ADF Group Inc. - Management Reports 2023

MANAGEMENT DISCUSSION & ANALYSIS of the Financial Position and Operating Results Fiscal Year Ended January 31, 2023

Toronto Stock Exchange: TSX/ DRX

TABLE OF CONTENTS

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Financial Highlights .............................................................................................................................................................................................................................. 1	Financial Highlights .............................................................................................................................................................................................................................. 1
Management’s Discussion and Analysis of the Financial Position and Operating Results .............................................................................................................. 2
1.	General....................................................................................................................................................................................................................................... 2
2.	Forward-Looking Statements ................................................................................................................................................................................................... 2
3.	General Overview ...................................................................................................................................................................................................................... 2
4.	Commercial Positioning ............................................................................................................................................................................................................ 2
5.	Market Trends ........................................................................................................................................................................................................................... 2
6.	Significant Events of the Fiscal Year ......................................................................................................................................................................................... 3
7.	Significant Events That Occurred Since January 31, 2023 ...................................................................................................................................................... 4
8.	Conflict In Ukraine ..................................................................................................................................................................................................................... 4
9.	Exchange Rate ........................................................................................................................................................................................................................... 4
10.	Non-GAAP Financial Measures and Other Financial Measures .............................................................................................................................................. 4
11.	Selected Annual Financial Information .................................................................................................................................................................................... 6
12.	Analysis of Operating Results for the Fiscal Year Ended January 31, 2023 ............................................................................................................................ 6
13.	Comments on Quarterly Results .............................................................................................................................................................................................. 9
14.	Cash Flows and Financial Position .......................................................................................................................................................................................... 10
15.	Capital Stock ............................................................................................................................................................................................................................ 12
16.	Stock Option Plan .................................................................................................................................................................................................................... 13
17.	Share-Based Compensation .................................................................................................................................................................................................... 13
18.	Dividends ................................................................................................................................................................................................................................. 14
19.	Order Backlog .......................................................................................................................................................................................................................... 14
20.	Financial Position ..................................................................................................................................................................................................................... 15
21.	Current Economic Environment ............................................................................................................................................................................................. 15
22.	Related Party Transactions ..................................................................................................................................................................................................... 16
23.	External Factors to Which the Corporation’s Performance is Exposed ............................................................................................................................... 16
24.	Financial Instruments .............................................................................................................................................................................................................. 17
25.	Assessment of the Effectiveness of Disclosure Controls and Procedures, and Internal Control Over Financial Reporting .............................................. 17
26.	Disclosure and Insider Trading Policies .................................................................................................................................................................................. 18
27.	Significant Accounting Policies, Estimation Uncertainty and Critical Accounting Judgments ............................................................................................ 18
28.	Environnement ........................................................................................................................................................................................................................ 19
29.	Sustainable Development ....................................................................................................................................................................................................... 19
30.	Human Resources.................................................................................................................................................................................................................... 19
31.	Subsequent Events .................................................................................................................................................................................................................. 19
32.	Outlook .................................................................................................................................................................................................................................... 20
33.	Additional Information ............................................................................................................................................................................................................ 20

Forward-Looking Statements

Management of ADF Group Inc. wishes to inform the reader that this document contains forward-looking statements within the meaning of applicable securities laws, in which Management’s expectations regarding ADF Group Inc.’s future performance may be discussed. These forward-looking statements include information concerning ADF Group’s probable or foreseeable future operating results and financial position, and involve certain risks and uncertainties with regard to their future realization. These forward-looking statements are based on currently available data regarding competition, financial position, economic conditions and operating plans.

The principal risks and uncertainties that could affect ADF Group Inc.’s results, such that those results could differ materially from those expressed in any forwardlooking statements, are presented in Sections "Current Economic Environment" and "External Factors to Which the Corporation’s Performance is Exposed" of the Management’s Discussion and Analysis of the Financial Position and Operating Results (hereinafter "MD&A Report") for the fiscal year ended January 31, 2023.

MD&A REPORT FOR THE FISCAL YEAR ENDED JANUARY 31, 2023

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FINANCIAL HIGHLIGHTS

Fiscal Years ended January 31,

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Revenues (In millions $) Adjusted EBITDA [(1)] (In millions $ and % of revenues) Net Income (In millions $)
$280.7
$26.1 $14.9
$250.9
10.4%
$17.8 $9.6
$172.6 $16.3
6.3% $6.9
9.5%
2021 2022 2023 2021 2022 2023 2021 2022 2023
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Fiscal Year Ended January 31,	2023	2022	2021	2020	2019(3)
(In thousands of dollars, unless otherwise specified)	$	$	$	$	$
Revenues	250,890	280,740	172,593	179,710	135,073
Adjusted earnings beforeinterest, taxes, depreciation and amortization
(adjusted EBITDA)(1)	26,119	17,759	16,341	5,225	1,945
Income (loss) before income taxes expense	16,854	11,059	9,019	(1,986)	(2,393)
Net income (loss)	14,935	9,563	6,867	(2,132)	(374)
Basic and diluted earnings per share	0.46	0.29	0.21	(0.07)	(0.01)
Cash flows from (used in) operating activities	(2,612)	2,669	28,842	(894)	11,675
Net acquisition ofproperty, plant and equipment	11,463	21,477	1,460	360	3,063

As at January31,	2023	2022	2021	2020	2019(3)
(In thousands of dollars, unless otherwise specified)	$	$	$	$	$
Total assets	271,617	201,050	189,951	173,544	163,212
Shareholders’ equity	124,985	108,450	99,565	94,407	96,895
Cash and cash equivalents	7,193	7,130	17,806	3,983	4,164
Working capital(2)	65,599	38,713	38,548	29,313	31,848
Working capital ratio(2)	1.74 :1	1.74 :1	1.62 :1	1.58 :1	1.85 :1
Order backlog(2)	376,489	373,100	436,200	328,700	219,500

Notes

(1) Adjusted EBITDA is a non-GAAP (Generally Accepted Accounting Principles) financial measure. A non-GAAP financial measure is not a standardized financial measure under the financial reporting framework used to prepare the Corporation’s financial statements and might not be comparable to similar financial measures used by other issuers. Refer to the Section 10 “Non-GAAP Financial Measures and Other Financial Measures” of the MD&A Report for the Fiscal Year Ended January 31, 2023, for the definition of this metric and the reconciliation to the most comparable International Financial Reporting Standard (hereinafter "IFRS").

(2) Additional financial measures. Refer to the Section 10 “Non-GAAP Financial Measures and Other Financial Measures” of the MD&A Report for the Fiscal Year Ended January 31, 2023, for the definition of these metrics.

(3) The Corporation adopted IFRS 16 Leases on February 1[st] , 2019, using the amended retrospective method that does not require the restatement of financial statements from prior fiscal years. As a result, the comparative data prior to February 1[st] , 2019, in this table have not been adjusted.

ADF Group Inc.

MD&A Report for the Fiscal Year Ended January 31, 2023

MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE FINANCIAL POSITION AND OPERATING RESULTS

1. GENERAL

The purpose of this Management’s Discussion and Analysis of the Financial Position and Operating Results (hereinafter "MD&A Report") is to provide the reader with an overview of the changes in the financial position of ADF Group Inc. ("ADF", "ADF Group" or "the Corporation") between February 1, 2022, and January 31, 2023. It also compares the operating results and cash flows for the fiscal year ended January 31, 2023, to those of the previous fiscal year. This MD&A Report covers all major events that occurred during the 2023 fiscal year and between February 1, 2023, and April 12, 2023.

This MD&A Report should be read in conjunction with the Corporation’s consolidated financial statements and the notes thereto for the fiscal year ended January 31, 2023. The consolidated financial statements and the comparative information have been prepared in accordance with the International Financial Reporting Standard ("IFRS") as issued by the International Accounting Standards Board ("IASB"). The significant accounting policies applied by the Corporation in accordance with IFRS are presented in Note 2 to the consolidated financial statements for the fiscal year ended January 31, 2023.

The Corporation reports its results in Canadian dollars. All amounts in this MD&A Report are expressed in Canadian dollars, except where otherwise indicated.

2. FORWARD-LOOKING STATEMENTS

In order to provide shareholders and potential investors with additional information regarding ADF, in particular Management’s assessment of future plans and operations, certain statements in this MD&A Report are forward-looking statements subject to risks, uncertainties and other important factors that could cause the Corporation’s actual performance to differ from those expressed in or implied by these forward-looking statements.

Such factors include, but are not limited to the impact of economic conditions in Canada and the United States; industry conditions including amendments in laws and regulations; increased competition; potential shortfall of qualified personnel or managers; availability and fluctuations in commodity prices; foreign exchange or interest rate fluctuations; stock market volatility; and the impact of accounting policies issued by Canadian, U.S. and international standard setters. Some of these factors are further discussed under Section 23 "External Factors to Which the Corporation’s Performance is Exposed" in this MD&A Report. It should be noted that the list of factors that may affect future growth, results and performance, provided in this MD&A Report, is not exhaustive. The reader should not place undue reliance on forward-looking statements.

The expectations expressed by the forward-looking statements are based on information available to the Corporation on the date such statements were made. However, there can be no assurance that such estimates will prove to be correct. All subsequent forward-looking statements made, whether written or verbally, by the Corporation or persons acting on its behalf, are expressly qualified in their entirety by the caveats referred to above. Unless otherwise required by applicable securities legislation, the Corporation expressly disclaims any intention, and assumes no obligation, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

3. GENERAL OVERVIEW

From a blacksmith shop founded in 1956, ADF Group has become over the years a North American leader in the design and engineering of connections, fabrication, including industrial coating, and installation of complex steel structures, heavy steel built-ups, as well as miscellaneous and architectural metalwork. The Corporation’s products and services are intended for the following five principal segments of the non-residential construction industry: office towers and high-rises, commercial and recreational buildings, airport facilities, industrial complexes and transport infrastructure. The Corporation uses the latest technologies in its industry and operates two state-of-the-art fabrication plants and two cuttingedge paint shops. ADF Group’s complex located in Canada houses the Corporation’s head office, the 58,530-square-metre (630,000-square-foot) fabrication plant, which includes the 3,900 square-meter (42,000 square feet) paint shop. ADF’s complex in the United-States is home to the 9,290-square-metre (100,000 square feet) fabrication plant, the 60-acre pre-assembly yard and the 4,460-square-meter (48,000 square feet) dual-purpose building, adjacent to the fabrication plant, housing a 2,323-square-meter (25,000 square feet) paint and blast zone, and a 2,137square-meter (23,000 square feet) area for preparation and detailing work.

