Dear Poetech2, 

Welcome to PyroGenesis.  Good to see you here.  No apologies needed.  I am glad to see you are doing your homework; an informed investor is the best investor to have. 

PyroGenesis has only recently been showing signs of being cash flow positive, as one might expect of a growing high tech small cap company.  Although we had cash flow positive projects we hadn’t, until recently, had enough to be profitable overall. In such circumstances one could expect to see skinny cash balances.  Cash balances as a line item are also subject to timing differences as well since they are reported as at a certain date…in this case June 30th, 2017 (as compared to December 31st, 2016).  Receiving a payment from a client just before or after these dates would impact cash balances significantly as you can appreciate…so as a line item standing alone cash balances are subject to many influences.  I would suggest cash balances taken in combination with other indicators (such as working capital and possibly some form of adjusted EBITDA) might me in order. 

Turning to working capital (current assets – current liabilities); I find that quite interesting.  You are quite right that working capital is negative $6.486 Million.  However, if you look at the components of current liabilities you may be surprised at what unfolds.  I would like to draw your attention to two line items, namely (i) convertible debenture of approx. $3.756 Million and (ii) Billings in excess of costs…of approx. $3.1 MM. 

The conv debenture is a current liability as it matures in March of 2018.  It has an interest rate of 7.5% and converts at 80 cents. We did this deal when the company was not in as good a position as it is today.  It is widely accepted that the debenture will either convert, or be refinanced with another instrument, or both, and will not be paid out of cash flow.  If one takes this view than arguably it can be taken out of working capital needs.  This leaves a negative working capital of $2.729.

Let us now consider what the other line item represents, Billings in excess of costs approx. $3.1 MM.  It is an accounting anomaly which reconciles percent complete revenue recognition with when cash actually came into the company and in effect has nothing to do with liabilities in the sense that trade payables would.  Let me try to explain.  In an example where I have a project with expected revenues of $1MM I am not allowed to recognize this revenue as the customer pays.  I must recognize it as the project completes, regardless of when I am paid.  So, lets take two extreme examples of a project that is 25% complete and in one I am paid the full $1MM up front and in the other I am paid the full $1MM at the end.  Accounting on a % complete basis I am only allowed to recognize 25% of the project (in this case $250,000) as revenue notwithstanding how the money comes in in the two examples we are looking at.  So how does accounting recognize the fact that in the first case $1MM was paid up front and in the other case it is paid at the end.  In the first case $1MM is collected up front but can only recognize $250,000.  The difference of $750,000 is put in current liabilities as Billings in excess of cost.  In the second case where 25% is recognized but all the money is collected at the end, the amount I have recognized as revenues but haven’t received yet, goes into current assets as Costs and profits in excess. In a weird way I am being penalized on my balance sheet for collecting faster…or put another way who would you rather invest in…someone who has collected faster and it is shown as a liability or someone who hasn’t collected fast enough, and it is shown as a current asset?  Just asking…. Interestingly enough clients pay based on pre agreed benchmarks and they are usually not paying based on the  % complete concept.  The client pays what was due on the date it was due as dictated by a seperate agreement.  The take away here is that this line item is not a trade payable in the normal sense of the term and is more an accounting anomaly to reconcile differences in timing of revenue recognition.  As such, if one takes this view then this item can be taken out of working capital which now leaves us with a POSITIVE working capital (-6.486 +3.756 +3.1) of $370,700. 

This is just one perspective of many that must be understood before investments are made.  I share with you mine as this is what I manage towards and, as the CEO of a company you may invest in, I think it is important that I share that with you.  In short, my view is that, from a working capital perspective, the sky is not falling…far from it.  As an ex-NYC investment banker who specialized in fortune 500 M&A, I can share with you that these were the balance sheet gems (anomalies?) we would look for and take advantage of.

Hope this helped.  If you need any other information, please do not hesitate to ask.  I thank you for taking the time to peel back the layers and take a good hard look at us, and for posting your questions on this forum.

Sincerely,

P. Peter Pascali, CEO, PyroGenesis Canada Inc.