UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 6-K

 

REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 UNDER THE SECURITIES EXCHANGE ACT OF 1934

 

For the month of May 2023

 

Commission File Number: 001-39989

 

PYROGENESIS CANADA INC.
(Translation of registrant's name into English)

 

1744, William St. Suite 200

Montreal, QC, H3J1R4

Canada

(Address of principal executive office)

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
Form 20-F [   ]      Form 40-F [ X ]

 

 

EXHIBIT INDEX

Exhibit Number   Description
     
99.1   Press Release dated May 15, 2023
99.2   Condensed Consolidated Interim Financial Statements Three months ended March 31, 2023
99.3   Management’s Discussion and Analysis
99.4   Form 52-109F2 CEO Certification of Interim Filings
99.5   Form 52-109F2 CFO Certification of Interim Filings

 

 

 

 

 

 

 

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

        PYROGENESIS CANADA INC.    
    (Registrant)
     
   
Date: May 15, 2023       /s/ P. Peter Pascali    
    P. Peter Pascali
    Chief Executive Officer
   

 

 

 

 

 

 

 

EdgarFiling

Exhibit 99.1

PyroGenesis Announces 2023 First Quarter Results

MONTREAL, May 15, 2023 (GLOBE NEWSWIRE) -- PyroGenesis Canada Inc. (http://pyrogenesis.com) (TSX: PYR) (NASDAQ: PYR) (FRA: 8PY), a high-tech company (hereinafter referred to as the “Company” or “PyroGenesis”), that designs, develops, manufactures and commercializes advanced plasma processes and sustainable solutions which are geared to reduce greenhouse gases (GHG), is pleased to announce today its financial and operational results for the first quarter ended March 31st, 2023.

“The Company remains intensely focused on its goal of demonstrating its expertise and capturing greater market share across the broad industrial decarbonization landscape, and more specifically around the refined strategic verticals that the company introduced in Q4, namely Energy Transition & Emissions Reduction, Commodity Security & Optimization, and Waste Remediation,” said Mr. P. Peter Pascali, CEO and President of PyroGenesis.

“Our backlog of signed and/or awarded contracts remains strong, at $30.6 million. Our belief in both our strategy and our technology has never been stronger, and the expanding interest from customers throughout the world and in fast-moving industries speaks not just to our potential, but to our immediate future,” continued Mr. Pascali. “Our recent relationship with the New Zealand Trust for the Destruction of Synthetic Refrigerants – who have made PyroGenesis’ SPARC™ waste destruction system central to their efforts to safely reduce greenhouse gas emissions throughout New Zealand – and the rapidly developing interest within the additive manufacturing industry for our metal powders, as noted in our Outlook, are to us the ultimate expressions of this belief.”

“The industrial world is changing, and while our quarterly revenues may fluctuate in this continued period of inflationary and logistical pressures, our customer-ready solutions will only gain more visibility as heavy industry races to meet decarbonization goals or maintain a competitive advantage,” Mr. Pascali added.

The information below represents important highlights from the past quarter, followed by an outline of the company’s strategy and outlook for the next quarter.

Q1 Production Highlights

In Q1 2023, PyroGenesis focused on advancing its updated business strategy that was first outlined in the Company’s 2022 fourth quarter and year-end results.

As noted, as the variety of uses for the Company’s core technologies has expanded, and industry interest has increased, the Company is concentrating its solution ecosystem under three verticals that align with economic drivers that are key to global heavy industry:

Energy Transition & Emission Reduction:

Commodity Security & Optimization:

Waste Remediation:

Within each vertical the Company offers several solutions at different stages to commercialization.


The information below represents highlights from the past quarter for each of the above verticals, followed by an outline of the company’s strategy, and key developments that will impact the subsequent quarters.

Waste Remediation

The purchasing entity was subsequently revealed in February to be The Trust for the Destruction of Synthetic Refrigerants, who will use PyroGenesis’ SPARCTM system as the core technology for New Zealand’s national hazardous refrigerant collection and destruction initiative. The SPARCTM system will be managed and operated by a wholly owned subsidiary of the Trust, for use by the Zealand government-accredited product stewardship programme known as Cool-Safe, run by the Trust. Cool-Safe, also previously known as the Recovery Trust or RECOVERY, has been managing refrigerant gas collection and destruction in New Zealand since 1993. Cool-Safe’s mission is to be a significant factor in the government of New Zealand’s stated goal to reduce synthetic refrigerant greenhouse gas emissions by 2035 by at least 35%. This will be achieved by implementing their own 90% reduction target for hazardous refrigerants.

Up until now any of the refrigerants collected by Cool-Safe for safe destruction have had to be shipped to Australia. With the purchase of the SPARCTM system, New Zealand will have its own on-shore destruction capabilities. With the shift from voluntary to regulated handling of these waste streams in New Zealand, scheduled for 2024, combined with the relaunch and marketing of the Cool-Safe initiative, the collection and safe disposal of hazardous refrigerants in New Zealand is anticipated to be widespread, and the organization had indicated to PyroGenesis that they may require additional SPARCTM systems as the initiative grows.

The three plasma torches ordered are for the USS Gerald R. Ford aircraft carrier, the largest and most technologically advanced warship ever built1, valued at approximately $13 billion. The plasma torches are to be used in PyroGenesis’ proprietary Plasma Arc Waste Destruction System (“PAWDS”) that the Company previously built and delivered to the US Navy.

As noted in the Q&A portion of the 2022 fiscal year end financial results conference call, the order was for plasma torches alone, and included none of the large ancillary equipment such as power supplies that comprise a significant portion of an entire PAWDS system.

Commodity Security & Optimization

With that approval and acceptance, PyroGenesis’ moved to the next and final step in a two-year long supplier qualification process: to provide sample titanium metal powder for verification and confirmation of their chemical and mechanical properties.

As noted at the time by Massimo Dattilo, VP PyroGenesis Additive, the Client “is a very discerning aerospace company with some of the most stringent and demanding standards”, and PyroGenesis “are very proud to have gained their confidence and to be moving forward to the final phase”.

The updated confirmed that process testing referred to in the press release dated January 19th, 2023 from the client HPQ Silicon, is moving forward as expected and represents, in PyroGenesis’ management’s opinion, a key development in the overall project. The tests were geared to not only confirm that the technology works as expected, but also to give input into the subsequent engineering study which will be geared to determining amongst other things, the actual number of systems required for commercialization and the profitability of each.

The PUREVAP™ process is an innovative patented process that will enable the one-step conversion of quartz (SiO2) into high-purity silicon (Si) at reduced costs, energy input and carbon footprint that will propagate its considerable renewable energy potential. PyoGenesis is the engineering and development producer, but also, as part of the terms of the contract with HPQ, PyroGenesis benefits from a royalty payment representing 10% of the Client’s sales, with set minimums.

The Client, HPQ Silicon Inc. (TSX-V: HPQ) is an advanced materials engineering provider that offers sustainable silica (Si02) and silicon (Si) solutions. Based in Quebec, HPQ Silicon is developing a unique portfolio of value-added silicon products sought after by electric vehicle and battery manufacturers, among other industries.

As part of his contract with PyroGenesis Additive, Mr. Dubois will support broadening the Company’s global strategy, with an initial goal to help structure the Company’s plan for establishing European operations.

Energy Transition & Emission Reduction

The agreement outlined initial steps for supporting the Client’s energy-transition goals, with the first step being a computational fluid dynamics (“CFD”) study to gather initial data to evaluate the use of plasma in chemical production boilers. Depending on the results, the Client indicated that it may proceed to a live experimental validation study within their facilities, using PyroGenesis’ plasma torches, as per a separate to-be-negotiated agreement.

The contract was for the delivery of a system to decontaminate the dust generated during the battery recycling process, resulting in highly effective destruction of airborne contaminants with minimal energy use, reduced operating costs, and environmental impact.

The update indicated the successful completion and delivery of four (4) 1-MW plasma torch systems to a major international iron ore producer, Client B (the “Client”), for use in the Client’s iron ore pelletization furnaces – a key upstream process in the steelmaking industry that traditionally relies on fossil-fuel burners. With the completion of this delivery, Client B now has all the necessary components related to the Company’s plasma torch systems on site at one of their key integrated iron ore mining and processing locations, allowing for the installation and trials (also known as site acceptance testing or “SAT”) to then proceed at the Client’s discretion.

The Company also reported that the value of the contract had increased by approximately $500,000 as a result of additional modifications requested by the Client during manufacturing, with total value of the project now exceeding $6.5 million

The update also confirmed that the previously announced contract and planned trials of its plasma torch system with another very large global iron ore client, Client A, continued to advance, as the Client informed PyroGenesis that, despite the Client’s own operational delays, all objectives remain the same, and the trials will be going ahead as designed. That client has already received the contracted plasma system from PyroGenesis in advance of the trials.

Q1 Operational Highlights

With Mr. Curleigh’s return, Mr. P. Peter Pascali stepped down as Chair of PyroGenesis to pursue his regular duties as CEO, President and Director of PyroGenesis. The Board now has eight directors, of which 6 are independent directors.

Q1 Financial Highlights

OUTLOOK

Consistent with the Company’s past practice, and in view of the early stage of market adoption of our core lines of business, we are not providing specific revenue or net income (loss) guidance for 2023. However, numerous events have occurred that allow for a partial window into the remainder of 2023.

Overall Strategy

PyroGenesis provides technology solutions to heavy industry that leverage off of the Company’s proprietary position and expertise in ultra-high temperature processes. The Company has evolved from its early roots of being a specialty-engineering firm to being a provider of a robust technology eco-system for heavy industry that helps address key strategic goals.

The Company believes its strategy to be timely, as multiple heavy industries are committing to major carbon and waste reduction targets at the same time as many governments are increasingly funding environmental technologies and infrastructure projects – all while both are making efforts to ensure the availability of critical minerals during the coming decades of increased output demand.

While there can be no guarantee, the Company believes this evolution of its strategy beyond a greenhouse gas emission reduction emphasis, to an expanded focus that encapsulates the key verticals listed above, both improves the Company’s chances for success while also providing a clearer picture of how the Company’s wide array of offerings work in tandem to support heavy industry goals.

PyroGenesis’ market opportunity remains large, as major industries such as aluminum, steelmaking, manufacturing, and government require factory-ready, technology-based solutions to help steer through the paradoxical landscape of increasing demand and tightening regulations and material availability.

As more of the Company’s offerings reach full commercialization, PyroGenesis will remain focused on attracting influential customers in broad markets, and ensuring that operating expenses are controlled to achieve profitable growth.

For the remainder of 2023, we will continue to sharpen our focus on our strategy that structures our solution ecosystem under the three verticals noted previously: energy transition & emission reduction; commodity security & optimization; and waste remediation. Some key developments to that end, include:

Enhanced Sales and Marketing

Against the backdrop of this strategy, the Company is increasing sales, marketing, and R&D efforts in-line – and in some cases ahead of – the growth curve for industrial change related to greenhouse gas reduction efforts.

Some initial marketing efforts can be seen with the development of promotional videos and video presentations that are currently in use by the Company’s New Zealand-based waste destruction client Cool-Safe, who has embarked on a promotional road-show to introduce their nation-wide hazardous synthetic waste reduction program to industry and consumers. PyroGenesis has partnered with the Client on this roadshow, as the events feature prominently a showcase of the SPARCTM waste destruction technology that is central to the initiative. An introductory video made for that promotional tour can be viewed online, and other material that has been developed by the Company and is in use will be made available to the general public at a later date.

The Company intends to develop additional visual material along these lines for the Company’s other verticals, throughout 2023.

Separately, the Company’s involvement with key industry trade shows has ramped up with the Spring season, with attendance at shows for additive manufacturing and aluminum production already secured and more scheduled.

Upcoming milestones which are expected to confirm the validity of our strategies, are as follows:

Business Line Developments: Near Term (0 – 3 months)

Financial

Payments for Outstanding Major Receivables: The Company was notified that Radian Oil and Gas Services Company has commenced transfer of the US$1.5 million (approximately CA$2 million) against the outstanding receivable of approximately US$9.5 million under the Company’s existing CA$25million+ Drosrite™ contract. As previously announced, PyroGenesis agreed to a strategic extension of the payment plan, by the customer and its end-customer, geared to better align the pressures on the end-user’s operating cash flows created by increased business opportunities.

Innovation Grants: The Company has applied for grants tailored to technology innovation and/or carbon reduction, and expects to have results regarding these applications.

Commodity Security & Optimization

Negotiations for Multiple Metal Powder Orders: concurrent negotiations are underway with several companies for commercial orders of the Company’s metal powders, which are expected to be in excess of $1million.

Product Qualification Process for Global Aerospace Firm: Based on information flow between the Company and the Client, the Company believes that the previously announced 2-year long qualification process to approve the Company’s titanium metal powers for use by a global aerospace firm and their suppliers, will conclude in the near term.

Energy Transition & Emission Reduction

Plasma Torch Order: The Company is in advanced discussions with an international entity, whereby a plasma torch contract, if signed, will be between CDN$3-$4million.

Iron Ore Pelletization Torch Trials: In April 2023, the commissioning of the plasma torch systems, for use in Client B’s pelletization furnaces, was underway, with the Company’s engineers onsite at the Client’s iron ore facility. The commissioning process includes installation, start-up, and site acceptance testing (SAT). “Client B” is the customer to whom the Company previously announced that it had shipped four 1 MW plasma torch systems for use in Client B’s iron ore pelletization furnaces, for trials toward potentially replacing fossil-fuel burners with plasma torches in the Client’s furnaces.

Business Line Developments: Mid Term (4 – 6 months)

Energy Transition & Emission Reduction

Pyro Green-Gas: The Company’s wholly-owned subsidiary is expected to sign a contract with a value of approximately between CDN$10-$15 million.

Please note that projects or potential projects previously announced that do not appear in the above summary updates should not be considered as at risk. Noteworthy developments can occur at any time based on project stages, and the information presented above is a reflection of information on hand.

Financial Summary

Revenues

PyroGenesis recorded revenue of $2.6 million in the first quarter of 2023 (“Q1, 2023”), representing a decrease of $1.6 million compared with $4.2 million recorded in the first quarter of 2022 (“Q1, 2022”),

Revenues recorded in Q1 2023 were generated primarily from:

  (i) PUREVAP™ related sales of $527,600 (2022 Q1 - $441,605)
  (ii) DROSRITE™ related sales of $90,226 (2022 Q1 - $900,079)
  (iii) Support services related to systems supplied to the US Navy $352,103 (2022 Q1 - $745,260)
  (iv) Torch related sales of $1,170,748 (2022 Q1 - $1,041,709)
  (v) Refrigerant destruction (SPARC™) related sales of $67,847 (2022 Q1 – $0)
  (vi) Biogas upgrading & pollution controls of $32,895 (2022 Q1 - $990,045)
  (vii) Other sales and services $350,203 (2022 Q1 - $88,064)

Q1, 2023 revenues decreased by $1.6 million, mainly as a result of:

  (i) DROSRITE™ related sales decreased by $0.8 million due to continued customer delays in funding for the construction of the onsite facility,
  (ii) Support services related to systems supplied for the US Navy decreased by $0.4 million due to remaining project milestones mainly related to inspection, packaging and shipment of the equipment to our customer in order to move forward with installation and commission,
  (iii) Biogas upgrading and pollution controls related sales decreased by $1.0 million of which $0.6 million is due to clients requiring additional modifications prior to installation and commissioning, as well as continuous testing to achieve desired results and $0.4 million due to the Company’s Italian subsidiary and a customer who both agreed on the final acceptance of a contract which resulted in the reversal of costs and profits in excess of billings on uncompleted contracts,
  (iv) Other sales and services increased by $0.3 million due to an increase in sales related to spare parts required by our customers.

As of May 15, 2023, revenue expected to be recognized in the future related to backlog of signed and/or awarded contracts is $30.6 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.

Cost of Sales and Services and Gross Margins

Cost of sales and services was $2.1 million in Q1 2023, representing a decrease of $1.1 million compared with $3.2 million in Q1 2022, primarily due to a decrease of $0.6 million in subcontracting attributed to additional work being completed in-house and a decrease in direct materials of $0.5 million due to lower levels of material required based on the decrease in product and service-related revenues.

The gross margin for Q1, 2023 was $0.5 million or 20.3% of revenue compared to a gross margin of $1.1 million or 25% of revenue for Q1 2022, the decrease in gross margin was mainly attributable to the impact on foreign exchange charge on materials of $0.2 million and the reversal of costs and profits in excess of billings on uncompleted contracts due to the agreed upon final acceptance prior to final completion of $0.4 million.

The amortization of intangible assets for Q1, 2023 was $0.2 million compared to $0.2 million for Q1, 2022. 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 and sales and services are in line with management’s expectations and with the nature of the revenue.

