PyroGenesis Canada 40F 2022 Annual report | PYRGF Filing

Exhibit 99.3

PyroGenesis Canada Inc.

Consolidated Financial Statements

December 31, 2022 and 2021

PyroGenesis Canada Inc.

Consolidated Financial Statements

December 31, 2022 and 2021

Management’s responsibility

Report of Independent Registered Public Accounting Firm – Current Firm

(PCAOB ID Number

1232

)

Financial Statements

Consolidated Statements of Financial Position

Consolidated Statements of Comprehensive Loss

Consolidated Statements of Changes in Shareholders’ Equity

Consolidated Statements of Cash Flows

8 - 9

Notes to Consolidated Financial Statements

10 - 51

Management’s Responsibility

Management is

responsible for

the preparation

and presentation

of the

accompanying consolidated

financial statements,

including

responsibility

for

significant

accounting

judgments

and

estimates

accordance

with

International

Financial

Reporting

Standards

issued

the

International

Accounting

Standards

Board.

This

responsibility

includes

selecting

appropriate accounting principles

and methods, and

making decisions affecting

the measurement of transactions

in which

objective judgment is required.

The

Board

Directors

and

Audit

Committee

are

composed

primarily

Directors

who

are

neither

management

nor

employees of

the Company.

The Board

of Directors

is responsible

for overseeing

management in

the performance

of its

financial reporting responsibilities, and

for approving the

financial information included in

the annual report.

The Board fulfills

these responsibilities by reviewing the financial information prepared by management and

discussing relevant matters with

management and

the external

auditor.

The Audit

Committee has

the responsibility

of meeting

with management

and the

external auditors to

discuss the internal

controls over the

financial reporting process, auditing

matters and financial

reporting

issues. The Audit Committee is also responsible for recommending

the appointment of the Company's external auditor.

Raymond Chabot

Grant Thornton

LLP, an Independent Registered Public

Accounting Firm,

is appointed

by the

shareholders

to audit the

consolidated financial statements

and report directly

to them; their

report follows. The

external auditor has

full

and free access to, and meets periodically and

separately with, both the Audit Committee and management to discuss their

audit findings.

March 30, 2023

[Signed by P.

Peter Pascali]

[Signed by Andre Mainella]

Peter Pascali, Chief Executive Officer

Andre Mainella, Chief Financial Officer

Raymond Chabot

Grant Thornton LLP

Suite 2000

National Bank Tower

600 De La Gauchetière Street West

Montréal, Quebec

H3B 4L8

514-878-2691

Report of Independent Registered Public Accounting Firm

the Shareholders and Directors of PyroGenesis Canada Inc.

Opinion on the consolidated financial statements

We have

audited the

accompanying consolidated

statements of

financial position

of PyroGenesis

Canada Inc.

(the "Company")

as of

December 31,

2022 and

2021, the

related consolidated

statements of

comprehensive loss,

changes in

shareholders’ equity

and cash

flows for the years then ended,

and the related notes (collectively referred

to as the "consolidated financial statements"). In

our opinion,

the consolidated

financial statements present

fairly,

in all

material respects,

the financial position

of the

Company as

of December

31,

2022 and

2021, and

the results

of its

operations and

its cash

flows for

the years

then ended

in conformity

with International

Financial

Reporting Standards as issued by the International Accounting Standards Board.

Going concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as

a going concern.

As discussed

in Note

2 to

the consolidated

financial statements,

the Company

has incurred

operating losses

and negative

cash flows

from operations and, as a result, has an accumulated deficit as of

December 31, 2022. These conditions, along with other matters as set

forth in

Note 2,

indicate the existence

of a material

uncertainty that

may cast significant

doubt about

the Company’s

ability to continue

operating as a

going concern. Management's

plans in regard

to these matters

are also described

in Note 2.

The consolidated financial

statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for opinion

These consolidated financial statements are

the responsibility of the Company’s

management. Our responsibility is to

express an opinion

on the

Company's consolidated

financial statements

based on

our audits.

are a

public accounting

firm registered

with the

Public

Company Accounting

Oversight Board (United

States) ("PCAOB") and

are required to

be independent with

respect to the

Company in

accordance with the

U.S. federal securities

laws and the

applicable rules and

regulations of the

Securities and Exchange

Commission

and the PCAOB.

We conducted our

audits in accordance with

the standards of the

PCAOB. Those standards require

that we plan and

perform the audit

to obtain reasonable

assurance about whether

the consolidated financial

statements are free

of material misstatement,

whether due to

error

fraud.

The

Company is

not

required

have,

nor

were

we engaged

perform, an

audit

its internal

control

over

financial

reporting. As

part of

our audits,

we are

required to

obtain an

understanding of

internal control

over financial

reporting but

not for

the

purpose of expressing an opinion

on the effectiveness of the

Company's internal control over financial

reporting. Accordingly, we express

no such opinion.

Our audits included performing

procedures to assess the

risks of material misstatement

of the consolidated financial

statements, whether

due

error

fraud,

and performing

procedures

that

respond to

those

risks. Such

procedures included

examining,

test basis,

evidence

regarding

the

amounts

and

disclosures

the

consolidated

financial

statements.

Our

audits

also

included

evaluating

the

accounting

principles

used

and

significant

estimates

made

management,

well

evaluating

the

overall

presentation

the

consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

We have served as the Company’s auditor since 2021.

Montréal, Canada

March 30, 2023

PyroGenesis Canada Inc.

Consolidated Statements of Financial Position

December 31, 2022 and 2021

(In Canadian dollars)

December 31,

2022

2021

Assets

Current assets

Cash and cash equivalents [note 8]

3,445,649

12,202,513

Accounts receivable [note 9]

18,624,631

17,639,616

Costs and profits in excess of billings on uncompleted contracts [note 10]

1,051,297

4,922,710

Inventory [note 24]

1,876,411

887,590

Investment tax credits receivable [note 11]

276,404

256,513

Income taxes receivable

14,169

117,029

Current portion of deposits [note 14]

432,550

1,328,452

Current portion of royalties receivable [note 13]

455,556

311,111

Contract assets

499,912

375,789

Prepaid expenses

771,603

717,661

Total current assets

27,448,182

38,758,984

Non-current assets

Deposits [note 14]

46,053

248,756

Strategic investments [note 12]

6,242,634

14,901,659

Property and equipment [note 15]

3,393,452

3,712,937

Right-of-use assets [note 16]

4,818,744

5,765,993

Royalties receivable [note 13]

952,230

947,543

Intangible assets [note 17]

2,104,848

2,774,198

Goodwill [note 18]

2,660,607

Total assets

47,666,750

69,770,677

Liabilities

Current liabilities

Bank indebtedness [note 28]

991,902

—

Accounts payable and accrued liabilities [note 19]

10,115,870

10,069,177

Billings in excess of costs and profits on uncompleted contracts [note 20]

9,670,993

9,400,231

Current portion of term loans [note 21]

69,917

83,004

Current portion of lease liabilities [note 16]

2,672,212

2,934,236

Balance due on business combination [note 6]

2,088,977

2,242,503

Income taxes payable

187,602

23,048

Total current liabilities

25,797,473

24,752,199

Non-current liabilities

Lease liabilities [note 16]

2,861,482

2,389,729

Term

loans [note 21]

320,070

107,901

Balance due on business combination [note 6]

1,818,798

1,709,700

Deferred income taxes [note 31]

—

42,394

Total liabilities

30,797,823

29,001,923

Shareholders’ equity

[note 22]

Common shares

85,483,223

82,104,086

Warrants

223,200

—

Contributed surplus

24,546,960

19,879,055

Accumulated other comprehensive income

402

3,444

Deficit

(93,384,858)

(61,217,831)

Total shareholders’ equity

16,868,927

40,768,754

Total liabilities and shareholders’ equity

47,666,750

69,770,677

Contingent liabilities, subsequent events [notes 29 and

33].

The accompanying notes form an integral part of the consolidated

financial statements.

Approved on behalf of the Board:

[Signed by P.

Peter Pascali] P.

Peter Pascali

[Signed by Andrew Abdalla] Andrew Abdalla

PyroGenesis Canada Inc.

Consolidated Statements of Comprehensive Loss

For the years ended December 31, 2022 and 2021

(In Canadian dollars)

2022

2021

Revenues

[note 7]

19,013,503

31,068,350

Cost of sales and services [note 24]

10,869,616

18,636,539

Gross profit

8,143,887

12,431,811

Expenses

Selling, general and administrative [note 24]

29,025,434

27,237,135

Research and development, net [note 11]

2,317,973

2,535,987

31,343,407

29,773,122

Net loss from operations

(23,199,520)

(17,341,311)

Changes in fair value of strategic investments [note 12]

(8,340,781)

(21,426,218)

Finance costs, net [note 25]

(550,742)

(404,370)

Loss before income taxes

(32,091,043)

(39,171,899)

Income taxes [note 31]

75,984

(739,960)

Net loss

(32,167,027)

(38,431,939)

Other comprehensive income (loss)

Items that will be reclassified subsequently to profit or loss

Foreign currency translation gain (loss) on investments

in foreign

operations

(3,042)

3,444

Comprehensive loss

(32,170,069)

(38,428,495)

Loss per share

[note 26]

Basic

(0.19)

(0.23)

Diluted

(0.19)

(0.23)

The accompanying notes form an integral part of the consolidated

financial statements.

PyroGenesis Canada Inc.

Consolidated Statements of Changes in Shareholders’

Equity

For the years ended December 31, 2022 and 2021

(In Canadian dollars)

Accumulated

Number of

other

common

Common

Contributed

comprehensive

Warrants

Surplus

income

Deficit

Total

Balance - December 31, 2021

170,125,795

82,104,086

—

19,879,055

3,444

(61,217,831)

40,768,754

Shares issued upon exercise of stock

options [note 22]

2,440,000

2,283,357

—

(870,558)

—

1,412,799

Private placement [note 22]

1,014,600

1,095,780

223,200

—

1,318,980

Share-based payments

—

5,538,463

—

5,538,463

Other comprehensive loss for the year

—

(3,042)

—

(3,042)

Net loss

—

(32,167,027)

Balance – December 31, 2022

173,580,395

85,483,223

223,200

24,546,960

402

(93,384,858)

16,868,927

Balance - December 31, 2020

159,145,992

67,950,069

—

10,480,310

—

(19,007,273)

59,423,106

Shares issued upon exercise of stock

options [note 22]

3,482,000

1,473,818

—

(364,000)

—

1,109,818

Shares issued upon exercise of purchase

warrants and compensation options [note

22]

8,337,897

13,085,197

—

13,085,197

Share redemptions for cancellation [note

22]

(840,094)

(404,998)

—

(3,778,619)

(4,183,617)

Share-based payments

—

9,762,745

—

9,762,745

Other comprehensive income for the year

—

3,444

—

3,444

Net loss

—

(38,431,939)

Balance – December 31, 2021

170,125,795

82,104,086

—

19,879,055

3,444

(61,217,831)

40,768,754

The accompanying notes form an integral part of the consolidated

financial statements.

PyroGenesis Canada Inc.

Consolidated Statements of Cash Flows

For the years ended December 31, 2022 and 2021

(In Canadian dollars)

2022

2021

Cash flows provided by (used in)

Operating activities

Net loss

(32,167,027)

(38,431,939)

Adjustments for:

Share-based payments

5,538,463

9,762,745

Depreciation of property and equipment

603,894

356,103

Depreciation of right-of-use assets

635,828

570,411

Amortization and write-off of intangible assets

878,030

465,913

Amortization of contract assets

243,626

513,572

Net finance costs

550,742

404,370

Change in fair value of investments

8,340,781

21,426,218

Deferred income taxes

(42,394)

(584,246)

Unrealized foreign exchange

(102,236)

(10,623)

(15,520,293)

(5,527,476)

Net change to working capital items [note 23]

4,391,408

(12,585,956)

(11,128,885)

(18,113,432)

Investing activities

Additions to property and equipment

(396,051)

(1,502,231)

Additions to intangible assets

(290,373)

(246,630)

Purchase of strategic investments

(3,604,000)

(10,588,857)

Disposal of strategic investments

3,922,244

14,252,730

Business combination, net of cash acquired

—

807,945

(368,180)

2,722,957

Financing activities

Increase in bank indebtedness

991,902

—

Interest paid

(467,453)

(253,791)

Repayment of term loans

(33,003)

(20,507)

Repayment of lease liabilities

(657,381)

(263,078)

Repayment of balance due on business combination

(217,778)

—

Proceeds from issuance of term loans

292,941

—

Proceeds from issuance of shares upon exercise

of warrants

—

13,085,197

Proceeds from issuance of shares upon exercise

of stock options

1,412,799

1,109,818

Proceeds from private placement [note 22]

1,318,980

—

Shares repurchased for cancellation

—

(4,183,617)

2,641,007

9,474,022

Effect of exchange rate changes on cash denominated in

foreign currencies

99,194

14,067

Net decrease in cash and cash equivalents

(8,756,864)

(5,902,386)

Cash and cash equivalents - beginning of year

12,202,513

18,104,899

Cash and cash equivalents - end of year

3,445,649

12,202,513

2022

2021

Supplemental cash flow disclosure

Non-cash transactions:

Purchase of intangible assets included in accounts payable

—

81,693

Purchase of property and equipment included in

accounts payable

—

22,557

Addition to contract assets included in accounts

payable

—

195,060

Settlement of accounts receivable on business acquisition

—

1,744,400

Accretion interest on balance due on business

combination

173,350

110,204

Accretion interest on royalties receivable

118,290

132,809

Accretion on term loan

28,236

12,185

Fair value of HPQ warrants exercised

—

9,181,250

Initial recognition or modification of lease liabilities

and right-of-use assets [note 16]:

Right-of-use assets

(311,421)

2,157,796

Prepaid rent expense

—

(36,903)

Lease liabilities

867,110

2,120,893

The accompanying notes form an integral part of the consolidated

financial statements.

PyroGenesis Canada Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2022 and 2021

(In Canadian dollars)

Nature of operations

PyroGenesis Canada Inc.

(“PyroGenesis”) 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”.

Going concern

These

consolidated

financial

statements

have

been

prepared

the

going

concern

basis,

which

presumes

that

the

Company will be

able to continue

its operations

for the foreseeable

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

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

93,384,858

as at December

31, 2022 ($

61,217,831

as at December

31, 2021).

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.

