Draganfly Inc. - Audit Report / Information 2020

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CONSOLIDATED FINANCIAL STATEMENTS

For the years ended September 30, 2020 and 2019

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Independent Auditor's Report

To the Shareholders of TerraVest Industries Inc.

Raymond Chabot Grant Thornton LLP Suite 2000 National Bank Tower 600 De La Gauchetière Street West Montréal, Quebec H3B 4L8

T 514-878-2691

Opinion

We have audited the consolidated financial statements of TerraVest Industries Inc. (hereafter "the Company"), which comprise the consolidated statements of financial position as at September 30, 2020 and 2019, and the consolidated statements of income, the consolidated statements of comprehensive income, the consolidated statements of changes in shareholders’ equity and the consolidated statements of cash flows for the years then ended, and notes to consolidated financial statements, including a summary of significant accounting policies.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of the Company as at September 30, 2020 and 2019, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards (IFRS).

Basis for opinion

We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the "Auditor's responsibilities for the audit of the consolidated financial statements" section of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Information other than the consolidated financial statements and the auditor’s report thereon

Management is responsible for the other information. The other information comprises the information, other than the consolidated financial statements and our auditor’s report thereon, included in Management's Discussion and Analysis.

Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether

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the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.

We obtained Management’s Discussion and Analysis prior to the date of this auditor’s report. If, based on the work we have performed on this other information, we conclude that there is a material misstatement of this other information, we are required to report that fact in this auditor’s report. We have nothing to report in this regard.

Responsibilities of management and those charged with governance for the consolidated financial statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with International Financial Reporting Standards (IFRS), and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, management is responsible for assessing the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Company's financial reporting process.

Auditor's responsibilities for the audit of the consolidated financial statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control;

Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control;
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management;
Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern;
Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation;
Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

The engagement partner on the audit resulting in this independent auditor’s report is Nancy Wolfe.

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Montréal December 15, 2020

1 CPA auditor, CA public accountancy permit no. A120795

TERRAVEST INDUSTRIES INC.

Consolidated Statements of Financial Position

(In thousands of Canadian dollars, except share and per share amount)

Note As at September 30, 2020	As at September 30, 2019
$ ASSETS Current Cash 27,452 Accounts receivable 7 44,610 Income taxes receivable 783 Inventories 8 83,955 Assets held for sale - Other current assets 9 3,790	$ 9,442 50,337 2,745 83,624 1,559 3,765
160,590 Non-Current Property, plant and equipment 10 108,770 Intangible assets 11 21,404 Deferred income tax assets 17 8,587 Investment in equity instruments 6,273 Investment in an associate 1,197 Other non‐current assets 150 Goodwill 12 12,654	151,472 74,468 21,036 8,452 - 1,226 330 16,610
319,625	273,594
LIABILITIES Current Bank overdrafts 735 Revolving credit facilities 14 864 Accounts payable and accrued liabilities 13 24,536 Deferred revenues 15,888 Dividends payable 18 1,868 Income taxes payable 2,833 Contingent considerations - Convertible debentures 16 - Current portion of long‐term debt 14 5,251 Current portion of lease liabilities 15 4,374	349 - 28,569 7,904 1,764 2,426 3,534 9,943 2,368 -
56,349 Non-Current Long‐term debt 14 98,400 Lease liabilities 15 30,523 Deferred income tax liabilities 17 8,211	56,857 107,444 - 8,367
193,483	172,668
SHAREHOLDERS’ EQUITY Share capital 18 149,284 Share premium 35,191 Share‐based payments reserve 18 417 Accumulated other comprehensive income 393 Equity component of convertible debentures 16 - Accumulated deficit (59,355)	139,290 36,513 432 163 1,451 (77,346)
125,930 Non‐controlling interest 212	100,503 423
126,142	100,926
319,625	273,594

See accompanying notes to the consolidated financial statements

On behalf of the Board:

/s/ Charles Pellerin, Director

/s/ Blair Cook, Director

TERRAVEST INDUSTRIES INC.