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, 2023 were $7.6 million, representing an increase of 35% compared to $5.6 million for Q1, 2022. The increase is mainly a result of employee compensation increasing to $2.6 million mainly caused by additional headcount.

Share-based compensation expense decreased by $0.7 million, which is a non-cash item and relates mainly to a Q4 2021, and 2022 grants not repeated in 2023. Professional fees are $1.2 million which increased by $0.6 million, due to additional legal fees, consulting services, public listing expenses and patent expenses. Other expenses were favorable by $0.2 million due to a net reduction of insurance expenses, taxes, interest and bank charges. The expected credit loss & bad debt increased to $1.4 million is Q1 2023, and is due to an increase in the allowance for expected credit loss increase of $0.8 million and to the write-off of the accounts receivable related to the Company’s Italian subsidiary subsequent to both parties agreeing on the final acceptance of the contract prior to final completion.

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.

Depreciation on Property and Equipment

The depreciation on property and equipment increased to $0.2 million in Q1 2023, compared with $0.1 in Q1 2022. The expense is comparable to the same quarter last year and the increase is primarily due to the nature and useful lives of the property and equipment being depreciated.

Research and Development (“R&D”) Expenses

During the three-months ended March 31, 2023, the Company incurred $0.3 million of R&D costs on internal projects, a decrease of 33% as compared with $0.5 million in Q1 2022. The decrease in Q1 2023 is primarily related to a decrease in employee compensation, subcontracting, and materials and equipment, offset by the increase in other expenses of $0.2 million related to equipment rentals.

In addition to internally funded R&D projects, the Company also incurred R&D expenditures during the execution of client funded projects. These expenses are eligible for Scientific Research and Experimental Development (“SR&ED”) tax credits. SR&ED tax credits on client funded projects are applied against cost of sales and services (see “Cost of Sales” above).

Financial Expenses

Finance expense (income) for Q1 2023 totaled $0.9 million as compared with an expense of $0.2 million for Q1 2022, representing a favorable variation of $1.1 million year-over-year. The decrease in finance expenses in Q1 2023, is primarily due to the revaluation of balance due on business combination due to the Company’s Italian subsidiary and a customer who both agreed on the final acceptance of a contract, prior to final completion. As a result, the contract did not attain the pre-determined milestone in connection with the balance due on business combination, and a reversal of the liability was recorded.

Strategic Investments

During the three-months ended March 31, 2023, the adjustment to fair market value of strategic investments for Q1 2023 resulted in a gain of $0.3 million compared to a gain in the amount of $1.2 million in Q1 2022. The decrease in gain is attributable to the variation of the market value of the common shares and warrants owned by the Company of HPQ Silicon Inc.

Comprehensive Loss

The comprehensive loss for Q1 2023 of $6.2 million compared to a loss of $4.1 million, in Q1 2022, represents a variation of $2.1 million, and is primarily attributable to the factors described above, which have been summarized as follows:

Liquidity and Capital Resources

As at March 31, 2023, the Company had cash of $1.9 million, included in the net working capital of $0.8 million. Certain working capital items such as billings in excess of costs and profits on uncompleted contracts do not represent a direct outflow of cash. The Company expects that with its cash, liquidity position, the proceeds available from the strategic investment and access to capital markets it will be able to finance its operations for the foreseeable future.

The Company’s term loan balance at March 31, 2023 was $389,857, and varied only slightly since December 31, 2022. The increase from January 1, 2022, to December 31, 2022, was mainly attributable to the additional proceeds received on the Economic Development Agency of Canada loan, which is interest free and will remain so, until the balance is paid over the 60-month period ending March 2029. The average interest expense on the other term loans was 7.2% in the period. The Company does not expect changes to the structure of term loans in the next twelve-month period. The Company maintained two credit facilities which bear interest at variable rates ranging between 7% and 8% at March 31, 2023. The Company expects to reimburse a portion of the credit facilities during 2023, and extend the due date of the remaining balance, while maintaining the similar conditions.

About PyroGenesis Canada Inc.

PyroGenesis Canada Inc., a high-tech company, is a proud leader in the design, development, manufacture and commercialization of advanced plasma processes and sustainable solutions which reduce greenhouse gases (GHG) and are economically attractive alternatives to conventional “dirty” processes. PyroGenesis has created proprietary, patented and advanced plasma technologies that are being vetted and adopted by industry leaders in four massive markets: iron ore pelletization, aluminum, waste management, and additive manufacturing. With a team of experienced engineers, scientists and technicians working out of its Montreal office, and its 3,800 m2 and 2,940 m2 manufacturing facilities, PyroGenesis maintains its competitive advantage by remaining at the forefront of technology development and commercialization.  The operations of PyroGenesis are ISO 9001:2015 and AS9100D certified, having been ISO certified since 1997. For more information, please visit: www.pyrogenesis.com.

Cautionary and Forward-Looking Statements

This press release contains “forward-looking information” and “forward-looking statements” (collectively, “forward-looking statements”) within the meaning of applicable securities laws, including, without limitation, statements regarding anticipated use of the net proceeds of the Private Placement. In some cases, but not necessarily in all cases, forward-looking statements can be identified by the use of forward-looking terminology such as “plans”, “targets”, “expects” or “does not expect”, “is expected”, “an opportunity exists”, “is positioned”, “estimates”, “intends”, “assumes”, “anticipates” or “does not anticipate” or “believes”, or variations of such words and phrases or state that certain actions, events or results “may”, “could”, “would”, “might”, “will” or “will be taken”, “occur” or “be achieved”. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances contain forward-looking statements. Forward-looking statements are not historical facts, nor guarantees or assurances of future performance but instead represent management’s current beliefs, expectations, estimates and projections regarding future events and operating performance.

Forward-looking statements are necessarily based on a number of opinions, assumptions and estimates that, while considered reasonable by the Company as of the date of this release, are subject to inherent uncertainties, risks and changes in circumstances that may differ materially from those contemplated by the forward-looking statements. Important factors that could cause actual results to differ, possibly materially, from those indicated by the forward-looking statements include, but are not limited to, the risk factors identified under “Risk Factors” in the Company’s latest annual information form, and in other periodic filings that the Company has made and may make in the future with the securities commissions or similar regulatory authorities, all of which are available under the Company’s profile on SEDAR at www.sedar.com, or at www.sec.gov. These factors are not intended to represent a complete list of the factors that could affect the Company. However, such risk factors should be considered carefully. There can be no assurance that such estimates and assumptions will prove to be correct. You should not place undue reliance on forward-looking statements, which speak only as of the date of this release. The Company undertakes no obligation to publicly update or revise any forward-looking statement, except as required by applicable securities laws.

Neither the Toronto Stock Exchange, its Regulation Services Provider (as that term is defined in the policies of the Toronto Stock Exchange) nor the NASDAQ Stock Market, LLC accepts responsibility for the adequacy or accuracy of this press release.

FURTHER INFORMATION

Additional information relating to Company and its business, including the 2022 Financial Statements, the Annual Information Form and other filings that the Company has made and may make in the future with applicable securities authorities, may be found on or through SEDAR at www.sedar.com, EDGAR at www.sec.gov or the Company’s website at www.pyrogenesis.com.

Additional information, including directors’ and officers’ remuneration and indebtedness, principal holders of the Company’s securities and securities authorized for issuance under equity compensation plans, is also contained in the Company’s most recent management information circular for the most recent annual meeting of shareholders of the Company.

For further information please contact:
Rodayna Kafal, Vice President, IR/Comms. and Strategic BD
Phone: (514) 937-0002, E-mail: ir@pyrogenesis.com

RELATED LINK: http://www.pyrogenesis.com/

A photo accompanying this announcement is available at https://www.globenewswire.com/NewsRoom/AttachmentNg/7b8318aa-3a1a-4301-acbc-8071b1e15825

 

Exhibit 99.2

 

 

 

 

 

 

PyroGenesis Canada Inc.

 

 

Condensed Consolidated Interim

 

Financial Statements

 

As at March 31, 2023 and for the three-month period ended March 31, 2023 and 2022

 

(Unaudited)

 

 

 

 

 

 

March 31, 2023.

 

 

 

 

 

 

PyroGenesis Canada Inc.

Condensed Consolidated Interim Statements of Financial Position

(Unaudited)

(In Canadian dollars)

    Notes    March 31,    December 31, 
         2023    2022 
         $    $ 
Assets               
Current assets               
Cash        1,887,021    3,445,649 
Accounts receivable   6    14,914,085    18,624,631 
Costs and profits in excess of billings on uncompleted contracts   7    1,193,968    1,051,297 
Inventory   15    1,823,134    1,876,411 
Investment tax credits receivable   8    189,376    276,404 
Income taxes receivable        16,470    14,169 
Current portion of deposits        498,314    432,550 
Current portion of royalties receivable        468,980    455,556 
Contract assets        474,314    499,912 
Prepaid expenses        665,695    771,603 
Total current assets        22,131,357    27,448,182 
Non-current assets               
Deposits        46,272    46,053 
Strategic investments   9    6,211,505    6,242,634 
Property and equipment        3,278,388    3,393,452 
Right-of-use assets        4,662,383    4,818,744 
Royalties receivable        980,291    952,230 
Intangible assets        1,919,121    2,104,848 
Goodwill        2,660,607    2,660,607 
Total assets        41,889,924    47,666,750 
Liabilities               
Current liabilities               
Bank indebtedness        1,087,253    991,902 
Accounts payable and accrued liabilities   10    7,483,627    10,115,870 
Billings in excess of costs and profits on uncompleted contracts   11    7,874,489    9,670,993 
Current portion of term loans   12    61,521    69,917 
Current portion of lease liabilities        2,679,987    2,672,212 
Balance due on business combination        1,968,922    2,088,977 
Income taxes payable        188,633    187,602 
Total current liabilities        21,344,432    25,797,473 
Non-current liabilities               
Lease liabilities        2,755,768    2,861,482 
Term loans   12    328,336    320,070 
Balance due on business combination        801,436    1,818,798 
Total liabilities        25,229,972    30,797,823 
Shareholders’ equity   13           
Common shares        90,443,706    85,483,223 
Warrants        223,200    223,200 
Contributed surplus        25,535,122    24,546,960 
Accumulated other comprehensive income        (18,611)   402 
Deficit        (99,523,465)   (93,384,858)
Total shareholders’ equity        16,659,952    16,868,927 
Total liabilities and shareholders’ equity        41,889,924    47,666,750 

 

The accompanying notes form an integral part of the condensed consolidated interim financial statements.
Contingent liabilities, Note 20

 

 

 

Q1 2023PyroGenesis Canada Inc.1

 

 

PyroGenesis Canada Inc.

Condensed Consolidated Interim Statements of Comprehensive Loss

(Unaudited)

(In Canadian dollars)

         Three months ended March 31, 
    Notes    2023    2022 
         $    $ 
Revenues   5    2,591,622    4,206,762 
Cost of sales and services   15    2,065,049    3,155,039 
Gross profit        526,573    1,051,723 
                
Expenses               
Selling, general and administrative   15    7,557,108    5,612,368 
Research and development, net        323,216    482,432 
         7,880,324    6,094,800 
Net loss from operations        (7,353,751)   (5,043,077)
Changes in fair value of strategic investments   9    300,891    1,176,755 
Finance income (costs), net   16    914,253    (183,900)
                
Net loss before income taxes        (6,138,607)   (4,050,222)
                
Income taxes            56,553 
                
Net loss        (6,138,607)   (4,106,775)
                
Other comprehensive income (loss)               
Items that will be reclassified subsequently to profit or loss               
Foreign currency translation gain (loss) on investments in foreign operations               
         (19,013)   37,656 
Comprehensive loss        (6,157,620)   (4,069,119)
                
Loss per share               
Basic   17    (0.03)   (0.02)
Diluted   17    (0.03)   (0.02)

 

The accompanying notes form an integral part of the condensed consolidated interim financial statements.

 

 

Q1 2023PyroGenesis Canada Inc.2

 

 

PyroGenesis Canada Inc.

Condensed Consolidated Interim Statements of Changes in Shareholders’ Equity

(Unaudited)

(In Canadian dollars)

                             Accumulated           
         Number of                   other           
         common    Common         Contributed    comprehensive           
    Notes    shares    shares    Warrants    surplus    income    Deficit    Total 
              $    $    $    $    $    $ 
Balance - December 31, 2022        173,580,395    85,483,223    223,200    24,546,960    402    (93,384,858)   16,868,927 
Private placement, net of issuance costs   13    5,000,000    4,960,483                    4,960,483 
Share-based payments   13                988,162            988,162 
Other comprehensive loss for the period                        (19,013)       (19,013)
Net loss                            (6,138,607)   (6,138,607)
Balance – March 31, 2023        178,580,395    90,443,706    223,200    25,535,122    (18,611)   (99,523,465)   16,659,952 
                                         
Balance - December 31, 2021        170,125,795    82,104,086        19,879,055    3,444    (61,217,831)   40,768,754 
Share-based payments   13                1,669,630            1,669,630 
Other comprehensive income for the period                        37,656        37,656 
Net loss                            (4,106,775)   (4,106,775)
Balance – March 31, 2022        170,125,795    82,104,086        21,548,685    41,100    (65,324,606)   38,369,265 

 

The accompanying notes form an integral part of the condensed consolidated interim financial statements.

 

 

 

 

 

 

Q1 2023PyroGenesis Canada Inc.3

 

 

PyroGenesis Canada Inc.

Condensed Consolidated Interim Statements of Cash Flows

(Unaudited)

(In Canadian dollars)

    Notes    Three months ended March 31, 
         2023    2022 
         $    $ 
Cash flows provided by (used in)               
Operating activities               
Net loss        (6,138,607)   (4,106,775)
Adjustments for:               
Share-based payments   15    988,162    1,669,630 
Depreciation of property and equipment   15    160,363    141,095 
Depreciation of right-of-use assets   15    156,362    166,224 
Amortization and write-off of intangible assets   15    221,752    218,759 
Amortization of contract assets        25,598    41,129 
Finance costs (income)   16    (914,253)   183,900 
Change in fair value of investments        (300,891)   (1,176,755)
Income taxes            86,245 
Unrealized foreign exchange        (17,814)   34,390 
         (5,819,328)   (2,742,158)
Net change to working capital items   14    (711,303)   (5,023,565)
         (6,530,631)   (7,765,723)
Investing activities               
Additions to property and equipment        (45,299)   (126,172)
Additions to intangible assets        (36,025)   3,407 
Disposal of strategic investments        332,020    1,397,001 
         250,696    1,274,236 
Financing activities               
Bank indebtedness        95,351    943,475 
Interest paid        (127,972)   (97,510)
Repayment of term loans        (8,448)   (8,166)
Repayment of lease liabilities        (97,939)   (47,160)
Repayment of balance due on business combination        (100,000)    
Proceeds from issuance of term loans            107,700 
Proceeds from private placement, net of issuance costs        4,960,483     
         4,721,475    898,339 
                
Effect of exchange rate changes on cash denominated in foreign currencies        (168)   3,259 
                
Net decrease in cash and cash equivalents        (1,558,628)   (5,589,889)
Cash and cash equivalents - beginning of period        3,445,649    12,202,513 
Cash and cash equivalents - end of period        1,887,021    6,612,624 
                
Supplemental cash flow disclosure               
Non-cash transactions:               
Purchase of intangible assets included in accounts payable            4,038 
Purchase of property and equipment included in accounts payable            83,697 
Interest accretion on and revaluation of balance due on business combination        (1,037,417)   82,973 
Accretion interest on royalties receivable        41,485    1,364 
Accretion on term loan        8,266    4,781 

 

The accompanying notes form an integral part of the condensed consolidated interim financial statements

 

 

Q1 2023PyroGenesis Canada Inc.4

PyroGenesis Canada Inc.

Notes to the Condensed Consolidated Interim Financial Statements

As at March 31, 2023 and for the periods ended March 31, 2023 and 2022

(Unaudited)

(In Canadian dollars)

 

1.Nature of operations

 

PyroGenesis Canada Inc. and its subsidiaries (collectively, the “Company”), incorporated under the laws of the Canada Business Corporations Act, was formed on July 11, 2011. The Company owns patents of advanced waste treatment systems technology and designs, develops, manufactures and commercialises advanced plasma processes and sustainable solutions to reduce greenhouse gases. The Company is domiciled at 1744 William Street, Suite 200, Montreal, Quebec. The Company is publicly traded on the TSX Exchange under the Symbol “PYR”, on NASDAQ in the USA under the symbol "PYR" and on the Frankfurt Stock Exchange (FSX) under the symbol “8PY “.

 

2.Going concern

 

These condensed consolidated financial statements have been prepared on the going concern basis, which presumes that the Company will be able to continue its operations for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future.

 

The Company is subject to certain risks and uncertainty associated with the achievement of profitable operations such as the successful signing and delivery of contracts and access to adequate financing.

