- DROSRITE™ related sales decreased by $6.0 million due to client delays in funding for the construction of the onsite facility,
- Support services related to systems supplied for the US Navy decreased by $6.2 million due to the project nearing its completion with remaining milestones based largely on inspections and shipment of the equipment, as well as, additional out of scope work costs incurred and not yet reflected in receipt of purchase order modifications, and
- Biogas upgrading and pollution controls decreased by $3.4 million due to the continuous effort in reaching desired results in order to advance to final steps, such as, commissioning.
PUREVAP™ related sales includes revenue from the sale of technologies in the amount of $3.6 million ($3.3 million in 2021). See note 7 to the 2022 consolidated financial statements.
As of March 30, 2023, revenue expected to be recognized in the future related to backlog of signed and/or awarded contracts is $32.4 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 $2.8 million in Q4, 2022, representing a decrease of 52% compared to $5.9 million in Q4, 2021, primarily due to decreases in subcontracting $0.1 million (Q4, 2021 - $0.2 million), direct materials $1.0 million (Q4, 2021 - $4.5 million), manufacturing overhead & other $0.3 million (Q4, 2021 - $0.4 million), foreign exchange charge on materials $0.2 million, (Q4, 2021 – ($0.3 million), which is largely due to the decrease in product and service-related revenues, as well as being negatively impacted by the foreign exchange charge on materials, and a decrease in investment tax credits ($0.02 million) due to a lower levels of qualifying projects.
Fiscal 2022, cost of sales and services was $10.9 million, representing a decrease of 42% compared to $18.6 million in 2021, primarily due to the decrease of product and service-related revenues in the Company and its subsidiaries. Decreases in direct materials $4.7 million (2021 - $14.3 million) and investment tax credits ($0.07 million) (2021 – ($0.1 million)), were offset by the increases in employee compensation $3.7 million (2021 - $2.6 million), subcontracting $1.3 million (2021 - $0.9 million), manufacturing overhead & other $1.4 million (2021 - $1.1 million), foreign exchange charge on materials ($1.0 million) (2021 – ($0.6 million), totaling an increase of $5.4 million compared to $4.1 million in 2021. The increase in employee compensation, subcontracting, and manufacturing overhead & other is primarily related to an increase in labour intense projects, which require additional engineering hours, as well as specific subcontracting work related to equipment capacity improvements, mainly for torch-related sales, and the increase to manufacturing and other was due to higher utility costs, and equipment rentals, such as cranes and power generators. These increases were offset by the decrease in direct materials and by the foreign exchange charge on materials.
The gross margin for Q4, 2022 was $0.5 million or 14.5% of revenue compared to a gross margin of $1.3 million or 18.1% of revenue for Q4, 2021, the decrease in gross margin was mainly attributable to the negative impact in foreign exchange charge on materials of $0.5 million.
Fiscal 2022, gross margin was $8.1 million or 42.8% of revenue compared to a gross margin of $12.4 million or 40% for fiscal 2021. 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, the mix between labour, materials and subcontracts may be significantly different. The cost of sales and services for 2022 and 2021 are in line with management’s expectations and with the nature of revenue.
Investment tax credits recorded against cost of sales are related to projects that qualify for tax credits from the provincial government of Quebec. Qualifying tax credits decreased in Q4, 2022 to $0.02 million compared to $0.07 million for Q4,2021. In 2022, $0.07 million compared to $0.1 million in 2021. The decrease in fiscal 2022 is primarily related to less contracts being eligible for qualifying tax credits.
The amortization of intangible assets for Q4, 2022 was $0.2 million compared to $0.4 million for Q4, 2021. In 2022, the amortization of intangible assets was $0.9 million compared to $0.5 million for 2021. The increase in 2022, 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 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 Q4, 2022 were $10.4 million, representing a decrease of 13% compared to $11.9 million for Q4, 2021. The decrease is mainly a result of employee compensation decreasing to $2.5 million (Q4, 2021 – 4.6 million), due to lower levels of eligible commissions and bonuses, a decrease in share-based compensation of $3.6 million (a non- cash expense related to a Q4 2021 grant not repeated in 2022), and a decrease in other expenses, which in Q4 2021 comprised of insurances, taxes, interest, and bank charges. Professional fees for Q4 2022 were greater due to an increase in legal fees, accounting fees, investor relation fees and patent expenses. In addition, in Q4 2022 a credit loss of $4.5 million was recorded related to collection of accounts receivable, also a non-cash expense.
SG&A expenses for fiscal 2022 were $29.0 million, representing an increase of 7% compared to $27.2 million for fiscal 2021. The SG&A expense now includes those of Pyro Green-Gas for the full year, versus approximately 5 months for fiscal 2021, increased due to the following:
| i) | a decrease of $0.6 million in employee compensation primarily due to a decrease in commissions and bonuses, | |
| ii) | an increase of $1.3 million for professional fees, primarily due to an increase in consulting fees, accounting and audit fees, legal fees, investor relation fees and public listing fees, | |
| iii) | an increase of $0.5 million in office and general expenses, is primarily due to information technology expenses including those related to the new ERP system, | |
| iv) | depreciation on property and equipment increased by $0.2 million due to higher amounts of property and equipment being depreciated, | |
| v) | Bad debt provision increased by $4.5 million, of which $4.2 million is attributable to accounts receivable and $0.3 million related to costs and profits in excess of billings on uncompleted contracts. |
Separately, share-based payments decreased to $1.3 million for Q4, 2022 (Q4, 2021 - $4.9 million) and decreased to $5,538,463 in 2022, compared to $9,762,745 over the same period in 2021. This was directly impacted by the vesting structure of the stock option plan with options vesting between 10% and 100% on the grant date requiring an immediate recognition of that cost.
Depreciation on Property and Equipment
During the three months ended December 31, 2022, deprecation on property and equipment increased to $0.2 million compared to $0.1 million for the same period in the prior year. The 54% increase is due to the equipment under construction placed in service.
The depreciation on property and equipment increased to $0.6 million in 2022, compared to $0.4 million in 2021. The 70% increase is due to higher amounts of property and equipment being depreciated.
Research and Development (“R&D”) Expenses
