The gross margin for 2018, was $1,109,297, or 22.1% of revenue. This compares with a gross margin of $3,126,961 (43.5% of revenue) for 2017.

As a result of the type of contracts being executed, the nature of the project activity had a significant impact on the gross margin and the overall level of cost of sales and services reported in a period, as well as the composition of the cost of sales and services, as the mix between labour, materials and subcontracts may be significantly different. The cost of sales and services for 2018 and 2017 are in line with management’s expectations.

The amortization of intangible assets of $60,326 in 2018 and $Nil for 2017 relates to patents and deferred development costs. Of note, these expenses are non-cash items and will be amortized over the duration of the patent lives.

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 2018 excluding the costs associated with share-based compensation (a non-cash item in which options vest principally over a four-year period), were $5,864,528, representing an increase of 33% compared with $4,394,837 reported for 2017. 

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

• an increase of 32% in employee compensation due primarily to additional headcount,
• an increase of 55% for professional fees, primarily due to an increase in consulting fees, legal fees and patent expenses,
• an increase of 6% in office and general expenses, due to an increase in telephone & internet expenses and stationary & office expenses,
• travel costs increased by 21%, due to an increase in travel abroad,
• depreciation on property and equipment increased by 90% due to higher amounts of property and equipment being depreciated. In 2018, depreciation was taken on the Plasma atomization system (previously asset under development). In 2017 there was no depreciation on asset under development,
• government grants increased by 100% due to a government grant contribution for a maximum amount of $350,000 for the period 2018-2020,
• other expenses increased by 35%, primarily due to an increase in marketing expenses, and in sub-contracting expenses.

Separately, share based payments decreased by 11% in 2018 over the same period in 2017 as a result of the vesting structure of the stock option plan including the stock options granted in 2018.

Research and Development (“R&D”) Costs

The Company incurred $892,045 of R&D costs, net of government grants, on internal projects in 2018, an increase of 208% as compared with $289,851 in 2017. The increase in 2018 is related to torch development and plasma atomization related expenses.

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.

Inventory       

The Company’s inventory as at December 31, 2018 was $382,832 which includes powders, raw material and spare parts compared with $123,735 for the same period in 2017.

Net Comprehensive Loss

The net comprehensive loss for 2018 of $7,845,800 compared to a loss of $6,174,303, in 2017, represents an increase of 27% year-over-year.

The increase of $1,671,497 in net comprehensive loss in 2018 is primarily attributable to the factors described above, which have been summarized as follows:

(i)	a decrease in product and service-related revenue of $2,162,745 arising in 2018,
(ii)	a decrease in cost of sales and services totaling $145,075, primarily due to an increase in an increase in subcontracting, a decrease in investment tax credits, and an increase in amortization of intangible assets.
(iii)	an increase in SG&A expenses of $1,383,927 arising in 2018 primarily due to an increase in employee compensation, professional fees, travel, depreciation on property & equipment, and other expenses,
(iv)	an increase in R&D expenses of $602,194 primarily due to the increase in employee compensation, subcontracting, materials & equipment and other expenses,
(v)	a decrease due to the settlement of the claim related to the IP debt balance of $3,215,643, an increase in net finance costs of $883,349 in 2018.

EBITDA

The EBITDA loss in 2018 was $6,864,461 compared with an EBITDA loss of $5,558,640 for 2017, representing an increase of 23% year-over-year. The increase in the EBITDA loss in 2018 compared with 2017 is due to the increase in comprehensive loss of $1,671,497, offset by an increase depreciation on property and equipment of $100,685, an increase amortization of intangible assets of $60,326 and an increase in finance charges of $204,665.

Adjusted EBITDA loss in 2018 was $6,191,212 compared with an Adjusted EBITDA loss of $1,583,985 for 2017. The increase of $4,607,227 in the Adjusted EBITDA loss in 2018 is attributable to an increase in EBITDA loss of $1,305,821, offset by a decrease of $85,764 in share-based payments and a decrease in the settlement of a claim related the long-term debt of $3,215,643.

The Modified EBITDA loss in 2018 was $5,271,749 compared with a Modified EBITDA loss of $1,445,785 for 2017, representing an increase of 265%. The increase in the Modified EBITDA loss in 2018 is attributable to the increase as mentioned above in the Adjusted EBITDA of $4,607,227 and a decrease in change of fair value of investments of $781,263.

Liquidity

The Company has incurred, in the last several years, operating losses and negative cash flows from operations, resulting in an accumulated deficit of $51,066,540 and a negative working capital of $4,101,429 as at December 31, 2018 (December 31, 2017 - $43,200,708 and $9,527,105 respectively). Furthermore, as at December 31, 2018, the Company’s current liabilities and expected level of expenses for the next twelve months exceed cash on hand of $644,981 (December 31, 2017 - $622,846). The Company has relied upon external financings to fund its operations in the past, primarily through the issuance of equity, debt, and convertible debentures, as well as from investment tax credits.

Separately, PyroGenesis is pleased to announce that Mr. Lelio Lato has joined the Company as V.P. Finance. As a CPA and CFA with over 20 years of experience, he has worked in various senior management roles across small cap technology companies with extensive capital markets knowledge.

About PyroGenesis Canada Inc.

PyroGenesis Canada Inc., a high-tech company, is the world leader in the design, development, manufacture and commercialization of advanced plasma processes and products. We provide engineering and manufacturing expertise, cutting-edge contract research, as well as turnkey process equipment packages to the defense, metallurgical, mining, advanced materials (including 3D printing), oil & gas, and environmental industries. With a team of experienced engineers, scientists and technicians working out of our Montreal office and our 3,800 m² manufacturing facility, PyroGenesis maintains its competitive advantage by remaining at the forefront of technology development and commercialization. Our core competencies allow PyroGenesis to lead the way in providing innovative plasma torches, plasma waste processes, high-temperature metallurgical processes, and engineering services to the global marketplace. Our operations are ISO 9001:2015 and AS9100D certified, having been since 1997. PyroGenesis is a publicly-traded Canadian Corporation on the TSX Venture Exchange (Ticker Symbol: PYR) and on the OTCQB Marketplace. For more information, please visit www.pyrogenesis.com .