 

The Company has incurred, in the last years, operating losses and negative cash flows from operations, and as a result, the Company has an accumulated deficit of $99,523,465 as at March 31, 2023, ($93,384,858 as at December 31, 2022). Furthermore, there have been unexpected delays in the collection of certain accounts receivable from contracts closed in a prior year. This has resulted in a shortfall in cash flows from operating activities that would be used in funding the Company’s operations.

 

As at March 31, 2023, the Company has working capital of $786,925 ($1,650,709 as at December 31, 2022) including cash of $1,887,021 ($3,445,649 as at December 31, 2022). The working capital is net of an allowance for credit losses amounting to $5,725,840 ($5,023,283 as at December 31, 2022) as further described in notes 6 and 7. The Company’s business plan is dependent upon the successful completion of contracts and also the receipt of payments from certain contracts closed in a prior year and expects these payments to be made during fiscal 2023, as well as the achievement of profitable operations through the signing, completion and delivery of additional contracts or a reduction in certain operating expenses. In the absence of this, the Company is dependent upon raising additional funds to finance operations within and beyond the next twelve months. The Company has been successful in securing financing in the past and has relied upon external financing to fund its operations, primarily through the issuance of equity, debt and convertible debentures. The Company completed a private placement in October 2022 for an amount of $1,318,980 and also completed another private placement in March 2023 for net proceeds $4,960,483 (note 13). While the Company has been successful in securing financing, raising additional funds is dependent on a number of factors, some of which are outside the Company’s control, and therefore there is no assurance that it will be able to do so in the future or that these sources will be available to the Company or that they will be available on terms which are acceptable to the Company. These conditions indicate the existence of a material uncertainty that may cast significant doubt about the Company’s ability to continue operating as a going concern.

 

The condensed consolidated financial statements have been prepared on a going concern basis and do not include any adjustments to the amounts and to classifications of the assets and liabilities that might be necessary should the Company be unable to achieve its plan and continue in business. If the going concern assumption were not appropriate, adjustments, which could be material, would be necessary to the carrying value of assets and liabilities, the reported expenses, and the classification of items on the condensed consolidated statement of financial position.

 

3.Basis of preparation

 

(a)Statement of compliance

 

These financial statements have been prepared in accordance with International Accounting Standards (“IAS”) 34 Interim Financial Statements, as issued by the International Accounting Standards Board ("IASB"). These condensed consolidated interim financial statements do not include all of the necessary information required for full annual financial statements in accordance with International Financial Reporting Standards (“IFRS”) and should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2022.

 

 

Q1 2023PyroGenesis Canada Inc.5

PyroGenesis Canada Inc.

Notes to the Condensed Consolidated Interim Financial Statements

As at March 31, 2023 and for the periods ended March 31, 2023 and 2022

(Unaudited)

(In Canadian dollars)

 

These financial statements were approved and authorized for issuance by the Board of Directors on May 15, 2023.

 

(b)Functional and presentation currency

 

These consolidated financial statements are presented in Canadian dollars, which is the functional currency of PyroGenesis, Drosrite International LLC and Pyro Green-Gas Inc. The functional currency of Airscience Italia SRL is the Euro whereas the functional currency of Airscience Technologies Private Limited is the Indian rupee.

 

(c)Basis of measurement

 

These financial statements have been prepared on the historical cost basis except for:

 

(i)strategic investments which are accounted for at fair value,

 

(ii)stock-based payment arrangements, which are measured at fair value on the grant date pursuant to IFRS 2, Share-based Payment; and

 

(iii)lease liabilities, which are initially measured at the present value of minimum lease payments

 

(d)Basis of consolidation

 

For financial reporting purposes, subsidiaries are defined as entities controlled by the Company. The Company controls an entity when it has power over the investee; it is exposed to, or has rights to, variable returns from its involvement with the entity; and it has the ability to affect those returns through its power over the entity.

 

In instances where the Company does not hold a majority of the voting rights, further analysis is performed to determine whether or not the Company has control of the entity. The Company is deemed to have control when, according to the terms of the shareholder’s and/or other agreements, it makes most of the decisions affecting relevant activities.

 

These consolidated financial statements include the accounts of PyroGenesis and its subsidiaries, Drosrite International LLC and Pyro Green-Gas Inc. and its subsidiaries. Drosrite International LLC is owned by a member of the Company’s key management personnel and close member of the Chief Executive Officer (“CEO”) and controlling shareholder’s family and is deemed to be controlled by the Company. All transactions and balances between the Company and its subsidiaries have been eliminated upon consolidation.

 

The accounting policies disclosed in the December 31, 2022 year-end consolidated financial statements have been applied consistently in the preparation of these condensed consolidated interim financial statements. Finance income (costs) and changes in fair value of strategic investments are excluded from the loss from operations in the consolidated statements of comprehensive loss.

 

4.Significant accounting judgments, estimates and assumptions

 

The significant judgments, estimates and assumptions applied by the Company in these condensed consolidated interim financial statements are the same as those applied by the Company in its audited annual financial statements as at and for the year ended December 31, 2022.

 

 

Q1 2023PyroGenesis Canada Inc.6

PyroGenesis Canada Inc.

Notes to the Condensed Consolidated Interim Financial Statements

As at March 31, 2023 and for the periods ended March 31, 2023 and 2022

(Unaudited)

(In Canadian dollars)

 

5.Revenues

 

The following is a summary of the Company’s revenues by product line:

 

    March 31,    March 31, 
    2023    2022 
    $    $ 
Revenue from contracts with customers by product line:          
High purity metallurgical grade silicon & solar grade silicon from quartz (PUREVAP™)   527,600    441,605 
Aluminium and zinc dross recovery (DROSRITE™)   90,226    900,079 
Development and support related to systems supplied to the U.S. Navy   352,103    745,260 
Torch-related sales   1,170,748    1,041,709 
Refrigerant destruction (SPARC™)   67,847     
Biogas upgrading and pollution controls   32,895    990,045 
Other sales and services   350,203    88,064 
    2,591,622    4,206,762 

 

The following is a summary of the Company’s revenues by revenue recognition method:

 

    March 31,    March 31, 
    2023    2022 
    $    $ 
Revenue from contracts with customers:          
Sales of goods under long-term contracts recognized over time   2,549,220    3,681,601 
Sales of goods at a point of time   42,402    525,161 
    2,591,622    4,206,762 

 

See Note 22 for sales by geographic area.

 

Transaction price allocated to remaining performance obligations

 

As at March 31, 2023, revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially satisfied) at the reporting date is $24,499,540 ($26,741,550 as at December 31, 2022). Revenue will be recognized as the Company satisfies its performance obligations under long-term contracts, which is expected to occur over the next 3 years.

 

 

Q1 2023PyroGenesis Canada Inc.7

PyroGenesis Canada Inc.

Notes to the Condensed Consolidated Interim Financial Statements

As at March 31, 2023 and for the periods ended March 31, 2023 and 2022

(Unaudited)

(In Canadian dollars)

 

6.Accounts receivable

 

Details of accounts receivable based on past due terms were as follows:

 

    March 31,    December 31, 
    2023    2022 
    $    $ 
Current   3,704,926    6,578,269 
1 – 30 days   30,379    15,959 
31 – 60 days   175,198    57,944 
61 – 90 days   451,091    718,239 
Greater than 90 days   13,562,461    13,790,716 
Holdback receivable   1,452,351    1,536,115 
Total trade accounts receivable   19,376,406    22,697,242 
Allowance for expected credit loss   (5,450,840)   (4,693,283)
Other receivables   353,484    240,560 
Sales tax receivable   635,036    380,112 
    14,914,085    18,624,631 

 

As at March 31, 2023 the allowance for expected credit loss on trade accounts receivable is $5,450,840 ($4,693,283 as at December 31, 2022). The amount as at March 31, 2023, includes $4,750,000 attributable to one specific customer, whereby the carrying amount has been reduced from $12,799,827 to $8,049,827. The remaining credit allowance is $700,840 and attributable to all other trade accounts, whereby the carrying value was reduced from $6,576,579 to $5,875,739. On the basis of the Company’s expected credit loss policy, the allowance was determined generally by applying a loss rate of 1% on balances 1-30 days past the invoice date, 2% for 31-60 days, 3% for 61-90 days and a minimum of 10% for those beyond 90 days. Specific consideration was applied for situations where the receivable is a holdback on a contract, and also for customers that have exceeded normal payment terms.

 

The closing balance of the trade receivables credit loss allowance as at March 31, 2023 reconciles with the trade receivables credit loss allowance opening balance as follows:

 

    $ 
Loss allowance at December 31, 2021   520,000 
Loss recognized during the year   4,150,000 
Foreign exchange   23,283 
Loss allowance at December 31, 2022   4,693,283 
Loss recognized during the period   756,000 
Foreign exchange   1,557 
Loss allowance at March 31, 2023   5,450,840 

 

7.Costs and profits in excess of billings on uncompleted contracts

 

As at March 31, 2023, the Company had seventeen contracts with total billings of $15,293,633 which were less than total costs incurred and had recognized cumulative revenue of $16,762,601 since those projects began. This compares with eighteen contracts with total billings of $10,475,299 which were less than total costs incurred and had recognized cumulative revenue of $11,856,596 as at December 31, 2022.

 

The net amount of $1,193,968 as at March 31, 2023 includes an expected credit loss allowance of $275,000 ($330,000 as at December 31, 2022). On the basis of the Company’s expected credit loss policy, the allowance was determined generally by applying a loss rate of 2% on all balances, and adjusting for specific situations, such as past due customers, whereby the loss rate varied from 25% to 50%.

 

 

Q1 2023PyroGenesis Canada Inc.8

PyroGenesis Canada Inc.

Notes to the Condensed Consolidated Interim Financial Statements

As at March 31, 2023 and for the periods ended March 31, 2023 and 2022

(Unaudited)

(In Canadian dollars)

 

Changes in costs and profits in excess of billings on uncompleted contracts during the three-month period ended March 31, 2023, are explained by $462,099 recognized at the beginning of the period being transferred to accounts receivable, $549,770 resulting from changes in the measure of progress and $55,000 due to the variation of the expected credit loss allowance. The variation for the three-month period ended March 31, 2022, is explained by $104,689 recognized at the beginning of the period being transferred to accounts receivables and $1,045,914 resulting from changes in the measure of progress.

 

8.Investment tax credits

 

An amount recognized in the three-month period ended March 31, 2023, included $19,942 of investment tax credits earned in the period whereby $2,346 was recorded against cost of sales and services, $10,096 against research and development expenses and $7,500 against selling, general and administrative expenses, as well as $169,434 of investment tax credits earned in prior years that met the criteria for recognition in 2022. During the three-month period ended March 31, 2022, the Company earned $10,498 of investment tax credits, whereby $1,829 was recognized against cost of sales and services, $1,169 against research and development expenses and $7,500 against selling, general and administrative expenses.

 

9.Strategic investments

 

    March 31,    December 31, 
    2023    2022 
    $    $ 
Beauce Gold Fields (“BGF”) shares – level 1   46,161    56,419 
HPQ Silicon Inc. (“HPQ”) shares - level 1   5,316,138    5,415,749 
HPQ warrants – level 3   849,206    770,466 
    6,211,505    6,242,634 

 

The change in the strategic investments is summarized as follows:

 

   (“BGF”) shares – level 1  (“HPQ”) shares - level 1  HPQ warrants – level 3
    Quantity    $    Quantity    $    Quantity    $ 
Balance, December 31, 2021   1,025,794    123,095    26,752,600    12,306,196    9,594,600    2,472,368 
Additions           6,800,000    3,196,000    6,800,000    408,000 
Disposed           (11,447,500)   (3,922,244)        
Change in the fair value       (66,676)       (6,164,203)       (2,109,902)
Balance, December 31, 2022   1,025,794    56,419    22,105,100    5,415,749    16,394,600    770,466 
Disposed           (1,257,500)   (332,020)        
Change in the fair value       (10,258)       232,409        78,740 
Balance, March 31, 2023   1,025,794    46,161    20,847,600    5,316,138    16,394,600    849,206 

 

 

Q1 2023PyroGenesis Canada Inc.9

PyroGenesis Canada Inc.

Notes to the Condensed Consolidated Interim Financial Statements

As at March 31, 2023 and for the periods ended March 31, 2023 and 2022

(Unaudited)

(In Canadian dollars)

 

At March 31, 2023 and December 31, 2022, the fair value of the HPQ warrants was measured using the Black-Scholes option pricing model using the following assumptions:

 

   March 31, 2023  December 31, 2022
Number of warrants   1,200,000    4,394,600    4,000,000    6,800,000    1,200,000    4,394,600    4,000,000    6,800,000 
Date of issuance   29-Apr-20    2-Jun-20    3-Sep-20    20-Apr-22    29-Apr-20    2-Jun-20    3-Sep-20    20-Apr-22 
Exercise price ($)   0.10    0.10    0.61    0.60    0.10    0.10    0.61    0.60 
Assumptions under the Back Sholes model:                                        
Fair value of the shares ($)   0.26    0.26    0.26    0.26    0.25    0.25    0.25    0.25 
Risk free interest rate (%)   3.79    3.79    3.79    3.79    4.03    4.03    4.03    4.03 
Expected volatility (%)   58.01    51.69    75.55    79.28    80.55    73.74    76.85    74.58 
Expected dividend yield                                
Contractual remaining life (in months)   1    2    5    13    4    5    8    16 

 

As at March 31, 2023, a gain from initial recognition of the warrants of $201,675 ($280,926 at December 31, 2022) has been deferred off balance sheet until realized.

 

10.Accounts payable and accrued liabilities

 

    March 31,    December 31, 
    2023    2022 
    $    $ 
Accounts payable   4,735,085    6,065,996 
Accrued liabilities   1,602,022    2,891,053 
Sale commissions payable1   806,364    904,724 
Accounts payable to the controlling shareholder and CEO   340,156    254,097 
    7,483,627    10,115,870 

 

1 Sale commissions payable relate to the costs to obtain long-term contracts with clients.

 

11.Billings in excess of costs and profits on uncompleted contracts

 

The amount to date of costs incurred and recognized profits less recognized losses for construction projects in progress amounted to $30,186,310 ($37,374,909 as at December 31, 2022).

 

Payments to date received were $38,060,799 on contracts in progress ($47,045,902 as at December 31, 2022).

 

Changes in billings in excess of costs and profits on uncompleted contracts during the three-month period ended March 31, 2023, is explained by $1,880,534 recognized at the beginning of the period being recognized as revenue, and a decrease of $84,030 resulting from cash received, excluding amounts recognized as revenue. The variation in billings in excess of costs and profits on uncompleted contracts during the three-month period ended March 31, 2022, is explained by $1,510,567 recognized at the beginning of the period being recognized as revenue, and an increase of $1,186,954 resulting from cash received, excluding amounts recognized as revenue.

 

Q1 2023PyroGenesis Canada Inc.10

PyroGenesis Canada Inc.

Notes to the Condensed Consolidated Interim Financial Statements

As at March 31, 2023 and for the periods ended March 31, 2023 and 2022

(Unaudited)

(In Canadian dollars)

 

12.Term loans

 

    Economic               Canada      
    Development Agency    Other Term    Other Term    Emergency Business      
    of Canada Loan1    Loans2    Loans3    Account Loan4    Total 
    $    $    $    $    $ 
Balance, December 31, 2022   320,070    11,617    8,300    50,000    389,987 
Accretion   8,266                8,266 
Payments       (3,416)   (4,980)       (8,396)
Balance, March 31, 2023   328,336    8,201    3,320    50,000    389,857 
Less current portion       (8,201)   (3,320)   (50,000)   (61,521)
Balance, March 31, 2023   328,336                328,336 

 

1 Maturing in 2029, non-interest bearing, payable in equal instalments from April 2024 to March 2029.

 

2 Maturing October 23, 2023 bearing interest at a rate of 6.95% per annum, payable in monthly instalments of $1,200 (including interest in capital) secured by automobile (carrying amount of $7,556 at March 31, 2023).

 

3 Maturing in May 2023, payable in monthly instalments of $1,660, bearing interest at 7.45%.

 

4 Loan bearing no interest and no minimum repayment, if repaid by December 2023.

 

13.Shareholders’ equity

 

Common shares and warrants

 

Authorized:

 

The Company is authorized to issue an unlimited number of common shares without par value.

 

Issuance of units

 

On March 8, 2023, the Company completed a non-brokered private placement consisting of the issuance and sale of 5,000,000 units of the Company at a price of $1.00 per unit, for net proceeds of $4,960,483 (gross proceeds of $5,000,000). Each unit consists of one common share of the Company and one common share purchase warrant. Each warrant entitles the holder thereof to purchase one common share at a price of $1.25 until March 7, 2025. The entire amount is allocated to the common shares as the fair value of the common shares on March 8, 2023 was $1.38.