Consolidated Statements of Income

(In thousands of Canadian dollars, except share and per share amount)

(In thousands of Canadian dollars, except share and per share amount)	(In thousands of Canadian dollars, except share and per share amount)
Years ended Note September 30, 2020 September 30, 2019
$ SALES 28 Products 293,291 Services 10,962	$ 289,419 16,867
304,253 Cost of sales 231,990	306,286 235,544
Grossprofit 72,263	70,742
EXPENSES Administration 31,164 Selling 5,656 Financing costs 21 5,240 Share of an associate’s net (income) loss 29 Other(gains)losses 22 (5,324)	28,152 5,537 5,769 (136) 468
36,765	39,790
EARNINGS BEFORE INCOME TAXES 35,498	30,952
INCOME TAX EXPENSE 17 Current 8,312 Deferred 558	6,460 1,937
8,870	8,397
NET INCOME 26,628	22,555
Net income (loss) attributable to: Common shareholders 26,839 Non‐controllinginterest (211)	22,495 60
26,628	22,555
Weighted average number of common shares: Basic 19 18,486,064 Diluted 19 19,030,735	17,239,597 19,116,577
Net income per share: Basic 19 $1.45 Diluted 19 $1.42	$1.30 $1.24

See accompanying notes to the consolidated financial statements

TERRAVEST INDUSTRIES INC.

Consolidated Statements of Comprehensive Income

(In thousands of Canadian dollars, except share and per share amount)

(In thousands of Canadian dollars, except share and per share amount)	(In thousands of Canadian dollars, except share and per share amount)
Years ended September 30, 2020 September 30, 2019
$ NET INCOME 26,628 Other comprehensive income, net of income tax: Item that may be reclassified subsequently to profit or loss: Exchange difference on translatingforeign operations 230	$ 22,555 681
COMPREHENSIVE INCOME 26,858	23,236
Attributable to: Common shareholders 27,069 Non‐controllinginterest (211)	23,176 60
26,858	23,236

See accompanying notes to the consolidated financial statements

TERRAVEST INDUSTRIES INC.

Consolidated Statements of Changes in Shareholders’ Equity

(In thousands of Canadian dollars, except share and per share amount)

			Years	ended
	Note	September	30, 2020	September	30, 2019
		$		$
Share capital
Common shares:	18
Balance, beginning of year			139,290		137,406
Issued on conversion of convertible debentures			10,690		3,957
Issued on exercise of stock options			-		2,815
Repurchased and cancelled duringtheyear			(696)		(4,888)
Balance,end ofyear			149,284		139,290
Share premium
Balance, beginning of year			36,513		41,640
Carrying value of common shares and convertible debentures
repurchased lower than consideration paid			(259)		(2,463)
Reduction on exercise of stock options			-		(2,664)
Excess considerationpaid on settlement of stock options			(1,063)		-
Balance,end ofyear			35,191		36,513
Share‐based payments reserve
Balance, beginning of year			432		501
Share‐based payments expense	18		100		82
Reduction on exercise of stock options			-		(151)
Reduction on settlement of stock options			(115)		-
Balance,end ofyear			417		432
Accumulated other comprehensive income (loss)
Balance, beginning of year			163		(518)
Other comprehensive income			230		681
Balance,end ofyear			393		163
Equity component of convertible debentures	16
Balance, beginning of year			1,451		2,203
Conversion of convertible debentures			(1,311)		(444)
Convertible debentures repurchased,net of income tax			(140)		(308)
Balance,end ofyear			-		1,451

TERRAVEST INDUSTRIES INC.

Consolidated Statements of Changes in Shareholders’ Equity – Continued

(In thousands of Canadian dollars, except share and per share amount)

			Years	ended
	Note	September	30, 2020	September	30, 2019
		$		$
Accumulated deficit
Balance, beginning of year			(77,346)		(92,911)
Impact of change in accounting policy	4		(1,407)		-
Adjusted balance, beginning of year			(78,753)		(92,911)
Net income attributable to common shareholders			26,839		22,495
Dividends declared duringtheyear			(7,441)		(6,930)
Balance,end ofyear			(59,355)		(77,346)
Total shareholders’ equity attributable to common shareholders			125,930		100,503
Non‐controlling interest
Balance, beginning of year			423		364
Net income (loss) attributable to non‐controlling interest			(211)		60
Net change of non‐controllinginterest			-		(1)
Balance,end ofyear			212		423
Total shareholders’ equity			126,142		100,926

See accompanying notes to the consolidated financial statements

TERRAVEST INDUSTRIES INC.