December

31,

2022,

the

Company

has

working

capital

1,650,709

14,006,785

December

31,

2021)

including cash and

cash equivalents

of $

3,445,649

12,202,513

as at December

31, 2021). The

working capital

is net of

an allowance for credit losses amounting to $

5,023,283

520,000

as at December 31, 2021) as further described

in notes

9 and 10. 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

the

achievement

profitable

operations

through

the

signing,

completion

and

delivery

additional

contracts

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

March

2023

for

5,000,000

(see

note

33).

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

available

the

Company

that

they

will

available

terms

which

are

acceptable

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 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.

Basis of preparation

(a)

Statement of compliance

These financial statements have been prepared

in accordance with International Financial Reporting Standards (“IFRS”) as

issued by

the International Accounting

Standards Board (“IASB”).

These financial statements

were approved and

authorized

for issuance by the Board of Directors on March 30, 2023.

PyroGenesis Canada Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2022 and 2021

(In Canadian dollars)

(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)

share-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.

Pyro Green-Gas Inc. and its subsidiaries Airscience Italia SRL and Airscience

Technologies Private Limited were acquired

by the

Company on August

11, 2021 (see note

6). All

transactions and balances

between the Company and its subsidiaries have been eliminated

upon consolidation.

The

accounting

policies

set

out

below

have

been

applied

consistently

the

preparation

the

consolidated

financial

statements of all years

presented. Finance costs

and changes in fair

value of strategic

investments are excluded

from the

loss from operations in the consolidated statements of

comprehensive loss.

Significant accounting policies

(a)

Business combinations

Business combinations are accounted

for using the

acquisition method. Goodwill is

measured as the

excess of the

fair value

of the consideration transferred over the

net recognized amount of the identifiable

assets acquired and liabilities assumed,

all measured at the acquisition date.

The consideration transferred is measured as the net of the fair values of assets transferred,

liabilities assumed, and equity

instruments

issued

the

Company

the

acquisition

date,

including

any

asset

liability

resulting

from

contingent

consideration arrangement, in exchange of the acquiree.

The obligation to pay the contingent consideration

is classified as a liability and measured as a financial

instrument or as a

provision. Changes in fair values that qualify as measurement period adjustments of preliminary purchase price allocations

are adjusted in the current period and such changes are

applied on a retroactive basis.

Acquisition costs

that the

Company incurs

in connection

with a

business

combination

are recognized

in profit

or loss

incurred, except for costs associated with the issuance

of debt or equity securities.

PyroGenesis Canada Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2022 and 2021

(In Canadian dollars)

(b)

Revenue recognition

Revenue from

contracts

is recognized

for each

performance obligation

either over

a period

of time

or at

a point

in time,

depending on which method reflects the transfer of control of the goods and services underlying the particular performance

obligation.

Long-term contracts

involve made-to-order

customized equipment

and machines

and are

generally priced

on a

fixed fee

basis.

Under

these

contracts,

the

equipment

machines

are

made

customer’s

specifications

and

contract

terminated by the customer, the Company

is entitled to the greater of the amounts invoiced at the termination

date and the

reimbursement of the costs

incurred to date of

termination, including a reasonable margin.

Agreements that contain multiple

deliverables require the Company to determine whether they contain separately identifiable performance obligations and to

allocate the consideration received to each performance

obligation.

Revenue

relating

long-term

contracts

recognized

over

time

based

the

measure

progress

determined

the

Company’s efforts or inputs

towards satisfying the performance obligation

relative to the total expected inputs.

The degree

of completion

is assessed

based on

the

proportion

total costs

and/or

hours

incurred

to date,

compared

total costs

and/or hours anticipated

to provide the

service under the

entire contract,

excluding the effects

of inputs that

do not depict

performance,

e.g.

uninstalled

materials.

For

long-term

contracts

with

uninstalled

materials,

the

Company

adjusts

the

transaction price and

recognizes revenue on

uninstalled materials to the

extent of those

costs incurred, i.e.

at a zero percent

profit margin, when certain conditions are met.

Estimates are required

to determine anticipated

costs and/or hours

on long-term contracts. A

provision is made

for the entire

amount of expected loss, if any,

in the period in which they are first determinable.

Contract modifications are changes in scope and/or price that are approved by the parties to the contract. Approval may

written,

oral

implied

customary

business

practices,

and

are

legally

enforceable.

The

Company

accounts

for

modifications as a separate

contract if the modifications

add distinct goods or

services that are priced

commensurate with

stand-alone

selling

prices

the

remaining

goods

services

are

distinct

from

those

already

transferred,

otherwise

modifications are accounted for as part of the original contract.

Costs and

profits in

excess of

billings on

uncompleted contracts

and trade

receivables are

both rights

to consideration

exchange for

goods or

services that

the Company

has transferred

to a

customer,

however the

classification

depends on

whether such right is only

conditional on the passage of time

(trade receivables) or if it is

also conditional on something else

(costs and profits

in excess of

billings on uncompleted contracts),

such as the

satisfaction of further performance

obligations

under the contract. Billings in excess of costs and

profits on uncompleted contracts is the cumulative

amount received and

contractually receivable by the Company that exceeds the right

to consideration resulting from the Company’s performance

under a given contract.

The costs

to obtain

long-term contracts

such as

sale commissions

are recognized

as Contract

assets and

recognized as

selling expenses over time based on degree of completion

of the related contract.

ii)

Sales of goods

Revenue related to sales of goods, which may

include powders and spare parts are measured

based on the consideration

specified in contracts

with customers. The

Company recognizes

revenue at a

point in time

when it transfers

control of the

goods to

the buyer.

This is

generally at

the time

the customer

obtains legal

title to

the product

and when

it is

physically

transferred to the custody transfer point agreed with the customer.

iii)

Sale of intellectual property

Sale of

intellectual property is

recognized at the

date the recipient

obtains control of

the asset. Variable consideration related

to the sale of intellectual property is recognized to the extent that it

is highly probable that a reversal will not occur when the

uncertainty associated with the variable consideration

is subsequently resolved.

PyroGenesis Canada Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2022 and 2021

(In Canadian dollars)

(c)

Foreign currency translation

Foreign currency transactions

Revenue and expense transactions in foreign

currencies are translated into the functional

currency of the respective entity

using the

average exchange

rates prevailing

at the

time of

the transaction.

Foreign currency

balances are

translated into

the functional

currency of

the respect

ive entity

at year

end exchange

rates for

monetary items

and at

historical

rates for

non-monetary items. Translation gains

or losses are included in the determination of net loss.

ii)

Foreign operations

The assets and

liabilities of foreign

operations are translated

into Canadian dollars

using exchange rates

prevailing at the

end

the

reporting

period.

Revenue

and

expense

items

are

translated

the

average

exchange

rates

for

the

period.

Exchange

differences

arising

from

the

translation

process

foreign

operations

are

recognized

foreign

currency

translation adjustments in other comprehensive income and

accumulated in equity.

(d)

Cash and cash equivalents

Cash and

cash equivalents

are financial

instruments readily

convertible to

a known

amount of

cash and

not subject

to a

significant risk of

changes in fair

value. Cash equivalents

include instruments with

a maturity of

three months or

less from

the date of

acquisition and

instruments with

an original

term longer than

three months if

there is

no significant

penalty for

withdrawal within a three-month period from the date

of acquisition.

(e)

Inventory

Inventory is composed of spare

parts for resale. Inventory

is valued at the

lower of cost and net

realizable value. The

cost

inventory

based

the

first-in,

first-out

principle

and

comprises

all

costs

purchases.

Net

realizable

value

the

estimated selling price in the ordinary course of business,

less estimated costs of completion and selling costs.

(f)

Income taxes

Current tax

Current tax assets and liabilities for the current and prior years are measured at the amount expected to be recovered from

or paid

to the

taxation authorities.

The tax

rates and

tax laws

used to

compute the

amount are

those that

are enacted

substantively enacted by the date of the consolidated statements

of financial position.

iii)

Deferred tax

Deferred tax is provided using the liability method, providing for temporary differences between the tax

bases of assets and

liabilities and their carrying

amounts in the consolidated

financial statements. The

temporary difference

is not provided for

if it arises from the initial recognition

of goodwill or the initial recognition

of an asset or liability in

a transaction other than

business combination that at the time of the transaction affects neither accounting

nor taxable profit or loss. The amount of

deferred tax

provided is

based on

the expected

manner of

realization or

settlement of

the carrying

amount of

assets and

liabilities, using tax

rates enacted or

substantively enacted at

the financial position

reporting date and

whose implementation

is expected over the period in which the deferred tax is

realized or recovered. A deferred tax asset is recognized only to the

extent that it is probable that future taxable profits will

be available against which the asset can be used.

Deferred tax assets

and liabilities are

presented as non-current. Assets

and liabilities are

offset where the

entity has a

legally

enforceable right

to offset current

tax assets and

liabilities or

deferred tax assets

and liabilities,

and the respective

assets

and liabilities

relate to

income taxes

levied by

the same

taxation authority

on the

same taxable

entity or

different

taxable

entities which intend to settle the liabilities and assets on a net

basis.

(g)

Earnings (loss) per share

The Company

presents basic

earnings (loss)

per share data

for its common

shares. Basic

loss per share

is computed

dividing net earnings

(loss) by the

weighted average

number of common

shares outstanding

during the year.

Diluted loss

PyroGenesis Canada Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2022 and 2021

(In Canadian dollars)

per share is

computed similarly to

basic earnings per

share, except that

the weighted average

number of shares

outstanding

is increased

to include

shares from

the assumed

exercise of

stock options

and share

purchase warrants,

if dilutive.

The

number of additional shares

is calculated by assuming

that outstanding share options and

warrants were exercised and that

the

proceeds

from

such

exercises

were

used

acquire

common

the

average

market

price

during

the year.

Potential shares from

all outstanding stock

options and share

purchase warrants are excluded

from the calculation of

diluted

loss per share as their inclusion is considered anti-dilutive in

years when a loss is incurred.

(h)

Property and equipment

Property

and

equipment

are

measured

cost

less

accumulated

depreciation

and

accumulated

impairment

losses

applicable. Cost includes expenditures that

are directly attributable to the

acquisition of the asset

and bringing the asset into

operation. Borrowing

costs capitalized

to asset

under development

represents the

interest expense

calculated under

the

effective interest

method and

does not include

any fair value

adjustments of

investments designated

at fair

value through

profit and loss. Government assistance

and investment tax credits related to

the purchase or development of

property and

equipment

are recorded

in reduction

of the

cost.

When major

parts

of an

item of

property

and

equipment

have different

useful lives, they are accounted for separately. Property and equipment are depreciated from the acquisition date

over their

respective useful life.

Depreciation of

an asset under

construction begins

when it is

available for

use, i.e. when

it is in

the

location and condition necessary for it to be capable of

operating in the manner intended by the Company.

Depreciation is calculated using the following methods

and rates:

Computer equipment

Straight line over

3 years

Machinery and equipment

Straight line over

10 years

Automobiles

Straight line over

7 years

Leasehold improvements

Lesser of the lease term or the useful life (

20 years

)

Impairment losses recognized in prior

periods are assessed at each reporting

date as to whether there are

any indications

that the previously recognized losses may no longer exist or may be decreased. An impairment loss is reversed only to the

extent

that

the

asset’s

carrying

amount

does

not

exceed

the

carrying

amount

that

would

have

been

determined,

net

depreciation, had no impairment loss been recognized for the

asset in prior years.

Property and equipment are assessed for impairment

whenever there is an indication of impairment.

Depreciation methods, useful lives and residual

values are reviewed at each financial

year end and adjusted prospectively

if appropriate.

(i)

Leases

Under IFRS 16 Leases, at

inception, the Company assesses

whether a contract is, or contains,

a lease based on whether

the contract conveys the right to control the use of an identified

asset for a period of time in exchange for consideration.

The Company recognizes a right-of-use asset and

a lease liability at the

commencement date of the lease, i.e., the date

the

underlying asset is available for use.

Right-of-use assets

Right-of-use

assets

are measured

at cost,

less

any

accumulated

depreciation

and

accumulated

impairment

losses,

and

adjusted for any remeasurement of lease liabilities. Cost

of right-of-use assets is comprised of:

the initial measurement amount of the lease liabilities recognized

;

any lease payments made at or before the commencement

date, less any lease incentives received;

any initial direct costs incurred; and

an estimate of costs to dismantle and remove the underlying

asset, restore the site on which it is located or

restore the underlying asset to the condition required by

the terms and conditions of the lease contract.

PyroGenesis Canada Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2022 and 2021

(In Canadian dollars)

Right-of-use assets are

depreciated over the

shorter period of

the lease term

and the useful

life of the underlying

asset. If

a lease transfers ownership

of the underlying asset

or the cost of the

right-of-use asset reflects

that the Company expects

to exercise a purchase option,

the related right-of-use asset is

depreciated over the useful life

of the underlying asset based

periods

detailed

above.

The

depreciation

starts

the

commencement

date

the

lease.

Right-of-use

assets

are

assessed for impairment whenever there is an indication that

the right-of-use assets may be impaired.

Lease liabilities

Lease liabilities are

initially measured at

the present value

of the lease

payments that

are not paid

at the commencement

date over the lease term. The present value of the lease payments is determined

using the lessee’s incremental borrowing

rate at

the commencement date

if the

interest rate implicit

in the

lease is

not readily determinable.

The incremental borrowing

rate is

a function

of the

lessee’s incremental

borrowing rate,

the nature

of the

underlying asset,

the location

of the

asset,

the

length

the

lease

and

the

currency

the

lease

contract.

Generally,

the

Company

uses

the

lessee’s

incremental

borrowing rate

for the

present value.

At the commencement

date, lease

payments generally

include fixed

payments, less

any

lease

incentives

receivable,

variable

lease

payments

that

depend

index

(e.g.,

based

inflation

index)

specified rate, and payments of

penalties for terminating the lease,

if the lease term

reflects the lessee exercising the

option

to terminate the lease. Lease payments also include amounts expected to be

paid under residual value guarantees and the

exercise price of a purchase option if the Company is reasonably

certain to exercise that option.

Variable

lease payments that

do not depend on

an index or a

specified rate are not

included in the measurement

of lease

liabilities but

instead are

recognized

as expenses

in the

period in

which the

event or

condition that

triggers the

payment

occurs.

After the

commencement date,

the carrying

amount of

lease liabilities

is increased

to reflect

the accretion

of interest

and

reduced to reflect lease payments made.

In addition, the carrying amount of

lease liabilities is remeasured when

there is a

change in future

lease payments arising

from a change

in an index

or specified rate,

if there is a

modification to the

lease

terms and conditions, a change in the estimate of

the amount expected to be payable under residual

value guarantee, or if

the

Company

changes

its

assessment

whether

will

exercise

termination,

extension

purchase

option.