 

Stock options

 

The Company has a stock option plan authorizing the Board of Directors to grant options to directors, officers, employees and consultants to acquire common shares of the Company at a price computed by reference to the closing market price of the shares of the Company on the business day before the Company notifies the stock exchanges of the grant of the option. The number of shares which may be granted to any one person shall not exceed 5% (2% for consultants) of total share capital over a twelve-month period.

 

 

Q1 2023PyroGenesis Canada Inc.11

PyroGenesis Canada Inc.

Notes to the Condensed Consolidated Interim Financial Statements

As at March 31, 2023 and for the periods ended March 31, 2023 and 2022

(Unaudited)

(In Canadian dollars)

 

The following table sets out the activity in stock options:

 

         Weighted 
    Number of    average 
    options    exercise price 
         $ 
Balance – December 31, 2021   8,403,000    3.10 
Granted   2,475,000    3.55 
Exercised1   (2,440,000)   0.58 
Forfeited   (242,500)   4.07 
Balance, December 31, 2022   8,195,500    3.96 
Granted   1,625,000    1.03 
Forfeited   (10,000)   4.41 
Balance, March 31, 2023   9,810,500    3.47 

(1) The weighted fair market value of the share price for options exercised in 2022 was $1.44.

 

Grants in 2023

 

The Company granted 150,000 stock options to the President and Chief Executive Officer of the Company, and 500,000 stock options to members of its Board of Directors. The stock options have an exercise price of $1.03 per common share, vest immediately and are exercisable over a period of five (5) years. The Company recorded an expense amounting to $453,204 related to these options in fiscal 2022 as the stock options granted related to the services rendered in 2022, for which there was a shared understanding of the terms and conditions related to such grant prior to the grant date.

 

The Company also granted 975,000 stock options to employees of the Company. The stock options have an exercise price of $1.03 per common share. The 975,000 options will vest as follows: 10 percent as of the day of the grant, 20 percent at the first anniversary of the date of the grant, 30 percent on the second anniversary of the date of the grant and 40 percent on the third anniversary of the date of the grant. All options mentioned above are exercisable over a period of five (5) years.

 

Grants in 2022

 

On January 3, 2022, the Company granted 150,000 stock options to the President and Chief Executive Officer of the Company, and 300,000 stock options to members of its Board of Directors. The stock options have an exercise price of $3.36 per common share, vest immediately and are exercisable over a period of five (5) years.

 

 

Q1 2023PyroGenesis Canada Inc.12

PyroGenesis Canada Inc.

Notes to the Condensed Consolidated Interim Financial Statements

As at March 31, 2023 and for the periods ended March 31, 2023 and 2022

(Unaudited)

(In Canadian dollars)

 

The weighted average fair value of stock options granted for the three-month period ended March 31, 2023, was $0.70 ($2.17 for the three-month period ended March 31, 2022). The weighted average fair value of each option granted was estimated at the grant date for purposes of determining share-based payment expense using the Black-Scholes option pricing model based on the following weighted-average assumptions:

 

   2023  2022
Number of options granted   650,000    975,000    450,000 
Exercise price ($)   1.03    1.03    3.36 
Fair value of each option under the Black-Scholes pricing model ($)   0.70    0.70    2.17 
Assumptions under the Black-Scholes model:               
Fair value of the shares ($)   1.03    1.03    3.36 
Risk-free interest rate (%)   3.38    3.38    1.25 
Expected volatility (%)   83.15    83.15    82.45 
Expected dividend yield            
Expected life (number of months)   60    60    60 

 

The underlying expected volatility was determined by reference to historical data of the Company’s share price. No special features inherent to the stock options granted were incorporated into the measurement of fair value.

 

As at March 31, 2023, the outstanding options, as issued under the stock option plan to directors, officers, employees and consultants for the purchases of one common share per option, are as follows:

 

    Number of                   Number of    Number of         
    stock                   stock    stock    Exercise    
    options                   options    options    price    
Issuance date   31-Dec-22    Granted    Exercised    Forfeitures    31-Mar-23    vested 1    per option   Expiry date
                                  $    
July 3, 2018   300,000                300,000    300,000    0.51   July 3, 2023
September 29, 2019   100,000                100,000    100,000    0.51   September 29, 2024
January 2, 2020   100,000                100,000    100,000    0.45   January 2, 2025
July 16, 2020   2,200,500            (10,000)   2,190,500    1,770,500    4.41   July 16, 2025
October 26, 2020   50,000                50,000    37,500    4.00   October 26, 2025
April 6, 2021   550,000                550,000    410,000    8.47   April 6, 2026
June 1, 2021   200,000                200,000    100,000    6.59   June 1, 2026
June 14, 2021   100,000                100,000    50,000    6.70   June 14, 2026
October 14, 2021   100,000                100,000    30,000    5.04   October 14, 2026
December 17, 2021   1,920,000                1,920,000    1,920,000    3.13   December 17, 2026
December 31, 2021   100,000                100,000    30,000    3.61   December 31, 2026
January 3, 2022   450,000                450,000    450,000    3.36   January 3, 2027
April 5, 2022   400,000                400,000    40,000    2.96   April 5, 2027
June 2, 2022   1,500,000                1,500,000    375,000    3.88   June 2, 2027
July 13, 2022   125,000                125,000    12,500    2.14   July 13, 2027
January 2, 2023       1,625,000            1,625,000    747,500    1.03   January 2, 2028
    8,195,500    1,625,000        (10,000)   9,810,500    6,473,000    3.47    

(1) At March 31, 2023, the weighted average exercise price for options outstanding which are exercisable was $3.53.

 

For the three-month period ended March 31, 2023, a stock-based compensation expense of $988,162 was recorded in Selling, general and administrative expenses in the condensed consolidated statements of comprehensive loss, ($1,669,630 for the three-month period ended March 31, 2022).

 

At March 31, 2023, an amount of $2,876,240 ($3,184,866 at December 31, 2022) remains to be amortized until January 2026 related to the grant of stock options.

 

 

Q1 2023PyroGenesis Canada Inc.13

PyroGenesis Canada Inc.

Notes to the Condensed Consolidated Interim Financial Statements

As at March 31, 2023 and for the periods ended March 31, 2023 and 2022

(Unaudited)

(In Canadian dollars)

 

Share purchase warrants

 

The following table reflects the activity in warrants during the period ended March 31, 2023, and the number of issued and outstanding share purchase warrants at March 31, 2023:

 

   Number of           Number of      
   warrants           warrants  Exercise   
   Dec 31,           Mar 31,  price per   
   2022  Issued  Exercised  Expired  2023  warrant  Expiry date
Issuance of warrants – October 19, 2022   1,014,600                1,014,600    1.75   October 19, 2024
Issuance of warrants – March 7, 2023       5,000,000            5,000,000    1.25   March 7, 2025
    1,014,600    5,000,000            6,014,600         

 

14.Supplemental disclosure of cash flow information

 

    March 31,    March 31, 
    2023    2022 
    $    $ 
           
Accounts receivable   3,710,546    462,589 
Costs and profits in excess of billings on uncompleted contracts   (142,671)   (941,225)
Inventory   53,277    (385,571)
Investment tax credits receivable   87,028    45,885 
Deposits   (65,983)   (1,061,420)
Prepaid expenses   105,908    (2,180,156)
Accounts payable and accrued liabilities   (2,662,904)   (640,057)
Billings in excess of costs and profits on uncompleted contracts   (1,796,504)   (323,610)
    (711,303)   (5,023,565)

 

15.Supplemental disclosure on statements of comprehensive loss

 

    March 31,    March 31, 
    2023    2022 
    $    $ 
           
Inventories recognized in cost of sales   93,726    212,595 
Amortization of intangible assets   221,752    218,759 
Depreciation of property and equipment   160,363    142,990 
Depreciation of ROU assets   156,362    166,224 
Employee benefits   3,458,524    4,380,499 
Share-based payments   988,162    1,669,630 
Awarded grants       39,434 

 

 

Q1 2023PyroGenesis Canada Inc.14

PyroGenesis Canada Inc.

Notes to the Condensed Consolidated Interim Financial Statements

As at March 31, 2023 and for the periods ended March 31, 2023 and 2022

(Unaudited)

(In Canadian dollars)

 

16.Net finance costs (income)

 

    March 31,    March 31, 
    2023    2022 
    $    $ 
Financial expenses          
Interest on term loans   361    851 
Interest on lease liabilities   93,121    77,465 
Interest accretion on and revaluation of balance due on business combination1   (1,037,417)   82,973 
Penalties and other interest expenses   71,167    23,975 
    (872,768)   185,264 
Financial income          
Accretion interest on royalty receivable   (41,485)   (1,364)
Net finance costs (income)   (914,253)   183,900 

1 During the three-month period ended March 31, 2023, the Company’s Italian subsidiary and a customer agreed on the final acceptance of a contract, prior to final completion. As a result, the contract did not attain the agreed milestone in connection with the balance due on business combination, and a reversal of the liability was recorded.

 

17.Loss per share

 

The following table provides a reconciliation between the number of basic and fully diluted shares outstanding for the three-month period ended March 31:

 

    2023    2022 
    $    $ 
Weighted average number of common shares outstanding   174,913,728    170,953,374 
Weighted average number of diluted shares outstanding   174,913,728    170,953,374 
           
Number of anti-dilutive stock options and warrants excluded from fully diluted earnings per share calculation   15,825,100    6,745,100 

 

18.Related party transactions

 

During the three-month period ended March 31, 2023, the Company concluded the following transactions with related parties:

 

In 2023, rent and property taxes were charged by a trust whose beneficiary is the controlling shareholder and CEO of the Company in the amount of $69,891 ($69,054 for the three-month period ended March 31, 2022).

 

These expenses are recorded in the captions cost of sales and services and in selling, general and administrative in the consolidated statements of comprehensive loss. As at March 31, 2023 the right-of-use asset and the lease liabilities amount to $732,500 and $815,823 respectively, ($799,090 and $881,635 respectively at December 31, 2022).

 

A balance due to the controlling shareholder and CEO of the Company amounted to $340,156 at March 31, 2023 ($254,097 at December 31, 2022) and is included in accounts payable and accrued liabilities.

 

 

Q1 2023PyroGenesis Canada Inc.15

PyroGenesis Canada Inc.

Notes to the Condensed Consolidated Interim Financial Statements

As at March 31, 2023 and for the periods ended March 31, 2023 and 2022

(Unaudited)

(In Canadian dollars)

 

The Key Management Personnel of the Company, in accordance with IAS 24, are the members of the Board of Directors and certain officers. Total compensation to key management consisted of the following:

 

    March 31,    March 31, 
    2023    2022 
    $    $ 
Salaries – key management   305,457    315,971 
Pension contributions   5,657    5,893 
Fees – Board of Directors   48,172    20,000 
Share-based compensation – officers   29,621    326,074 
Share-based compensation – Board of Directors       652,147 
Other benefits – key management   155,257    6,439 
Total compensation   544,164    1,326,524 

 

19.Financial instruments

 

As part of its operations, the Company carries a number of financial instruments. It is management's opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial instruments except as otherwise disclosed. The Company's overall risk management program focuses on the unpredictability of the financial market and seeks to minimize potential adverse effects on the Company's financial performance. The Company does not use derivative financial instruments to hedge these risks.

 

Foreign currency risk

 

The Company enters into transactions denominated in US dollars for which the related revenues, expenses, accounts receivable and accounts payable and accrued liabilities balances are subject to exchange rate fluctuations.

 

As at March 31, 2023 and December 31, 2022 the Company's exposure to foreign exchange risk for amounts denominated in US dollars is as follows:

 

    March 31,    December 31, 
    2023    2022 
    $    $ 
Cash   719,009    2,871,062 
Accounts receivable   10,395,044    13,537,912 
Accounts payable and accrued liabilities   (1,034,625)   (1,713,717)
Total   10,079,428    14,695,257 

 

Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates.

 

Sensitivity analysis

 

At March 31, 2023, if the US dollar had changed by 10% against the Canadian dollar with all other variables held constant, the impact on pre-tax gain or loss and equity for the three-month period ended March 31, 2023 would have been $1,008,000.

 

Credit concentration

 

During the three-month period ended March 31, 2023, three customers accounted for 68% (March 31, 2022 – three customers for 49%) of revenues from operations.

 

Q1 2023PyroGenesis Canada Inc.16

PyroGenesis Canada Inc.

Notes to the Condensed Consolidated Interim Financial Statements

As at March 31, 2023 and for the periods ended March 31, 2023 and 2022

(Unaudited)

(In Canadian dollars)

 

    Three months ended March 31,    Three months ended March 31, 
    2023    2022 
         % of total         % of total 
    Revenues    revenues    Revenues    revenues 
    $    %    $    % 
Customer 1   1,074,888    41    745,260    18 
Customer 2   384,119    15    723,571    17 
Customer 3   315,850    12    594,142    14 
Total   1,774,857    68    2,062,973    49 

 

Two customers accounted for 66% and 20%, respectively (December 31, 2022 – three customers for 56%, 16% and 11%, respectively) of the total trade accounts receivable with amounts owing to the Company of $16,603,323 (2022 - $18,894,727), representing the Company's major credit risk exposure. Credit concentration is determined based on customers representing 10% or more of total revenues and/or total accounts receivable.

 

Credit risk

 

Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. The maximum credit risk to which the Company is exposed as at March 31, 2023 represents the carrying amount of cash, accounts receivable (except sales tax receivable), costs and profits in excess of billings on uncompleted contracts, deposits and royalties receivable.

 

Cash is held with major reputable financial institutions.

 

Management has established a credit policy under which each new customer is analysed individually for creditworthiness before the Company’s payment and delivery terms and conditions are offered. The Company’s review could include reviewing external ratings, if they are available, financial statements, credit agency information, industry information and in some cases bank references. The Company’s exposure to credit risk is mainly influenced by the individual characteristics of each customer. In monitoring customer credit risk, customers are identified according to their characteristics such as their geographic location, industry, trading history with the Company and existence of previous financial difficulties.

 

The Company does not generally require collateral or other security from customers on accounts receivable, however, the contract terms may include the possibility of recourse in the event of late payment. The Company believes that there is no unusual exposure associated with the collection of these receivables.

 

The credit risk associated with costs and profits in excess of billings on uncompleted contracts is similar to that of accounts receivable, as these amounts are accumulated and converted to accounts receivable as invoicing milestones are reached.

 

The royalties receivable are due from a company in which the Company has a strategic investments. The Company does not have collateral or other security associated with the collection of this receivable. The carrying amount of the royalties receivable have been discounted to reflect the time value of money and credit risk of the counterparty.

 

The deposits are payments made to suppliers and entities from which the Company leases property. The Company does not have collateral or other security associated with the collection of these deposits. As at March 31, 2023 and December 31, 2022, no loss allowance has been recognized in connection with these deposits and the maximum exposure is the carrying amount of these deposits.

 

During the three-month period ended March 31, 2023, and the year-end December 31, 2022, provisions for expected credit losses were recorded, however, the accounts provisioned by the loss are still subject to enforcement activity in order to collect the balances due.

 

 

Q1 2023PyroGenesis Canada Inc.17

PyroGenesis Canada Inc.

Notes to the Condensed Consolidated Interim Financial Statements

As at March 31, 2023 and for the periods ended March 31, 2023 and 2022

(Unaudited)

(In Canadian dollars)

 

Interest rate risk

 

Interest rate risk is the risk that the value of a financial instrument might be adversely affected by a change in interest rates. Changes in market interest rates may have an effect on the cash flows associated with some financial assets and liabilities, known as cash flow risk, and on the fair value of other financial assets or liabilities, known as price risk, and on the fair value of investments or liabilities, known as price risks. The Company is exposed to a risk of fair value on term loans as those financial instruments bear interest at fixed rates and to cash flow risk from the variable interest rate of the bank indebtedness.

 

Price risk

 

Price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market price (other than those arising from foreign currency risk and interest risk), whether those changes are caused by factors specific to the individual financial instrument or its issuers or factors affecting all similar financial instruments traded in the market. The most significant exposure to the price risk for the Company arises from its investments in shares and warrants of public companies quoted on the TSX Venture Exchange. If equity prices had increased or decreased by 25% as at March 31, 2023, with all other variables held constant, the Company’s investments would have increased or decreased respectively, by approximately $1,804,394 (December 31, 2022 - $1,841,484).

 

Liquidity risk

 

Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivery of cash or another financial asset. The Company manages its liquidity risk by forecasting cash flows from operations and anticipating any investing and financing activities.