Consolidated Statements of Cash Flows

(In thousands of Canadian dollars, except share and per share amount)

			Years	ended
	Note	September	30, 2020	September	30, 2019
		$		$
OPERATING ACTIVITIES
Net income			26,628		22,555
Adjustments for:
Current income tax expense			8,312		6,460
Interest expense			4,832		4,667
Convertible debentures retirement costs			9		147
Items not affecting cash	23		14,832		14,604
Interest paid			(4,993)		(4,744)
Income taxes paid			(5,947)		(8,439)
Settlement of derivative financial instruments			(232)		(12)
Change in non‐cash operatingworkingcapital items	23		21,435		(4,261)
			64,876		30,977
INVESTING ACTIVITIES
Consideration paid on business combinations, net of
cash acquired	5		(10,491)		(10,237)
Payment of contingent consideration			(1,988)		-
Investment in equity instruments			(4,561)		-
Purchase of property, plant and equipment			(10,673)		(17,040)
Proceeds from disposal of property, plant and equipment			2,006		719
Proceeds from disposal of assets held for sale			3,065		805
Purchase of intangible assets			-		(590)
Net change of non-controllinginterest			-		(1)
			(22,642)		(26,344)
FINANCING ACTIVITIES
Net change in current revolving credit facilities			(3,844)		(25,237)
Net change in long-term revolving operating loans, net of
transaction costs			(9,518)		29,379
Issuance of long‐term debt, net of transaction costs			5,440		21,873
Repayment of long‐term debt			(2,344)		(5,272)
Repayment of lease liabilities			(3,603)		-
Common shares repurchased and cancelled	18		(1,080)		(6,964)
Convertible debentures repurchased	16		(1,093)		(3,375)
Settlement of stock options	18		(1,178)		-
Dividendspaid			(7,337)		(6,929)
			(24,557)		3,475
Net inflows for the year			17,677		8,108
Cash and bank overdrafts, beginning of year			9,093		984
Impact of foreign exchange on cash and bank overdrafts			(53)		1
CASH AND BANK OVERDRAFTS, END OF YEAR			26,717		9,093

See accompanying notes to the consolidated financial statements

TERRAVEST INDUSTRIES INC. Notes to the Consolidated Financial Statements For the year ended September 30, 2020 (In thousands of Canadian dollars, except share and per share amounts)

1. DESCRIPTION OF THE BUSINESS

TerraVest Industries Inc. (“TerraVest” or the “Company”) is incorporated under the laws of Alberta and is listed on the Toronto Stock Exchange (equity symbol: TVK). TerraVest’s head office is located at 4901 Bruce Road in Vegreville, Alberta, Canada.

TerraVest is a diversified industrial company that manufactures and sells goods and services to various end-markets including: energy, agriculture, mining, and transportation, among others. TerraVest is focused on acquiring and operating market-leading businesses that will benefit from TerraVest’s financial and operational support. These opportunities generally center on manufactured steel products that complement TerraVest’s existing operations and provide integration benefits.

TerraVest is comprised of three operating segments: Fuel Containment, Processing Equipment and Service.

2. ACCOUNTING POLICIES

TerraVest’s consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”). These consolidated financial statements were approved and authorized for issue by the Board of Directors on December 15, 2020.

The following significant accounting policies have been applied to all periods presented in these consolidated financial statements.

2.1 Basis of presentation

These consolidated financial statements have been prepared using the going concern assumption and the historical cost method except for certain financial instruments for which the accounting treatment is described in Note 2.26.

2.2 Functional and presentation currency

These consolidated financial statements are presented in Canadian dollars; TerraVest’s functional currency.

2.3 Basis of consolidation

These consolidated financial statements include the accounts of TerraVest and of its subsidiaries. Accounts of the subsidiaries are included in the consolidated financial statements from the date TerraVest obtains control until the date control ceases. All intercompany balances, revenues and expenses and cash flows are fully eliminated upon consolidation.