A pioneer in the development and implementation of innovative solutions, the Corporation is recognized for its engineering expertise, its project management, its important fabrication capacity and its skills in two specialized market niches: the fabrication of steel superstructures with a high level of architectural and geometric complexity, and projects subject to fast-track schedules. ADF Group’s commitment to deliver every project in accordance with the industry’s highest quality standards constitutes a core aspect of the Corporation’s mission.

4. COMMERCIAL POSITIONING

ADF Group serves a diversified client base in the non-residential construction market in Canada and the United States, including general contractors, project owners, engineering firms and project architects, structural steel erectors, and other steel structure fabricators.

5. MARKET TRENDS

The non-residential construction industry includes the products and services related to the construction of commercial, institutional and industrial buildings, such as office towers, commercial buildings, hotels, sports complexes, museums, recreational complexes, as well as manufacturing plants and other industrial facilities. This sector also encompasses public works, including the construction and renovation of infrastructure and buildings, notably, hydroelectric dams, airports, bridges and overpasses. It should be noted that the demand in this sector is related to business cycles. Generally, there are more private projects in a bull cycle, whereas government projects take over in a bear cycle.

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ADF Group Inc.

MD&A Report for the Fiscal Year Ended January 31, 2023

According to Management, approximately half of the non-residential projects use structural steel as a structural component, while the other half primarily uses concrete. Generally, structural steel accounts for about 10% to 20% of a project’s total cost, depending on the project’s nature. Structural steel offers a number of advantages when compared to other materials, which explains its increasing use in the construction of complex structures. These advantages include durability, speed of installation, greater flexibility in fast-track projects, lower installation and maintenance costs, as well as its high strength/weight ratio as a result of improved alloys.

Generally, there are more complex steel structure projects in the United States than in Canada, which can result in a certain dependence of the Corporation on the U.S. market.

As at the date of this MD&A Report, there are still several elements of uncertainty that complicate the analysis of the trends in the markets served by ADF. Central banks, both in Canada and the United States, are analyzing their monetary policies, and these choices will dictate future trends in interest rates and inflation.

The latest ABI indexes (Architectural Billing Index ), which give the trend of ongoing projects in U.S. architectural firms and which is a good indicator of future projects, have been declining since the beginning of 2023. However, architectural firms' order books are healthy and will provide adequate levels of design activity in return for new projects entering the pipeline if this weakness persists.

However, and for our Corporation more specifically, the level of bids on projects remains high. We do not see a slowdown at this time and we are consolidating our order backlog for the second half of the fiscal year that began on February 1[st] , and for the next one. Our internal improvements, including the commissioning of a brand-new robotic fabrication line and increased level of automation of fabrication processes at our complex in Terrebonne, Quebec, allow us to offset the cost increase in inputs, including labor, and thus remain competitive in our respective markets.

We will be following upcoming central bank announcements and inflation trends with interest, as well as their impact on our markets, and will be able to provide updates in our future financial reports.

6. SIGNIFICANT EVENTS OF THE FISCAL YEAR

6.1 Dividends

On April 11, 2022, the Corporation’s Board of Directors approved a semi-annual dividend of $0.01 per share, which was paid on May 17, 2022, to Shareholders of Record as at April 29, 2022.

On September 7, 2022, the Corporation’s Board of Directors approved a semi-annual dividend of $0.01 per share, which was paid on October 18, 2022, to Shareholders of Record as at September 29, 2022.

6.2 New Financing

On January 14, 2022, and January 18, 2022, the Corporation obtained two bank loans from Investissement Québec ("IQ"), totaling $20.0 million, for the financing of its capital expenditure program previously announced by the Corporation, and initiated during the fiscal year ended January 31, 2022. These two loans were fully drawn during the fiscal year ended January 31, 2023, namely $15.0 million for the 3-month period ended April 30, 2022 and $5.0 million for the 3-month period ended January 31, 2023.

6.3 Forgiveness of a COVID-19- Related Loan

In May 2022, the Corporation obtained the forgiveness of an initial $1.3 million (US$1.0 million) loan issued to one of its U.S. subsidiaries. This forgiveness resulted in the recognition of a government grant, mostly against salary expenses in the second quarter ended July 31, 2022 (see Section 14.3 "Financing Activities" for more details).

6.4 New Contracts

On June 7, 2022, the Corporation announced the signing of new major contracts, all in the automotive sector in the U.S. Midwest region, with a total value of $90.0 million. These new orders consist in the fabrication, including the supply of raw materials (steel) and industrial coating, as well as the design and engineering of connections, and the delivery of steel structures used in the construction of new, large surface industrial facilities. Fabrication work on these new projects characterized by high tonnage and tight completion schedules, are carried out at ADF's Terrebonne plant.

On December 14, 2022, the Corporation announced the signing of new major contracts in the industrial, transportation and public infrastructure sectors worth a total of $228.0 million. All these new orders consist in the design and engineering of connections, the fabrication, which encompasses the supply of raw materials (steel) and industrial coating, and the delivery of the various steel structures and heavy steel components, as part of new construction projects in the United States and in the greater Montreal area. The fabrication work of these new contracts, all characterized by a very high tonnage and tight schedules, should extend until the end of the 2023 calendar year. Both of ADF's fabrication plants and paint shops in Terrebonne, Quebec and in Great Falls, Montana will be called upon to carry out these major contracts.

On December 14, 2022, Management also announced that it had removed from its order backlog a major project valued at $131.0 million in the southeastern United States concluded in June 2019. The steel erection work of the new steel structure of a commercial multi-storey building was scheduled to begin in early 2020. However, due to the pandemic, this project has been delayed. Although this project is still ongoing and the owners have reiterated their commitment and confidence in ADF, the Corporation’s management considers its decision prudent. As soon as the owners officially confirm the restart of their project, ADF’s management will update and reintegrate this project into its order backlog when the time comes. It should be noted that very little costs were incurred by ADF for this project, and that this withdrawal from the order backlog therefore had no impact on the Corporation’s financial results.

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ADF Group Inc.

MD&A Report for the Fiscal Year Ended January 31, 2023

On January 6, 2023, the Corporation announced the addition of $30.0 million worth of work to the scope of work on one of the fabrication contracts in the U.S. industrial sector already awarded. Following a request from the client, these additions made to ADF's initial contract and are part of the project’s original completion schedule, which is expected to begin shortly and extend until the end of 2023. This additional work will be carried out by the ADF’s team in Terrebonne.

6.5 Interest Rate Options

On October 18, 2022, the Corporation entered into interest rate options for a nominal value of $10.0 million to hedge interest rate fluctuations greater than 4.5% (based on one-month CDOR) on its long-term floating rate debt, denominated in Canadian dollars, until October 23, 2025.

7. SIGNIFICANT EVENTS THAT OCCURRED SINCE JANUARY 31, 2023

7.1 Dividend

On April 12, 2023, the Corporation’s Board of Directors approved a semi-annual dividend of $0.01 per share, payable on May 17, 2023, to Shareholders of Record as at April 28, 2023.

7.2 New Financing Agreement

On February 10, 2023, the Corporation reached an agreement with its financial institution to increase its Canadian operating credit facility from $30.0 million to $40.0 million (refer to Section 31.2 "New Financing Agreement" hereinafter).

8. CONFLICT IN UKRAINE

For the fiscal year ended January 31, 2023, and as of the date hereof, the conflict in Ukraine has not had a direct impact on the Corporation’s operations or financial results, other than the impact that this conflict may have on inflation. The Corporation does not have projects abroad and does not source materials from the regions affected by this conflict.

The Corporation will continue to monitor the situation but does not foresee any impact in the short-term, other than the potential impact on inflation.

9. EXCHANGE RATE

The Corporation is subject to foreign currency fluctuations from the translation of revenues, expenses, assets and liabilities of its foreign operations and from commercial transactions denominated in foreign currencies. Average monthly rates (considered a reasonable approximation to actual rates at the date of transactions) are used to translate revenues (except for foreign exchange forward contracts) and expenses for the periods mentioned, while closing rates translate assets and liabilities.

During the fiscal year ended January 31, 2023, as well as during the previous fiscal year, the Corporation used the following exchange rates between the Canadian and U.S. dollars:

between the Canadian and U.S. dollars:
(CA$/US$)	Consolidated Statements of Income and Comprehensive Income		Consolidated Statements of Financial Position
	Quarterly	Cumulative
	2023 2022	2023 2022	2023 2022
First quarter (April 30) Second quarter (July 31) Third quarter (October 31) Fourthquarter(January 31)	1.2666 1.2585 1.2867 1.2293 1.3301 1.2571 1.3486 1.2661	1.2666 1.2585 1.2767 1.2439 1.2944 1.2482 1.3079 1.2527	1.2792 1.2285 1.2824 1.2462 1.3649 1.2384 1.3350 1.2719
Annual averages	1.3079 1.2527

The Canadian dollar has lost value against the U.S. currency on an annual average basis and the closing rate. Given recent decisions by global central banks, including those of Canada and the United States, to soften inflation, the U.S. currency has benefited from its role as a "safe haven" currency and has appreciated against all major currencies, including the Canadian dollar.

Although the Corporation enters, from time to time and in accordance with its internal policy, into foreign exchange contracts to hedge the foreign exchange risk, these exchange rate variations have had a favorable impact of $4.1 million on gross margin for the fiscal year ended January 31, 2023.

10. NON-GAAP FINANCIAL MEASURES AND OTHER FINANCIAL MEASURES

This MD&A Report is based on results prepared in accordance with IFRS and includes non-GAAP financial measures and other financial measures. Non-GAAP financial measures provide useful additional information, but do not have standardized meanings established in accordance with GAAP. Readers should be careful not to confuse or substitute them with performance measures prepared in accordance with GAAP. In addition, readers should avoid comparing these non-GAAP financial measures to similarly titled measures provided or used by other issuers. When such indicators are presented, they are defined, and the reader is notified.

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ADF Group Inc.