 

The following table summarizes the contractual amounts payable and maturities of financial liabilities and other liabilities at March 31, 2023:

 

         Total                     
    Carrying    contractual    Less than                
    value    amount    one year    2-3 years     4-5 years    Over 5 years 
    $    $    $    $    $    $ 
Bank indebtedness   1,087,253    1,087,253    1,087,253             
Accounts payable and accrued liabilities1   6,359,607    6,359,607    6,359,607             
Term loans   389,857    511,521    61,521    180,000    180,000    90,000 
Balance due on business combination   2,770,358    3,266,700    2,395,580    871,120         
Lease liabilities   5,435,755    6,543,087    2,940,114    1,125,789    642,528    1,834,656 
    16,042,830    17,768,168    12,844,075    2,176,909    822,528    1,924,656 

1 Accounts payable and accrued liabilities exclude amounts which are not financial liabilities.

 

At March 31, 2023, the Company's Canadian subsidiary benefits from a line of credit of $500,000, and the Italian subsidiary benefits from a 400,000 Euros ($588,000) line of credit. At March 31, 2023, $500,000 was drawn on the Canadian facility and 399,196 Euros ($587,253) was drawn on the Italian facility. The credit facilities both bear interest at variable rates which is the bank’s prime rate plus 1%, therefore, 7.45% for the Canadian facility and 8% for the Italian facility. There are no imposed financial covenants on the credit facilities.

 

Fair value of financial instruments

 

The fair value represents the amount that would be received for the sale of an asset or paid for the transfer of a liability in an orderly transaction between market participants at the measurement date. The fair value estimates are calculated at a specific date taking into consideration assumptions regarding the amounts, the timing of estimated future cash flows and discount rates. Accordingly, due to its approximate and subjective nature, the fair value must not be interpreted as being realizable in an immediate settlement of the financial instruments.

 

 

Q1 2023PyroGenesis Canada Inc.18

PyroGenesis Canada Inc.

Notes to the Condensed Consolidated Interim Financial Statements

As at March 31, 2023 and for the periods ended March 31, 2023 and 2022

(Unaudited)

(In Canadian dollars)

 

There are three levels of fair value that reflect the significance of inputs used in determining fair values of financial instruments:

 

Level 1 — quoted prices (unadjusted) in active markets for identical assets or liabilities.

 

Level 2 — inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).

 

Level 3 — inputs for the asset or liability that are not based on observable market data.

 

The fair values of cash, trade accounts receivable, other receivables, deposits, bank indebtedness, accounts payable and accrued liabilities approximate their carrying amounts due to their short-term maturities.

 

Investments in BGF and HPQ shares are valued at quoted market prices and are classified as Level 1.

 

Royalties receivable are discounted according to their corresponding agreements and are classified as Level 2.

 

Investments in HPQ warrants are valued using the Black-Scholes pricing model and are classified as Level 3 (Note 9).

 

The fair value of the term loans and the balance due on business combination as at March 31, 2023 is determined using the discounted future cash flows method and management's estimates for market interest rates for similar issuances. Accordingly, as a result, their fair market values correspond to their carrying amount. The term loans are classified as level 2 and the balance due on business combination as level 3.

 

The following table presents the variation of the balance due on business combination:

 

    $ 
Balance due on business combination at December 31, 2021 - Current and Non-Current   3,952,203 
Disbursement   (217,778)
Interest accretion   173,350 
Balance due on business combination at December 31, 2022 - Current and Non-Current   3,907,775 
Disbursement   (100,000)
Interest accretion on and revaluation of balance due on business combination   (1,037,417)
Balance due on business combination at March 31, 2023 - Current and Non-Current   2,770,358 

 

20.Contingent liabilities

 

The Company is currently a party to various legal proceedings. If management believes that a loss arising from these proceedings is probable and can reasonably be estimated, that amount of the loss is recorded. As additional information becomes available, any potential liability related to these proceedings is assessed and the estimates are revised, if necessary. Based on currently available information, management believes that the ultimate outcome of these proceedings, individually and in aggregate, will not have a material adverse effect on the Company’s financial position or overall trends in results of operations.

 

The Company had received a government grant in prior years of approximately $800,000 to assist with the development of a new system of advanced waste treatment systems technology. The grant is potentially repayable at the rate of 3% of any consideration received as a result of the project, for which funding has been received, to a maximum of the actual grant received. This repayment provision will remain in effect until May 30, 2024. The Company abandoned the project in 2011 and accordingly, no amount is expected to be repaid.

 

21.Capital management

 

The Company’s objectives in managing capital are:

 

a)To ensure sufficient liquidity to support its current operations and execute its business plan; and

 

b)To provide adequate return to the shareholders

 

 

Q1 2023PyroGenesis Canada Inc.19

PyroGenesis Canada Inc.

Notes to the Condensed Consolidated Interim Financial Statements

As at March 31, 2023 and for the periods ended March 31, 2023 and 2022

(Unaudited)

(In Canadian dollars)

 

The Company’s primary objectives when managing capital is to ensure the Company continues as a going concern as well as to maintain optimal returns to shareholders and benefits for other stakeholders.

 

The Company currently funds these requirements from cash flows from operations and with financing arrangements with third parties and shareholders. The Company is not subject to any externally imposed capital requirements.

 

The Company monitors its working capital in order to meet its financial obligations. On March 31, 2023, the Company’s working capital was $786,925 ($1,650,709 at December 31, 2022).

 

The management of capital includes shareholders’ equity for a total amount of $16,659,952 and term loans of $389,857 ($16,868,927 and $389,987 respectively at December 31, 2022), as well as cash amounting to $1,887,021 ($3,445,649 at December 31, 2022).

 

There were no significant changes in the Company’s approach during the current three-month period and preceding fiscal year, however, in order to maintain or adjust the capital structure, the Company may issue new shares, sell portions of its strategic investment and periodically purchase its own shares on the open market.

 

22.Segment information

 

The Company operates in one segment, based on financial information that is available and evaluated by the Company’s Board of Directors. The Company’s head office is located in Montreal, Quebec. The operations of the Company are located in three geographic areas: Canada, Italy and India.

 

The following is a summary of the Company’s revenue from external customers, by geography:

 

           
    2023    2022 
    $    $ 
Brazil   7,187    122,471 
Canada   2,052,670    1,367,792 
India   193,539    22,563 
Israel       6,808 
Italy1   (395,688)   356,023 
Mexico   30,184    176,508 
Netherlands   22,368    13,854 
New Zealand   67,847     
Poland   19,457    8,117 
Saudi Arabia   60,042    723,571 
United States of America   528,982    1,095,738 
Vietnam   5,034    309,023 
Other       4,294 
    2,591,622    4,206,762 

1 The Q1 2023 revenue attributable to Italy was reduced following the agreement between the Company’s Italian subsidiary and their customer to deliver a project prior to final completion, which resulted in an adjustment to revenue and to costs and profits in excess of billings on uncompleted contracts.

 

Revenue by product line and revenues recognized by revenue recognition method are presented in Note 5.

 

 

 

Q1 2023PyroGenesis Canada Inc.20

 

 

Exhibit 99.3

 

PyroGenesis Canada Inc.

Management’s Discussion and Analysis

For the three-month periods ended March 31, 2023, and 2022

(Unaudited)

 

This management’s discussion and analysis (“MD&A”) is intended to assist readers in understanding the business environment, strategies, performance and risk factors of PyroGenesis Canada Inc. (“PyroGenesis”, or the “Company”). The MD&A provides the reader with a view and analysis, from the perspective of management, of the Company’s financial results for the three-month period ended March 31, 2023. The MD&A has been prepared in accordance with National Instrument 51-102, Continuous Disclosure Requirements, and should be read in conjunction with the audited consolidated financial statements and related notes thereto of the Company for the year ended December 31, 2022.

 

The condensed consolidated interim financial statements and MD&A have been reviewed by PyroGenesis’ Audit Committee and were approved by its Board of Directors on May 15, 2023. The Board of Directors is responsible for ensuring that the Company fulfills its responsibilities for financial reporting and is ultimately responsible for reviewing and approving the MD&A. The Board of Directors carries out this responsibility principally through its Audit Committee. The Audit Committee is appointed by the Board of Directors and is comprised of independent directors. The Audit Committee reports its findings to the Board of Directors for its consideration when it approves the MD&A and financial statements for issuance to shareholders.

 

The following information takes into account all material events that took place up until May 15, 2023, the date on which the Company’s Board of Directors approved this MD&A. Unless otherwise indicated, all amounts are presented in Canadian dollars. The Company’s functional and reporting currency is the Canadian dollar.

 

Additional information regarding PyroGenesis is available on the System for Electronic Document Analysis and Retrieval (“SEDAR) at www.sedar.com, the Electronic Data Gathering, Analysis, and Retrieval system (“EDGAR”) at www.sec.gov, and on the Company’s website at www.pyrogenesis.com.

 

FORWARD-LOOKING STATEMENTS

 

This MD&A contains forward-looking statements and forward-looking information (collectively, “forward-looking statements”) within the meaning of applicable securities legislation. All statements other than statements of historical fact contained in this MD&A are forward-looking statements, including, without limitation, the Company’s statements regarding its products and services; relations with suppliers and clients; future financial position; business strategies; potential acquisitions; potential business partnering; litigation; and plans and objectives. In certain cases, forward-looking statements can be identified by the use of words such as “plans”, “expects” or “does not expect”, “is expected”, “budget”, “scheduled”, “estimates”, “forecasts”, “intends”, “anticipates” or “does not anticipate”, or “believes”, or variations of such words and phrases or state that certain actions, events or results “may”, “could”, “would”, “might” or “will be taken”, “occur” or “be achieved” and similar words or the negative thereof. Although management of the Company believes that the expectations represented in such forward-looking statements are reasonable, there can be no assurance that such expectations will prove to be correct.

 

In particular, this MD&A contains forward-looking statements that relate, but are not limited, to:

 

·the Company’s business strategies, strategic objectives and growth strategy;
·the Company’s current and future capital resources and the need for additional financing;
·the Company’s ability to increase sales, including the results of the successful completion of the Company’s current projects;
·management’s expectation that the Company will achieve sustained annual growth and profitability, and that gross margins will increase resulting in a decrease in cost of sales as a percentage of revenue; and
·the Company’s overall financial performance.

 

By their nature, forward-looking statements require assumptions and are subject to inherent risks and uncertainties including those discussed herein. In particular, forward-looking statements relating to future sales, growth and profitability are based on the assumption that current projects will be completed, and the Company will be awarded certain anticipated contracts pursuant to recent negotiations with, and statements made by, third parties. There is significant risk that predictions and other forward-looking statements will not prove to be accurate. Readers are cautioned to not place undue reliance on forward-looking statements made herein because a number of factors could cause actual future results, conditions, actions or events to differ materially from the targets, expectations, estimates or intentions expressed in the forward-looking statements.

 

Many factors could cause the Company’s actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by forward-looking statements, including, without limitation, risks and uncertainties relating to: the strength of the Canadian, US, European and Asian economies; operational, funding, and liquidity risks; unforeseen engineering and environmental problems; delays or inability to obtain required financing and/or anticipated contracts; risks associated with licenses, permits and regulatory approvals; supply interruptions or labour disputes; the impact of the Coronavirus (COVID-19) outbreak on our business and our operations; foreign exchange fluctuations and collection risk; competition from other suppliers, or alternative, less capital intensive, energy solutions; and risk factors described elsewhere under the heading “Risk Factors” in this MD&A and the Annual Information Form, and elsewhere in this MD&A and other filings that the Company has made and may make in the future with applicable securities regulatory authorities. We caution that the foregoing list of factors is not exhaustive, and that, when relying on forward-looking statements to make decisions with respect to the Company, investors and others should carefully consider these factors, as well as other uncertainties and potential events, and the inherent uncertainty of forward-looking statements.

 

Although the Company has attempted to identify significant factors that could cause actions, events or results to differ materially from those described in forward-looking statements, there may be other factors that cause actions, events or results not to be as anticipated, estimated or intended. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking statements. Forward-looking statements are provided as of the date of this MD&A, and the Company assumes no obligation to update or revise such forward-looking statements to reflect new events or circumstances except as required under applicable securities laws.

 

The forward-looking statements contained herein are expressly qualified in their entirety by this cautionary statement. The forward-looking statements included in this MD&A are made as of the date of this MD&A or such other date specified herein.

 

Q1 2023 MD&A

PyroGenesis Canada Inc.

1

PyroGenesis Canada Inc.

Management’s Discussion and Analysis

For the three-month periods ended March 31, 2023, and 2022

(Unaudited)

 

BASIS OF PRESENTATION

 

For reporting purposes, we prepared the 2022 consolidated financial statements in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board. The financial information contained in this MD&A was derived from the 2022 consolidated financial statements. Unless otherwise indicated, all references to “$” are to Canadian dollars. Unless otherwise indicated, all references to a specific “note” refer to the notes to the 2022 consolidated financial statements. Certain totals, subtotals and percentages throughout this MD&A may not reconcile due to rounding.

 

NON-IFRS MEASURES

 

This MD&A makes reference to certain non-IFRS measures. These measures are not recognized measures under IFRS and do not have a standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other companies. Rather, these measures are provided as additional information to complement those IFRS measures by providing further understanding of our results of operations from management’s perspective. Accordingly, these measures should not be considered in isolation nor as a substitute for analysis of our financial information reported under IFRS.

 

We use non-IFRS measures, including EBITDA and Modified EBITDA, both of which are not considered an alternative to income or loss from operations, or to net earnings or loss, in the context of measuring a company’s performance. EBITDA is used by management in order to facilitate operating performance comparisons from period to period, to prepare annual operating budgets and forecasts and to determine components of management compensation. Management believes that EBITDA is used by investors as it provides supplemental measures of operating performance and thus highlight trends in our business that may not otherwise be apparent when relying solely on IFRS measures, and to compare the results of our operations with other entities with similar structures. Modified EBITDA is used by management as it brings additional clarity to operating performance, as it eliminates variations in the fair value of strategic investments, among others, which may be beyond the control of the Company. Management believes that investors use Modified EBITDA for similar purposes as management and to evaluate performance while adjusting for non-cash discretionary expenses. Modified EBITDA allows a more appropriate comparison to other companies whose earnings or loss is not adjusted by fair value adjustments from strategic investments. The Company also uses “Backlog” or “Backlog of signed and/or awarded contracts” interchangeably, as a non-IFRS measure. Backlog figures allow management of the Company to foresee and predict their future needs and resource planning. Management believes that “Backlog” is used by investors to evaluate the Company, their future performance and better understand the production capacity.

 

EBITDA: We define EBITDA as net earnings before net financing costs, income taxes, depreciation and amortization. See “Results of Operations - Reconciliation of Non-IFRS measures (EBITDA and Modified EBITDA)”.

 

Modified EBITDA: We defined Modified EBITDA as EBITDA and adjust for non-cash items namely share-based payments expenses and changes in fair value of strategic investments. See “Results of Operations - Reconciliation of Non-IFRS measures (EBITDA and Modified EBITDA)”.

 

Backlog or Backlog of signed and/or awarded contracts: This measure is defined as contracts with customers, firm purchase order and contracts agreed between us and the customer, whereby we can determine the proceeds and the obligations to perform.

 

OVERVIEW

 

PyroGenesis Canada Inc. is a 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, additive manufacturing (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 40,902 sq. ft. (3,800 m²) and 31,632 sq. ft. (2,940 m²) manufacturing facilities, 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 9001:2015 and AS9100D certified, having been ISO certified since 1997. Since our acquisition of Pyro Green-Gas (formerly AirScience Technologies Inc), we now offer technologies, equipment, and expertise in the area of biogas upgrading, and air pollution control. As a result, we have extended our presence to Italy and India, and this acquisition provides potential synergies with our current land-based waste destruction offerings. Our common shares are listed on the Toronto Stock Exchange (TSX) (Ticker Symbol: PYR), NASDAQ (Ticker Symbol: PYR) and the Frankfurt Stock Exchange (FSX) (Ticker symbol: 8PY).

 

Q1 2023 MD&A

PyroGenesis Canada Inc.

2

PyroGenesis Canada Inc.

Management’s Discussion and Analysis

For the three-month periods ended March 31, 2023, and 2022

(Unaudited)

 

This MD&A includes the accounts of the Company, Pyro Green-Gas Inc (including the subsidiaries in Italy and India) as well as Drosrite International LLC (“Drosrite International). Drosrite International is owned by a member of the Company’s key management personnel and close family member of the Chief Executive Officer (“CEO”) and controlling shareholder and is deemed for the purposes of the consolidated financial statements to be controlled by the Company. Unless otherwise stated, reference to subsidiaries in the consolidated financial statements and this MD&A shall include Drosrite International and/or Pyro Green-Gas Inc. All transactions and balances between the Company and its subsidiaries have been eliminated upon consolidation.