Subsidiaries are entities controlled by TerraVest. Control is achieved when TerraVest has power over the entity, is entitled to returns from the entity and has the ability to affect those returns through its power over the entity.

TerraVest attributes net income and comprehensive income of subsidiaries between the owners of TerraVest and the non-controlling interest based on their respective ownership interests.

TERRAVEST INDUSTRIES INC. Notes to the Consolidated Financial Statements For the year ended September 30, 2020 (In thousands of Canadian dollars, except share and per share amounts)

The significant subsidiaries of TerraVest included in these consolidated financial statements are as follows:

Name of Subsidiary	Country	% of ownership
MaXfield Inc.	Canada	100
EnviroVault Limited Partnership	Canada	100
Segretech Inc.	Canada	76.5
NWP Industries Limited Partnership	Canada	100
TerraVest Industries Limited Partnership	Canada	100
Argo Sales Limited Partnership	Canada	100
Diamond Energy Services Limited Partnership	Canada	100
Gestion Jerico Inc.	Canada	100
Granby Industries Limited Partnership	Canada	100
Pro-Par Inc.	Canada	100
Granby Composites Inc.	Canada	100
Granby Furnaces Inc.	Canada	100
Granby FRP Tanks Inc.	Canada	100
Iowa Steel Fabricators, LLC	United States	100
Fischer Tanks, LLC	United States	100
Granby Industries Transport USA, LLC	United States	100
Signature Truck Systems, LLC	United States	100
GranbyHeatingProducts,LLC	United States	100

2.4 Foreign currency

Transactions and balances

Each subsidiary of TerraVest determines its own functional currency. Transactions in foreign currency are initially recorded in the entity’s functional currency using the exchange rate prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currency are translated into the entity’s functional currency using the exchange rate in effect on the reporting date, whereas non-monetary assets and liabilities denominated in foreign currency are translated using historical exchange rates. All exchange gains and losses arising from the translation of these items and transactions are recorded in the consolidated statement of income as they arise, in other (gains) losses.

Foreign operations

The assets and liabilities of foreign operations with a functional currency different from that of TerraVest are translated into Canadian dollars using the exchange rate in effect on the reporting date. Revenues and expenses are translated to Canadian dollars using the monthly average exchange rate for the period in which the transaction occurred. The exchange gains or losses arising from the translation of foreign operations are recognized in other comprehensive income and are reclassified in income on disposal or partial disposal of the investment in the related foreign operation.

2.5 Business Combinations

Business combinations are accounted for using the acquisition method. Consideration transferred in a business combination is the sum of the acquisition-date fair values of the assets transferred by TerraVest which includes the fair-value of any asset or liability arising from a contingent consideration arrangement. For each business combination, TerraVest measures the non-controlling interest, if any, at the proportionate share in the acquiree’s identifiable net assets. Acquisition costs are expensed as incurred in administration expenses.

At the acquisition date, the identifiable assets acquired and liabilities assumed are recognized at their fair value on that date and are classified in accordance with their contractual terms, economic circumstances and pertinent conditions.

TERRAVEST INDUSTRIES INC. Notes to the Consolidated Financial Statements For the year ended September 30, 2020 (In thousands of Canadian dollars, except share and per share amounts)

Goodwill, initially recognized at cost as an asset, is measured as the excess of the aggregate of the consideration transferred and the amount recognized for non-controlling interest over the fair value of the net identified assets and liabilities. If the aggregate of the consideration transferred and the amount recognized for non-controlling interests is lower than the fair value of the identified net assets and liabilities, the difference is recognized in the consolidated statement of income as a bargain purchase gain.