MD&A Report for the Fiscal Year Ended January 31, 2023

The Corporation uses the following indicators to measure its operating performance and the achievement of objectives:


Fiscal Years Ended January31,	2023	2022
Non-GAAP financial measures Adjusted earnings before interest, tax, depreciation and amortization(Adjusted EBITDA) (in thousands of dollars) Adjusted EBITDA margin(as a percentage of revenues) Supplementary financial measures Gross margin(as apercentage of revenues)	$26,119 10.4% 14.2%	$17,759 6.3% 8.8%


As at January 31,	2023	2022
Supplementary financial measures Working capital(in thousands of dollars) Working capital ratio Order backlog (in thousands of dollars)	$65,599 1.74:1 $376,489	$38,713 1.74 :1 $373,100

10.1 Adjusted EBITDA and Adjusted EBITDA Margin

The adjusted EBITDA and the adjusted EBITDA margin show the extent to which the Corporation generates profits from operations, without considering the following items:

Net financial expenses;
Income tax expense;
Foreign exchange (gain) losses, and
Depreciation and amortization of property, plant and equipment, intangible assets and right-of-use assets.

Net income is reconciled with adjusted EBITDA in the table below:


Fiscal Years Ended January 31,	2023	2022
(In thousands of dollars) Net income	$ 14,935	$ 9,563
Income tax expense Net financial expenses Amortization Foreign exchange loss	1,919 1,999 5,323 1,943	1,496 1,174 5,054 472
Adjusted EBITDA — As a % of revenues(1)	26,119 10.4%	17,759 6.3%

(1) The adjusted EBITDA margin results from dividing adjusted EBITDA by revenues.

Adjusted EBITDA for the fiscal year ended January 31, 2023, increased by $8.4 million, in line with the increase in gross margin for the fiscal year. Adjusted EBITDA for this fiscal year benefited from the forgiveness of an initial $1.3 million (US$1.0 million) loan issued to a U.S. subsidiary (see Section 14.3 "Financing Activities" of this MD&A Report).

Adjusted EBITDA for the fiscal year ended January 31, 2022, benefited from COVID-19-related grants from the Canadian government totaling $1.9 million and a $2.1 million gain on disposal of property, plant and equipment.

10.2 Gross Margin as a Percentage of Revenues

The gross margin as a percentage of revenue indicator is used by the Corporation to assess the level of profitability for a given period based on the project mix for that same period. This indicator is subject to fluctuations in project prices and also in the operational efficiency of the Corporation. The indicator of gross margin as a percentage of revenues results from dividing gross margin by revenues.

In general, the Corporation aims to improve this indicator but recognizes that its fluctuation depends on the type of project signed and several other factors, including the economic context.

10.3 Working Capital and Working Capital Ratio

The working capital indicator is used by the Corporation to assess whether current assets are sufficient to meet current liabilities. Working capital is equal to current assets, less current liabilities, whereas the working capital ratio is calculated by dividing current assets by current liabilities.

Generally, Management’s goal is to achieve a working capital ratio of at least 2.0:1. Although this ratio of 1.74:1 was below the goal for the fiscal years ended January 31, 2023 and 2022, the Corporation establishes the achievement of this goal on the pursuit of its strategy focusing on the execution of contracts generating positive cash flows throughout their execution.

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ADF Group Inc.

MD&A Report for the Fiscal Year Ended January 31, 2023

However, the Corporation also recognizes that the growth of its order backlog adds some pressure on working capital, thus explaining the level of this ratio in relation to the Corporation’s long-term objective. It should be noted that the drawing up and/or revision of this corporate goal depends on a number of factors, such as the economic context and development projects that might materialize.

10.4 Order Backlog

The order backlog is a measure used by the Corporation to assess future revenue levels. The order backlog includes firm orders obtained by the Corporation, either through a firm contract or a formal notice to proceed confirmed by the client. The order backlog disclosed by the Corporation therefore includes the portion of confirmed contracts that have not been put into production.

In general, the Corporation aims to improve this indicator but recognizes that its fluctuation is dependent on several factors, including the economic context.

11. SELECTED ANNUAL FINANCIAL INFORMATION

SELECTED ANNUAL FINANCIAL INFORMATION

Fiscal YearsEndedJanuary 31,	2023	2022 2021
(In thousands of dollars and in dollars per share) Revenues Net income — Basic and diluted per share Total assets Non-current liabilities Annual dividendper share	$ 250,890 14,935 0.46 271,617 57,851 0.02	$ $ 280,740 172,593 9,563 6,867 0.29 0.21 201,050 189,951 40,211 28,338 0.02 0.02

Revenues for the fiscal year ended January 31, 2023, totalled $250.9 million, posting a decrease of $29.9 million over the previous fiscal year. Revenues for the fiscal year ended January 31, 2022, benefited from high-volume, accelerated projects with lower margins, thus explaining the increase in revenues compared to those of the fiscal year ended January 31, 2021, and the subsequent decrease for the fiscal year ended January 31, 2023.

Net income increased by $5.4 million during the fiscal year ended January 31, 2023, compared with fiscal 2022, in line with improved gross margin and adjusted EBITDA.

Net income for the fiscal year ended January 31, 2022, also increased compared to the previous fiscal year. As previously explained, although revenues for the fiscal year ended January 31, 2022 were higher than those for the fiscal year ended January 31, 2023, accelerated projects with lower margins did not generate the level of gross margins and net income as those for the fiscal year ended January 31, 2023.

Total assets for the fiscal year ended January 31, 2023, increased by $70.6 million compared with the previous fiscal year mainly due to the increase in the level of activity that generated higher accounts receivable and contract assets. In addition, the completion of our investment program to robotize and further automate our fabrication activities at our plant located in Terrebonne, Quebec, also resulted in an increase in property, plant and equipment and total assets.

12. ANALYSIS OF OPERATING RESULTS FOR THE FISCAL YEAR ENDED JANUARY 31, 2023

During the 12 months of operations between February 1[st] , 2022 and January 31, 2023, the Corporation pursued its activities consisting of the design and engineering of connections, fabrication, including industrial coating, and installation of complex steel structures and heavy steel builtups, in Canada and the United States.

12.1 Revenues and Gross Margin

Revenues and Gross Margin

Fiscal Years Ended January 31,	2023	2022	Annual Variations
(In thousands of dollars and in percentages) Revenues Cost ofgoods sold	$ 250,890 215,321	$ 280,740 256,046	$ % (29,850) (10.6) (40,725) (15.9)
Gross margin — As a % of revenues(1)	35,569 14.2%	24,694 8.8%	10,875 44.0 5.4

(1) Gross margin as a percentage of revenues is a supplementary financial measure. Refer to the Section 10 “Non-GAAP Financial Measures and Other Financial Measures” of this MD&A Report, for definition of this metric.

Revenues

Revenues during the fiscal year ended January 31, 2023, totalled $250.9 million, down by $29.9 million compared with the fiscal year ended January 31, 2022.

Revenues are recognized progressively based on costs incurred to date relative to the total estimated costs at completion on the various projects executed during the fiscal year.

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ADF Group Inc.

MD&A Report for the Fiscal Year Ended January 31, 2023

The decrease in revenues is mainly explained by high-volume projects with accelerated schedules which increased revenues during the fiscal year ended January 31, 2022, but which had much lower margins than normally generated by our Corporation. Moreover, the change in the foreign exchange rate during the 2023 fiscal year has in turn increased revenues by $15.2 million.

In terms of economic dependence, ADF has realized during the fiscal year ended January 31, 2023, 62% of its revenues from three (3) clients, for respective amounts of $46.1 million, $52.9 million, and $57.4 million all from the United States, each accounting for 10% or more of the Corporation’s revenues. Only one of these clients was among the clients representing more than 10% of revenues for the fiscal year ended January 31, 2022.

For the fiscal year ended January 31, 2022, the Corporation realized 86% of its revenues from three (3) clients, for respective amounts of $169.0 million and $40.6 million from the United States, and $31.4 million from Canada, each accounting for 10% or more of the Corporation’s revenues.

Although the Corporation attempts to limit the concentration of its revenues, given the nature of its activities and market, its revenues are likely to remain concentrated among a restricted number of clients in upcoming quarters.

Gross Margin

The gross margin, in dollar value, increased by $10.9 million during the 2023 fiscal year over the 2022 fiscal year. Gross margin, as a percentage of revenues,[ (1) ] went from 8.8% during the fiscal year ended January 31, 2022, to 14.2% during the fiscal year ended January 31, 2023.

This increase as a percentage of revenues is explained by the aforementioned projects executed during the fiscal year ended January 31, 2022 that had lower margins than normally generated by ADF. Margins for the fiscal year ended January 31, 2023 returned to more usual levels for our Corporation and also benefited from the commissioning of our new robotic fabrication line and automated equipment at our plant in Terrebonne, Quebec.

Gross margin for the fiscal year ended January 31, 2023, was also positively impacted by the forgiveness of an initial $1.3 million (US$1.0 million) loan in the quarter ended July 31, 2022, which was issued to a U.S. subsidiary. This loan forgiveness resulted in the recognition of a $1.2 million government grant as a reduction in expenses during the second quarter ended July 31, 2022.

The gross margin during the fiscal year ended January 31, 2022, benefited from Canada Emergency Wage Subsidy ("CEWS") totalling $1.6 million recorded during the first quarter ended April 30, 2021.

As described in Section 19 "Order Backlog", the fabrication hours are not only the Corporation’s core activity but are also its most value-added activity. To that effect, the revenues during the fiscal year ended January 31, 2023, were comprised of 29% of fabrication hours, compared with 32% for the fiscal year ended January 31, 2022.

Increases or decreases in raw material (mainly steel) prices do not generally have a material impact on the gross margin since in some of the contracts in hand, the clients supply the steel to be transformed by ADF, whereas protection clauses with regards to price changes are usually included in contracts where ADF supplies the steel. In addition, the natural hedge attributable to revenues and the purchase of raw materials in U.S. dollars mitigates the impact of exchange rate fluctuations.

12.2 Selling and Administrative Expenses

Selling and Administrative Expenses

Fiscal Years Ended January31,	2023	2022	Annual Variations
(In thousands of dollars and in percentage) Selling and administrative expenses	$ 14,773	$ 11,989	$ % 2,784 23.2

Selling and administrative expenses amounted to $14.8 million, which is $2.8 million more than in the 2022 fiscal year. During the fiscal year ended January 31, 2022, selling and administrative expenses included a $2.1 million gain on disposal of assets. Excluding this non-recurrent gain, selling and administrative expenses for the fiscal year ended January 31, 2023, were up by 4.9% compared with the previous fiscal year, which is mainly explained by the return to pre-pandemic level of activity, including an increase in travel expenses, in light of the easing of COVID-19 related measures.

12.3 Amortization

In accordance with IFRS standards, amortization expense is included in the cost of goods sold and selling and administrative expenses. However, Management considers it appropriate to continue separately commenting on amortization expense since it is considered a significant, although non-cash, component in the analysis of the Corporation’s profit margins.