The

remeasurement amount of

the lease liabilities

is recognized as an

adjustment to the right-of-use

asset, or in the

profit and

loss statement when the carrying amount of the right-

of-use asset is reduced to zero.

Classification and presentation of lease-related expenses

Depreciation charge for right-of-use assets, expenses

related to variable lease payments not included in the measurement

of lease

liabilities and

loss (gain)

related to

lease modifications

are allocated

in the

Company’s

profit and

loss statement

based on their function within the Company,

while interest expense on lease liabilities is presented within

finance costs.

Cash flow classification

Lease payments related

to the principal

portion of the

lease liabilities are

classified as

cash flows from

financing activities

while lease

payments related

to the

interest portion

of the

lease liabilities

are classified

as interest

paid within

cash flows

from

financing

activities.

Lease

incentives

received

are

classified

cash

flows

from

investing

activities.

Variable

lease

payments not included in the measurement of lease

liabilities are classified as cash flows from operating activities.

(j)

Government assistance and investment tax credits

Investment

tax

credits

are

comprised

scientific

research

and

experimental

development

tax

credits.

Government

assistance and investment

tax credits are

recognized when there

is reasonable assurance

of their recovery

and recorded

as a reduction of the related expense or cost

of the asset acquired, as applicable. Investment

tax credits are subject to the

customary

approvals

the

pertinent

tax

authorities.

Adjustments

required,

any,

are

reflected

the year

when

such

assessments are received.

(k)

Intangible assets and Goodwill

Intangible

assets

acquired

separately

are

measured

cost

initial

recognition.

Following

initial

recognition,

intangible

assets are carried at cost less any accumulated amortization

and any accumulated impairment losses.

PyroGenesis Canada Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2022 and 2021

(In Canadian dollars)

Identifiable intangible assets

acquired in a

business combination

are recognized separately

from goodwill if

they meet the

definition of an intangible

asset and if their fair

value can be measured

reliably.

The cost of these

intangible assets equals

their acquisition-date fair value.

Subsequent to initial recognition, identifiable intangible assets acquired in a business combination are

recorded at cost less

accumulated

amortization

and

impairment

losses,

they

are

amortizable,

otherwise

only

cost

net

accumulated

impairment losses. The useful lives of intangible assets

are assessed as either finite or indefinite.

Intangible assets with finite

lives are amortized over

the useful life of

the asset and assessed for

impairment whenever there

indication

impairment.

Amortization

expense

the

intangible

assets

with

finite

lives

recognized

the

consolidated statements of comprehensive loss.

Research

costs

are

charged

comprehensive

loss

the year

they

are

incurred,

net

investment

tax

credits.

Development costs

are charged

to comprehensive

loss in

the year they

are incurred

net of

related investment

tax credits

unless they meet specific criteria related to technical, market and financial feasibility in order to be recognized as intangible

assets which include:

the technical feasibility of completing the intangible asset so that

it will be available for use or sale;

the Company has the intention to complete and the ability to

use or sell the asset;

the asset will generate future economic benefits;

the Company has the resources to complete the asset; and

ability to measure reliably the expenditure during development.

Costs

establish

patents

for

internally

developed

technology

are

considered

development

costs

and

are

charged

comprehensive loss in the year they are

incurred unless they meet specific criteria related to

technical, market and financial

feasibility. Patent costs

include legal and other advisor fees to obtain patents,

and patent application fees.

Amortization

the

development

costs

is calculated

a straight

-line

basis

over

the

remaining

useful

life

the

patent

and

begins

when

development

complete.

During

the

period

development,

the

asset

tested

annually

for

impairment. Residual values and useful lives are reviewed

at each reporting date.

Amortization is calculated on a straight-line basis:

Useful life

Production backlog

30 months

Patents and development costs

21 years

Goodwill represents the future

economic benefits arising from

a business combination that are

not individually identified and

separately

recognized.

Goodwill

is carried

at cost

less

accumulated

impairment

losses.

Goodwill

is not

amortized

but

tested for impairment

annually or if

there is an indication

of impairment. Impairment

losses recognized for

goodwill cannot

be reversed.

(l)

Impairment testing of goodwill, other intangible assets,

property and equipment and right-of-use assets

The carrying

amounts of

the Company’s

non-financial

assets are

assessed at

each reporting

date to

determine

whether

there is an indication of impairment. If any such indication

exists, then the asset’s recoverable amount

is estimated.

For impairment assessment purposes, assets are

grouped at the lowest levels

for which there are largely independent

cash

inflows (cash

-generating

units).

a result,

some

assets

are tested

individually

for impairment

and some

are tested

cash-generating unit level. Goodwill is allocated to those

cash-generating units that are expected to benefit from

synergies

business

combination

and

represents

the

lowest

level

within

the

Company

which

management

monitors

goodwill.

PyroGenesis Canada Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2022 and 2021

(In Canadian dollars)

Cash-generating units to which goodwill

has been allocated are tested for

impairment at least annually.

All other individual

assets

cash-generating

units

are

tested

for

impairment

whenever

events

changes

circumstances

indicate

the

carrying amount may not be recoverable.

The recoverable amount

of an asset

or cash-generating unit

(CGU) is the

greater of its

value in use and

its fair value

less

costs to sell.

In assessing

value in use,

the estimated

future cash flows

are discounted to

their present value

using a pre-

tax discount

rate that

reflects current

market assessments

of the

time value

of money

and the

risks specific

to the

asset.

For the purposes of testing non-financial assets for

impairment, management has identified

one

CGU.

An impairment loss is

recognized if the carrying amount of

an asset or its

CGU exceeds its recoverable amount. Impairment

losses are

recognized in

the consolidated

statements

of comprehensive

loss. Impairment

losses recognized

in respect

the CGU are allocated first to reduce the carrying amount of goodwill allocated to the units, and then to reduce the carrying

amounts on a pro-rata basis of the other assets in the

unit.

(m)

Provisions and contingent liabilities

Provisions for legal

disputes, onerous contracts

or other claims

are recognized when

the Company has

a present legal

constructive obligation as a result of a past event, it is probable that an outflow of economic resources will be required from

the Company and amounts can be estimated reliably.

The timing or amount of the outflow may still be uncertain.

Provisions are measured at the estimated

expenditure required to settle the

present obligation, based on the

most reliable

evidence available at the reporting date, including the risks and uncertainties associated with the

present obligation. Where

there

are

number

similar

obligations,

the

likelihood

that

outflow

will

required

settlement

determined

considering the class

of obligations as a

whole. Provisions are discounted

to their present values,

where the time value

money is material.

liability

recognized

outflow

economic

resources

result

present

obligations

not

probable.

Such

situations are disclosed as contingent liabilities unless

the outflow of resources is remote.

(n)

Employee benefits

Share-based payments

The Company applies a fair

value-based method of accounting to

all share-based payments. Employee

and director stock

options are measured

at their fair

value of each

tranche on the

grant date and

recognized in its

respective vesting period.

Non-employee stock options

are measured when

the services are

rendered by the

consultant at the

fair value of

the services

received if the

fair value can

be measured reliably.

In the case

the fair value

of the services

cannot be measured

reliably,

the services are measured

indirectly using the fair

value of the equity

instruments granted at

grant date. The

cost of stock

options is presented

as share-based

payment expense.

On the

exercise of stock

options, share

capital is

credited for

the

consideration received

and for

the fair

value amounts

previously credited

to contributed

surplus. The

Company uses

the

Black-Scholes option-pricing model to estimate the fair value

of share-based payments.

Deferred profit-sharing plan

The Company

established a

yearly Deferred

Profit-Sharing

Plan (“DPSP”)

for all

eligible employees

who have

materially

and

significantly

contributed

the

prosperity

and

profits

the

Company.

The

significance

any

contribution

any

employee to the prosperity and profits of the Company for purposes of eligibility in the DPSP is determined by the Board of

Directors of the Company

upon such relevant information

as the Board, in its

sole discretion, may find

relevant. All related

persons to the Company are excluded from participating in

the DPSP.

For all eligible

employees, the Company is

required to contribute to

the DPSP out

of the profits

of the Company. The amount

of the Company’s contribution will be such amount which, in the opinion of its Board of Directors, is

warranted by the profits

and overall financial

position of the

Company.

During the year,

the Company contributed

Nil

to the DPSP

Nil

in 2021).

Obligations for contributions

to the DPSP

are recognized as

an employee benefit

expense in the

consolidated statements

of comprehensive loss in the periods during which services

are rendered by employees.

PyroGenesis Canada Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2022 and 2021

(In Canadian dollars)

Short-term employee benefits

Short-term employee benefit obligations

are measured on an undiscounted

basis and are expensed as

the related service

is provided.

A liability is

recognized for the amount

expected to be

paid under the

short-term incentive plan if

the Company has a

present

legal or constructive obligation

to pay this amount as

a result of past service

provided by the employee,

and the obligation

can be estimated reliably.

(o)

Equity instruments

Issuance of equity instruments

Incremental

costs

directly

attributable

the

issue

equity-classified

are

recognized

deduction

from

the

common

and

warrants,

net

any

tax

effects.

Upon

issuance

units,

the

Company

uses

the

residual

value

allocate the net proceeds between common shares and

warrants.

Extinguishing financial liabilities with equity instruments

When

equity

instruments

issued

creditor

extinguish

all

part

financial

liability

are

recognized

initially,

the

Company

measures

them

the

fair

value

the

equity

instruments

issued,

unless

that

fair

value

cannot

reliably

measured. If the fair

value of the equity

instruments issued cannot

be reliably measured,

then the equity instruments

shall

be measured to reflect the fair value of the financial liability

extinguished.

Contributed surplus

Contributed

surplus

includes

amounts

equity-settled

share-based

payments

until

such

equity

instruments

are

exercised or settled, in which case the amounts are transferred

to common shares or reversed upon forfeiture if not vested.

It also includes the unexercised conversion option at the

maturity of the convertible debentures.

(p)

Financial Instruments

Recognition:

The Company

recognizes a

financial asset

or a

financial liability

when it

becomes a

party to

the contractual

provisions of

the instrument.

Purchases

sales

financial

assets

that

require

delivery

assets

within

the

time

frame

generally

established

regulation or

convention in

the marketplace

(regular way

trades) are

recognized on

the trade

date, i.e.,

the date

that the

Company commits to purchase or sell the asset.

Classification

Financial

assets

are

classified

amortized

cost,

fair

value

through

profit

loss

(“FVTPL”)

fair

value

through

other

comprehensive

income

(“FVOCI”)

based

the

Company’s

business

model

for

managing

the

financial

assets

and

the

contractual cash flow characteristics of these assets.

Assessment and decision on the business model

approach used is an

accounting judgment.

A financial

asset

is measured

at amortized

cost

if it

is held

within

a business

model

whose

objective

is to

hold financial

assets in order to collect contractual cash flows and its contractual terms give rise on specified dates to cash flows that are

solely payments of principal and interest on the principal amount outstanding. The Company

includes in this category cash

and cash equivalents, trade accounts receivable, other receivables,

royalties receivable and deposits.

A financial asset is measured at fair value through profit or

loss (“FVTPL”) if:

(a)

Its contractual terms do not give rise to

cash flows on specified dates that are

solely payments of principal and interest

(SPPI) on the principal amount outstanding; or

PyroGenesis Canada Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2022 and 2021

(In Canadian dollars)

(b)

not

held

within

business

model

whose

objective

either

collect

contractual

cash

flows,

both

collect

contractual cash flows and sell; or

(c)

initial

recognition,

irrevocably

designated

measured

FVTPL

when

doing

eliminates

significantly

reduces a measurement or

recognition inconsistency that would

otherwise arise from

measuring assets or

liabilities or

recognizing the gains and losses on them on different

bases.

The Company includes in this category strategic investments

in equity instruments.

All financial liabilities,

other than

those measured

at fair

value through

profit or

loss, are

included in the

financial liabilities

measured at

amortized cost.

The Company

includes in

this category

bank indebtedness,

accounts payable

and accrued

liabilities and term loans. The balance due on business

combination is measured at FVTPL.

Initial measurement

Financial assets and

liabilities (other than

financial assets at

FVTPL) are measured

initially at

their fair value

plus any directly

attributable incremental costs of acquisition or issue.

Financial assets

and financial

liabilities at

FVTPL are

recorded in

the consolidated

statements

of financial

position at

fair

value. All transaction costs for such instruments are recognized

directly in profit or loss.

Subsequent measurement

Financial assets (other than financial assets at FVTPL) are measured at amortized

cost using the effective interest method

less

any

allowance

for

impairment.

Gains

and

losses

are

recognized

profit

loss

when

the

debt

instruments

are

derecognized or impaired, as well as through the amortization

process.

Financial liabilities are

measured at amortized

cost using the

effective interest

method except for

derivatives and financial

liabilities designated at

FVTPL. Gains and

losses are recognized

in profit or

loss when the

liabilities are derecognized,

well as through

the amortization

process. Changes

in fair value

of financial liabilities

attributable to changes

in the entity’s

own credit risk are to be presented in other comprehensive

income unless they affect amounts recorded

in income.

Fair value measurement principles

Fair value is the price that would be received to sell

an asset or paid to transfer a liability in an orderly

transaction between

market participants at the measurement date.

Where financial assets and

financial liabilities measured

at fair value though

profit or loss have

a quoted price in

an active

market at the reporting date,

the fair value is based

on this price. A financial

instrument is regarded as

quoted in an active

market if

quoted prices

are readily

and regularly

available from

a stock

exchange and

those prices

represent actual

and

regularly occurring market transactions on an arm’s

length basis.

Securities traded on stock exchanges are stated at market

price based on the closing price on the

relevant valuation day.

Derecognition

A financial asset is derecognized

where the rights to receive

cash flows from the asset

have expired, or the Company

has

transferred its

rights to receive

cash flows

from the asset.

The Company derecognizes

a financial liability

when the obligation

under the liability is discharged, cancelled,

or expired.

Offsetting of financial instruments

Financial assets and financial

liabilities are offset,

and the net amount

reported in the

consolidated statements

of financial

position if, and only if, there is a currently enforceable

legal right to offset the recognized amounts

and there is an intention

to settle on a net basis, or to realize the assets and settle

the liabilities simultaneously.

PyroGenesis Canada Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2022 and 2021

(In Canadian dollars)

Impairment of financial instruments

The

Company

applies

the

“expected

credit

loss”

(“ECL”)

model

financial

assets

measured

amortized

cost.

The

Company’s financial

assets subject to

this impairment model

are cash and

cash equivalents,

trade and other

receivables,

costs and profits in excess of billings on uncompleted

contracts, royalties receivable and deposits.

