor relations,
• an increase of 41% in office and general expenses, due to an increase in rent, municipal taxes and computer software expenses,
• travel costs increased by 194%, due to an increase in travel abroad,
• depreciation on property and equipment increased by 18%, the asset under development in Q1, 2018 totaling $2,356,374 will begin to be depreciated when the asset is available or ready for use,
• government grants increased by 100% due to higher level of activities supported by such grants and,
• other expenses increased by 35%, primarily due to an increase in insurance expense and computer service subcontract expense.

Separately, share based payments decreased by 6% in Q1, 2018 over the same period in 2017 as a result of the vesting structure of the stock option plan including the stock options granted on November 3, 2017 and February 9, 2018.

Net Comprehensive Loss

The net comprehensive loss from operations for Q1, 2018 of $1,028,795 compared to $298,610, in Q1, 2017, representing an increase in loss of $730,185 (245%) primarily attributable to the factors described above, which have been summarized as follows:

1. an increase in product and service related revenue of $364,464 arising in Q1, 2018,
2. an increase in cost of sales and services totaling $534,432 in Q1, 2018,
3. an increase in SG&A expenses of $209,453 arising in Q1, 2017 as explained above,
4. a decrease in R&D expenses of $15,566 primarily due to the fact that many of the Company’s engineering and R&D resources were concentrated on activities within projects under construction for clients, with such costs being recorded within cost of sales.
5. an increase in net finance costs of $366,330.

EBITDA

The EBITDA loss in Q1, 2018 was $894,244 compared with an EBITDA loss of $115,565 for Q1, 2017, representing an increase of 674%. The increase in the EBITDA loss in Q1, 2018 compared with Q1, 2017 is primarily attributable to the lower gross margin in Q1, 2018.

Adjusted EBITDA loss in Q1, 2018 was $764,281 compared with an Adjusted EBITDA of $22,586 for Q1, 2017. The increase of $786,867 in the Adjusted EBITDA loss in Q1, 2018 is mainly attributable to the increased comprehensive loss of $730,185, an increase in depreciation on property and equipment of $4,519, a decrease of  $53,013 in finance charges and a decrease of $8,188 in share-based payments.

The Modified EBITDA loss in Q1, 2018 was $545,281 compared with a Modified EBITDA loss of $177,757 for Q1 2017, representing an increase of 207%. The increase in the Modified EBITDA loss in Q1 2018 is attributable to the increase as mentioned above in the Adjusted EBITDA and a decrease in change of fair value of investments of $419,343.

Liquidity

The Company has incurred, in the last several years, operating losses and negative cash flows from operations, resulting in an accumulated deficit of $44,229,503 as at March 31, 2018. Furthermore, as at March 31, 2018, the Company’s current liabilities and expected level of expenses for the next twelve months exceed cash on hand of $2,584,988. The Company has relied upon external financings to fund its operations in the past, primarily through the issuance of equity, debt, and convertible debentures, as well as from investment tax credits.

As at March 31, 2018, the Company had cash on hand of $2,584,988 and negative working capital of $5,287,533 compared with a cash balance of $622,846 and negative working capital of $9,403,370 as at December 31, 2017.

Revenue generated from active projects does not yet produce sufficient positive cash flow to fund operations. However, based on current backlog of $5.2MM at May 30, 2018 (more than 70% of 2017 revenues), together with the pipeline of prospective new projects, cash flow from operations are expected to become positive in the very near future.

Separately, at a recent board meeting dated May 29th, 2018, the Board of Directors of the Company passed a resolution, effectively accelerating the vesting period under the Company’s option agreements in the event of a change in control of the Company.

About PyroGenesis Canada Inc.

PyroGenesis Canada Inc., a TSX Venture 50^® high-tech company, is the world leader in the design, development, manufacture and commercialization of advanced plasma processes. We provide engineering and manufacturing expertise, cutting-edge contract research, as well as turnkey process equipment packages to the defense, metallurgical, mining, advanced materials (including 3D printing), oil & gas, and environmental industries. With a team of experienced engineers, scientists and technicians working out of our Montreal office and our 3,800 m² manufacturing facility, PyroGenesis maintains its competitive advantage by remaining at the forefront of technology development and commercialization. Our core competencies allow PyroGenesis to lead the way in providing innovative plasma torches, plasma waste processes, high-temperature metallurgical processes, and engineering services to the global marketplace. Our operations are ISO 9001:2008 certified, and have been since 1997. PyroGenesis is a publicly-traded Canadian Corporation on the TSX Venture Exchange (Ticker Symbol: PYR) and on the OTCQB Marketplace. For more information, please visit www.pyrogenesis.com