 

INFORMATION FROM CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS FOR THE QUARTERS ENDED MARCH 31:

 

   Three months ended March 31   Variation 
   2023   2022   2023 vs 2022 
Revenues  $2,591,622   $4,206,762   $(1,615,140)
Cost of sales and services   2,065,049    3,155,039    (1,089,990)
Gross profit   526,573    1,051,723    (525,150)
                
Expenses               
Selling, general and administrative (not including share-based expenses)   6,568,946    3,942,738    2,626,208 
Research and development, net   323,216    482,432    (159,216)
                
Total expenses (not including share-based expenses)   6,892,162    4,425,170    2,466,992 
                
Net loss from operations (not including share-based expenses)   (6,365,589)   (3,373,447)   (2,992,142)
                
Share-based expenses   (988,162)   (1,669,630)   681,468 
Net loss from operations   (7,353,751)   (5,043,077)   (2,310,674)
                
Changes in fair market value of strategic investments and finance income (costs), net   1,215,144    992,855    222,289 
                
Income taxes       56,553    (56,553)
                
Net loss  $(6,138,607)  $(4,106,775)  $(2,031,832)
                
Foreign currency translation gain (loss) on investments in foreign operations   (19,013)   37,656    (56,669)
                
Comprehensive loss  $(6,157,620)  $(4,069,119)  $(2,088,501)
                
Loss per share               
Basic  $(0.03)  $(0.02)  $(0.01)
Diluted  $(0.03)  $(0.02)  $(0.01)
                
Modified EBITDA(1)  $(5,846,127)  $(2,807,818)  $(3,038,309)

 

1.See “Non-IFRS Measures”

 

Q1 2023 MD&A

PyroGenesis Canada Inc.

3

PyroGenesis Canada Inc.

Management’s Discussion and Analysis

For the three-month periods ended March 31, 2023, and 2022

(Unaudited)

 

INFORMATION FROM CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS FOR THE PERIODS ENDED MARCH 31:

 

   March 31, 2023   March 31, 2022   March 31, 2021 
Revenues  $2,591,622   $4,206,762   $6,264,503 
Cost of sales and services   2,065,049    3,155,039    4,121,493 
Gross profit   526,573    1,051,723    2,143,010 
Expenses               
Selling, general and administrative (not including share-based expenses)   6,568,946    3,942,738    2,803,095 
Research and development, net   323,216    482,432    286,307 
Total expenses (not including share-based expenses)   6,892,162    4,425,170    3,089,402 
Net loss from operations (not including share-based expenses)   (6,365,589)   (3,373,447)   (946,392)
Share-based expenses   (988,162)   (1,669,630)   (922,340)
Net loss from operations   (7,353,751)   (5,043,077)   (1,868,732)
Changes in fair market value of strategic investments and finance income (costs), net   1,215,144    992,855    5,581,635 
Income taxes       56,553     
Net income (loss) and comprehensive income (loss)  $(6,138,607)  $(4,106,775)  $3,712,903 
Foreign currency translation gain (loss) on investments in foreign operations   (19,013)   37,656     
Comprehensive income (loss)  $(6,157,620)  $(4,069,119)  $3,712,903 
Earnings (loss) per share               
Basic  $(0.03)  $(0.02)  $0.02 
Diluted  $(0.03)  $(0.02)  $0.02 
Modified EBITDA(1)  $(5,846,127)  $(2,807,818)  $(761,501)

 

SELECTED FINANCIAL INFORMATION

 

   March 31, 2023   December 31, 2022   December 31, 2021 
Current assets   22,131,357    27,448,182    38,758,984 
Non-current assets   19,758,567    20,218,568    31,011,693 
Total assets  $41,889,924   $47,666,750   $69,770,677 
                
Current liabilities   21,344,432    25,797,473    24,752,199 
Non-current liabilities   3,885,540    5,000,350    4,249,724 
Total liabilities  $25,229,972   $30,797,823   $29,001,923 
                
Shareholders' equity  $16,659,952   $16,868,927   $40,768,754 

 

 

Q1 2023 MD&A

PyroGenesis Canada Inc.

4

PyroGenesis Canada Inc.

Management’s Discussion and Analysis

For the three-month periods ended March 31, 2023, and 2022

(Unaudited)

 

FINANCIAL CONDITION

 

           Variation 
   March 31, 2023   December 31, 2022   2023 vs 2022 
Current Assets               
Cash  $1,887,021   $3,445,649   $(1,558,628)
Accounts receivable   14,914,085    18,624,631    (3,710,546)
Costs and profits in excess of billings on uncompleted contracts   1,193,968    1,051,297    142,671 
Inventory   1,823,134    1,876,411    (53,277)
Investment tax credits receivable   189,376    276,404    (87,028)
Income tax receivable   16,470    14,169    2,301 
Current portion of deposits   498,314    432,550    65,764 
Current portion of royalties receivable   468,980    455,556    13,424 
Contract assets   474,314    499,912    (25,598)
Prepaid expenses   665,695    771,603    (105,908)
Total Current Assets  $22,131,357   $27,448,182   $(5,316,825)
                
Non-Current assets               
Deposits   46,272    46,053    219 
Strategic investments   6,211,505    6,242,634    (31,129)
Property and equipment   3,278,388    3,393,452    (115,064)
Right-of-use-assets   4,662,383    4,818,744    (156,361)
Royalties receivable   980,291    952,230    28,061 
Intangible assets   1,919,121    2,104,848    (185,727)
Goodwill   2,660,607    2,660,607     
Total Non-Current Assets  $19,758,567   $20,218,568   $(460,001)
                
Current Liabilities               
Bank indebtedness   1,087,253    991,902    95,351 
Accounts payable and accrued liabilities   7,483,627    10,115,870    (2,632,243)
Billings in excess of costs and profits on uncompleted contracts   7,874,489    9,670,993    (1,796,504)
Current portion of term loans   61,521    69,917    (8,396)
Current portion of lease liabilities   2,679,987    2,672,212    7,775 
Balance due on business combination   1,968,922    2,088,977    (120,055)
Income tax payable   188,633    187,602    1,031 
Total Current Liabilities  $21,344,432   $25,797,473   $(4,453,041)
                
Non-current Liabilities               
Lease liabilities   2,755,768    2,861,482    (105,714)
Term loans   328,336    320,070    8,266 
Balance due on business combination   801,436    1,818,798    (1,017,362)
Total Non-Current Liabilities  $3,885,540   $5,000,350   $(1,114,810)

 

Working capital, (expressed as current assets less current liabilities) varied since December 31, 2022 by $0.9 million, mainly a result of:

 

a decrease of cash of $1.6 million, explained in the section Summary of Cash Flows,
a decrease of $3.7 million of accounts receivable as the Company has collected the invoicing milestones on contracts in progress, offset by the increase in sales tax receivable $0.3 million and by $0.8 million as a result of the increased allowance for expected credit loss,
an increase of $0.1 million in costs and profits in excess of billings on uncompleted contracts related to the advancement on paying projects, offset by the decrease of $0.06 million as a result of the allowance for credit loss on costs and profits in excess of billings on uncompleted contracts,
an increase in bank indebtedness of $0.1 million due to the usage of the credit facilities by Pyro Green-Gas and its Italian subsidiary,
a decrease of $2.6 million in accounts payable and accrued liabilities due to an increase in payments to suppliers,
a decrease of $1.8 million in billings in excess of costs and profits on uncompleted contracts due to the increase in workforce working on progressing customer projects by achieving contract milestones in shorter amounts of time, and
a decrease in balance due on business combination by $0.1 million due to disbursement of an achieved milestone.

 

Q1 2023 MD&A

PyroGenesis Canada Inc.

5

PyroGenesis Canada Inc.

Management’s Discussion and Analysis

For the three-month periods ended March 31, 2023, and 2022

(Unaudited)

 

Non-current assets varied since December 31, 2022, by $0.5 million, mainly a result of:

 

a decrease of property and equipment of $0.1 million due to annual depreciation including the assets under construction placed in service,
a decrease of $0.2 million in right-of-use-assets due to depreciation and timing of lease maturity dates, and
a decrease of $0.2 million in intangible assets due to the amortization of the intangible asset from the 2021 business combination as well as the HP Torch and SPARC patents,

 

Non-current liabilities varied since December 31, 2022, by $1.1 million, mainly a result of:

 

a repayment of lease liabilities, an increase in the Economic Development Agency of Canada loan, and to the revaluation of the balance due on business combination caused primarily to the agreement between the Company’s Italian subsidiary and a customer who both agreed on the final acceptance of a contract, prior to final completion. As a result, the contract did not attain the agreed milestone in connection with the balance due on business combination, and thus a reversal of the liability was recorded.

 

RESULTS OF OPERATIONS

 

Revenues

 

PyroGenesis recorded revenue of $2.6 million in the first quarter of 2023 (“Q1, 2023”), representing a decrease of $1.6 million compared with $4.2 million recorded in the first quarter of 2022 (“Q1, 2022”),

 

Revenues recorded in the three months ended March 31, 2023, were generated primarily from:

 

   Three months ended March 31   Variation 
   2023   2022   2023 vs 2022 
High purity metallurgical grade silicon & solar grade silicon from quartz (PUREVAP™)  $527,600   $441,605   $85,995 
Aluminium and zinc dross recovery (DROSRITE™)   90,226    900,079    (809,853)
Development and support related to systems supplied to the U.S. Navy   352,103    745,260    (393,157)
Torch-related sales   1,170,748    1,041,709    129,039 
Refrigerant destruction (SPARC™)   67,847        67,847 
Biogas upgrading and pollution controls   32,895    990,045    (957,150)
Other sales and services   350,203    88,064    262,139 
Revenue  $2,591,622   $4,206,762   $(1,615,140)

 

Q1, 2023 revenues decreased by $1.6 million, mainly as a result of:

 

·DROSRITE™ related sales decreased by $0.8 million due to continued customer delays in funding for the construction of the onsite facility,
·Support services related to systems supplied for the US Navy decreased by $0.4 million due to remaining project milestones mainly related to inspection, packaging and shipment of the equipment to our customer in order to move forward with installation and commission,
·Biogas upgrading and pollution controls related sales decreased by $1.0 million of which $0.6 million is due to clients requiring additional modifications prior to installation and commissioning, as well as continuous testing to achieve desired results and $0.4 million due to the Company’s Italian subsidiary and a customer who both agreed on the final acceptance of a contract which resulted in the reversal of costs and profits in excess of billings on uncompleted contracts,
·Other sales and services increased by $0.3 million due to an increase in sales related to spare parts required by our customers.

 

As of May 15, 2023, revenue expected to be recognized in the future related to backlog of signed and/or awarded contracts is $30.6 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.

 

Cost of Sales and Services

 

   Three months ended March 31   Variation 
   2023   2022   2023 vs 2022 
Employee compensation  $888,435   $802,629   $85,806 
Subcontracting   48,573    671,275    (622,702)
Direct materials   614,998    1,082,783    (467,785)
Manufacturing overhead & other   293,637    159,619    134,018 
Foreign exchange charge on materials       221,803    (221,803)
Investment tax credits   (2,346)   (1,829)   (517)
Amortization of intangible assets   221,752    218,759    2,993 
Total Cost of Sales and Services  $2,065,049   $3,155,039   $(1,089,990)

 

Q1 2023 MD&A

PyroGenesis Canada Inc.

6

PyroGenesis Canada Inc.

Management’s Discussion and Analysis

For the three-month periods ended March 31, 2023, and 2022

(Unaudited)

 

Gross Profit

 

   Three months ended March 31 
   2023   2022 
Revenues  $2,591,622   $4,206,762 
Cost of Sales and Services   2,065,049    3,155,039 
Gross Profit  $526,573   $1,051,723 
Gross Margin %   20.3%   25.0%

 

Cost of sales and services was $2.1 million in Q1 2023, representing a decrease of $1.1 million compared with $3.2 million in Q1 2022, primarily due to a decrease of $0.6 million in subcontracting attributed to additional work being completed in-house and a decrease in direct materials of $0.5 million due to lower levels of material required based on the decrease in product and service-related revenues.

 

The gross margin for Q1, 2023 was $0.5 million or 20.3% of revenue compared to a gross margin of $1.1 million or 25% of revenue for Q1 2022, the decrease in gross margin was mainly attributable to the impact on foreign exchange charge on materials of $0.2 million and the reversal of costs and profits in excess of billings on uncompleted contracts due to the agreed upon final acceptance prior to final completion of $0.4 million.

 

The amortization of intangible assets for Q1, 2023 was $0.2 million compared to $0.2 million for Q1, 2022. 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 and sales and services are in line with management’s expectations and with the nature of the revenue.

 

Selling, General and Administrative Expenses

 

   Three months ended March 31   Variation 
   2023   2022   2023 vs 2022 
Employee compensation  $2,553,957   $1,671,789   $882,168 
Share-based expenses   988,162    1,669,630    (681,468)
Professional fees   1,244,279    661,979    582,300 
Office and general   172,263    233,460    (61,197)
Travel   59,793    27,209    32,584 
Depreciation of property and equipment   160,363    142,990    17,373 
Depreciation of ROU assets   156,362    166,224    (9,862)
Investment tax credits   (7,500)   (7,500)   –— 
Government grants   (53,511)   (39,434)   (14,077)
Other expenses   885,450    1,086,021    (200,571)
Foreign exchange charge on materials   21,894    –—    21,894 
Expected credit loss & bad debt   1,375,596    –—    1,375,596 
Total selling, general and administrative  $7,557,108   $5,612,368   $1,944,740 

 

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, 2023 were $7.6 million, representing an increase of 35% compared to $5.6 million for Q1, 2022. The increase is mainly a result of employee compensation increasing to $2.6 million mainly caused by additional headcount. Share-based compensation expense decreased by $0.7 million, which is a non-cash item and relates mainly to a Q4 2021, and 2022 grants not repeated in 2023. Professional fees are $1.2 million which increased by $0.6 million, due to additional legal fees, consulting services, public listing expenses and patent expenses. Other expenses were favourable by $0.2 million due to a net reduction of insurance expenses, taxes, interest and bank charges. The expected credit loss & bad debt increased to $1.4 million is Q1 2023 and is due to an increase in the allowance for expected credit loss increase of $0.8 million and to the write-off of the accounts receivable related to the Company’s Italian subsidiary subsequent to both parties agreeing on the final acceptance of the contract prior to final completion.

 

Share-based 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.

 

Q1 2023 MD&A

PyroGenesis Canada Inc.

7

PyroGenesis Canada Inc.

Management’s Discussion and Analysis

For the three-month periods ended March 31, 2023, and 2022

(Unaudited)

 

Depreciation on Property and Equipment

 

   Three months ended March 31   Variation 
   2023   2022   2023 vs 2022 
Depreciation of property and equipment  $160,363   $142,990   $17,373 

 

The depreciation on property and equipment increased to $0.2 million in Q1 2023, compared with $0.1 in Q1 2022. The expense is comparable to the same quarter last year and the increase is primarily due to nature and useful lives of the property and equipment being depreciated.

 

Research and Development (“R&D”) Costs, net

 

   Three months ended March 31   Variation 
   2023   2022   2023 vs 2022 
Employee compensation  $16,132   $236,451   $(220,319)
Investment tax credits   (10,097)   (1,168)   (8,929)
Subcontracting   31,291    32,054    (763)
Materials and equipment   84,324    144,420    (60,096)
Other expenses   201,566    70,675    130,891 
Total net R&D expenses, net  $323,216   $482,432   $(159,216)

 

During the three-months ended March 31, 2023, the Company incurred $0.3 million of R&D costs on internal projects, a decrease of 33% as compared with $0.5 million in Q1 2022. The decrease in Q1 2023 is primarily related to a decrease in employee compensation, subcontracting, and materials and equipment, offset by the increase in other expenses of $0.2 million related to equipment rentals.

 

In addition to internally funded R&D projects, the Company also incurred R&D expenditures during the execution of client funded projects. These expenses are eligible for Scientific Research and Experimental Development (“SR&ED”) tax credits. SR&ED tax credits on client funded projects are applied against cost of sales and services (see “Cost of Sales” above).

 

Finance costs (income), net

 

   Three months ended March 31   Variation 
   2023   2022   2023 vs 2022 
Interest on term loans   361    851    (490)
Interest on lease liabilities   93,121    77,465    15,656 
Interest accretion on and revaluation of balance due on business combination   (1,037,417)   82,973    (1,120,390)
Interest accretion of royalty receivable   (41,485)   (1,364)   (40,121)
Penalties and other interest   71,167    23,975    47,192 
Finance costs (income), net  $(914,253)  $183,900   $(1,098,153)

 

Finance expense (income) for Q1 2023 totaled $0.9 million as compared with an expense of $0.2 million for Q1 2022, representing a favourable variation of $1.1 million year-over-year. The decrease in finance expenses in Q1 2023, is primarily due to the revaluation of balance due on business combination due to the Company’s Italian subsidiary and a customer who both agreed on the final acceptance of a contract, prior to final completion. As a result, the contract did not attain the pre-determined milestone in connection with the balance due on business combination, and a reversal of the liability was recorded.