The trade accounts receivable have no financing component

and have maturities of less than 12 months

at amortized cost

and,

such,

the

Company

applies

the

simplified

approach

for

expected

credit

losses

(ECLs)

all

its

trade

accounts

receivable. Therefore, the Company recognizes a loss

allowance based on lifetime ECLs at each reporting date.

The Company’s

approach to

ECLs reflects

a probability-weighted

outcome, the

time value

of money

and reasonable

and

supportable

information

that

available

without

undue

cost

effort

the

reporting

date

about

past

events,

current

conditions, and forecasts of future economic conditions.

The Company

uses

the

provision

matrix

as a

practical

expedient

measure

ECLs

trade

receivables

and

costs

and

profits in excess of billings on uncompleted contracts, based on days past due for

groupings of receivables with similar loss

patterns. Contracts with particular

recovery history are analysed

separately from other accounts.

The loss rates are based

on historical observed loss rates over the expected life of the receivables and are adjusted for forward-looking estimates to

reflect differences between economic conditions

during the period over which the historical data has been collected.

Impairment

losses

are

recognized

profit

loss

and

reflected

allowance

account

presented

reduction

receivables and cost in excess of billings on uncompleted

contracts.

Write-off

The

gross

carrying

amount

financial

asset

written

off

when

the

Company

has

reasonable

expectations

recovering a financial asset in its entirety or a portion thereof.

Failure to engage and communicate with

the Company on alternative payment arrangements and

failure to make payments

within 90

days, amongst

others, are

considered possible

indicators of

no reasonable

expectation of

recovery of

accounts

receivable.

Effective Interest Method

The

effective

interest

method

calculating

the

amortized

cost

financial

asset/financial

liability

and

allocating

interest

income/expense

over

the relevant

period. The

effective

interest

rate is

the

rate

that

exactly

discounts

estimated

future

cash

receipts/payments

(including

all

fees

and

points

paid

received

that

form

integral

part

the

effective

interest

rate,

transaction

costs

and

other

premiums

discounts)

through

the

expected

life

the

financial

instrument, or (when appropriate) a shorter period, to the net

carrying amount on initial recognition.

(q)

Future Changes and Amendments to Accounting Standards

and Interpretations

IAS 1

Presentation of Financial Statements - Accounting Policies

2021,

the

IASB

amended

IAS

Presentation

Financial

Statements,

require

entities

disclose

their

material

accounting policy information rather than their significant accounting policies. Additional amendments to IAS 1 are made to

explain how an entity can identify

a material accounting policy.

The amendments are effective

for annual reporting periods

beginning on or after January 1, 2023, with earlier application

permitted.

ii)

IAS 1

Presentation of Financial Statements - Classification of Liabilities

The

IASB

released

Classification

Liabilities

Current

Non-current

(Amendments

IAS

1),

which

clarifies

the

guidance in IAS 1 Presentation

of Financial Statements on whether

a liability should be classified

as either current or non-

current

relating

the

right

defer

settlement

the

liability

for

least

twelve

months

after

the

reporting

date.

The

amendment is effective

for annual reporting

periods beginning on

or after January 1,

2023, with earlier

application permitted.

PyroGenesis Canada Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2022 and 2021

(In Canadian dollars)

iii)

IAS 12

Income Taxes

The IASB released

Deferred Tax

Related to Assets

and Liabilities Arising

from a Single

Transaction (Amendments

to IAS

12). The amendment relates

to the recognition of deferred

tax when an entity

accounts for transactions, such

as leases or

decommissioning obligations, by recognizing both an asset and a liability. The objective of this amendment is to narrow the

initial recognition exemption

in paragraphs 15

and 24 of

IAS 12, so

that it would

not apply to

transactions that give

rise to

both taxable and deductible temporary differences,

to the extent the amounts recognized for the temporary

differences are

the

same.

The

amendment

effective

for

annual

reporting

periods

beginning

after

January 1,

2023,

with

earlier

application permitted.

iv)

IAS 37

Provisions, Contingent Liabilities and Contingent Assets

The IASB

released Onerous

Contracts -

Cost of

Fulfilling a

Contract (Amendments

to IAS

37). The

amendments specify

which costs an

entity includes in

determining the cost

of fulfilling a

contract for the

purpose of assessing

whether the contract

is onerous.

Costs

to be

included

comprise

the costs

that

relate directly

to the

contract,

which

includes

both

incremental

costs of fulfilling the contract and an allocation

of other costs that relate directly to

fulfilling the contract. The amendment

effective for annual reporting periods beginning

on or after January 1, 2023, with earlier application permitted.

The Company has determined that the adoption of these standards or amendments will not have a significant impact on its

consolidated financial statements as of the date of adoption.

Significant accounting judgments, estimates and assumptions

The preparation of

consolidated financial statements requires management

to make judgments, estimates

and assumptions

based on

currently

available information

that affect

the

reported amounts

of assets,

liabilities and

contingent

assets and

liabilities at the

date of the

consolidated financial

statements and

reported amounts

of revenues and

expenses during the

reporting period.

Estimates and

judgments are

continuously evaluated

and are

based on

management’s

experience and

other factors, including expectations of future events

that are believed to be

reasonable under the circumstances. However,

actual

results

could

differ

from

those

estimated.

their

very

nature,

these

estimates

are

subject

measurement

uncertainty and the effect of any changes in estimates

on the financial statements of future periods could be

material.

In the process of applying the Company’s

accounting policies, management has made the following

judgments, estimates,

and assumptions which

have the most

significant effect on the

amounts recognized in the

consolidated financial statements.

Critical judgments in applying accounting policies

(a)

Assessment of

whether there

is any

indication that

property and

equipment, right-of-use

assets and

intangible assets

may be impaired

At each reporting date,

the Company reviews

the carrying amounts

of its property and

equipment, right-of-use assets

and

intangible assets

with a

finite useful

life to

determine whether

there is

any indication

of impairment.

If any

such indication

exists, then the

asset’s recoverable

amount is estimated.

Management’s judgment

is required in

assessing whether

there

is any indication that an asset may be impaired.

(b)

Intangible assets

The recognition of development costs as intangible

assets requires judgments to determine whether the

required criteria for

recognition are met including management estimates of future

economic benefits.

(c)

Sale of intellectual property and related royalties

The recognition

of variable

consideration related

to the

sale of

intellectual property

requires management’s

judgments to

determine

whether

highly

probable

that

reversal

will

not

occur

when

the

uncertainty

associated

with

the

variable

consideration is subsequently resolved.

PyroGenesis Canada Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2022 and 2021

(In Canadian dollars)

(d)

Investment tax credits receivable

The investment tax credits are estimated

by management based on quantitative

and qualitative analysis and interpretation

of various government programs,

related restrictions, limitations,

definitions, and eligibility

conditions. Uncertainty over

the

eligibility and final assessment by taxation authorities of investment

tax credits requires judgment. Management involves its

technical staff

and external

specialists in

determining if

the expenditures

meet the

requirements of

the different

tax credit

claims.

Key sources of estimation uncertainty

(e)

Revenue recognition

Revenue recognition for long-term contracts completion requires the use of estimates to determine the recorded amount of

revenues, costs in excess of billings and billings in excess

of costs and profits on uncompleted contracts.

The determination of anticipated

costs for completing

a contract is based on

estimates that can

be affected by a

variety of

factors,

including

the

cost

materials,

labour

and

sub-contractors,

well

potential

claims

from

customers

and

subcontractors.

As risks and

uncertainties are different for

each project, the

sources of variations between

anticipated costs and actual

costs

incurred will also vary by project. The determination

of estimates is based on the Company’s

business practices as well as

its historical experience. Estimates are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in

the period in which the estimate is revised.

Given

this

estimation

process,

possible

that

changes

future

conditions

could

cause

material

change

the

recognized amount of revenues

and costs and

profits in excess of

billings on uncompleted contracts

and accrued expenses.

Agreements that

contain multiple

deliverables require

the use

of judgment

to determine

whether they

contain separately

identifiable performance obligations and to allocate the consideration

received to each performance obligation.

(f)

Share-based payments

The Company uses the

fair value method

of valuing compensation

cost associated with

the Company’s

stock option plan.

Estimating fair value

requires determining the

most appropriate valuation

model for a grant

of equity instruments,

which is

dependent

the

terms

and

conditions

the

grant.

This

also

requires

determining

the

most

appropriate

inputs

the

valuation model including the

expected life of the option

and volatility.

The assumptions and models

are discussed in note

22.

(g)

Useful lives of property and equipment and intangible

assets

The Company estimates

the useful lives

of property and

equipment and intangible

assets based on

the period over

which

the assets are expected to be available

for use. The estimated useful lives of property and equipment and intangible

assets

are reviewed periodically and are updated

if expectations differ from previous

estimates due to physical wear and tear

and

legal or other

limits on the

use of the

relevant assets. In addition,

the estimation of

the useful lives

of property and

equipment

and intangible assets are based

on management’s experience with similar assets. It

is possible, however, that future results

operations

could

materially

affected

changes

the

estimates

brought

about

changes

factors

mentioned

above. The

amounts and

timing of

recorded expenses

for any

period would

be affected

by changes

in these

factors and

circumstances. Useful lives, depreciation and amortization

rates and residual values are reviewed at least annually.

(h)

Impairment of non-financial assets and goodwill

In assessing impairment,

management estimates the

recoverable amount

of each asset or

cash generating unit

based on

expected future cash flows and uses an interest rate to discount them. Estimation uncertainty relates to assumptions about

future operating results and the determination of a suitable

discount rate (see note 4 (l)).

PyroGenesis Canada Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2022 and 2021

(In Canadian dollars)

(i)

Fair value of strategic investments

Where the fair

values of investments

recorded in the

consolidated statements

of financial position

cannot be derived

from

active markets,

they

are

determined

using

valuation

techniques

including

the

Black-Scholes

model.

The

inputs

these

models are taken from observable markets where possible, but where

this is not feasible, a degree of judgment is required

in establishing the fair values. The judgments

include considerations of inputs such as the expected volatility

and the initial

allocation of the consideration paid between the fair value of the common shares and warrants

received. Should any of the

inputs to these models or changes in assumptions about

these factors occur,

this could affect the reported fair value of the

investments.

(j)

Right-of-use assets and lease liabilities

In determining

the carrying

amount of

the right-of-use

assets and

corresponding lease

liabilities, assumptions

include the

non-cancellable term of the lease

plus periods covered by an

option to renew or purchase

the assets, estimated useful lives

of the related assets, and incremental borrowing

rate. Renewal and purchase options are only

included in the lease term if

management is reasonably certain to renew.

Management considers factors such as market conditions, comparable

rental

rates and similar property values. The

Company is also required to estimate the incremental borrowing

rate specific to each

portfolio of leased assets with similar characteristics

if the interest rate in the lease is not readily

determined. Management

determines the incremental borrowing rate using the base

rate for similar loans plus a risk premium.

(k)

Income taxes

The Company has unused available tax

losses, deductible temporary differences and investment tax

credits. The Company

recognizes deferred income tax assets for these unused tax losses and deductible temporary differences only to the extent

that, in

management’s

opinion, it

is probable

that future

taxable profit

will be

available against

which these

available tax

losses and temporary differences

can be utilized. The Company recognizes

investment tax credits when it

has reasonable

assurance

that

has

complied

with

the

conditions

the

program

and

that

the

amounts

will

realized

(i.e.

that

will

generate future federal income taxes

payable against which the tax

credits can be applied). The

Company’s projections of

future taxable profit

involve the use

of significant assumptions

and estimates with

respect to a

variety of factors,

including

future sales

and operating

expenses. There

can be

no assurance

that the

estimates and

assumptions used in

our projections

of future

taxable

income will

prove to

be accurate

predictions

of the

future,

and in

the event

that

our assessment

of the

recoverability of these deferred tax

assets and investment tax credits

changes in the future, a

material increase or reduction

in the carrying value of

these deferred tax assets and

investment tax credits could be required, with

a corresponding charge

to net loss.

(l)

Business combinations

Fair value of assets acquired and liabilities assumed in a

business combination is estimated based on information available

the

date

acquisition

and

involves

considerable

judgment

determining

the

fair

values

assigned

the

identifiable

assets acquired and liabilities

assumed on acquisition. Among

other things, the determination

of these fair values involves

the

use

discounted

cash

flow

analyses

and

estimated

profit

margins

contracts

progress.

addition,

the

determination of the

contingent consideration due on

the business combination

is based on

the estimations of

the probability

and timing of completing the predetermined milestones

(see note 6);

(m) COVID-19 pandemic

The COVID-19

pandemic continues

to cause

significant financial

market and

social dislocation.

The situation

is dynamic

with various cities and

countries around the world responding

in different ways to address

the outbreak. While the

Company

has experienced

the impact

of the outbreak

of the Coronavirus

(COVID 19)

on its

operations, it

had continued

to operate

during the

current

pandemic.

In the

event of

a prolonged

continuation

of the

pandemic,

it is

not clear

what

the potential

impact may be on the Company’s business,

financial position and financial performance.

Business combination

On August 11, 2021, the Company completed the

acquisition of Pyro Green-Gas

Inc. and its

subsidiaries, a Montreal-based

company

which

offers

technologies,

equipment,

and

expertise

the

area

biogas

upgrading,

well

air

pollution

controls, for

a maximum

purchase price

consideration of $

4,355,600

in cash,

subject to customary

post-closing adjustments.

PyroGenesis Canada Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2022 and 2021

(In Canadian dollars)

In addition, the Company settled

a pre-existing loan receivable from Pyro

Green-Gas Inc. of approximately $

1,744,000

. The

transaction was executed

through a purchase

of the entirety of

the common class

“A” shares of Pyro

Green-Gas Inc. This

acquisition

enables

the

Company

springboard

into

the

renewable

natural

gas

market

and

provides

advantage

compared

to building

its own

operations.

In addition,

the Company

will now

have

a presence

in Italy

and

India, and

the

acquisition will provide potential synergies with the Company’s land-based waste

destruction offerings. The purchase price

will

paid

upon

the

achievement

various

contract

and

business-related

milestones

Pyro

Green-Gas

Inc.