Fiscal Years Ended January31,	2023	2022	Annual Variations
(In thousands of dollars and in percentage) Amortization	$ 5,323	$ 5,054	$ % 269 5.3

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ADF Group Inc.

MD&A Report for the Fiscal Year Ended January 31, 2023

The amortization expense for the 2023 fiscal year amounted to $5.3 million, which was $0.3 million higher than in fiscal 2022. This increase in amortization is mainly explained by the capital expenditure program aimed at robotization and increased automation of fabrication processes at ADF’s plant in Terrebonne, Quebec, which began during the fiscal year ended January 31, 2022, and which is now completed.

The amortization expenses breakdown is as follows:

	The amortization expenses breakdown is as follows:

12.4	Fiscal Years Ended January31,	2023	2022	Annual Variations
	(In thousands of dollars and in percentages) Amortization expense included in cost of goods sold Amortization expense included in selling and administrative expenses	$ 4,127 1,196	$ 3,730 1,324	$ % 397 10.6 (128) (9.7)
	Total amortization	5,323	5,054	269 5.3

	Net Financial Expenses

	Fiscal Years Ended January31,	2023	2022	Annual Variations
	(In thousands of dollars and in percentage) Net financial expenses	$ 1,999	$ 1,174	$ % 825 70.3

The increase in net financial expenses is explained by the impact of higher debt level and the increase in the interest rates on ADF's floating-rate loans, and the use of the Corporation’s credit facilities during the fiscal year ended January 31, 2023 (see Section 14 "Cash Flows and Financial Position" below).

12.5 Foreign Exchange Loss

Foreign Exchange Loss

Fiscal Years Ended January31,	2023	2022	Annual Variations
(In thousands of dollars and in percentage) Foreign exchange loss	$ 1,943	$ 472	$ % 1,471 Pos.

The foreign exchange loss recorded during the fiscal year ended January 31, 2023, included a $0.6 million foreign exchange gain on ongoing operations and a $2.5 million realized and not realized foreign exchange loss relating to the fair value of financial derivatives. During the 2023 fiscal year, a $2.2 million foreign exchange gain on the translation of foreign subsidiaries was recorded in Comprehensive Income.

The foreign exchange loss recorded during the fiscal year ended January 31, 2022, included a $0.1 million foreign exchange gain on ongoing operations and a $0.6 million realized and not realized foreign exchange loss relating to the fair value of financial derivatives. During the 2022 fiscal year, an immaterial foreign exchange loss on the translation of foreign subsidiaries was recorded in Comprehensive Income.

The Corporation is exposed to exchange rate fluctuations between the Canadian and U.S. dollars, since a significant portion of its revenues is generally recorded in U.S. dollars. For the fiscal year ended January 31, 2023, 85% of the Corporation’s revenues were recorded in U.S. dollars (86% during the fiscal year ended January 31, 2022). Considering the improvement in U.S. markets and its new plant in Great Falls, Montana, the Corporation expects that the percentage of its revenues in U.S. dollars will continue to be significant during the fiscal year 2024.

In line with its hedging policy, to manage its net risk between the future US-denominated cash inflows and outflows, the Corporation entered into foreign exchange forward contracts. As at January 31, 2023, the Corporation was party to foreign exchange forward contracts for the sale of US$44.6 million (US$24.5 million as at January 31, 2022) with maturities varying between three (3) months to twelve (12) months with rates between 1.2744 and 1.3544 (between 1.2578 and 1.2950 as at January 31, 2022).

Based on the balance as at January 31, 2023, of the Corporation’s financial instruments denominated in foreign currencies, a 10% fluctuation in the exchange rate between the Canadian and U.S. dollars (all other variables remaining constant), would have had no impact on net income before tax (no impart during the fiscal year ended January 31, 2022).

However, this information only applies to financial instruments based on year-end balances and does not take into account the impact of foreign exchange fluctuations on revenues and other miscellaneous expenses for a complete fiscal year.

12.6 Income Tax Expenses

Income Tax Expenses

Fiscal Years Ended January31,	2023	2022	Annual Variations
(In thousands of dollars and in percentage) Income tax expenses	$ 1,919	$ 1,496	$ % 423 28.3

The effective tax rates for the fiscal years ended January 31, 2023 and 2022, stood respectively at 11.4% and 13.5%, compared with the Corporation’s Canadian effective rate, which is 27%.

These effective rates come mainly from the mix of profits or losses of ADF’s different subsidiaries, according to their legal and tax jurisdictions.

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ADF Group Inc.

MD&A Report for the Fiscal Year Ended January 31, 2023

As at January 31, 2023, the Corporation had operating tax losses estimated at $25.4 million available in the United States ($31.8 million as at January 31, 2022) for carry forwards, for which no deferred tax benefit has been recorded in the Consolidated Statement of Income. The Corporation deems prudent not to recognize these new deferred tax assets related to its U.S. operations, since the time of the write-off of deferred tax assets in the fourth quarter ended January 31, 2018, which were also derived from tax losses of U.S. subsidiaries. The Corporation therefore recognizes these assets as its U.S. subsidiaries record taxable income.

In addition, these operating losses will also have a favorable impact on the Corporation’s future cash outflows, avoiding incurring tax payable up to the full amount of these tax attributes available in the various jurisdictions where the Corporation has contracts.

12.7 Net Income, Basic and Diluted Earnings per Share

Net Income, Basic and Diluted Earnings per Share

Fiscal Years Ended January31,	2023	2022
(In thousands of dollars and in percentage) Total net income Total basic and diluted earningsper share	$ 14,935 0.46	$ 9,563 0.29

The increase in net income during the fiscal year ended January 31, 2023, compared with the previous fiscal year, results from items previously explained in this section, and more specifically, the increase in gross margins.

13. COMMENTS ON QUARTERLY RESULTS

The trends observed in the analysis of quarterly results do not necessarily represent those of the future results of the Corporation. ADF’s fabrication activities are not, as such, subject to seasonal fluctuations. However, the non-residential construction market in which the Corporation is active goes through upward and downward cycles.

Overall, quarterly fluctuations in the following indicators result mainly from the changes in the revenue mix and accrued costs within different projects and for every given period, together with the lags between the recognition of costs and revenues, where appropriate, that could result from the use of estimates based on the percentage-of-completion method.

More specifically and considering the results for the last eight (8) quarters presented hereinafter, these quarterly fluctuations to another are mostly explained by the fabrication schedules of the different projects underway. Considering that revenues is recognized progressively based on costs incurred to date relative to the total estimated costs at completion on the various projects executed by the Corporation, revenue and operating results can differ significantly from quarter to quarter because of these execution schedules.

13.1 Results for the Last Eight (8) Quarters


Fiscal Years Ended January 31,	2023	2022
	4th Quarter (01.31.2023) 3rd Quarter (10.31.2022) 2nd Quarter (07.31.2022) 1stQuarter (04.30.2022)	4thQuarter (01.31.2022) 3rdQuarter (10.31.2021) 2ndQuarter (07.31.2021) 1stQuarter (04.30.2021)
(In thousands of dollars and in dollars per share) Revenues Gross margin — As a % of revenues(1) Adjusted EBITDA(2) — As a % of revenues(2) Income before income tax expense Net income — Basic and dilutedper share	$ $ $ $ 51,501 64,999 66,382 68,008 9,037 9,779 8,532 8,221 18% 15% 13% 12% 5,873 7,543 7,101 5,602 11% 12% 11% 8% 3,918 3,300 5,746 3,890 2,343 2,910 5,426 4,256 0.07 0.09 0.17 0.13	$ $ $ $ 46,993 110,189 73,171 50,387 5,081 6,202 5,639 7,772 11% 6% 8% 15% 3,875 4,698 3,074 6,112 8% 4% 4% 12% 1,954 3,247 1,362 4,496 882 2,788 1,498 4,395 0.03 0.09 0.05 0.13

(2) Adjusted EBITDA and adjusted EBITDA margin (as a percentage of revenues) are non-GAAP financial measures. A non-GAAP financial measure is not a standardized financial measure under the financial reporting framework used to prepare the Corporation’s financial statements and might not be comparable to similar financial measures used by other issuers. Refer to the Section 10 “Non-GAAP Financial Measures and Other Financial Measures” of this MD&A Report, for definition of these metrics and the reconciliation to the most comparable IFRS.

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ADF Group Inc.

MD&A Report for the Fiscal Year Ended January 31, 2023

13.2 Results for the Fourth Quarter Ended January 31, 2023

For the 3-month period ended January 31, 2023, the Corporation recorded revenues of $51.5 million, up by $4.5 million from the fourth quarter of the 2022 fiscal year. The change compared with this quarter is explained by the fabrication schedule, in line with the order backlog in hand. The decrease in revenues during the quarter ended January 31, 2023, compared with the previous quarter ended October 31, 2022, is explained by the completion of projects, while the fabrication of projects recently signed and announced in December 2022 and January 2023 has not yet started.

The gross margin, as a percentage of revenues[ (1)] stood at 17.5% for the fourth quarter ended January 31, 2023, compared with 10.8% for the corresponding quarter of fiscal 2022. The increase in margins between these two quarters is primarily explained the completion fast-track projects with lower margins during the last quarter of the fiscal year ended January 31, 2022 and the improvement in operational efficiency during the quarter ended January 31, 2023, following the commissioning of a new robotic fabrication line and a new increase in the automation level of our fabrication processes at ADF’s plant in Terrebonne, Quebec.

The Corporation recorded net income of $2.3 million during the last quarter of fiscal 2023, compared with net income of $0.9 million for the corresponding period of fiscal 2022, which had benefited, in addition to the items previously mentioned, from a favorable effective tax rate, in light of the breakdown of profits and losses according to the Corporation’s subsidiaries respective tax jurisdictions.

14. CASH FLOWS AND FINANCIAL POSITION

The Corporation has a sound financial position and is on a solid footing to address its financial needs. Taking into account its cash and cash equivalents position, its credit facilities and the level of planned capital spending, the Corporation does not expect any liquidity risk in a foreseeable future.

On January 31, 2023, cash and cash equivalents totalled $7.2 million, up slightly by $63,000 compared with January 31, 2022. In addition, as at January 31, 2023, and as at January 31, 2022, the Corporation did not draw from its credit facilities.

Management believes that these available funds are sufficient to support the growth and execution of its order backlog in hand on January 31, 2023, and to meet its financial commitments for the 2024 fiscal year.