 

Strategic Investments

 

   Three months ended March 31   Variation 
   2023   2022   2023 vs 2022 
Changes to fair value of strategic investments  $300,891   $1,176,755   $(875,864)

 

During the three-months ended March 31, 2023, the adjustment to fair market value of strategic investments for Q1 2023 resulted in a gain of $0.3 million compared to a gain in the amount of $1.2 million in Q1 2022. The decrease in gain is attributable to the variation of the market value of the common shares and warrants owned by the Company of HPQ Silicon Inc.

 

Q1 2023 MD&A

PyroGenesis Canada Inc.

8

PyroGenesis Canada Inc.

Management’s Discussion and Analysis

For the three-month periods ended March 31, 2023, and 2022

(Unaudited)

 

Comprehensive loss

 

   Three months ended March 31   Variation 
   2023   2022   2023 vs 2022 
Comprehensive loss  $(6,157,620)  $(4,069,119)  $(2,088,501)

 

The comprehensive loss for Q1 2023 of $6.2 million compared to a loss of $4.1 million, in Q1 2022, represents a variation of $2.1 million, and is primarily attributable to the factors described above, which have been summarized as follows:

 

·a decrease in product and service-related revenue of $1.6 million arising in Q1 2023,
·a decrease in cost of sales and services of $1.1 million, primarily due to a decrease in subcontracting, direct materials and foreign exchange charge on materials, offset by the increase in employee compensation and manufacturing overhead,
·an increase in SG&A expenses of $1.9 million arising in Q1 2023, was primarily due to an increase in employee compensation, professional fees, travel, depreciation in property and equipment, foreign exchange charge on materials, and the allowance for credit loss of $0.8 million and write-off of $0.6 million which is offset by a decrease in several non-significant expenses,
·a decrease in share-based expenses of $0.7 million
·a decrease in R&D expenses of $0.2 million primarily due to a decrease in employee compensation, subcontracting, material and equipment and an increase in investment tax credits and other expenses,
·a decrease in finance costs (income), net of $1.1 million in Q1 2023 primarily due to the revaluation of balance due on business combination,
·a decrease in changes in fair market value of strategic investments of $0.9 million,
·a decrease in income taxes of $0.06 million in Q1 2023.

 

Reconciliation of Non-IFRS measures (EBITDA, Adjusted and Modified)

 

   Three months ended March 31   Variation 
   2023   2022   2023 vs 2022 
Comprehensive loss  $(6,157,620)  $(4,069,119)  $(2,088,501)
Depreciation of property and equipment   160,363    142,990    17,373 
Depreciation of ROU assets   156,361    166,224    (9,863)
Amortization of intangible assets   221,752    218,759    2,993 
Finance costs (income), net   (914,253)   183,900    (1,098,153)
Income taxes       56,553    (56,553)
EBITDA(1)  $(6,533,397)  $(3,300,693)  $(3,232,704)
Other non-cash items:               
Share-based expenses   988,162    1,669,630    (681,468)
Change in fair value of investments   (300,891)   (1,176,755)   875,864 
Modified EBITDA (1)  $(5,846,126)  $(2,807,818)  $(3,038,308)

¹ See “Non-IFRS Measures”

 

The EBITDA in Q1, 2023 was a $6.5 million loss compared to an EBITDA loss of $3.3 million for Q1, 2022, representing a increase of 98% year-over-year. The variation in the EBITDA in the three-months ended March 31, 2023, compared to March 31, 2022, is due to the increase in comprehensive loss of $2.1 million, an increase in depreciation on property and equipment of $0.02, an increase in amortization of intangible assets, a decrease in depreciation on right-of-use assets, a decrease in finance costs (income), net of $1.1 million and a decrease in income taxes of $0.06 million.

 

The Modified EBITDA in Q1, 2023 was a $5.9 million loss compared to a Modified EBITDA loss of $2.8 million for Q1, 2022, representing an increased loss of $3.0 million. The increase in the Modified EBITDA loss in Q1, 2023 is attributable to the increase as mentioned above in the EBITDA of $3.2 million and a decrease in share-based expenses of $0.7 million from an expense not recurring in Q1, 2023 and a decrease in the change of fair value of investments of $0.9 million, based on the fair value of such investment.

 

Q1 2023 MD&A

PyroGenesis Canada Inc.

9

PyroGenesis Canada Inc.

Management’s Discussion and Analysis

For the three-month periods ended March 31, 2023, and 2022

(Unaudited)

 

SUMMARY OF QUARTERLY RESULTS

 

   2023   2022   2021 
    Q1    Q4    Q3    Q2    Q1    Q4    Q3    Q2 
Revenues  $2,591,622   $3,301,777   $5,657,783   $5,847,180   $4,206,762   $7,205,349   $9,317,926   $8,280,572 
                                         
Gross profit   526,573    479,715    4,113,176    2,499,273    1,051,723    1,302,789    4,052,531    4,933,481 
Gross margin %   20.3%   14.5%   72.7%   42.7%   25.0%   18.1%   43.5%   59.6%
                                         
Comprehensive income (loss)   (6,157,620)   (10,818,755)   (4,053,706)   (13,039,531)   (4,069,119)   (22,402,857)   623,664    (20,362,205)
                                         
Earnings (loss) per share                                        
Basic   (0.03)   (0.06)   (0.02)   (0.08)   (0.02)   (0.13)       (0.12)
Diluted   (0.03)   (0.06)   (0.02)   (0.08)   (0.02)   (0.13)       (0.12)

 

The majority of PyroGenesis’ revenue is recognised over the time of the contract and is dependent on the timing of project initiation and execution, including project engineering, manufacturing, and testing.

 

LIQUIDITY AND CAPITAL RESOURCES

 

As at March 31, 2023, the Company had cash of $1.9 million, included in the net working capital of $0.8 million. Certain working capital items such as billings in excess of costs and profits on uncompleted contracts do not represent a direct outflow of cash. The Company expects that with its cash, liquidity position, the proceeds available from the strategic investment and access to capital markets it will be able to finance its operations for the foreseeable future.

 

The Company’s term loan balance at March 31, 2023 was $389,857, and varied only slightly since December 31, 2022. The increase from January 1, 2022 to December 31, 2022, was mainly attributable to the additional proceeds received on the Economic Development Agency of Canada loan, which is interest free and will remain so, until the balance is paid over the 60-month period ending March 2029. The average interest expense on the other term loans was 7.2% in the period. The Company does not expect changes to the structure of term loans in the next twelve-month period. The Company maintained two credit facilities which bear interest at variable rates ranging between 7.45% and 8% at March 31, 2023. The Company expects to reimburse a portion of the credit facilities during 2023, and extend the due date of the remaining balance, while maintaining the similar conditions.

 

       Total   Less             
   Carrying   contractual   than one           Over 5 
   Value   amount   year   2-3 years   4-5 years   years 
   $   $   $   $   $   $ 
Bank indebtedness   1,087,253    1,087,253    1,087,253             
Accounts payable and accrued liabilities1   6,359,607    6,359,607    6,359,607             
Term loans   389,857    511,521    61,521    180,000    180,000    90,000 
Balance due on business combination   2,770,358    3,266,700    2,395,580    871,120         
Lease liabilities   5,435,755    6,543,087    2,940,114    1,125,789    642,528    1,834,656 
    16,042,830    17,768,168    12,844,075    2,176,909    822,528    1,924,656 

1 Accounts payable and accrued liabilities exclude amounts which are not financial liabilities.

 

Q1 2023 MD&A

PyroGenesis Canada Inc.

10

PyroGenesis Canada Inc.

Management’s Discussion and Analysis

For the three-month periods ended March 31, 2023, and 2022

(Unaudited)

 

SUMMARY OF CASH FLOWS

 

   Three months ended March 31 
   2023   2022 
Cash used in operating activities  $(6,530,631)  $(7,765,723)
           
Cash provided by investing activities   250,696    1,274,236 
           
Cash provided by financing activities   4,721,475    898,339 
           
Effect of exchange rate changes on cash denominated in foreign currency   (168)   3,259 
           
Decrease in cash   (1,558,628)   (5,589,889)
           
Cash - end of period   1,887,021    6,612,624 

 

During the three months ended March 31, 2023, cash flow used by operating activities was $6.5 million compared to $7.8 million for the same period in the prior year. The use of cash during Q1, 2023, consists of the net loss of $6.1 million (Q1, 2022 – net loss of $4.1 million) plus adjustments for operating activities of $0.3 million (Q1, 2022 - $1.4 million), including a net change in non-cash operating working capital items of $0.7 million (Q1, 2022 – net change of $5.0 million). The favourable variation is due to collections of accounts receivables and payments made on trade payables.

 

Investing activities resulted in a net source of funds of $0.3 million in Q1, 2023, compared to a net source of funds of $1.3 million in Q1, 2022 resulting from less additions to property and equipment, and less disposals of strategic investments.

 

Financing activities in Q1, 2023, resulted in a net source of funds of $4.7 million, compared with a net source of funds of $0.9 million for the same period in 2022. In Q1, 2023, the Company issued common shares for net cash proceeds of $4.96 million and repaid an amount of $0.1 million in loans and lease liabilities and $0.1 million in balance due on business combination. Financing activities also include interest paid of $0.1 million in both Q1, 2023 and Q1, 2022.

 

The net cash position of the Company decreased by $1.6 million for Q1, 2023, compared to a decrease of $5.6 million for Q1, 2022.

 

USE OF PROCEEDS FROM FINANCINGS

 

Description of intended use of funds from financings in the past 12 months   Proposed use of proceeds from financings completed in the past 12 months     Use of funds to Date
October 19, 2022: Private Placement for total gross proceeds of $1,318,980   Proceeds were intended and used for working capital and general corporate purposes   $ 1,318,980
March 8, 2023: Private Placement for total gross proceeds of $5,000,000   Proceeds were intended and used for working capital and general corporate purposes   $ 5,000,000

 

CAPITAL STOCK INFORMATION

 

The authorized share capital of the Company consists of an unlimited number of common shares. As at May 15, 2023 PyroGenesis had 178,580,395 Common Shares, 6,014,600 share purchase warrants, 9,810,500 outstanding stock options issued, and 6,648,000 exercisable options issued.

 

GOING CONCERN

 

These condensed consolidated financial statements have been prepared on the going concern basis, which presumes that the Company will be able to continue its operations for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future.

 

The Company is subject to certain risks and uncertainty associated with the achievement of profitable operations such as the successful signing and delivery of contracts and access to adequate financing.

 

The Company has incurred, in the last years, operating losses and negative cash flows from operations, and as a result, the Company has an accumulated deficit of $99,523,465 as at March 31, 2023 ($93,384,858 as at December 31, 2022). Furthermore, there have been unexpected delays in the collection of certain accounts receivable from contracts closed in a prior year. This has resulted in a shortfall in cash flows from operating activities that would be used in funding the Company’s operations.

 

Q1 2023 MD&A

PyroGenesis Canada Inc.

11

PyroGenesis Canada Inc.

Management’s Discussion and Analysis

For the three-month periods ended March 31, 2023, and 2022

(Unaudited)

 

As at March 31, 2023, the Company has working capital of $786,925 ($1,650,709 as at December 31, 2022) including cash of $1,887,021 ($3,445,649 as at December 31, 2022). The working capital is net of an allowance for credit losses amounting to $5,725,840 ($5,023,283 as at December 31, 2021) as further described in notes 6 and 7. The Company’s business plan is dependent upon the successful completion of contracts and also the receipt of payments from certain contracts closed in a prior year and expects these payments to be made during fiscal 2023, as well as the achievement of profitable operations through the signing, completion and delivery of additional contracts or a reduction in certain operating expenses. In the absence of this, the Company is dependent upon raising additional funds to finance operations within and beyond the next twelve months. The Company has been successful in securing financing in the past and has relied upon external financing to fund its operations, primarily through the issuance of equity, debt and convertible debentures. The Company completed a private placement in October 2022 for an amount of $1,318,980 and also completed another private placement in March 2023 for net proceeds of $4,960,483 (see note 13). While the Company has been successful in securing financing, raising additional funds is dependent on a number of factors, some of which are outside the Company’s control, and therefore there is no assurance that it will be able to do so in the future or that these sources will be available to the Company or that they will be available on terms which are acceptable to the Company. These conditions indicate the existence of a material uncertainty that may cast significant doubt about the Company’s ability to continue operating as a going concern.

 

The condensed consolidated financial statements have been prepared on a going concern basis and do not include any adjustments to the amounts and to classifications of the assets and liabilities that might be necessary should the Company be unable to achieve its plan and continue in business. If the going concern assumption were not appropriate, adjustments, which could be material, would be necessary to the carrying value of assets and liabilities, the reported expenses, and the classification of items on the consolidated statement of financial position.

 

RELATED PARTY TRANSACTIONS

 

During the three-month period ended March 31, 2023, the Company concluded the following transactions with related parties:

 

In 2023, rent and property taxes were charged by a trust whose beneficiary is the controlling shareholder and CEO of the Company in the amount of $69,891 ($69,054 for the three-month period ended March 31, 2022).

 

These expenses are recorded in the captions cost of sales and services and in selling, general and administrative in the consolidated statements of comprehensive loss. As at March 31, 2023 the right-of-use asset and the lease liabilities amount to $732,500 and $815,823 respectively, ($799,090 and $881,635 respectively at December 31, 2022).

 

A balance due to the controlling shareholder and CEO of the Company amounted to $340,156 at March 31, 2023 ($254,097 at December 31, 2022) and is included in accounts payable and accrued liabilities.

 

The Key Management Personnel of the Company, in accordance with IAS 24, are the members of the Board of Directors and certain officers. Total compensation to key management consisted of the following:

 

   Three months ended March 31   Variation 
   2023   2022   2023 vs 2022 
Salaries - key management  $305,457   $315,971   $(10,514)
Pension contributions   5,657    5,893    (236)
Fees - Board of Directors   48,172    20,000    28,172 
Share-based compensation - officers   29,621    326,074    (296,453)
Share-based compensation - Board of Directors       652,147    (652,147)
Other benefits - key management   155,257    6,439    148,818 
Total compensation  $544,164   $1,326,524   $(782,360)

 

CORPORATE HIGHLIGHTS

 

On January 10, 2023, PyroGenesis announced signed a $6,000,000 contract with advanced materials firm to supply SPARC™ land-based waste destruction system.

 

On January 12, 2023, PyroGenesis announced an “Energy Transition” contract with a major European multinational chemical and energy conglomerate.

 

On January 17, 2023, PyroGenesis announced signed emissions reduction contract with North American lithium-ion battery recycler.

 

On January 24, 2023, PyroGenesis announced the approval of NexGen™ facility by global aerospace client for 3D metal powder production.

 

On January 24, 2023, PyroGenesis confirms receipt of milestone payments from client B.

 

On March 8, 2023, PyroGenesis announced that it has completed a non-brokered private placement consisting of the issuance and sale of 5,000,000 units of the Corporation at a price of $1.00 per unit, for gross proceeds of $5,000,000 to the Company. Each unit consisted of one Common Share and one warrant entitling the holder thereof to purchase one Common Share at a price of $1.25 until March 7, 2025.

 

On March 21, 2023, PyroGenesis received $700,000 purchase order for three plasma torches.

 

On May 3, 2023, PyroGenesis announced that its subsidiary, Pyro Green-Gas Inc had successfully completed the Integrated Cold Test under a previously announced $9,300,000 project with a key client, one of the world’s top diversified steel producers.

 

Q1 2023 MD&A

PyroGenesis Canada Inc.

12

PyroGenesis Canada Inc.

Management’s Discussion and Analysis

For the three-month periods ended March 31, 2023, and 2022

(Unaudited)

 

CRITICAL ACCOUNTING ESTIMATES, NEW AND FUTURE ACCOUNTING POLICIES AND FINANCIAL INSTRUMENTS

 

For a discussion of significant accounting policies, judgements, estimates assumptions and financial instruments, please refer to notes 4, 5 and 28 of the 2022 consolidated Financial Statements.

 

CONTROLS AND PROCEDURES

 

The Company’s shares are traded on the Toronto Stock Exchange (“TSX”) since November 2020 and on the NASDAQ since March 2021. Prior to November 2020, the Company’s shares traded on the TSX Venture Exchange (“TSXV”), and all requirements of the TSXV were attainted by the Company. The Company acknowledged that being listed on the TSX, and NASDAQ would require more stringent disclosure controls, and started implementing such before the NASDAQ listing.

 

As a result of the graduation to the TSX and NASDAQ, the Company became subject to additional requirements under applicable securities laws relating to the establishment and maintenance of disclosure controls and procedures (“DC&P”) and internal control over financial reporting (“ICFR”), as defined in NI 52-109 and the applicable rules of the U.S. Securities and Exchange Commission. Such requirements also include the assessment and evaluation of both DC&P and ICFR, which was not required while the Company was listed on the TSXV. Consequently, the Company continues to take several actions to improve its DC&P and ICFR, in accordance with the thresholds provided by the regulators. The Company is currently implementing measures designed to improve its ICFR environment and remediate the control deficiencies that led to the material weaknesses identified below.