The

Company’s assessment

is that

these milestones

will be

realized at

various moments

during the

30 months

following

the date of the acquisition. The contingent consideration

was estimated using a discount rate of

The acquisition was accounted for using the purchase

method and the final allocation of the purchase price is as

follows:

Total consideration

Consideration paid at closing

Contingent consideration

3,841,999

Consideration paid at closing and continent consideration

3,842,000

Settlement of pre-existing loan receivable from Pyro Green-Gas

1,744,400

5,586,400

Net assets acquired

Current assets

5,186,086

ROU asset

477,608

Property and equipment

42,552

Intangible assets and Goodwill

4,780,607

Deferred income tax asset

79,360

Current liabilities

(4,507,907)

Non-current liabilities

(471,906)

5,586,400

Includes $

807,946

of cash and trade receivables with a net fair value of $

3,255,000

, including an allowance for expected credit losses

of $

512,592

The goodwill of $

2,660,607

recorded on the transaction

is mainly attributable

to the expected growth

in biogas upgrading market

and

the expertise of the workforce, and it is not expected to be deductible for tax purposes.

During the

period ended

December 31, 2021,

the Company recognized

revenue of $

6,800,090

and net

earnings of

$807,395

related to the operations generated by Pyro Green-Gas

Inc. since the acquisition date.

In connection with

this acquisition, the

Company incurred acquisition-related

costs of $

101,157

, recognized within

Selling,

General and Administrative expenses in the 2021 consolidated

statements

of comprehensive loss.

The

maximum

purchase

price

consideration

4,355,600

was

discounted

3,841,999

August

11,

2021

and

accretion expense of $

173,350

was recognized in Net finance costs in

the consolidated statements of comprehensive

loss

for the year

ended December

31, 2022,

compared to

a recognized

accretion expense

of $

110,204

during the year

ended

December 31, 2021.

PyroGenesis Canada Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2022 and 2021

(In Canadian dollars)

Revenues

Revenues by product line:

The company’s revenues are generated primarily

from the following:

2022

2021

Revenue from contracts with customers by product

line:

High purity metallurgical grade silicon & solar grade silicon from

quartz

(PUREVAP™)

6,272,697

6,138,111

Aluminium and zinc dross recovery (DROSRITE™)

1,912,807

7,940,771

Development and support related to systems supplied to the

U.S. Navy

1,288,356

7,522,809

Torch

-related sales

5,558,210

2,084,511

Biogas upgrading and pollution controls

3,347,443

6,800,090

Other sales and services

633,990

582,058

19,013,503

31,068,350

The following is a summary of the Company’s

revenues by revenue recognition method:

2022

2021

Revenue from contracts with customers:

Sales of goods under long-term contracts recognized over

time

13,997,163

25,918,594

Sales of goods at a point of time

1,135,498

1,533,910

Other revenue:

Sale of intellectual properties (i)

3,600,000

3,300,000

Royalties

280,842

315,846

19,013,503

31,068,350

See note 32 for sales by geographic area.

(i)

Sale of intellectual properties

During the year, the Company sold

intellectual property to a subsidiary

of a company in

which it holds a

strategic investment

for

non-refundable

fee

3,600,000

Under

the

terms

the

sale

agreement,

control

the

intellectual

property

was

transferred

the

purchaser

and

the

Company

has

obligation

undertake

activities

that

will

significantly

affect

the

intellectual property.

In June 2021, the Company

sold intellectual property to

a subsidiary of a company

in which it holds a strategic

investment

for

non-refundable

fee

3,300,000

Under

the

terms

the

sale

agreement,

control

the

intellectual

property

was

transferred

the

purchaser

and

the

Company

has

obligation

undertake

activities

that

will

significantly

affect

the

intellectual property.

The terms of the agreement also include additional

variable consideration that can be received based

on the

greater of

% of

sales made

by the

purchaser,

and royalties

of $

50,000

in 2023,

100,000

in 2024,

150,000

2025, and $

200,000

in 2026 and every year thereafter.

Transaction price

allocated to remaining performance obligations

December 31,

2022,

revenue

expected

recognized

the

future

performance

obligations

that

are

unsatisfied (or partially satisfied) at the reporting

date is $

26,741,550

(2021 - $

34,258,148

, excluding a contract which was

terminated in the fall

of 2022). Revenue will

be recognized as the

Company satisfies its performance obligations

under long-

term contracts, which is expected to occur over the

years.

PyroGenesis Canada Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2022 and 2021

(In Canadian dollars)

Cash and cash equivalents

As at

December 31, 2022

and 2021,

there are

restrictions on

cash and

cash equivalents.

Cash and

cash equivalents

include the following components:

2022

2021

Cash

3,445,649

3,568,561

Guaranteed investment certificates

—

8,633,952

Cash and cash equivalents

3,445,649

12,202,513

Guaranteed investment certificates were

instruments issued by Canadian

financial institutions, bore interest at

rates varying

from

0.08

% to

0.86

%, and held to maturity or were redeemed during the

year 2022.

Accounts receivable

Details of accounts receivable based on past due terms

were as follows:

December 31,

2022

2021

Current

6,578,269

1,919,786

1 – 30 days

15,959

32,028

31 – 60 days

57,944

7,006,652

61 – 90 days

718,239

788,330

Greater than 90 days

13,790,716

6,317,239

Holdback receivable

1,536,115

974,878

Total

trade accounts receivable

22,697,242

17,038,913

Allowance for expected credit loss

(4,693,283)

(520,000)

Other receivables

240,560

270,536

Sales tax receivable

380,112

850,167

18,624,631

17,639,616

December 31,

2022

the

allowance

for

expected

credit

loss

trade

accounts

receivable

4,693,283

(2021

520,000

), $

543,283

which was included

through the business

combination and only varied

due to foreign

exchange, and

4,150,000

recognized during 2022. The

portion recognized during the

year includes $

3,765,000

attributable to one specific

customer, whereby the carrying amount has been

reduced from $

12,810,231

to $

9,045,231

. The carrying value of all other

trade receivables was reduced from $

9,887,011

to $

8,958,728

. On the basis of the Company’s expected

credit loss policy,

the allowance was determined generally by applying a loss rate of

% on balances 1-30 days past the invoice date,

% for

31-60 days,

% for

61-90 days

and a

minimum of

% 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.

PyroGenesis Canada Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2022 and 2021

(In Canadian dollars)

The closing balance of the trade

receivables credit loss allowance as at December 31,

reconciles with the trade receivables

credit loss allowance opening balance as follows:

Opening allowance January 1, 2021

—

Business combination

512,592

Foreign exchange

7,408

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

10.

Costs and profits in excess of billings on uncompleted

contracts

As at December 31, 2022, the Company had

eighteen

contracts with total billings of $

10,475,299

which were less than total

costs

incurred

and

had

recognized

cumulative

revenue

11,856,596

since

those

projects

began.

This compares

with

fourteen

contracts with total

billings of $

16,676,700

which were less

than total costs

incurred and had

recognized cumulative

revenue of $

21,599,410

as at December 31, 2021.

The net amount

of $

1,051,297

as at December

31, 2022 includes

an expected credit

loss allowance of

330,000

Nil

at December 31,

2021). On the basis

of the Company’s expected

credit loss policy, the allowance was

determined generally

by applying a

loss rate of

% on all

balances, and

adjusting for

specific situations,

such as

past due customers,

whereby

the loss rate varied from

% to

Changes in

costs and

profits in

excess of

billings on

uncompleted contracts

during the

year are

explained by

4,164,109

(2021 -

983,891

)

recognized

the

beginning

the

year

being

transferred

accounts

receivable,

622,696

(2021 -

4,832,968

) resulting from changes in the measure of progress and the expected credit loss allowance of

330,000

Nil

2021).

11.

Investment tax credits

An amount recognized

in 2022 included

169,434

(2021 - $

202,472

) of investment

tax credits

earned in

the year,

as well

as $

Nil

(2021 -

706,000

) of

investment tax

credits earned

in prior years

that no

longer met

the criteria

for recognition

2021. $

70,258

(2021 -

148,695

) of

the investment

tax credits

recognized in

the year was

recorded against

cost of

sales

and

services,

69,176

(2021

684,709

))

against

research

and

development

expenses

and

30,000

(2021 -

32,486

)

against selling general and administrative expenses.

Eligible

scientific

research

and

experimental

development

(“SR&ED”)

expenses

for

the

year

amounted

2,783,450

(2021 – $

2,000,853

) less

investment

tax credits

of ($

169,434

) (2021

– ($

684,709

)), less

government grants

of $

296,043

(2021 – $

149,575

) totalling $

2,317,973

(2021 – $

2,535,987

12.

Strategic investments

December 31,

2022

2021

Beauce Gold Fields (“BGF”) shares – level 1

56,419

123,095

HPQ Silicon Inc. (“HPQ”) shares - level 1

5,415,749

12,306,196

HPQ warrants – level 3

770,466

2,472,368

6,242,634

14,901,659

PyroGenesis Canada Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2022 and 2021

(In Canadian dollars)

The change in the strategic investments is summarized as

follows:

(“BGF”) shares – level 1

(“HPQ”) shares - level 1

HPQ warrants – level 3

Quantity

Balance, December 31, 2020

1,025,794

123,095

14,990,200

16,489,220

25,844,600

23,379,435

Additions

—

8,268,000

8,070,109

—

Exercised

—

16,250,000

11,700,000

(16,250,000)

(9,181,250)

Disposed

—

(12,755,600)

(14,252,732)

—

Change in the fair value

—

(9,700,401)

—

(11,725,817)

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

The Company owns

9.82

% on a

fully diluted basis

of HPQ as

at December 31, 2022 (2021 –

9.64

%) and has

other business

transactions with this entity– see notes 7(i) and 13.

The following table sets out the details and activity of the HPQ

warrants:

Number of

warrants

Exercise

Expiry date

Dec 31, 2021

Additions

Exercised

Dec 31, 2022

price ($)

April 29, 2023

1,200,000

—

1,200,000

0.10

June 2, 2023

4,394,600

—

4,394,600

0.10

September 3, 2023

4,000,000

—

4,000,000

0.61

April 20, 2024

—

6,800,000

—

6,800,000

0.60

9,594,600

6,800,000

—

16,394,600

2022 Transactions

6,800,000

common shares

and

6,800,000

warrants of

HPQ were purchased

in cash

for an amount

of $

3,604,000

in April

2022.

11,447,500

HPQ

common

were

disposed

for

cash

amounts

totalling

3,922,244

resulting

realized

loss

225,527

2021 Transactions

12,755,600

HPQ

common

were

disposed

for

cash

amounts

totalling

14,252,732

resulting

realized

gain

9,893,900

16,250,000

shares purchase warrants were

exercised in cash for a

total amount of $

2,518,750

. An amount of

9,181,250

was transferred to the share value on the exercise

of the warrants.

8,268,000

common shares of HPQ were purchased in cash

for an amount of $

8,070,109

PyroGenesis Canada Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2022 and 2021

(In Canadian dollars)

At inception, the

fair value of

the HPQ warrants

purchased in

2022 was measured

using the Black-Scholes

option pricing

model using the following assumptions:

Number of warrants

6,800,000

Date of issuance

April 20, 2022

Exercise price ($)

0.60

Assumptions under the Black-Scholes model:

Fair value of the shares ($)

0.47

Risk-free interest rate (%)

2.47

Expected volatility (%)

107.60

Expected dividend yield

–

Contractual remaining life (number of months)

December 31,

2022

and

2021,

the

fair

value

the

HPQ

warrants

was

measured

using

the

Black-Scholes

option

pricing model using the following assumptions:

2022

2021

Number of warrants

1,200,000

4,394,600

4,000,000

6,800,000

1,200,000

4,394,600

4,000,000

Date of issuance

April 29, 2020

June 2, 2020

Sept. 3, 2020

April 20, 2022

April 29, 2020

June 2, 2020

Sept. 3, 2020

Exercise price ($)

0.1

0.61

0.60

0.1

0.61

Assumptions under the Black-

Scholes model:

Fair value of the shares ($)

0.25

0.46

Risk-free interest rate (%)

4.03

1.22

Expected volatility (%)

80.55

73.74

76.85

74.58

89.88

94.01

110.47

Expected dividend yield

–

Contractual remaining life (in

months)

As at December 31, 2022, a gain from

initial recognition of the warrants of $

280,926

510,573

– 2021) has been deferred

off balance sheet until realized.

13.

Royalties receivable

December 31

2022

2021

Opening balance

1,258,654

1,060,000

Accretion interest

118,290

132,809

Royalties recognized during the year

450,000

Discounting

(169,158)

(134,155)

Amounts received during the year

(250,000)

Balance at end of the year

1,407,786

1,258,654

Current portion

455,556

311,111

Non-current portion

952,230

947,543

1,407,786

1,258,654

The Company

sold intellectual

property to

HPQ Silicon

Inc. (“HPQ”)

in 2016

(“HPQ 2016

contract”) and

its wholly

owned

subsidiary,

HPQ Nano

Silicon Powders

Inc. in

2020 (“HPQ

Nano contract”),

and HPQ

Silica Polvere

Inc. (“HPQ

Polvere

contract”) in 2021. The

terms of those

sales contracts include,

in addition to the

purchase price amounts

already received

of $

1,000,000

in 2016 and $

2,400,000

in 2020 and $

3,300,000

in 2021, respectively, the following variable consideration in

the form of royalty payments:

PyroGenesis Canada Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2022 and 2021

(In Canadian dollars)

HPQ 2016 contract:

Royalties

are

net

sales,

with

minimum

payments

200,000

2021

and

250,000

2022

and

every year

thereafter.

Payment is

due no later

than 30 days

after the year

end of HPQ

Silicon Inc. An

amount of

250,000

has been

received under this agreement in 2022 ($

200,000

was received in 2021).

HPQ Nano contract:

Royalties

are

% of

net

sales,

with

minimum

payments

50,000

2021,

100,000

2022,

150,000

2023,

and

200,000

in 2024 and

every year thereafter. Payments are due

no later than

10 days after

the year end of

HPQ Nano Silicon

Powders Inc. An amount of $

Nil

has been received under this agreement in 2022

50,000

was received in 2021).

HPQ Polvere contract:

Royalties

are

net

sales

with

minimum

payments

50,000

2023,

100,000

2024,

150,000

2025

and

200,000

in 2026

and every

year thereafter.

Royalty payments

are limited

to the

total net

sales for

the period.

Payments

are due no later than 10 days after the year end of HPQ

Silica Polvere Inc.

During the

year ended

December 31, 2022,

the Company

recognized an

additional $

250,000

and $

200,000

for the

HPQ

2016 contract

and

HPQ

Nano

contracts,

respectively,

royalties

receivable,

which

have

been

discounted

using

12.5

discount rate.

During the

year ended

December 31, 2021,

the Company

recognized an

additional $

250,000

and $

200,000

for the

HPQ

2016 contract

and

HPQ

Nano

contracts,

respectively,

royalties

receivable,

which

have

been

discounted

using

12.5

discount rate.