Furthermore, the Corporation continually appraises the opportunities to use part of its liquidities to finance certain projects that could provide additional long-term competitive advantages. It also looks at opportunities for accelerated payments discounts negotiated with suppliers (see Section 32 "Outlook").

14.1 Operating Activities

The Corporation’s operating activities are summarized as follows:

Operating Activities The Corporation’s operating activities are summarized as follows:

Fiscal Years Ended January31,	2023	2022
(In thousands of dollars) Net income adjusted for non-cash items	$ 22,378	$ 16,607
Changes in non-cash operating working capital items: Accounts receivable Contract assets Inventories Prepaid expenses and other current assets Accounts payable and other current liabilities Contract liabilities Others	(48,647) (12,011) (550) 103 5,478 29,787 (10)	20,342 (21,099) (2,714) 2,382 (2,041) (9,366) (15)
	(25,850)	(12,511)
Income tax recovery (paid)	860	(1,427)
Cash flows(used in)from operatingactivities	(2,612)	2,669

Net income adjusted for non-cash items totalled $22.4 million during the 2023 fiscal year, which is $5.8 million more than during the 2022 fiscal year. This difference is for the most part explained by increase in net income.

During the 2023 fiscal year, changes in non-cash operating working capital items required cash of $25.9 million. This cash outflow is mostly explained by the increase in accounts receivable ($48.6 million) and in contract assets ($12.0 million), net of the increase in contract liabilities ($29.9 million). These variations are in line with the activity level as at January 31, 2023, compared with the same date a year ago, including the impact of new contracts announced in December 2022 and January 2023 totaling close to $260.0 million.

Overall, operating activities during the fiscal year ended January 31, 2022, generated cash flows of $2.7 million.

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ADF Group Inc.

MD&A Report for the Fiscal Year Ended January 31, 2023

14.2 Investing Activities

The Corporation’s investing activities are summarized as follows:

Investing Activities The Corporation’s investing activities are summarized as follows:

Fiscal Years Ended January31,	2023	2022
(In thousands of dollars) Acquisition of property, plant and equipment Acquisition of intangible assets Others	$ (11,463) (698) 80	$ (21,477) (589) 77
Cash flows used in investingactivities	(12,081)	(21,989)

During the 2023 fiscal year, $12.1 million in liquidities were used, mainly for the acquisition of property, plant and equipment ($11.5 million) and intangible assets ($0.7 million). As explained in previous MD&A reports, the vast majority of these amounts were for the capital investment program aimed at equipping ADF’s fabrication plant in Terrebonne, Quebec, with a brand-new robotic production line unique in North America, as well as new programmable and automated equipment.

The intangible assets for both fiscal years relate primarily to the in-house development and implementation of production, estimating and financial software.

The Corporation anticipates capital expenditure for fiscal year 2024 of $5.0 million, to keep the production equipment current at its plants in Terrebonne, Quebec and in Great Falls, Montana.

14.3 Financing Activities

The Corporation’s financing activities were as follows:

Financing Activities The Corporation’s financing activities were as follows:

Fiscal Years Ended January31,	2023	2022
(In thousands of dollars) Issuance of long-term debt Repayment of long-term debt Payment of lease liabilities Dividends paid Interest paid Others	$ 20,000 (2,216) (804) (653) (2,177) 7	$ 30,000 (17,878) (963) (653) (988) (316)
Cash flow from financingactivities	14,157	9,202

During fiscal year 2023, financing activities generated liquidities of $14.2 million, compared with a cash inflow of $9.2 million during the previous fiscal year.

During the fiscal year ended January 31, 2023 and 2022, the Corporation carried out the following transactions on its long-term debts:

a) New Financing from Investissement Québec

During the fiscal year ended January 31, 2022, being January 14, 2022, and January 18, 2022, the Corporation obtained from Investissement Québec ("IQ"), two authorized bank loans with progressive disbursements, totaling $20.0 million, to finance its equipment modernization and robotization program at its Terrebonne plant. These two loans, which progressive disbursements began in February 2022, are detailed as follows:

The first of these two bank loans, totaling $12.3 million, bear interest at IQ's annual prime rate plus 1.5% and benefit from a 24-month capital repayment moratorium at the end of which it will be repayable by 96 capital payments of $128,125 starting in March 2024 and ending in February 2032.

As at January 31, 2023, the Corporation had drawn $12.3 million on this loan, that is the entirety of the loan.

The second of these two bank loans, totaling $7.7 million benefit from a 36-month capital repayment moratorium, at the end of which it will be repayable by 83 capital installments of $91,667 beginning in March 2025 to end with a final capital payment of $91,639 in February 2032.

As at January 31, 2023, the Corporation had drawn an amount of $7.7 million on this loan, representing also the entirety of the loan. This loan, which bears no interest has been valued at fair value using an interest rate commonly used on the market. Therefore, interest at the implicit annual rate of 3.95% is calculated monthly. The difference of $1.6 million between this fair value of $6.1 million and the cash received in the amount of $7.7 million has been accounted for as a grant against the fixed assets to which it relates.

These two loans are guaranteed by a first rank movable hypothec in the amount total of $24.0 million on the universality of machinery and equipment, present and future. They are also subject to compliance with certain financial ratios.

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ADF Group Inc.

MD&A Report for the Fiscal Year Ended January 31, 2023

b) New Financing from Business Development Bank of Canada

The Corporation obtained in November 2021, from the Business Development Bank of Canada ("BDC"), a bank loan of $30.0 million, of which a portion in the amount of $16.2 million was used to fully repay an existing bank loan, and the other portion in the amount of $13.8 million was used to increase the Corporation's working capital. This new bank loan was fully drawn during the three-month period ended January 31, 2022.

c) Forgiveness of a COVID-19 Related Loan

On May 5, 2020, under the US Care Act and as part of a US Small Business Administration (SBA) paycheck protection program in response to COVID-19, the Corporation obtained a loan from a US bank totaling US$1.0 million. This loan was guaranteed by the SBA and was issued to a US subsidiary. According to the initial terms, the capital of this loan was to be repaid over two years. However, if certain conditions were met, this loan could be partially or totally forgiven.

In May 2022, this loan met the conditions to be forgiven in full. The cash received of $1.2 million (US$0.9 million) was therefore recognized as a government grant against expenses in the Consolidated Statement of Income for the fiscal year ended January 31, 2023.

During the fiscal years 2023 and 2022, the Corporation reimbursed a total of $3.0 million and $2.7 million respectively on its long-term debts and lease liabilities, in addition to the full repayment by January 31, 2022, of an existing bank loan of $16.2 million, as previously described in this section.

The Corporation also paid a total of $0.7 million in dividends to its Shareholders of Record, for each of the fiscal years 2023 and 2022.

14.4 Payment of Rents and Interest and Payment of Principal on Debt

The Corporation pays interest on its long-term debts, based on interest rates ranging between 0% and 8.2% as at January 31, 2023. The Corporation is currently making monthly principal repayments totalling less than $0.2 million on these debts. Other rent payments relating to lease liabilities and other long-term contracts are described in Section 14.6 "Contractual Obligations" below.

14.5 Debt Covenants

During the fiscal year ended January 31, 2023, the Corporation respected all covenants with its lenders, and still did at the date hereof. Management expects it will continue to respect its commitments during fiscal year 2024.

14.6 Contractual Obligations

Long-Term Debt

Long-term debt, excluding interests and deferred financing costs, is detailed as follows:

(In thousands of dollars)	$
Less than one year	2,290
2 to 3 years	7,380
4 to 5 years	8,608
And over	30,816
Total	49,094

Lease Obligations

The lease liabilities excluding interest, are detailed as follows:

(In thousands of dollars)	$
Less than one year	806
2 to 3 years	1,692
4 to 5 years	1,165
And over	671
Total	4,334

14.7 Commitments Related to Letters of Credit as at January 31, 2023

The Corporation held letters of credit, totalling US$3.4 million as at January 31, 2023 and 2022, corresponding to $4.3 million respectively for both fiscal years.

15. CAPITAL STOCK

Information on the outstanding shares:

CAPITAL STOCK Information on the outstanding shares:
	Subordinate Voting Shares	Multiple Voting Shares(1)	Total Outstanding Shares
(In thousands of dollars, and in number of shares) As at January 31, 2022 Issued on exercise of stock options	Number $ 18,292,099 52,119 5,000 7	Number $ 14,343,107 16,001 ― ―	Number $ 32,635,206 68,120 5,000 7
As at January 31, 2023	18,297,099 52,126	14,343,107 16,001	32,640,206 68,127

(1) These shares carry 10 votes per share.

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ADF Group Inc.

MD&A Report for the Fiscal Year Ended January 31, 2023

At the date hereof, the number of shares outstanding remained unchanged.

16. STOCK OPTION PLAN

The 5,000 options that were outstanding as at January 31, 2022, were exercised during the fiscal year ended January 31, 2023. Given that there were no options outstanding as at the date of this exercise, and at January 31, 2023, the Corporation terminated this Stock Option Plan.

17. SHARE-BASED COMPENSATION

17.1 Deferred Share Units ("DSU")

a) External Directors

This deferred compensation plan allows every external director, who wants to participate, to defer in whole or in part his/her director’s compensation (including fees and attendance fees), by electing to receive a percentage of this compensation in the form of DSU, which will be bought back in cash by the Corporation on the date the External Director ceases to be a director of the Corporation by reason of death, retirement or loss of function as director.

When a director elects to participate in this plan, the Corporation credits the account of the director for a number of units equal to the deferred compensation divided by the market value of the Subordinate Voting Shares, which is established using the average closing price during the five (5) trading days preceding the date of grant. DSU are not convertible into shares of the Corporation and do not result in a dilution to shareholders.

In addition, and independently to DSU that can be granted to External Directors for the purposes of deferring their directors’ compensation, the DSU plan also allows the Corporation’s Board of Directors to award, at its discretion, DSU to any external director, executive officer and key employee. If it sees fit, the Board of Directors can attach conditions related to time and/or to the Corporation’s performance to the vesting of these DSU.

When the Corporation pays dividends on Subordinate and Multiple Voting Shares, the accounts of the Directors, Executive Officers and key employees (see paragraph b) below) are credited for the amount in the form of additional units using the same basis of calculation previously described.

The DSU are re-evaluated at fair value at the end of each reporting period until the vesting date, using the market price of the Corporation’s subordinate voting shares.

