PyroGenesis Announces Q2 2016 Results - Seite 2

Cost of Sales and Services and Gross Margins

Cost of sales and services before amortization of intangible assets was $744,927 in Q2, 2016, representing a decrease of 38% as compared with $1,208,578 in Q2, 2015.

The amortization of intangible assets of $349,269 in Q2, 2016 and Q2, 2015 relates to the licenses and know-how purchased in 2011 from a company under common control. This expense is a non-cash item and the underlying asset will be fully amortized by December 31, 2016.

In Q2, 2016, the gross margin before amortization of intangible assets was $74,063, which represents 9% of revenue. This compares with a gross margin before amortization of intangible assets of $325,089 (21.2% of revenue) for Q2, 2015.

Investment tax credits recorded against cost of sales are primarily related to client funded projects that qualify for tax credits from the provincial government of Quebec. Qualifying tax credits decreased to $26,221 in Q2, 2016, compared with $65,851 in Q2, 2015, primarily as a result of the decreased R&D activities within projects under construction for clients in 2016. This represents a decrease of 10% year-over-year The Company continues to make investments in research and development projects involving of strategic partners and government bodies.

Selling, General and Administrative Expenses

Selling, general and administrative expenses ("SG&A") incorporate costs associated with corporate administration, business development, project proposals, operations administration, investor relations and employee training.

SG&A expenses for Q2, 2016 were $999,500, representing a decrease of 10% compared with $1,107,602 reported for Q2, 2015. Excluding the costs associated with share-based compensation (a non-cash item in which options vest over a four year period) SG&A expenses decreased by 10% in Q2, 2016 compared with Q2, 2015.

The decrease in SG&A expenses in Q2, 2016 over the same period in 2015 is attributable to the net effect of:

• an increase of 1% in employee compensation, and an increase of 7% in office and general expenses a decrease of 28% for professional fees, primarily due to decreased levels of external investor relations services, business development and accounting services,
• travel costs decreased by 36%,
• depreciation on property and equipment decreased by 22% due to a reduced level of investment in machinery and equipment since 2010, when major acquisitions were made,
• government grants decreased by 66% due to lower level of activities supported by such grants and
• other expenses decreased by 30%, primarily due to the reduced cost of freight and shipping.

Separately, share based payments increased by 6% in Q2, 2016 over the same period in 2015 as a result of the vesting structure of the stock option plan and the re-evaluation of options as at December 31, 2015 which increased the share-based payments expense in 2016. On a year-to- date basis, share-based payments expense decreased by 44% since there was no options granted in 2016 which was not the case in 2015.