The Company

only recognizes

variable consideration,

including minimum

royalties, arising

from these

agreements in

the

period(s)

when

highly

probable

that

reversal

will

not

occur

when

the

uncertainty

associated

with

the

variable

consideration

subsequently

resolved.

Minimum

royalties

are

recognized

for

the

period

the

Company

evaluates

the

collectability of the minimum royalties is probable, which

the Company has estimated over four years.

The HPQ Nano contract

and the HPQ Polvere

contract each provide

the Company with the

option to convert, at

any time,

the future

royalties

that would

be owed

to it

into a

% equity

stake

in HPQ

Nano

Silicon

Powders Inc.

and HPQ

Silica

Polvere

Inc., respectively.

Each option

is considered

an embedded

derivative

that

is initially

measured

fair

value

and

subsequently remeasured

at fair value at

each reporting period.

The Company determined

that the embedded

derivatives

had a fair value of $

Nil

at the inception of the contracts and $

Nil

at each of the reporting dates.

14.

Deposits

December 31

2022

2021

Current portion:

Suppliers

392,309

1,236,211

Security deposit on leased premises

40,241

92,241

Total

current

432,550

1,328,452

Non-current portion:

Suppliers

7,250

1,952

Security deposit on leased premises

38,803

246,804

Total

non-current

46,053

248,756

Total

deposits

478,603

1,577,208

PyroGenesis Canada Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2022 and 2021

(In Canadian dollars)

15. Property and equipment

Machinery

Equipment

Computer

and

Leasehold

under

equipment

Automobiles

improvements

construction

Total

Cost

Balance at December 31, 2020

549,659

1,621,899

306,164

180,901

1,940,234

4,598,857

Acquired through business

combination

13,585

28,967

—

42,552

Additions

245,984

384,092

30,495

752,204

84,143

1,496,918

Balance at December 31, 2021

809,228

2,034,958

336,659

933,105

2,024,377

6,138,327

Additions

(1)

164,059

(89,085)

—

209,435

—

284,409

Assets under construction put

in service

—

1,065,672

—

958,705

(2,024,377)

—

Balance at December 31, 2022

973,287

3,011,545

336,659

2,101,245

—

6,422,736

Accumulated depreciation

Balance at December 31, 2020

509,112

1,441,642

21,748

96,785

—

2,069,287

Depreciation

88,410

182,739

59,959

24,995

—

356,103

Balance at December 31, 2021

597,522

1,624,381

81,707

121,780

—

2,425,390

Depreciation

146,550

297,021

57,543

102,780

—

603,894

Balance at December 31, 2022

744,072

1,921,402

139,250

224,560

—

3,029,284

Carrying amounts

Balance at December 31, 2021

211,706

410,577

254,952

811,325

2,024,377

3,712,937

Balance at December 31, 2022

229,215

1,090,143

197,409

1,876,685

—

3,393,452

(1)

The adjustment to

additions to Machinery

and Equipment of

89,085

, relates to

the discounting of

the non-interest-bearing

loan from the Economic Development Agency of Canada,

representing government assistance (see note 21).

Equipment under

construction included

the leasehold

improvements of

a clean room

and the costs

related to

building the

new Plasma Powder Production equipment which have been

put in service during the year ended December

31, 2022.

16. Leases

The Company has entered into lease contracts mainly for buildings

and computer equipment, which expire at various dates

through

the

year

2036.

Some

leases

have extension

or purchase

options

for various

terms.

The

lease

contracts

do not

impose any financial covenants.

On January 1, 2022, a lease for rent

of a property with a trust whose

beneficiary is the controlling shareholder

and CEO of

the

Company,

was

modified

extend

the

lease

term

until

December

2026.

The

lessor

also

reimbursed

amount

1,070,264

representing the balance at

the date of modification

of the original prepayment

amount of $

1,178,530

made in

2020. At

the date

of modification,

the

lease

liability was

remeasured

using

a discount

rate

%. As

a result,

the

lease

liability was increased by an amount of $

1,070,264

and the right-of-use assets was decreased by an amount

of $

108,267

On September

1, 2022,

a lease

of a

property was

modified to

extend the

term, to

postpone the

exercise of

the purchase

option of the property,

and to factor a

deposit of $

275,000

required to exercise

the purchase option.

As a result, the

lease

liability was remeasured using a discount rate of

8.6

% and the lease liability and the right-of-use assets were decreased by

203,154

PyroGenesis Canada Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2022 and 2021

(In Canadian dollars)

a) Right-of-use assets

Land and

Computer

building

equipment

Total

Balance at January 1, 2021

3,688,315

12,685

3,701,000

Additions - business combination

477,608

—

477,608

Additions

2,157,796

—

2,157,796

Depreciation

(566,182)

(4,228)

(570,411)

Balance at December 31, 2021

5,757,537

8,457

5,765,993

Modification of lease agreements

(311,421)

—

(311,421)

Depreciation

(631,600)

(4,228)

(635,828)

Balance at December 31, 2022

4,814,516

4,229

4,818,744

b) The table below summarizes changes to the lease liabilities:

Balance at January 1, 2021

2,988,542

Addition - business acquisition

477,608

Additions - other

2,120,893

Payments

(263,078)

Balance at December 31, 2021

5,323,965

Modification of lease agreements

867,110

Payments

(657,381)

Balance at December 31, 2022

5,533,694

Current portion

2,934,236

Non-current portion

2,389,729

Balance at December 31, 2021

5,323,965

Current portion

2,672,212

Non-current portion

2,861,482

Balance at December 31, 2022

5,533,694

c) Amount recognized in the consolidated statements of comprehensive

loss:

2022

2021

Depreciation of right-of-use assets

635,828

570,411

Interest on lease liabilities

378,611

307,691

Expense related to lease payments excluded in the measurement

of lease

liabilities

243,209

178,707

PyroGenesis Canada Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2022 and 2021

(In Canadian dollars)

d) Maturity analysis – contractual undiscounted cash flows

of lease liabilities as at December 31, 2022

2023

2,984,243

2024

592,719

2025

572,562

2026

474,484

2027

229,332

Thereafter

1,891,989

6,745,329

17. Intangible assets

Production

Development

backlog

Patents

costs

Total

Cost

Balance at December 31, 2020

—

768,392

244,871

1,013,263

Acquired through business combination

2,120,000

—

2,120,000

Additions

—

214,497

—

214,497

Write-off

—

(85,544)

—

(85,544)

Balance at December 31, 2021

2,120,000

897,345

244,871

3,262,216

Additions

—

208,680

—

208,680

Balance at December 31, 2022

2,120,000

1,106,025

244,871

3,470,896

Accumulated amortization

Balance at December 31, 2020

—

58,125

49,524

107,649

Amortization

353,333

10,528

16,508

380,369

Balance at December 31, 2021

353,333

68,653

66,032

488,018

Amortization

848,000

13,522

16,508

878,030

Balance at December 31, 2022

1,201,333

82,175

82,540

1,366,048

Carrying amounts

Balance at December 31, 2021

1,766,667

828,692

178,839

2,774,198

Balance at December 31, 2022

918,667

1,023,850

162,331

2,104,848

The Company’s development costs have been incurred to develop plasma-related technologies and the patents protect the

design and specification of these technologies.

18. Goodwill

The

Company

tests

goodwill

for

impairment

annually,

frequently

when

indicator

impairment

identified.

Goodwill is considered impaired if the recoverable amount

is less than the carrying amount.

The recoverable

amount of

an operating

segment

is determined

based on

value-in-use

calculations,

covering a

detailed

five-year forecast, followed

by an

extrapolation of expected

cash flows for

the remaining useful

lives using a

declining growth

rate determined by management. The present value of the expected

cash flows of the operating segment is determined by

applying a suitable discount rate reflecting current market assessments of the time value of money and risks specific to the

segment.

PyroGenesis Canada Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2022 and 2021

(In Canadian dollars)

For

the

purpose

impairment

testing,

goodwill

allocated

the

sole

operating

segment,

Pyro

Green-Gas,

which

expected

benefit

from

the

synergies

the

business

combination

which

the

goodwill

arises

and

is compared

its

recoverable value.

At December

31,

2022

and

2021,

was

determined

that

the

recoverable

amounts

exceed

the

carrying

amount,

and

impairment was required.

The recoverable

amount in the

most recent

impairment test

performed was

determined using

pre-tax discount rate of

12.5

% and terminal growth rate of

% (2021 - pre-tax discount rate of

% and terminal growth rate

%).

19. Accounts payable and accrued liabilities

December 31

2022

2021

Accounts payable

6,065,996

5,457,259

Accrued liabilities

2,891,053

3,730,048

Sale commissions payable

904,724

737,364

Accounts payable to the controlling shareholder and CEO

254,097

144,506

10,115,870

10,069,177

Sale commissions payable relate to the costs to obtain long-term

contracts with clients.

20. 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 $

37,374,909

(2021 - $

21,834,137

Payments to date received were $

47,045,902

on contracts in progress (2021 - $

31,234,368

Changes in

billings in

excess of

costs and

profits on

uncompleted contracts

during the year

are explained

by $

2,416,229

(2021 - $

6,268,910

) recognized at

the beginning of

the year being recognized

as revenue, and

an increase of

2,686,991

(2021 - $

9,076,169

) resulting from cash received excluding amounts

recognized as revenue.

PyroGenesis Canada Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2022 and 2021

(In Canadian dollars)

21. Term

loans

Economic

Development Agency

Other Term

Canada

Emergency Business

of Canada Loan

Loans

Account Loan

Total

Balance, December 31, 2020

75,800

36,907

—

112,707

Assumed through business combination

—

36,520

50,000

86,520

Accretion

12,185

—

12,185

Payments

—

(12,207)

(8,300)

—

(20,507)

Balance, December 31, 2021

87,985

24,700

28,220

50,000

190,905

Additions

292,941

Discounting

(89,085)

—

(89,085)

Accretion

28,229

—

28,229

Payments

—

(13,083)

(19,920)

—

(33,003)

Balance, December 31, 2022

320,070

11,617

8,300

50,000

389,987

Less current portion

—

(11,617)

(8,300)

(50,000)

(69,917)

Balance, December 31, 2022

320,070

—

320,070

maturing in 2029, non-interest bearing, payable

in equal instalments from April 2024 to March 2029.

maturing October 23, 2023

bearing interest at

a rate

6.95

% per

annum, payable in monthly

instalments of $

1,200

secured by

automobile (carrying

amount of $

10,795

as at December 31, 2022)

maturing in May 2023, payable in monthly instalments

of $

1,660

, bearing interest at

7.45

loan bearing

interest and

minimum repayment, if repaid by December 2023

Economic Development Agency of Canada Loan

March 5,

2020,

the

Company

entered

into

repayable

contribution

agreement

450,000

under

the

Regional

Economic

Growth

through

Innovation

program

from

the

Economic

Development

Agency

Canada

(“EDC”).

The

contribution is

repayable in

equal monthly instalments due

and payable

24 months

following the

completion of

the project.

During

the year

ended

December 31,

2022,

the

Company

received

contributions

totalling

292,941

The

loan

was

discounted using the effective

interest method using a

rate of

% as it is non-interest

bearing. The difference

between the

discounted

amount

and

the

proceeds

received

of $

89,085

represents

government

assistance

and

is accounted

for as

reduction of the property and equipment.

Canada Emergency Business Account ("CEBA") Loan

The Company's

subsidiary participated

in the

CEBA program

whereby it

obtained an

interest free

and partially

forgivable

loan. The loan

bears

interest and

minimum repayment

terms, and

one third of

the loan

amount is forgiven

if repaid

by December 31,

2023. The

unpaid balance,

if any,

at December 31,

2023 would

be converted

to a

-month term

loan

bearing interest at

% and be reimbursed entirely by December 31, 2025.

22. 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 October 19,

2022, the

Company completed

a non-brokered

private placement

consisting of

1,014,600

units at

a price

of $

1.30

per unit for

aggregate gross proceeds to

the Company of $

1,318,980

. Each unit

is comprised of

one

common share

of the Company

and

one

common share

purchase warrant

of the

company.

Each warrant

entitles the

holder to

purchase

one additional common

share at an

exercise price of

1.75

for a period

24 months

. The Company

allocated an amount

of $

1,095,780

to share

capital representing

the fair

value of

the shares

on October

19, 2022,

of $

1.08

per share

and the

residual amount of $

223,200

to warrants.

PyroGenesis Canada Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2022 and 2021

(In Canadian dollars)

Shares issued upon exercise of stock options, share

purchase warrants and compensation options

During the year

ended December 31,

2022,

2,440,000

(

3,482,000

- 2021)

stock options

and Nil

(

8,146,483

- 2021)

purchase

warrants

were

exercised

for

net

proceeds

1,412,799

and

Nil

1,109,818

and

12,396,107

–

2021)

respectively.

The

amounts

credited

capital

from

the

exercise

stock

options

include

ascribed

value

from

contributed surplus of $

870,558

364,000

– 2021). In addition, in

2021,

191,414

compensation options relating to a bought

deal in 2020, were exercised for net proceeds of $

689,090

Share redemptions for cancellation

In January

2021, the

Company announced

it had

been authorized

to repurchase

for cancellation,

on the

open market,

subject to the

approval of any

securities authority by

private agreements,

5,000,000

common shares from

January 14, 2021,

to January

13,

2022. In

February

2022, the

Company

announced

it had

been authorized

to repurchase

7,500,000

of its

common shares from February 15, 2022, to February 14, 2023.

During the year 2022, the

Company did

t repurchase any common shares for

purpose of cancellation. The Company was

under no obligation to repurchase its common shares as

at December 31, 2022.

During the year

2021, the

Company repurchased

and cancelled

840,094

Common shares

at a weighted

average price

4.96

per share,

for a

total cash

consideration of

4,183,617

including commissions

of $

16,678

. The

excess of

the total

consideration over the carrying amount of the shares,

in the amount of $

3,778,619

was applied against deficit.

The repurchases were made in the normal course of business at market prices through the

TSX. The Company was under

no obligation to repurchase its common shares as at December

31, 2021.

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

% (

% for

consultants) of

total share

capital over a twelve-month period.

The following table sets out the activity in stock options:

Weighted

Number of

average

options

exercise price

Balance – December 31, 2020

9,040,000

1.57

Granted

2,970,000

4.55

Exercised

(1)

(3,482,000)

0.32

Forfeited

(125,000)

4.41

Balance, December 31, 2021

8,403,000

3.10

Granted

2,475,000

3.55

Exercised

(1)

(2,440,000)

0.58

Forfeited

(242,500)

4.07

Balance, December 31, 2022

8,195,500

3.96

(1)

The weighted fair market value of the share price for

options exercised in 2022 was $

1.44

5.48

in 2021).