 

In accordance with the provisions of National Instrument 52-109 – Issuers’ annual and interim filings (“NI 52-109”) adopted by Canadian securities regulators and in Rule 13a-15(e) and 15d-15(e) under the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company has filed certificates signed by the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) that report on, among other items, i) their responsibility for establishing and maintaining DC&P and ICFR for the Company, ii) the design of DC&P and the design of ICFR, and the effectiveness of DC&P and ICFR.

 

Disclosure controls and procedures

 

The Company under the supervision of the CEO and CFO, have designed DC&P (as defined in NI-52-109 and Rule 13a-15(e) and 15d-15(e) under the Exchange Act), in order to provide reasonable assurance that:

 

·material information relating to the Company is made known to the CEO and CFO by others; and

·information required to be disclosed by the Company in its filings, under applicable securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation.

 

As of December 31, 2022, an evaluation was carried out under the supervision of the CEO and CFO, of the design and operating effectiveness of the Company’s DC&P. Based on this evaluation, the CEO and CFO concluded that presence of material weaknesses in our ICFR as described below in Management’s Report on Internal Controls over Financial Reporting at December 31, 2022.

 

Management’s Annual Report on Internal Controls over Financial Reporting

 

The Company under the supervision of the CEO and CFO, are responsible to design ICFR (as defined in NI-52-109 and Rules 13a-15(f) and 15d-15(f) under the Exchange Act) in order to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with IFRS as issued by the IASB.

 

As of December 31, 2022, an evaluation was carried out, under the supervision of the CEO and the CFO, of the effectiveness of the Company’s ICFR. Based on this evaluation, the CEO and the CFO concluded that material weaknesses exist, as described below, and summarised the conclusion below. The control framework used to design and evaluate effectiveness of the Company’s ICFR is established under the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) on Internal Control – Integrated Framework (2013 framework). A material weakness is a deficiency, or combination of deficiencies, in ICFR, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis.

 

In connection with the Company’s evaluation of ICFR, the following are the control deficiencies that were considered to be material weaknesses in the current quarter and in fiscal 2022 and any remediation that occurred up to March 31, 2023:

 

·Control environment: The Company did not maintain an effective control environment and has identified deficiencies relating to appropriate organizational structure and authority and responsibilities. The Company did not have a sufficient number of trained resources with the appropriate skills and knowledge with assigned responsibilities and accountability for the design and operation of ICFR and for holding individuals accountable for their internal control-related responsibilities.

 

Nonetheless, as of March 31, 2023 and for a portion of fiscal 2022, the deficiencies related to the control environment over reporting lines as well as authority and responsibilities were improved with the implementation of additional controls. Oversight and governance of financial reporting and related party transactions, including the oversight executed by Board of Directors and the Audit Committee was not indicative of a control environment deficiency. The Company has financial reporting resources internally, or at their disposal to ensure they can deal with complex accounting matters, as well as period-end controls to mitigate the risk of misstatement in the financial information.

 

·Control activities: The Company did not fully design and implement effective control activities and has identified deficiencies relating to: (i) selecting and developing control activities that contribute to the mitigation of risks to acceptable levels, and (ii) deploying control activities through policies that establish what is expected and procedures that put policies into action.

 

Q1 2023 MD&A

PyroGenesis Canada Inc.

13

PyroGenesis Canada Inc.

Management’s Discussion and Analysis

For the three-month periods ended March 31, 2023, and 2022

(Unaudited)

 

During the course of the 2022 fiscal year, and the current reporting period, the Company continued to implement numerous internal controls, including compensating controls to mitigate these risks as well as adding sufficient levels of review and approval in order to reduce the risk related to control activities thereby improving the quality of financial information.

 

·Journal Entries: The Company did not effectively design and maintain appropriate segregation of duties and controls over the effective preparation, review and approval, and associated documentation of journal entries, across its ERP platform. The Company did not have adequate review procedures for the recording of manual entries.

 

Throughout 2022, and including the current reporting period, the Company continues to modify their processes to ensure that journal entries are sufficiently reviewed and approved, and compensating controls exist to ensure the financial information is free of misstatement.

 

·Complex Spreadsheet Controls: The Company did not implement and maintain effective controls surrounding certain complex spreadsheets, including addressing all identified risks associated with manual data entry, completeness of data entry, and the accuracy of mathematical formulas, impacting complex spreadsheets used in fixed asset continuity schedules, production and revenue forecasting, and the calculation of the fair value of investments.

 

During the course of 2022, the Company continued to improve the safeguarding of spreadsheets and data, through various controls, password protections and improved segregation of duties with the objective of reducing the possibility of error.

 

·User Access Controls: The Company did not maintain effective user access controls to adequately restrict user access to financial applications and related data in accordance with job responsibilities.

 

In response to this, and as part of the improvement process the Company has continued to implement controls to limit the access to financial and non-financial applications, based on employee profile. The Company continues to implement IT environment best practices for access controls, including prompt changes, access limitation to appropriate users and systematic periodic reviews of account privileges. Automated access controls are being integrated into the new ERP system.

 

As a consequence, the Company did not have effective control activities related to the design, implementation and operation of process-level and management review control activities related to order-to-cash (including revenue trade receivables, and billings in excess of cost/cost in excess of billings), procure-to-pay (including operating expenses, prepaid expenses, accounts payable, and accrued liabilities), hire-to-pay (including compensation expense and accrued liabilities), long-lived assets, significant unusual transactions, related party transactions and other financial reporting processes for the entire year.

 

Aside from these material weaknesses, management has concluded that the Company’s consolidated financial statements as at and for the period ended March 31, 2023, present fairly, in all material respects, the Company’s financial position, results of operations, changes in shareholders’ equity and cash flows in accordance with IFRS as issued by the IASB. There were no material adjustments to the Company’s consolidated financial statements for the period ended March 31, 2023, and there were no changes to previously released financial results. However, because the deficiencies and material weaknesses create a reasonable possibility that a material misstatement to our consolidated financial statements would not be prevented or detected on a timely basis, the CEO and CFO concluded that as of December 31, 2022, the Company’s design and operation of ICFR and DC&P were not effective.

 

Management’s Ongoing Remediation Measures

 

During the quarter, the year ended December 31, 2022, and beyond, management initiated and continues to implement remediation measures as outlined above, in the 2022 annual MD&A as well as the quarterly MD&A’s of 2022. Management has performed an initial risk assessment using a top-down, risk-based approach with respect to the risks of material misstatement of the consolidated financial statements. In addition, compensating controls have been applied to the areas where the risks of material misstatement are considered moderate to high, as throughout the various accounting cycles. The Company is using and plans to continue to use outside resources to strengthen the business process documentation and help with management’s self-assessment and testing of internal controls. In 2023, the Company’s management, with oversight of the Audit Committee expects to advance the documenting, testing, and refining the internal controls, in addition with the upgrade to the ERP system, which inherently will add additional automated controls. As a result, the Company will improve the design of control activities and strengthen process controls surrounding sales, purchases, payroll, among others, and will be call for fewer compensating controls.

 

Although the Company can give no assurance that these actions will remediate these material weaknesses in internal controls or that additional material weaknesses in our ICFR will not be identified in the future, management believes the foregoing efforts will, when implemented, strengthen our ICFR and DC&P and effectively remediate the identified material weaknesses.

 

Management will take additional remedial actions as necessary as they continue to evaluate and work to improve the Company’s ICFR environment.

 

Changes in internal controls over financial reporting

 

Other than the material weaknesses described above, and the remediation process described above, there were no changes to the Company’s ICFR during the quarter ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s ICFR.

 

Limitations on Effectiveness of Disclosure Controls and Procedures and Internal Control over Financial Reporting

 

The Company’s management recognizes that any DC&P and ICFR, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives. Because of their inherent limitations, DC&P and ICFR may not prevent or detect all errors or misstatements on a timely basis.

 

Q1 2023 MD&A

PyroGenesis Canada Inc.

14

PyroGenesis Canada Inc.

Management’s Discussion and Analysis

For the three-month periods ended March 31, 2023, and 2022

(Unaudited)

 

RISK FACTORS

 

The Company has identified below certain significant risks relating to the business of the Company and the industry in which it operates. The following information is only a summary of certain risk factors and is qualified in its entirety by reference to, and must be read in conjunction with, the detailed information appearing elsewhere in this MD&A. These risks and uncertainties are not the only ones facing the Company. Additional risks and uncertainties not currently known to the Company, or that the Company currently considers immaterial, may also impair the operations of the Company. If any such risks materialize into actual events or circumstances, the Company’s assets, liabilities, financial condition, results of operations (including future results of operations), business and business prospects, are likely to be materially and adversely affected. There is no assurance that risk management steps taken will avoid future loss due to the uncertainties described below or other unforeseen risks. An investment in the Common Shares or other securities of the Company is highly speculative and involves a high degree of risk. Before making any investment decision, prospective investors should carefully consider all the information contained in this document including, in particular, the risk factors described below.

 

Certain factors may have a material adverse effect on the Company’s business, financial condition and results of operations. Current and prospective investors should carefully consider the risks and uncertainties and other information contained in this MD&A, the 2022 Financial Statements and the Annual Information Form, particularly under the heading “Risk Factors” in the Annual Information Form, and in other filings that the Company has made and may make in the future with applicable securities authorities, Company’s website at www.pyrogenesis.com. The risks and uncertainties described herein and therein are not the only ones the Company may face. Additional risks and uncertainties that the Company is unaware of, or that the Company currently believes are not material, may also become important factors that could adversely affect the Company’s business. If any of such risks actually occur, the Company’s business, financial condition, results of operations, and future prospects could be materially and adversely affected. In that event, the trading price of the Common Shares (or the value of any other securities of the Company) could decline, and the Company’s securityholders could lose part or all of their investment.

 

Risks Related to the Company’s Business and Industry

 

Operating Income (Loss) and Negative Operating Cash Flow

 

Prior to March 31, 2022, the Company had a history of losses and negative cash flows. For the three-month period ended March 31, 2023, the Company has a net loss of $6.1 million, cash flows used in operations of $6.7 million, and an accumulated deficit of $99.5 million. To the extent that the Company has net losses and negative operating cash flow in future periods, it may need to allocate a portion of its cash reserves to fund such negative cash flow. The Company may also be required to raise additional funds through the issuance of equity or debt securities. There can be no assurance that the Company will be able to generate a positive cash flow from its operations, that additional capital or other types of financing will be available when needed or that these financings will be on terms favourable to the Company.

 

The Company’s ability to continue as a going concern is dependent upon its ability in the future to grow its revenue, achieve profitable operations, successfully developing and introducing new products and, in the meantime, to obtain the necessary financing to meet its obligations and repay its liabilities when they become due. While the Company has been successful in securing financing in the past, raising additional funds is dependent on a number of factors outside the Company’s control, and as such there is no assurance that it will be able to do so in the future. External financing, predominantly by the issuance of equity and debt, might be sought to finance the operations of the Company; however, there can be no certainty that such funds will be available at terms acceptable to the Company, or at all. If the Company is unable to obtain sufficient additional financing, it may have to curtail operations and development activities, any of which could harm the business, financial condition and results of operations.

 

Actual Financial Position and Results of Operations May Differ Materially from the Expectations of the Company’s Management

 

The Company’s actual financial position and results of operations may differ materially from management’s expectations. The Company has experienced some changes in its operating plans and certain delays in the timing of its plans. As a result, the Company’s revenue, net income and cash flow may differ materially from the Company’s projected revenue, net income and cash flow. The process for estimating the Company’s revenue, net income and cash flow requires the use of judgment in determining the appropriate assumptions and estimates. These estimates and assumptions may be revised as additional information becomes available and as additional analyses are performed. In addition, the assumptions used in planning may not prove to be accurate, and other factors may affect the Company’s financial condition or results of operations.

 

Revenue Risks

 

PyroGenesis may experience delays in achieving revenues, particularly with plasma gasification projects which have a long sales cycle. Revenues may be delayed or negatively impacted by issues encountered by the Company or its clients including:

 

(i)unforeseen engineering and/or environmental problems;

 

(ii)delays or inability to obtain required financing, licenses, permits and/or regulatory approvals;

 

(iii)supply interruptions and/or labour disputes;

 

(iv)foreign exchange fluctuations and/or collection risk; and

 

(v)competition from other suppliers and/or alternative energy solutions that are less capital intensive.

 

There is no assurance that the business will perform as expected or that returns from the business will support the expenditures needed to develop it.

 

Concentration Risk and Credit Risk

 

To date, a small number of customers have accounted for a majority of PyroGenesis’ revenues. As its business expands, the Company expects that revenue distribution will be over a larger number of different customers. The loss of, or a reduction in, purchase orders or anticipated purchase orders from PyroGenesis’ principal customers could have a material adverse effect on its business, financial condition and results of operations. Additionally, if one of PyroGenesis’ customers is unable to meet its commitments to PyroGenesis, the Company’s business, financial condition and results of operations could be adversely affected.

 

Q1 2023 MD&A

PyroGenesis Canada Inc.

15

PyroGenesis Canada Inc.

Management’s Discussion and Analysis

For the three-month periods ended March 31, 2023, and 2022

(Unaudited)

 

As a result of the Drosrite International Exclusive Agreement and the Dross Processing Service Agreement, the Company generates significant revenues from payments made to Drosrite International under the Dross Processing Service Agreement. The Company will no longer receive payments under such arrangement if the Dross Processing Service Agreement, which involves a third party in a foreign jurisdiction, is terminated, which could have a material adverse effect on the business, financial condition and results of operations of the Company.

 

Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. The maximum credit risk to which the Company is exposed as at March 31, 2023 represents the carrying amount of cash, accounts receivable (except sales tax receivable), costs and profits in excess of billings on uncompleted contracts, deposits and royalties receivable.

 

Cash is held with major reputable financial institutions.

 

Management has established a credit policy under which each new customer is analysed individually for creditworthiness before the Company’s payment and delivery terms and conditions are offered. The Company’s review could include reviewing external ratings, if they are available, financial statements, credit agency information, industry information and in some cases bank references. The Company’s exposure to credit risk is mainly influenced by the individual characteristics of each customer. In monitoring customer credit risk, customers are identified according to their characteristics such as their geographic location, industry, trading history with the Company and existence of previous financial difficulties.

 

The Company does not generally require collateral or other security from customers on accounts receivable, however, the contract terms may include the possibility of recourse in the event of late payment. The Company believes that there is no unusual exposure associated with the collection of these receivables.

 

The credit risk associated with costs and profits in excess of billings on uncompleted contracts is similar to that of accounts receivable, as these amounts are accumulated and converted to accounts receivable as invoicing milestones are reached.

 

The royalties receivable are due from a company in which the Company has a strategic investments. The Company does not have collateral or other security associated with the collection of this receivable. The carrying amount of the royalties receivable have been discounted to reflect the time value of money and credit risk of the counterparty.

 

The deposits are payments made to suppliers and entities from which the Company leases property. The Company does not have collateral or other security associated with the collection of these deposits. As at March 31, 2023 and 2022, no loss allowance has been recognized in connection with these deposits and the maximum exposure is the carrying amount of these deposits.

 

During the three-month period ended March 31, 2023, and the year-end December 31, 2022, provisions for expected credit losses were recorded, however, the accounts provisioned by the loss are still subject to enforcement activity in order to collect the balances due.

 

Technology Development and Manufacturing Capability Risks

 

PyroGenesis recently expanded into new areas of business and, as a result, many of the Company’s products are at various stages of the development cycle. The Company may be unable to commercialise such products, or it may be unable to manufacture such products in a commercially viable manner. Whilst management is confident in both its technology and in its team of experienced engineers, scientists and technicians, it cannot know with certainty, which of its products will be commercialised, when such products will be commercialised, or whether such products will be able to be manufactured and distributed profitably.

 

Product Revenues/History of Losses

 

PyroGenesis has incurred losses in the majority of years since its inception. In the past the Company’s operations have not generated sufficient earnings and cash flows to date to result in consistent profitability or positive cash flow. For the three months ended March 31, 2023, the Company had a net loss of $6.1 million, which includes a gain from the change in fair value of strategic investments of $300,891 and cash flows used in operations of $6.5 million. There can be no assurance that the Company will be able to continue to generate significant gains from the value of its strategic investments in the future.

 

Additional financing and dilution

 

PyroGenesis may require additional financing. There can be no assurance that additional financing will be available to the Company when needed, or on terms acceptable to the Company. PyroGenesis’ inability to raise financing to support ongoing operations or to fund capital expenditures could limit the Company’s growth and may have a material adverse effect upon the Company.

 

The Company does not exclude raising additional funds by equity financing. In addition, as of March 31, 2023, 9,810,500 stock options are currently issued and outstanding, together with 6,014,600 share purchase warrants. The exercise of stock options and/or warrants, as well as any new equity financings, represents dilution factors for present and future shareho