During the fiscal year ended January 31, 2023, DSU compensation to External Directors recorded in the Consolidated Statement of Income amounted to an expense of $0.2 million (a $0.2 million expense during the fiscal year ended January 31, 2022), including the impact of the change in the market price of the Corporation’s share.

The fluctuation in DSU for External Directors was as follows:

change in the market price of the Corporation’s share. The fluctuation in DSU for External Directors was as follows:

Fiscal Years Ended January 31,	2023	2022
(In number of deferred share units) Outstanding, at the beginning of fiscal year Granted Distributed	Number 54,996 111,657 ―	Number 619,521 140,603 (705,128)
Outstandingand vested, at the end of fiscalyear	166,653	54,996

The carrying amount and the intrinsic value of the liabilities related to the External Directors’ vested DSU were $0.4 million as at January 31, 2023 (immaterial amounts as at January 31, 2022).

b) Executive Officers and Key Employees

As set forth in the DSU Plan, the Corporation may grant DSU, on a discretionary basis, Executive Officers and key employees. These DSU usually vest gradually over a 2 to 5-year period, at a rate of 20% to 50% per year. The vested DSU will be bought back in cash by the Corporation on the date its holder ceases to be an officer or employee of the Corporation by reason of death, retirement or loss of function as officer or employee.

The DSU are progressively expensed as incurred over the vesting period and their costs is determined using a valuation model based on the market price of the Corporation’s Subordinate Voting Shares. The DSU are re-evaluated at the fair value at the end of each reporting period until the vesting date, using the market price of the Corporation’s Subordinate Voting Shares.

The DSU compensation for Executive Officers and key employees, recorded in the Consolidated Statement of Income during the fiscal year ended January 31, 2023, amounted to an expense of $0.3 million (an immaterial expense during the fiscal year ended January 31, 2022), including the impact of the variation in the Corporation’s share price.

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ADF Group Inc.

MD&A Report for the Fiscal Year Ended January 31, 2023

The fluctuation in DSU for the Executive Officers and key employees was as follows:

The fluctuation in DSU for the Executive Officers and key employees was as follows:

Fiscal Years Ended January31,	2023	2022
(In number of deferred share units) Outstanding, at the beginning of fiscal year Granted	Number 330,570 47,697	Number 293,460 37,110
Outstanding,at the end of fiscalyear	378,267	330,570
Vested,at the end of fiscalyear	280,016	234,987

The carrying amount of the liabilities related to Executive Officers and key employees’ DSU, amounting to $0.7 million as at January 31, 2023 ($0.5 million as at January 31, 2022), and of which $0.6 million correspond to the intrinsic value of vested DSU as at January 31, 2023 ($0.4 million as at January 31, 2022).

17.2 Performance Share Units Plan ("PSU")

As part of its long-term compensation plan, the Corporation may issue PSU to its Executive Officers and key employees. PSU are not convertible into shares of the Corporation and do not result in dilution for shareholders. The acquired PSU are only redeemable in cash by the Corporation upon the expiration of three (3) years after their grant (the "PSU Settlement Date"), subject to the achievement of financial targets. PSU tranches whose vesting conditions have not been met on the applicable vesting date are canceled, without compensation.

PSU also entitle holders to receive additional units each time dividends are paid on the Corporation’s subordinate voting shares.

Compensation expense is recognized in the Consolidated Statement of Income over the vesting period and the counterpart is recognized in current liabilities in the Consolidated Statement of Financial Position. Changes in fair value between the grant date and the valuation date result in a change in liability and compensation expense.

The fair value of a PSU at any given date (for example, its grant date, vest date or PSU settlement date, etc.) is equal to the market value of the subordinate voting shares of the Corporation on that date, calculated using the average closing price subordinate voting shares of the Corporation on the Toronto Stock Exchange during the five (5) trading days immediately preceding that date.

During the fiscal year ended January 31, 2023, PSU compensation for Executive Officers and key employees amounted to a $0.2 million expense (immaterial expense for the fiscal year ended January 31, 2022) including the impact of the variation in the Corporation's share price.

Fluctuations in PSU for Executive Officers and key employees were as follows:

Fluctuations in PSU for Executive Officers and key employees were as follows:

Fiscal Years Ended January31,	2023	2022
(In number of performance share units) Outstanding, at the beginning of fiscal year Granted Distributed	Number 317,744 74,786 (174,152)	Number 346,248 93,549 (122,053)
Outstanding, at the end of fiscalyear	218,378	317,744
Vested, at the end of fiscal year	91,641	178,624

As at January 31, 2023, the carrying amount of the liabilities related the Executive Officers and key employees’ PSU, amounted to $0.4 million ($0.4 million as at January 31, 2022), including an amount of $0.2 million, which corresponds to the intrinsic value of the vested PSU as at January 31, 2023 ($0.3 million as at January 31, 2022).

18. DIVIDENDS

During the fiscal year ended January 31, 2023, two semi-annual dividends of $0.3 million each (or $0.01 per share), were recognized as distribution to the Shareholders of Record of the Corporation as at April 29, 2022, and September 29, 2022, respectively, totalling $0.7 million (or $0.02 per share), of which $0.4 million for Subordinate Voting Shares and $0.3 million for Multiple Voting Shares. These sums were paid on May 17, 2022 and October 18, 2022, respectively.

During the fiscal year ended January 31, 2022, two semi-annual dividends of $0.3 million each (or $0.01 per share), were recognized as distribution to the Shareholders of Record of the Corporation as at April 30, 2021, and September 30, 2021, respectively, totalling $0.7 million (or $0.02 per share), of which $0.4 million for Subordinate Voting Shares and $0.3 million for Multiple Voting Shares. These sums were paid on May 17, 2021, and October 15, 2021, respectively.

19. ORDER BACKLOG[(1)]

ADF Group’s order backlog totalled $376.5 million on January 31, 2023, compared with $373.1 million on the same date a year earlier. This variation is attributable to new contracts and contractual changes, net of the execution of contracts.

(1) The order backlog is a supplementary financial measure. Refer to the Section 10 “Non-GAAP Financial Measures and Other Financial Measures” of this MD&A Report, for the definition of this metric.

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ADF Group Inc.

MD&A Report for the Fiscal Year Ended January 31, 2023

As at January 31, 2023, 55% of the order backlog consisted of fabrication hours – the Corporation’s core business and most value-added activity – compared with 40% on January 31, 2022. Most of the contracts in hand as at January 31, 2023, will progressively be executed by the middle of the fiscal year ending January 31, 2025.

FINANCIAL POSITION

As at January 31, 2023, the Corporation had a sound financial position. The Corporation’s solid consolidated statement of financial position allowed it to obtain, when required, the necessary bonding for the award of large-scale contracts. This represents a major advantage for ADF within its markets.

The following table provides details on the major changes in the Consolidated Statement of Financial Position between January 31, 2023 and January 31, 2022.

January 31, 2022.
Sections	Changes (In millions of dollars)	Explanatory Notes
Accounts receivable	50.5	Increase in billing, in line with the level of activity and progress of work schedules.
Contract assets, net of contract liabilities	(18.2)	Net difference between the progress of the work and the progressive revenue billing; the variation reflecting the progress schedule.
Property, plant and equipment, intangible assets and right-of-use assets	7.3	Change from acquisition of property, plant and equipment and intangible assets ($12.2 million) and the impact of foreign exchange and other miscellaneous items ($2.0 million) net of amortization ($5.3 million)andgovernmentgrants($1.6 million).
Accounts payable and other current liabilities	5.6	Change in line with the level of activity at the respective closing dates.
Long-term debt and lease liabilities (including current portions)	14.8	Change resulting from the issuance of the new debts ($20.0 million) and the impact of foreign exchange rate and other miscellaneous items ($0.7 million) net of long-term debt repayments ($2.2 million) and lease obligations ($0.8 million) and government grants ($2.8 million).
Deferred tax liabilities	1.7	Increase in temporary differences between the tax and accounting recognition of certain items.
Accumulated other comprehensive income	2.2	Variation mostly caused by the impact of the variation in the foreign exchange rates on the translation of foreign operations.

21. CURRENT ECONOMIC ENVIRONMENT

Although the trends are improving in certain markets served by the Corporation, a degree of uncertainty remains regarding the economic context. In times of economic uncertainty, the Corporation is faced with the following challenges:

Its business segment is strongly dependent on project owners’ capacity to finance their projects. For lack of financing, certain projects can be delayed or simply abandoned. Although the Corporation strives to mitigate this risk by focusing its marketing efforts on projects whose financing is most likely to materialize, it has no control over financial market trends, and
Certain project owners who secured financing on the start-up of projects could be forced to cease the work pursuant to the withdrawal of financing, due to a lack of capital of either the project lender or the owner. The Corporation mitigates this risk by ensuring that amounts due are diligently collected and, insofar as possible, maintaining at all times a positive cash flow for every project. Moreover, the Corporation does business with owners who are financially solid. At the date hereof, no project of the Corporation is subject to such constraints.

From a financing point of view, the Corporation has a sound financial position and currently respects all its financial covenants. It expects it will continue to do so during the next 12 months. While the previously mentioned investment program represents a larger investment, capital expenditures are closely monitored by Management. The Corporation does not anticipate any liquidity problems, in particular since its principal credit facility is issued by a Canadian chartered bank with a solid credit rating, and the Corporation’s major clients are leaders in their respective fields. Based on the foregoing, the Corporation maintains its short-term prospects (see Section 32 "Outlook") and does not currently foresee any short-term elements that could compromise its course of business.

That being said, and in light of the fact that the Corporation does not enjoy all the visibility from which it normally benefits in its markets, the Corporation will continue to use caution and will closely monitor the situation (see Sections 8 "Conflict in Ukraine", 23 "External Factors to Which the Corporation’s Performance is Exposed" and 32 "Outlook").

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ADF Group Inc.

MD&A Report for the Fiscal Year Ended January 31, 2023

22. RELATED PARTY TRANSACTIONS

During the fiscal year ended January 31, 2023, certain advances were granted to executive-shareholders. These advances were fully reimbursed at the date hereof and no outstanding balances remained as at January 31, 2023.