PyroGenesis Canada Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2022 and 2021

(In Canadian dollars)

Grants in 2022

January 3,

2022,

the

Company

granted

150,000

stock

options

the

President

and

Chief

Executive

Officer

the

Company,

and

300,000

stock options

to members

of its

Board of

Directors. The

stock options

have an

exercise price

3.36

per common share, vest immediately and are exercisable

over a period of five (

) years.

On April 5,

2022, the

Company granted

400,000

stock options

to employees

of the Company.

The stock

options have

exercise price of $

2.96

per common share. The

400,000

options will vest as follows:

percent as of the day

of the grant,

percent at

the first

anniversary of

the date

of the

grant,

percent on

the second

anniversary of

the date

of the

grant

and

percent on the third anniversary of the date of the grant. All

options mentioned above are exercisable over a period

of five (

) years.

On June 2, 2022,

the Company granted

600,000

stock options to

the President and

Chief Executive Officer of

the Company,

and

900,000

stock options to members

of its Board of

Directors. The

1,500,000

options will vest

as follows:

percent as

of the day of the grant,

percent at the first anniversary of the

date of the grant,

percent on the second anniversary of

the date

of the grant

and

percent at

the third

anniversary of

the date

of the grant.

The stock

options have

an exercise

price of $

3.88

per common share and are exercisable over a period of five (

) years.

On July 3,

2022, the

Company granted

125,000

stock options

to employees

of the

Company.

The stock

options have

exercise price of $

2.14

per common share. The

125,000

options will vest as follows:

percent as of the day

of the grant,

percent at

the first

anniversary of

the date

of the

grant,

percent on

the second

anniversary of

the date

of the

grant

and

percent on the third anniversary of the date of the grant. All

options mentioned above are exercisable over a period

of five (

) years.

Subsequent to

year end, 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

1.03

per common

share, vest

immediately and

are exercisable

over a period

of five

(

) years.

The Company

accounted

for an expense amounting to $

453,204

related to these options as the stock options granted related to the services in 2022

and 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:

percent as of

the day of

the grant,

percent at

the first anniversary of the

date of the grant,

percent on the second

anniversary of the date

of the grant and

percent

on the third anniversary of the date

of the grant. All options mentioned above

are exercisable over a period of five (

) years.

There was no expense accounted for in 2022 relating to

these stock options.

Grants in 2021

December 30,

2021,

the

Company

granted

100,000

stock

options

member

its

Board

Directors

The

stock

options have an exercise

price of $

3.61

per common share, vest

immediately and are

exercisable over a period

of five (

)

years.

On December 17, 2021, the Company

granted

1,920,000

stock options to the President and

Chief Executive Officer of the

Company. The stock options have an exercise

price of $

3.13

per common share, vest

immediately and are exercisable over

a period of five (

) years.

On October 14, 2021, the

Company granted

100,000

stock options to the Chief

Financial Officer of the Company. The stock

options have an exercise

price of $

5.04

per common share. The

100,000

options will vest

as follows:

percent as of the

day of the grant,

percent at the first anniversary of

the date of the grant,

percent at the second anniversary of the

date

of the

grant, and

percent at

the third

anniversary of

the date

of the

grant and

are exercisable

over a

period of

five (

)

years.

On June 14,

2021, the Company

granted

100,000

stock options

to an

officer of

the Company.

The stock

options have an

exercise price of $

6.70

per common share. The

100,000

options will vest as follows:

percent at the date of the grant,

percent at the

first anniversary of

the date of

grant,

percent at the

second anniversary of the

date of grant,

and

percent

at the third anniversary of the date of grant and are exercisable

over a period of five (

) years.

PyroGenesis Canada Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2022 and 2021

(In Canadian dollars)

On June 1,

2021, the

Company granted

200,000

stock options

to a

member of

its Board

of Directors.

The stock

options

have an exercise price of

6.59

per common share. The

200,000

options will vest as follows:

percent at the date of

the

grant,

percent at the first anniversary of the date of grant,

percent at the second anniversary of the date of grant, and

percent at the third anniversary of the date of grant

and are exercisable over a period of five (

) years.

On April 6, 2021, the

Company granted

150,000

stock options to the

President and Chief Executive Officer of

the Company,

100,000

and

200,000

stock options to two members of the Board of Directors and

100,000

stock options to an employee of

the Company.

The stock

options have

an exercise

price of

8.47

per common

share. Of

these options,

250,000

will vest

immediately,

200,000

options will vest

as follows:

percent as of the

day of the

grant,

percent at the

first anniversary

of the date

of the grant

and

percent on the

second anniversary of the

date of the

grant and the

remaining

100,000

options

will vest

as follows:

percent as

of the

day of

the grant,

percent at

the first

anniversary of

the date

of the

grant,

percent at the second anniversary

of the date of the grant,

and

percent at the third anniversary

of the date of the grant.

All options mentioned above are exercisable over a period of

five (

) years.

The weighted average fair value of stock options granted

for the year ended December 31, 2022 was $

2.37

2.99

in 2021)

and $

2.02

per option for stock options granted subsequent to the year end. 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:

Years ended December 31,

2022

2021

Number of options granted or recognized

2,475,000

650,000

2,970,000

Exercise price ($)

3.55

3.02

4.55

Fair value of each option under the Black-Scholes pricing

model

($)

2.37

2.02

2.99

Assumptions under the Black-Scholes model:

Fair value of the shares ($)

3.54

3.02

4.52

Risk-free interest rate (%)

2.43

3.38

1.11

Expected volatility (%)

83.17

83.15

83.00

Expected dividend yield

—

Expected life (number of months)

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.

PyroGenesis Canada Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2022 and 2021

(In Canadian dollars)

As at December 31, 2022,

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

stock

Exercise

options

price

Dec 31, 2021

Granted

Exercised

Forfeitures

Dec 31, 2022

vested (1)

per option

Expiry date

November 3, 2017

2,400,000

—

(2,400,000)

—

0.58

November 3, 2022

July 3, 2018

300,000

—

300,000

0.51

July 3, 2023

October 29, 2018

40,000

—

(40,000)

—

0.52

October 29, 2023

September 29, 2019

100,000

—

100,000

0.51

September 29, 2024

January 2, 2020

100,000

—

100,000

0.45

January 2, 2025

July 16, 2020

2,243,000

—

(42,500)

2,200,500

1,775,500

4.41

July 16, 2025

October 26, 2020

250,000

—

(200,000)

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

3.13

December 17, 2026

December 30, 2021

100,000

—

100,000

30,000

3.61

December 30, 2026

January 3, 2022

—

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

8,403,000

2,475,000

(2,440,000)

(242,500)

8,195,500

5,730,500

3.96

(1)

At December 31, 2022, the weighted average exercise

price for options outstanding which are exercisable was

3.96

As at December 31, 2021,

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

stock

Exercise

options

price

Dec 31, 2020

Granted

Exercised

Forfeitures

Dec 31, 2021

vested

per option

Expiry date

November 3, 2017

2,420,000

—

(20,000)

—

2,400,000

0.58

November 3, 2022

July 3, 2018

300,000

—

300,000

0.51

July 3, 2023

October 29, 2018

70,000

—

(30,000)

—

40,000

0.52

October 29, 2023

September 29, 2019

200,000

—

(100,000)

—

100,000

0.51

September 29, 2024

January 2, 2020

100,000

—

100,000

0.45

January 2, 2025

July 16, 2020

2,450,000

—

(82,000)

(125,000)

2,243,000

1,775,500

4.41

July 16, 2025

October 26, 2020

250,000

—

250,000

125,000

4.00

October 26, 2025

April 6, 2021

—

550,000

—

550,000

320,000

8.47

April 6, 2026

June 1, 2021

—

200,000

—

200,000

50,000

6.59

June 1, 2026

June 14, 2021

—

100,000

—

100,000

25,000

6.70

June 14, 2026

October 14, 2021

—

100,000

—

100,000

10,000

5.04

October 14, 2026

December 17, 2021

—

1,920,000

—

1,920,000

3.13

December 17, 2026

December 30, 2021

—

100,000

—

100,000

3.61

December 30, 2026

9,040,000

2,970,000

(3,482,000)

(125,000)

8,403,000

7,265,500

3.10

For

the year

ended

December 31,

2022,

share-based

compensation

expense

5,538,463

(2021

9,762,745

)

was

recorded in Selling, general and administrative expenses

to the consolidated statements of comprehensive

loss.

As at December 31,

2022, an amount

of $

3,184,866

(2021 - $

2,719,354

) remains to

be amortized until

October 2025 related

to the grant of stock options.

PyroGenesis Canada Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2022 and 2021

(In Canadian dollars)

Share purchase warrants

The following

table reflects

the activity

in warrants

during the year

ended December 31,

2022, and

the number

of issued

and outstanding share purchase warrants at December

31, 2022:

Number of

warrants

Exercise

Dec 31,

price per

2021

Issued

Exercised

Expired

2022

warrant

Expiry date

Issuance of units – October 19, 2022

—

1,014,600

—

1,014,600

1.75

Oct 19, 2024

—

1,014,600

—

1,014,600

1.75

The following

table reflects

the activity

in warrants

during the year

ended December 31,

2021, and

the number

of issued

and outstanding share purchase warrants at December

31, 2021:

Number of

warrants

Exercise

Dec 31,

price per

2020

Issued

Exercised

Expired

2021

warrant

Expiry date

Issuance of units – September 28, 2018

3,448,276

—

(3,448,276)

—

0.58

January 28, 2021

Issuance of units – October 19, 2018

100,000

—

(100,000)

—

0.58

February 13, 2021

Issuance of units – May 15, 2019

1,355,500

—

(1,355,500)

—

0.85

May 15, 2021

Issuance of units – May 28, 2019

750,000

—

(750,000)

—

0.85

May 24, 2021

Issuance of units – June 19, 2019

500,000

—

(500,000)

—

0.85

June 19, 2021

Issuance of units – October 25, 2019

225,000

—

(225,000)

—

0.75

October 25, 2021

Issuance of units – November 10, 2020

1,677,275

—

(1,672,000)

(5,275)

—

4.5

November 10, 2022

Issuance of warrants – November 10, 2020

—

(95,707)

—

4.5

November 10, 2022

8,056,051

—

(8,146,483)

(5,275)

—

23. Supplemental disclosure of

cash flow information

2022

2021

Accounts receivable

(985,015)

(12,372,139)

Costs and profits in excess of billings on uncompleted

contracts

3,871,413

(3,849,077)

Inventory

(988,821)

(839,352)

Investment tax credits receivable

(19,891)

1,015,862

Royalties receivable

(30,842)

(65,845)

Deposits

2,277,136

145,379

Contract assets

(562,809)

—

Prepaid expenses

(53,942)

39,111

Accounts payable and accrued liabilities

346,003

1,953,208

Billings in excess of costs and profits on uncompleted contracts

270,762

1,485,969

Income taxes

267,414

(99,072)

4,391,408

(12,585,956)

PyroGenesis Canada Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2022 and 2021

(In Canadian dollars)

24. Supplemental disclosure on

comprehensive income statement

The amount

inventories

recognized

in cost

of sales

is $

844,304

for the

year

ended December

31,

2022 ($

326,279

2021).

The aggregate amortization

and write-off of

intangible assets expense

for the

year ended December 31, 2022

was $

878,030

(2021 - $

465,913

) and was recorded in cost of sales and services.

Depreciation

property

and

equipment

amounted

603,894

and

ROU

assets

was

635,828

for

the year

ended

December 31, 2022, as

compared to (2021 -

356,103

and $

570,411

respectively) and is

recorded in selling,

general and

administrative.

Employee

benefits

totaled

18,115,284

the year

ended

December 31,

2022

(2021 -

21,855,957

)

and

include

share-

based compensation of $

5,538,463

(2021 - $

9,762,745

The Company

has been

awarded various

government grants

during the year,

which were

recognized when

they became

receivable. The

grants, received

in 2022,

are unconditional

and amounted

to $

204,791

(2021 - $

226,420

). An

amount of

Nil

(2021 - $

149,575

) was

recorded as

a reduction

to the

related expenses

in research

and development,

an amount

204,791

(2021 - $

76,845

) was recorded as a reduction to the related expenses

in selling, general and administrative.

25. Net finance costs

2022

2021

Financial expenses

Interest on term loans

3,198

87,775

Interest on lease liabilities

378,611

307,691

Interest accretion on balance due on business combination

173,350

110,204

Interest accretion on long term loans

28,229

12,185

Penalties and other interest expenses

85,644

19,324

669,032

537,179

Financial income

Interest accretion on royalty receivable

(118,290)

(132,809)

Net finance costs

550,742

404,370

26. Loss per share

The

following

table

provides

reconciliation

between

the

number

basic

and

fully

diluted

outstanding

December 31, 2022 and 2021:

2022

2021

Weighted daily average of Common shares

170,953,374

166,645,546

Dilutive effect of stock options

—

Dilutive effect of warrants

—

Weighted average number of diluted shares

170,953,374

166,645,546

Number of anti-dilutive stock options and warrants excluded

from fully diluted loss

per share calculation

6,745,100

8,403,000

27. Related party transactions

During

the years

ended

December 31,

2022

and

2021,

the

Company

concluded

the

following

transactions

with

parties:

PyroGenesis Canada Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2022 and 2021

(In Canadian dollars)

In 2022, rent

and property taxes

were charged by

a trust whose beneficiary

is the controlling

shareholder and CEO

of the

Company

in the

amount

277,389

(2021

- $

274,934

). On

January

1, 2022,

lease for

rent of

a property

with a

trust

whose beneficiary

is the

controlling

shareholder

and

CEO of

the

Company,

was

modified to

extend

the

lease

term until

December 2026. The lessor also reimbursed an amount of $

1,070,264

representing the balance at the date of modification

the

original

prepayment

amount

1,178,530

made

2020.

the

date

modification,

the

lease

liability

was

remeasured using a discount rate of

%. As a result, the lease liability

was increased by an amount of $

1,070,264

and the

right-of-use assets was decreased by an amount of $

108,267

These

expenses

are

recorded

captions

cost

sales

and

selling

and

general

the

consolidated

statements

comprehensive

loss.

December 31,

2022

the

right-of-use

asset

and

the

lease

liabilities

amount

680,980

and

799,090

respectively (2021 - $

1,107,131

and $

Nil

A balance due

to the controlling

shareholder and CEO of

the Company amounted to

254,097

(2021 - $

144,506

) is included

in accounts payable and accrued liabilities.

