PyroGenesis Announces Q3, 2016 Results

MONTREAL, QUEBEC -- (Marketwired) -- Nov 22, 2016 -- PyroGenesis Canada Inc. ( http://pyrogenesis.com) (TSX VENTURE: PYR)(OTCQB: PYRNF), a clean-tech company (the "Company" or "PyroGenesis") that designs, develops, manufactures and commercializes plasma waste-to-energy systems and plasma torch products, announced today its financial and operational results for the third quarter of fiscal year 2016.

Second Quarter Highlights

In Q3 of Fiscal 2016,


--  Revenues increased 40%; over the same period in 2015; 
--  Gross margins before amortization of intangible assets increased to
    64.2%; over the same period in 2015; 
--  Adjusted EBITDA increased 138% 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 $11.5MM in contracts have 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 ending September 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 $10MM, and as such significant pressure was placed on revenues and margins during this period. The strategic decision to produce powders for Additive Manufacturing (3D 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 onetime profit from selling 10 systems, and as such the Company announced on October 26, 2015, the strategy to move into this potentially lucrative market of producing powders for the Additive Manufacturing industry (3D printing).

Revenues

PyroGenesis recorded revenue of $1,902,748 in the third quarter of 2016 ("Q3, 2016"), representing an increase of 40% compared with $1,363,077 recorded in the third quarter of 2015 ("Q3, 2015"). Revenues for the nine first months of fiscal 2016 were $3,738,590, a decrease of 7% over revenues of $4,013,221 reported during the same period in 2015.

Revenues recorded in Q3, 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' existing plasma chemical warfare agent destruction platform with locally available materials, for the complete eradication of chemical warfare agents without creating hazardous by-products; (iv) support services related to PAWDS-Marine systems supplied to the US 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 Q3, 2016, represented a decrease of 31% as compared to $989,362 in Q3, 2015.

In Q3, 2016 the gross margin before amortization of intangible assets was $1,220,643, or 64.2% of revenue. This compares with a gross margin before amortization of intangible assets of $373,715 (27.4% of revenue) for Q3, 2015.

The amortization of intangible assets of $349,268 in Q3, 2016 and Q3, 2015 relates to the licenses 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 December 31, 2016.

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 increased slightly to $ 16,354 in Q3, 2016, compared with $7,488 in Q3, 2015. This represents an increase of 17% 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 ("SG&A") incorporate costs associated with corporate administration, business development, project proposals, operations administration, investor relations and employee training.

SG&A expenses for Q3, 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% compared with $1,048,489 reported for Q3, 2015.

The decrease in SG&A expenses in Q3, 2016 over the same period in 2015 is attributable to the net effect of:


--  an increase of 2% in employee compensation, a decrease of 23% in office
    and general expenses and a decrease of 4% for professional fees, 
--  travel costs decreased by 69%, 
--  depreciation on property and equipment decreased by 24% due to a reduced
    level of investment in machinery and equipment since 2010, when major
    acquisitions were made, 
--  government grants decreased by 100% due to lower level of activities
    supported by such grants and 
--  other expenses decreased by 15%, primarily due to the reduced cost of
    freight and shipping.

Separately, share based payments increased significantly in Q3, 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 September 30, 2016 including the stock options offered on September 25, 2016. On a year-to-date basis, share-based payments expense (a non-cash item) increased by 488%.

Net Loss and Comprehensive loss

The net loss and comprehensive loss for Q3, 2016 was $717,041 compared to a loss of $1,267,748, in Q3, 2015, representing a decrease in loss of 43% year-over-year.

EBITDA

EBITDA (earnings from operations before interest, taxes, depreciation and amortization) loss in Q3, 2016 was $176,553 compared with an EBITDA loss of $739,370 for the same period last year, representing a decrease of 76%. The decrease of $562,817 in the EBITDA loss in Q3, 2016 compared with Q3, 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 Q3, 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%. 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 share 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 $0.20 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 $0.19 per unit for gross proceeds of $1,165,000 (see subsequent events section for further details).

As at September 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 December 31, 2015.

Subsequent Events

Subsequent to Q3, 2016, the total number of options issued by the Company decreased by 2,000,000 as a director refused 2,000,000 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 $11.5MM in contracts have 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 ending September 30, 2016.

2017 now looks like a breakout year for many of the Company's product lines, some of which is already taking place:


--  The Company is on schedule to produce powders for Additive Manufacturing
    (3D printing) this Q1 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  3D
        printing.  According  to  Wohler's  report  (2015)  the  demand  created  by  the
        Additive  Manufacturing  (3D  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  proven  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  we
        now  expect  to  have  at  least  3  orders  placed  and  delivered.  The  market
        potential  for  PyroGenesis'  DROSRITE™  system,  from  Aluminium  dross
        alone,  exceeds  $400MM

--    On  August  2,  2016  Pyrogenesis  announced  that  it  had  signed  a  contract
        for  CDN$8,260,000  with  HPQ  Silicon  Resources  Inc.,  formally  Uragold  Bay
        Resources  Inc.  to  provide  a  200  metric  tonne  (MT)  per  year  PUREVAP™
        pilot  system  to  produce  silicon  metal  directly  from  quartz  (the
        "Contract").  This  system  will  for  the  most  part  be  constructed  in  2017.
        If  successful,  PyroGenesis  benefits  from  a  10%  royalty  on  all  revenues
        derived  from  the  use  of  this  system.

--    Last  but  not  least  is  the  testing  of  PyroGenesis'  chemical  warfare
        destruction  unit  by  its  customer  for  a  cost  to  the  customer  of  over
        $100MM  (of  note,  PyroGenesis  is  not  contracted  for  any  of  this  $100MM).
        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,  such  procurement  would  entail.

 
Management remains focused on reducing PyroGenesis' 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.
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