Moreover, in the normal course of business, management agreements have been reached with companies held by a group of majority shareholders. These transactions are measured at the exchange value, which is the consideration established and accepted by the related parties:


Fiscal Years Ended January31,			2023	2022
Company	Type	Transactions with ADF Group Inc.	(In $)	(In $)
Groupe JPMP Inc. ADF Group Inc.	Executives Executives	Three executives of ADF Group are compensated through this company for their work within the Corporation, as stipulated in their contracts of employment (see Section 10 "Executive Compensation" of the Management Information Circular for the 2023 fiscal year). Other compensation paid directly to Executives.	1,247,155 900,955	1,240,290 778,351

23. EXTERNAL FACTORS TO WHICH THE CORPORATION’S PERFORMANCE IS EXPOSED

23.1 Global Pandemic

A pandemic outbreak, as COVID-19 demonstrates, must now be considered in external factors that may influence ADF’s performance. Although the type of pandemic or future variant is innumerable, and the impacts of these pandemics on the sector in which our Corporation operates can be multiple, the Corporation will now have to monitor this new risk. The measures taken by ADF to minimize the impacts of COVID-19 on all operations will serve as the basis for future years and will need to be adjusted, if necessary, according to the potential impacts of future pandemics.

23.2 Exchange Rate

The exchange rate fluctuation between the Canadian and U.S. dollars has an impact on the Corporation’s results. Thus, a $1.9 million foreign exchange loss was recorded for the fiscal year ended January 31, 2023, compared with a $0.5 million foreign exchange loss for the 2022 fiscal year.

In order to minimize the impact of exchange rate fluctuations on its results, the Corporation implemented the following protective measures:

Issuance of debts in U.S. dollars;

— When advantageous, the raw material (steel) and welding products required for fabrication are purchased in U.S. dollars, and

— A foreign exchange policy to protect a portion of the net exchange risk between cash inflows and outflows denominated in U.S. dollars.

23.3 Operating Risks and Uncertainties

The following is a description of the Corporation’s main operating risks and uncertainties:

a) Uncertainties Relating to the World Economy

The uncertainty related to the global economy could have a negative impact on the Corporation’s business segment, i.e. the non-residential construction industry, particularly in North America, its primary market. At the date hereof, although the Corporation’s order backlog will provide work for the next quarters, the uncertainty relating to the global economy could adversely affect the Corporation’s revenues and profitability beyond that period (please also refer to Section 8 "Conflict in Ukraine").

b) Bonding Capacity and Irrevocable Letters of Credit

During the fiscal year ended January 31, 2023, the Corporation maintained the necessary bid bonds and/or letters of credit to its business partners, required for bids, as well as in the scope of contractual commitments, or other financial instruments, such as performance, payment and supply bonds, or an irrevocable letter of credit.

c) Operational Risks and Uncertainties That Could Have an Impact on the Corporation’s Financial Position and Operating Results

Normally, ADF’s contracts are performed under contractual arrangements at firm prices. ADF has developed and applies rigorous risk assessment and management practices to reduce the nature and extent of the financial, technical and legal risks specific to each of these contractual agreements. ADF’s continued commitment to strict risk management practices when undertaking and executing contracts includes the technical risks assessment, legal review of contracts, application of tight cost controls and scheduling of projects, regular review of projects’ revenues, costs and cash flows, and implementation of agreements aimed at generating positive cash flows from projects and other provisions aimed at mitigating risks.

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ADF Group Inc.

MD&A Report for the Fiscal Year Ended January 31, 2023

The following items could have an impact on the Corporation’s future financial position and operating results:

Economic conditions could exert pressure on the profit margins on new projects to be negotiated with clients and have an impact on the order backlog and the award of new contracts ;
Contractual changes overlapping two periods, that is, for which costs would have been recognized but no revenues recorded during a given period and no final settlement concluded with the client at the end of that period, could have an impact on the Corporation’s results and cash flows in the following period, subsequent to the signing of this agreement ;
An increase in the price of steel might be a risk, although it would be mitigated by the sale price adjustment clauses concluded with clients and included in contracts ;
The risk associated with the fluctuations in interest rates is also mitigated by having a mix between fixed-rate and variable-rate debts, as well as available liquidities, when appropriate, that can generate financial revenues. This risk is also mitigated by the implementation of interest rate options that limit fluctuations in interest rates on a portion of the Corporation's variable debt ;
Competition in the Corporation’s business segment ;
Economic dependency related to the concentration of its client base; the Corporation strives to mitigate this risk through its development strategy of broadening its geographical and market sectors ;
The imposition by the United States, historically ADF's main market, of tariffs or other protectionist measures on imported processed steel ;
Fluctuations in the exchange rate between the Canadian and U.S. dollars. However, this risk is mitigated in part by the foreign currency hedge policy adopted by the Corporation’s Executive Officers, and
The nature of contracts in hand, depending on the type of client, can influence the delay of collection. When these contracts are funded by government agencies, it is possible that the collection period of contract receivables is not impacted upward. However, the risk related to the collection is minimal given that these sums are actually guaranteed by government agencies. When these same contracts are funded by non-governmental organizations, Management believes that the vast majority of these accounts are not doubtful accounts since that they are with well-established companies.

24. FINANCIAL INSTRUMENTS

A significant number of items in the Corporation’s Statement of Financial Position include financial instruments. The Corporation’s financial assets consist of cash, cash equivalents, accounts receivable, contract assets, as well as derivative financial instruments, whose fair market value is positive. Financial liabilities include credit facilities, accounts payable and other current liabilities, contract liabilities, long-term debt and derivative financial instruments, whose fair market value is negative.

As at January 31, 2023 and 2022, the carrying amount of these financial instruments did not significantly differ from the fair market value, either because of their forthcoming maturity date (in the case of cash, cash equivalents, accounts receivable, contract assets and liabilities, credit facilities, and accounts payable and other current liabilities), or because the Corporation believed it could obtain similar conditions and schedules in the case of the long-term debt (excluding lease liabilities) or since they are re-evaluated at their fair value at the end of every period (in the case of derivative financial instruments) (see Note 24 "Financial Instruments" in the Consolidated Financial Statements for the fiscal year ended January 31, 2023).

Derivative financial instruments are typically used to manage the Corporation’s foreign exchange and interest rate risk exposure. They are generally comprised of foreign exchange forward contracts and an interest rate swap.

The Corporation is mostly exposed to credit, liquidity and market risks, including exchange rate and interest rate risks, when using financial instruments. A description of how the Corporation manages these risks is included hereinabove in this MD&A Report, as well as in Note 23 "Financial Risk Management" in the Consolidated Financial Statements for the fiscal year ended January 31, 2023.

25. ASSESSMENT OF THE EFFECTIVENESS OF DISCLOSURE CONTROLS AND PROCEDURES, AND INTERNAL CONTROL OVER FINANCIAL REPORTING

In accordance with National Instrument 52-109, Certification of Disclosure in Issuers’ Annual and Interim Filings, disclosure controls and procedures have been designed to provide reasonable assurance that the information that must be presented in Corporation’s interim and annual reports is accumulated and communicated to management on a timely basis, including the Chief Executive Officer and the Chief Financial Officer, so that appropriate decisions can be made regarding disclosure. Internal control over financial reporting has also been designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with IFRS.

The Chief Executive Officer and the Chief Financial Officer have evaluated the effectiveness of Corporation’s disclosure controls and procedures as at January 31, 2023, as well as the effectiveness of Corporation’s internal control over financial reporting as of the same date using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) on Internal Control – Integrated Framework (2013 Framework) and have concluded that they are effective.

During the quarter ended January 31, 2023, no changes were made to internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, internal controls and procedures.

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ADF Group Inc.

MD&A Report for the Fiscal Year Ended January 31, 2023

26. DISCLOSURE AND INSIDER TRADING POLICIES

In accordance with its internal policies and guidelines, the Corporation diligently reports all relevant financial information. In addition, when the Corporation publishes its financial results or announces major contract awards or any other material information, it enforces a blackout period for its directors and managers, as well as for its personnel who wishes to trade on ADF Group’s securities, in order to ensure compliance and transparency of any trading by persons regarded as insiders. With regard to the employees, this blackout period can, under the circumstances, be either enforced for all the Corporation’s employees or limited to a more restricted number of employees according to their knowledge of privilege information concerning the event to be disclosed.

27. SIGNIFICANT ACCOUNTING POLICIES, ESTIMATION UNCERTAINTY AND CRITICAL ACCOUNTING JUDGMENTS

The summary of ADF’s significant accounting policies is described in Note 2 "Summary of Significant Accounting Policies" of the notes to consolidated financial statements for the fiscal year ended January 31, 2023.

The preparation of financial statements in accordance with IFRS requires Management to make judgements in the application of accounting policies used and to make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the periods. Because financial reporting involves accounting judgements and entails the use of estimates, actual results could differ from those estimates. Underlying estimates and assumptions are periodically reviewed, and the impact of any changes is recognized immediately.

The significant accounting judgements and estimates used by the Corporation to prepare the financial statements are:

27.1 Revenue Recognition

The identification of revenue-generating contracts with customers, the identification of performance obligations, the determination of the transaction price and its allocation between identified performance obligations, the use of the appropriate revenue recognition method (over time or at a specific point in time) for each performance obligation and the measure of progress for performance obligation satisfied over time are the main aspects of the revenue recognition process, all of which require judgment and the use of assumptions.

The transaction price corresponds to the amount of consideration to which the Corporation expects to be entitled in exchange for transferring promised goods or services to a customer. Such amount may require the Corporation to estimate an amount of a variable consideration, notably from estimated volume of work, claims and unpriced change orders, incentives or penalties, among others. Furthermore, the Corporation needs to constraint the transaction price by including only the amount for which it is highly probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The amount of variable consideration to be included in the transaction price of a given contract is determined by using various estimates and assumptions, which could be based on historical experience with the same customer or other similar contracts, third-party assessments, legal interpretation of relevant contractual clauses and probabilistic methodologies, among others. Due to the uncertain nature of the estimations, the amount of a variable consideration may vary significantly over time. Such estimated amount of a variable consideration then needs to be updated at the end of each reporting period.

The determination of anticipated costs for completing a contract is based on estimates that can be affected by a variety of factors such as potential variances in scheduling and cost of materials along with the availability and cost of qualified labour and subcontractors, productivity, and possible claims from subcontractors. A change in any of those factors could affect revenues recognition.

27.2 Assessment and Amortization of Long-Lived Assets

Management reviews the useful lives of its amortizable assets at each reporting date. The carrying amounts are analyzed at the end of each fiscal year. Actual results could however differ because of technical obsolesce, particularly with regards to hardware and software.

27.3 Significant Judgment in Determining the Lease Term of Contracts

The Corporation determines the lease term as the non-cancellable period of the lease, together with any periods covered by an option to extend the lease, if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain not to be exercised. The Corporation applies judgment in assessing whether it is reasonably certain to exercise its options to extend its leases or to not exercise its options to terminate its leases, by considering all facts and circumstances that create an economic incentive to exercise an extension option or not to exercise a termination option. The assessment is reviewed if a significant event or a significant change in circumstances occurs which affects this assessment and that is within the Corporation’s control.