The key management personnel

of the Company,

in accordance with IAS

24 Related Party Disclosures,

are the members

of the Board of Directors and certain officers. Total

compensation to key management consisted of the following:

2022

2021

Salaries – key management

1,204,306

3,049,501

Pension contributions

22,479

59,377

Fees – Board of Directors

157,900

187,600

Share-based compensation – officers

2,017,348

6,182,573

Share-based compensation – Board of Directors

2,293,167

2,338,650

Other benefits – key management

244,621

237,903

Total

compensation

5,939,821

12,055,604

28. Financial instruments

part

its

operations,

the

Company

carries

number

financial

instruments.

management's

opinion

that

the

Company is

not exposed

to significant

interest, currency

or credit risks

arising from

these financial

instruments except

otherwise

disclosed.

The

Company's

overall

risk

management

program

focuses

the

unpredictability

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

dollars

for

which

the

revenues,

expenses,

accounts

receivable and accounts payable and accrued liabilities

balances are subject to exchange rate fluctuations.

As at December 31, the Company's exposure

to foreign exchange risk for

amounts denominated in US dollars is

as follows:

2022

2021

Cash

2,871,062

1,714,670

Accounts receivable

13,537,912

14,465,011

Accounts payable and accrued liabilities

(1,713,717)

(1,023,999)

Total

14,695,257

15,155,682

Foreign currency

risk is

the risk

that the

fair value

or future

cash flows

of a

financial

instrument will

fluctuate because

changes in foreign exchange rates.

PyroGenesis Canada Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2022 and 2021

(In Canadian dollars)

Sensitivity analysis

At December 31, 2022, if the US Dollar changes by

% against the Canadian dollar with all other variables held constant,

the

impact

pre-tax

gain

loss

and

equity

for

the

year

ended

December 31,

2022

would

have

been

1,470,000

(December 31, 2021 - $

1,516,000

Credit concentration

During the year

ended December 31,

2022,

two

customers accounted

for

% (December 31,

2021 –

four

customers for

%) of revenues from operations.

2022

2021

% of total

Revenues

revenues

Revenues

revenues

Customer 1

5,598,653

7,308,191

Customer 2

4,314,225

7,019,953

Customer 3

—

6,417,373

Customer 4

—

3,551,900

Total

9,912,878

24,297,417

Three

customers accounted

for

% and

%, respectively

(December 31, 2021

–

one

customer for

%) of

trade

accounts receivable with

amounts owing to

the Company of

18,894,727

(2021 - $

12,063,636

), representing the

Company's

major

credit

risk

exposure.

Credit

concentration

determined

based

customers

representing

total

revenues and/or total accounts receivable.

Credit risk

Credit

risk

the

risk

that

one

party

financial

instrument

will

cause

financial

loss

for

the

other

party

failing

discharge an obligation.

The maximum credit

risk to which

the Company is

exposed as at

December 31, 2022

represents

the carrying amount

of cash

and cash equivalents,

accounts receivable

(except sales

tax receivable),

costs and

profits in

excess of billings on uncompleted contracts, deposits and

royalties receivable.

Cash and cash equivalents,

which only comprise guaranteed

investment certificates redeemable

on relatively short

notice

by the Company,

are 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

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 December

31, 2022 and

2021,

PyroGenesis Canada Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2022 and 2021

(In Canadian dollars)

no loss

allowance has been

recognized in

connection with these

deposits and

the maximum exposure

is the

carrying amount

of these deposits.

During the

years 2022

and 2021,

provisions for

expected credit

losses were

recorded, however,

amounts

of financial

assets have been written off. The accounts provisioned by

the loss are still subject to

enforcement activity in order to collect

the balances due.

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

is the

risk that

the fair

value or

future cash

flows of

a financial

instrument will

fluctuate because

of changes

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

December 31,

2022,

with

all

other

variables

held

constant,

the

Company’s

investments

would

have

increased

decreased respectively,

by approximately $

1,841,484

(December 31, 2021 - $

4,042,000

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 as

at December 31, 2022:

Total

Carrying

contractual

Less than

value

amount

one year

2-3 years

4-5 years

Over 5 years

Bank indebtedness

991,902

—

Accounts payable and accrued

liabilities

9,620,591

—

Term

loans

389,987

520,444

59,917

190,587

180,000

89,940

Balance due on business

combination

3,907,775

4,137,820

2,177,800

1,960,020

—

Lease liabilities

5,533,694

6,745,329

2,984,243

1,165,281

703,816

1,891,989

20,443,949

22,016,086

15,834,453

3,315,888

883,816

1,981,929

Accounts payable and accrued liabilities exclude amounts

which are not financial liabilities.

PyroGenesis Canada Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2022 and 2021

(In Canadian dollars)

The following table summarizes the contractual amounts payable and maturities of financial liabilities and other

liabilities as

at December 31, 2021:

Total

Carrying

contractual

Less than

value

amount

one year

2-3 years

4-5 years

Over 5 years

Accounts payable and accrued

liabilities

9,586,423

—

Term

loans

190,905

263,232

85,731

67,561

62,823

47,117

Balance due on business

combination

3,952,203

4,355,600

2,395,580

1,960,020

—

Lease liabilities

5,323,965

6,614,192

3,220,750

710,493

561,628

2,121,321

19,053,496

20,819,447

15,288,484

2,738,074

624,451

2,168,438

Accounts payable and accrued liabilities exclude amounts

which are not financial liabilities.

The Company's

Canadian subsidiary

benefits from

a line

of credit

of $

500,000

, and

the Italian

subsidiary benefits

from a

400,000

Euros ($

576,000

) line of credit. At December 31, 2022, $

498,200

was drawn on the Canadian facility and

341,473

Euros ($

493,702

) 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

% 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.

There

are

three

levels

fair

value

that

reflect

the

significance

inputs

used

determining

fair

values

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

and cash

equivalents, 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

11).

The fair value

of the term

loans and the

balance due on business

combination as at December 31,

2022 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.

PyroGenesis Canada Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2022 and 2021

(In Canadian dollars)

29.

Contingent liabilities

The

Company

currently

party

various

legal

proceedings.

management

believes

that

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

these

proceedings

assessed

and

the

estimates

are

revised,

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

% 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,

amount is expected to be repaid.

30.

Capital management

The Company’s objectives in managing capital are:

ensure sufficient liquidity to support its current

operations and execute its business plan; and

provide adequate return to the shareholders

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

order to

meet its

financial obligations.

As at

December 31, 2022,

the Company’s

working capital

was $

1,650,709

(2021 -

14,006,785

The management of capital includes shareholders’ equity for a total amount of $

16,868,927

(2021 - $

40,768,754

) and term

loans of $

389,987

(2021 - $

190,905

), as well as cash and cash

equivalents amounting to $

3,445,649

(2021 - $

12,202,513

There were

no significant

changes in

the Company’s

approach during

the current

and preceding

fiscal year,

however,

order to

maintain or

adjust capital

structure, the

Company may

issue new

shares, sell

portions of

its strategic

investment

and periodically purchase its own shares on the open

market.

31.

Income taxes

a) Income tax expenses is comprised of the following:

2022

2021

Current tax

Current year

118,378

(155,714)

Deferred tax

Origination and reversal of temporary differences

(6,219,309)

(5,095,595)

Change in unrecognized deductible temporary differences

6,176,915

4,511,349

(42,394)

(584,246)

Income tax expense (recovery)

75,984

(739,960)

PyroGenesis Canada Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2022 and 2021

(In Canadian dollars)

b) Reconciliation of effective tax rate

2022

2021

Loss before income taxes

(32,091,043)

(39,171,899)

Income tax rates

26.5

Income tax recovery at the combined basic Federal and

Provincial tax rates

(8,504,126)

(10,380,553)

Permanent differences

2,165,385

5,079,805

Tax

rate changes

(826)

8,334

Prior year adjustment

115,118

60,533

Change in unrecognized deductible temporary differences

6,176,915

4,511,349

Other

123,518

(19,428)

Income tax expense (recovery)

75,984

(739,960)

The applicable statutory tax

rates are

26.5

% in 2022

and

26.5

% in 2021.

The Company's applicable tax

rate is the

Canadian

combined rates applicable in the jurisdiction in which the

Company operates.

c) Deferred tax assets and liabilities

Recognized deferred tax assets and liabilities:

As at December 31, 2022 and 2021, recognized deferred

tax assets and liabilities are attributable to the following:

Assets

Liabilities

Net

2022

2021

2022

2021

2022

2021

Non-capital losses

carried forward

772,343

1,705,073

—

772,343

1,705,073

Strategic investments

—

(656,507)

—

(656,507)

Royalties receivable

—

(373,063)

(333,543)

(373,063)

(333,543)

Property and equipment

—

(155,833)

(147,127)

(155,833)

(147,127)

Intangibles

—

(243,447)

(468,167)

(243,447)

(468,167)

Deferred income

—

(21,000)

—

(21,000)

Right-of-use assets net of liabilities

—

(121,123)

—

(121,123)

Tax

assets (liabilities)

772,343

1,705,073

(772,343)

(1,747,467)

—

(42,394)

Set off of tax

(772,343)

(1,705,073)

772,343

1,705,073

—

Net tax assets (liabilities)

—

(42,394)

—

(42,394)

PyroGenesis Canada Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2022 and 2021

(In Canadian dollars)

Deferred taxes from temporary differences and unused

tax losses and tax credits are summarized as follows:

Recognized

January 1,

on business

in profit or

December

January

in profit or

December

2021

combination

loss

31, 2021

1, 2022

loss

31, 2022

Non-capital

losses carried

forward

4,982,328

642,149

(3,919,404)

1,705,073

(932,730)

772,343

Strategic

investments

(4,919,499)

—

4,262,992

(656,507)

656,507

—

Investment tax

credits

(273,854)

—

273,854

—

Royalties

receivable

(280,900)

—

(52,643)

(333,543)

(39,520)

(373,063)

Property and

equipment

(25,273)

(2,840)

(119,014)

(147,127)

(8,706)

(155,833)

Intangibles

—

(559,949)

91,782

(468,167)

224,720

(243,447)

Deferred income

—

(21,000)

21,000

—

Right-of-use

assets net of

liabilities

(188,802)

—

67,679

(121,123)

121,123

—

(706,000)

79,360

584,246

(42,394)

42,394

—

PyroGenesis Canada Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2022 and 2021

(In Canadian dollars)

As at December 31, 2022 and 2021, the amounts and expiry dates of tax attributes and temporary differences for which no

deferred tax assets were recognized are as follows:

December 31, 2022

December 31, 2021

Federal

Provincial

Federal

Provincial

Research and development expenses,

without time limitation:

11,917,963

12,150,617

11,399,104

11,023,013

Federal research and development

investment tax credits:

2029

299,881

—

299,881

—

2030

89,879

—

89,879

—

2031

223,759

—

223,759

—

2032

186,031

—

186,031

—

2033

105,216

—

105,216

—

2034

212,609

—

212,609

—

2035

488,555

—

488,555

—

2036

359,594

—

359,594

—

2037

253,885

—

253,885

—

2038

186,015

—

186,015

—

2039

340,728

—

465,535

—

2040

101,562

—

101,562

—

2041

167,461

—

359,115

—

2042

256,417

—

3,271,592

—

3,331,636

—

December 31, 2022

December 31, 2021

Federal

Provincial

Italy

Federal

Provincial

Italy

Tax

losses carried

forward:

2032

2,866,759

—

628,948

—

2033

2,047,643

—

2,047,643

1,490,639

—

2034

589,007

—

589,007

—

2035

703,664

416,827

—

703,664

416,827

—

2036

3,579,827

3,440,527

—

3,579,827

3,440,527

—

2037

1,577,876

1,568,739

—

1,577,876

1,568,739

—

2038

5,716,536

5,650,620

—

5,716,536

5,650,620

—

2039

4,772,060

4,079,919

—

4,163,315

4,079,919

—

2040

533,485

—

2041

3,818,898

3,773,941

—

2,710,255

2,659,255

—

2042

16,135,868

16,140,505

—

Indefinite

—

908,073

—

815,620

42,341,623

41,107,972

908,073

21,717,071

19,895,533

815,620

PyroGenesis Canada Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2022 and 2021

(In Canadian dollars)

December 31, 2022

December 31, 2021

Federal

Provincial

Federal

Provincial

Other deductible temporary differences,

Without time limitation:

Right-of-use assets net of liabilities

687,896

—

Strategic investments

3,068,378

—

Financing costs

677,789

1,100,504

Intangible assets

3,460,822

3,194,890

3,712,181

3,431,133

Capital losses

—

464,768

7,894,885

7,628,953

5,277,453

4,996,405

Deferred tax assets and

investment tax credits have

not been recognized in respect

to these items because

it is uncertain

that future taxable

profit will be

available against which

the Company can

utilise the benefits

therefrom. The generation

future taxable profit depends on the successful commercialisation

of the Company’s products and technologies.

32.

Segment information

The Company operates

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

total revenues by geography:

2022

2021

Brazil

162,797

1,475,608

Canada

11,933,904

7,383,884

England

—

634

Germany

11,606

3,867

India

91,699

698,837

Israel

27,360

126,246

Italy

1,309,478

2,514,665

Mexico

371,668

920,818

Netherlands

112,634

—

Poland

47,591

60,406

Saudi Arabia

1,511,142

7,019,953

South Africa

29,997

—

Spain

22,049

1,178

United States of America

2,661,071

10,567,741

Vietnam

720,507

294,513

19,013,503

31,068,350

Revenue by product line and revenues recognized by

revenue recognition method are presented in note 7.

PyroGenesis Canada Inc.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2022 and 2021

(In Canadian dollars)

The following is a summary of selected asset categories

by geographic market, at December 31:

2022

2021

Canada

India

Total

Canada

India

Total

Property and equipment

3,372,356

21,096

3,393,452

3,685,974

26,963

3,712,937

Right-of-use assets

4,818,744

—

4,818,744

5,765,993

—

5,765,993

Intangible assets

2,104,848

—

2,104,848

2,774,198

—

2,774,198

Goodwill

2,660,607

—

2,660,607

—

2,660,607

12,956,555

21,096

12,977,651

14,886,772

26,963

14,913,735

In 2022 and 2021, none of the selected asset categories

above were located in Italy.

33.

Subsequent event

On March 8, 2023, the Company announced it had 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

gross proceeds of

5,000,000

. Each unit

consists

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

1.25

until

March

2025. The

entire amount

is allocated

the common

shares as the fair value of the common shares on March

8, 2023 was $

1.38

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	6th grade Good

PyroGenesis Canada (PYRGF) 40-F2022 FY Annual report (Canada)

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