27.4 Income Taxes

The Corporation calculates the income tax expense for each jurisdiction where it operates. However, the actual income tax amounts become definitive only upon the filing of income tax returns and acceptance thereof by the competent authorities, which occur after the financial statements are published.

Judgements must periodically be made to determine if deferred income tax assets must be recognized in the Consolidated Statement of Financial Position. Deferred income tax assets, including unused tax losses, require Management to assess whether the Corporation will generate taxable income in subsequent periods, in order to use deferred income tax assets. Once the assessment is done, if the Corporation believes that it is likely that a portion of its deferred income tax assets will not be realized, the deferred income tax asset is derecognized. The estimate of future taxable income is based on cash flow from operations forecasts and applicable tax laws in effect in each jurisdiction. Should future cash flows and taxable profit differ materially from these estimates, it could have an impact on the Corporation’s ability to realize the net deferred income tax assets at the reporting date of the financial position.

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ADF Group Inc.

MD&A Report for the Fiscal Year Ended January 31, 2023

27.5 Impairment of Non-Financial Assets

ADF’s Management makes judgments in assessing whether changes to certain factors would be considered an indicator of impairment, which include both internal and external factors such as:

changes in signed backlog,
changes in adjusted EBITDA margin,
changes in EBITDA multiples of comparable companies, and
the Corporation’s market capitalization compared to its net assets.

An impairment loss is recognized, if any, for the amount by which an assets or CGUs (cash-generating units) carrying amount exceeds its recoverable amount, which is the higher of fair value less cost of disposal and value in use.

For the purpose of assessing the potential impairment of the Corporation's non-financial assets, management would use the fair value less costs of disposal model to estimate the fair value based on earnings before interest depreciation and amortization (EBITDA) multiple approach. The significant assumptions, which affect the financial analysis include revenues, operating costs and margins, foreign exchange rates and comparable companies EBITDA multiple. These estimates are subject to certain risks and uncertainties that may affect the determination of the recoverability of the Corporation’s non-financial assets.

As at January 31, 2023 and 2022, the management of the Corporation has determined that there is no indicator of impairment and therefore no impairment test has been performed.

28. ENVIRONNEMENT

ADF’s operations are subject to various laws and regulations adopted by federal, provincial, state and local governments pertaining to environmental protection.

The Corporation’s Terrebonne and Great Falls facilities were built on vacant lands. The operations that could have a potential impact on the environment are welding, which generates smoke, and equipment maintenance, which generates waste oil, and industrial coating, which generate fumes and vapours. ADF has installed appropriate pollution control equipment in order to comply with the existing laws and regulations and ensures to perform in the normal course of business, the investments required to meet the highest standards.

Waste oil is recuperated by specialized firms. The Corporation has the necessary environmental certificates of authorization for its facilities and for all expansion phases subsequently carried out.

Moreover, as part of the construction of its new paint shop in Terrebonne, the Corporation updated its environmental certificate of authorization for all its operations located in Terrebonne, including its fabrication plant. Following these investments, ADF Group’s facilities in Terrebonne meet the highest environmental standards. More recently, during the fiscal year ended January 31, 2022, as part of the new financing that the Corporation obtained (see Section 14.3 "Financing Activities"), the Corporation conducted phase I and phase II environmental assessments at its Terrebonne, Quebec site, which did not identify any deficiencies or contaminants requiring corrective action in accordance with applicable environmental standards.

For the fiscal years ended January 31, 2023 and 2022, and taking into account the preceding paragraph, the requirements with regard to environmental protection did not have a significant financial or operational impact on the Corporation’s capital expenditures, net income and competitive position. The Corporation does not expect to incur any costs outside the normal course of business to comply with environmental requirements.

29. SUSTAINABLE DEVELOPMENT

During the fiscal year ended January 31, 2023, the Corporation began a process to adopt a Sustainable Development Policy. Established around the three ESG axes (environment, social and governance), ADF will identify in the coming months the key objectives for each of these three axes while endowing itself with targets and means to achieve these targets. Although it is too early to confirm these objectives and targets, the Corporation will provide regular updates on a quarterly basis in the MD&A Report.

30. HUMAN RESOURCES

As at January 31, 2023, the Corporation employed a total of 638 people across its head office, fabrication complex and paint shop in Terrebonne, Quebec, Canada, and its office, fabrication plant and paint shop in Great Falls, Montana, U.S.A., and as well as the sales office and various construction sites in the United States.

31.

31.1 SUBSEQUENT EVENTS

Dividend

On April 12, 2023, the Corporation’s Board of Directors approved a semi-annual dividend of $0.01 per share payable on May 17, 2023, to Shareholders of Record as at April 28, 2023.

31.2 New Financing Agreement

On February 10, 2023, the Corporation reached an agreement with its Canadian financial institution on the terms and conditions amending its Canadian operating credit facility. Once finalized, within the next few weeks, the credit facility will increase from $30.0 million to $40.0 million, this amount remaining subject to a margination calculation but only when the Corporation draws an amount greater than $20.0 million dollars. The other conditions will remain similar to the current ones.

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ADF Group Inc.

MD&A Report for the Fiscal Year Ended January 31, 2023

32. OUTLOOK

ADF closed its fiscal year ended January 31, 2023, with encouraging results. Despite the variables of the economy in general, including not only rising interest rates but also the impact of inflation, ADF closed its fiscal year with an increase in the order backlog, better margins and a net income 56% higher than a year ago. Although revenues are down, it is important to remember that revenues for the fiscal year ended on January 31, 2022, benefited from fast-track projects but with margins significantly below ADF's usual margins.

Given the order backlog in hand to begin this new fiscal year, ADF's management expects its revenues for the fiscal year ending January 31, 2024 to increase. Although our cost structure is under pressure, given the impact of inflation on our inputs, including the cost of labor, the Corporation is confident it will remain competitive and will generate higher margins given all the operational improvements implemented, including the commissioning of a brand new and unique robotic production line and the increased automation of fabrication processes at its plant in Terrebonne, Quebec.

In addition, and as described in section 31.2 "New Financing Agreement", the Corporation gives itself the financial means to continue to grow its order backlog.

The major investments in robotization and automation over the last two fiscal years are now completed and allow us to face economic challenges with confidence. We are now well positioned to continue to grow, generate cash and improve profitability. However, we remain cautious in our approaches and will closely monitor economic developments in order to adjust our strategies accordingly.

33. ADDITIONAL INFORMATION

The Corporation regularly discloses information through press releases, quarterly and annual reports and the Annual Information Form, available on the Corporation’s website at www.adfgroup.com and the SEDAR (System for Electronic Document Analysis and Retrieval) website at www.sedar.com.

Mr. Jean-Francois Boursier, CPA

Ms. Marise Paschini

/ Signed /

Chief Financial Officer

Executive Vice-President, Treasurer and Corporate secretary

Terrebonne, Quebec, Canada, April 12, 2023

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ADF Group Inc.

ADF GROUP INC. 300 Henry-Bessemer Terrebonne, Quebec, Canada J6Y 1T3 T. (450) 965-1911 / 1 (800) 263-7560 [email protected] / www.adfgroup.com

MD&A Report Fiscal Year Ended January 31, 2023

The electronic version of this document is also available at www.adfgroup.com and at www.sedar.com.

Ce document est aussi disponible en français.

Toronto Stock Exchange : TSX/ DRX

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ADF Group Inc. — Management Reports 2023

44820_rns_2023-04-28_f761c3de-c571-432f-b6f9-8e40df87cb97.pdf

Forward-Looking Statements

FINANCIAL HIGHLIGHTS

MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE FINANCIAL POSITION AND OPERATING RESULTS

1. GENERAL

2.

FORWARD-LOOKING STATEMENTS

3.

GENERAL OVERVIEW

4.

COMMERCIAL POSITIONING

5.

MARKET TRENDS

6. SIGNIFICANT EVENTS OF THE FISCAL YEAR

6.1 Dividends

6.2 New Financing

6.3 Forgiveness of a COVID-19- Related Loan

6.4 New Contracts

6.5

Interest Rate Options

7. SIGNIFICANT EVENTS THAT OCCURRED SINCE JANUARY 31, 2023

7.1

Dividend

7.2 New Financing Agreement

8.

CONFLICT IN UKRAINE

9.

EXCHANGE RATE

10. NON-GAAP FINANCIAL MEASURES AND OTHER FINANCIAL MEASURES

10.1 Adjusted EBITDA and Adjusted EBITDA Margin

10.2 Gross Margin as a Percentage of Revenues

10.3 Working Capital and Working Capital Ratio

10.4 Order Backlog

11. SELECTED ANNUAL FINANCIAL INFORMATION

12. ANALYSIS OF OPERATING RESULTS FOR THE FISCAL YEAR ENDED JANUARY 31, 2023

12.1 Revenues and Gross Margin

Revenues

Gross Margin

12.2 Selling and Administrative Expenses

12.3 Amortization

12.5 Foreign Exchange Loss

12.6 Income Tax Expenses

12.7 Net Income, Basic and Diluted Earnings per Share

13. COMMENTS ON QUARTERLY RESULTS

13.1

Results for the Last Eight (8) Quarters

13.2 Results for the Fourth Quarter Ended January 31, 2023

14. CASH FLOWS AND FINANCIAL POSITION

14.1 Operating Activities

14.2 Investing Activities

14.3

Financing Activities

a) New Financing from Investissement Québec

b) New Financing from Business Development Bank of Canada

c) Forgiveness of a COVID-19 Related Loan

14.4 Payment of Rents and Interest and Payment of Principal on Debt

14.5 Debt Covenants

14.6 Contractual Obligations

Long-Term Debt

Lease Obligations

14.7

Commitments Related to Letters of Credit as at January 31, 2023

15. CAPITAL STOCK

16.

STOCK OPTION PLAN

17. SHARE-BASED COMPENSATION

17.1 Deferred Share Units ("DSU")

a) External Directors

b) Executive Officers and Key Employees

17.2

Performance Share Units Plan ("PSU")

18. DIVIDENDS

19.

ORDER BACKLOG[(1)]

FINANCIAL POSITION

21.

CURRENT ECONOMIC ENVIRONMENT

22. RELATED PARTY TRANSACTIONS

ADF Group Inc. Management Reports 2023