2.6 Segment reporting

TerraVest has three reportable segments as follows:

Fuel Containment: is a provider of products and services to a variety of industries across Canada and the United States. The Fuel Containment segment manufactures products including: bulk liquefied petroleum gas (LPG) transport trailers, LPG delivery and service trucks, bulk LPG storage tanks, residential and commercial LPG tanks and dispensers, custom pressure vessels, commercial and residential refined fuel tanks, and furnaces and boilers. This segment sells its products direct to end user and through various distribution networks. The end users of the products are fuel distributors, transportation companies, and industrial, commercial and residential consumers.
Processing Equipment: is a fabricator of equipment for various end-markets including: upstream and midstream oil and gas processing, agriculture, transportation and mining. The Processing Equipment segment manufactures and sells a wide array of equipment such as: wellhead processing equipment and tanks, wellhead desanding units, central facilities processing equipment, natural gas liquids (NGL) and LPG storage tanks, anhydrous ammonia storage tanks, bulk NGL and LPG transport trailers, bulk ammonia transport trailers and wagons, compressed gas transport trailers and a wide variety of customized processing equipment for various applications. This segment’s products and services are primarily sold to oil and gas producers, midstream companies, engineering companies, propane distributors, fertilizer distributors and transportation companies.
Service: provides well servicing to the oil and gas sector in South‐Western and Central Saskatchewan. The Service segment currently operates 21 service rigs.

An operating segment is a component of TerraVest that engages in business activities from which it may earn revenues and incur expenses and for which discrete financial information is available. Each operating segment’s results are regularly reviewed by management to make decisions about resources to be allocated to the segment and assess its performance. Operating segments can be aggregated into reportable segments when the segments have similar economic characteristics.

Corporate charges, assets and liabilities are not allocated to segments.

2.7 Revenue recognition

TerraVest recognizes revenues from contracts with customers once control is transferred and in an amount equal to the consideration to which TerraVest expects to be entitled.

Product sales are revenues arising from the Fuel Containment and Processing Equipment segments and are recognized at a point of time when the manufacturing of the goods is complete, when the goods leave TerraVest’s premises, or when the goods are delivered to the customer, according to the terms of the contract. The contracts entered into are short-term in nature and revenues are generally recognized when the goods are delivered to the customer by the Fuel Containment segment or when the manufacturing of the goods is complete by the Processing Equipment segment.

Services revenues are revenues arising from the Service segment and are recognized at a point in time, when services are provided.

Where payments have been received, or invoices issued, for product and/or services not yet provided; amounts are recorded as deferred revenue on the consolidated statements of financial position and recorded as revenue when the product and/or services have been provided and the requirements for revenue recognition have been met.

TERRAVEST INDUSTRIES INC. Notes to the Consolidated Financial Statements For the year ended September 30, 2020 (In thousands of Canadian dollars, except share and per share amounts)

2.8 Employee benefits

The costs of all short-term employee benefits are measured on an undiscounted basis and are expensed during the period in which the employee renders the related service.

2.9 Government grants

Government grants are recorded when there is a reasonable assurance that the government assistance will be received and that TerraVest will comply with all relevant conditions.

Government grants related to expenses are recorded as a reduction of the related expenses. Government grants with general nature are recorded as other income when they are received. Government tax credits related to assets are recorded as a reduction of the cost of the related assets. Government grants and government tax credits recorded are based on management's best estimates of amounts expected to be received and are subject to audit by the taxation authorities.

2.10 Deferred development costs

TerraVest periodically invests in research and development activities to support the launch of new products. All costs incurred in the development of new products are recorded as deferred development costs, in other non-current assets on the consolidated statements of financial position, until the product reaches commercial production. At the commencement of commercial production, the deferred development costs are amortized on a straight-line basis over 5 years.

2.11 Borrowing costs

Borrowing costs directly attributable to the acquisition or construction of qualifying assets are added to the cost of those assets, until such time as the assets are substantially ready for their intended use. All other borrowing costs are expensed in the period in which they are incurred, in financing costs.

2.12 Income taxes

Income taxes are accounted for using the liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used in the determination of taxable income. A deferred income tax asset is recognized only to the extent that it is probable that future taxable profits will be available against which the underlying income tax attributes giving rise to the asset will be utilized. Deferred income tax assets are reduced to the extent that it is no longer probable that the related income tax benefit will be realized.

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current income tax assets against current income tax liabilities, when they relate to income taxes levied by the same income tax authority and when TerraVest intends to settle its current income tax assets and liabilities on a net basis.

Deferred income tax assets and liabilities are measured at the income tax rates that are expected to apply in the period in which the liability is settled or the asset realized, based on the income taxation rates (and income taxation laws) that have been enacted or substantively enacted by the statement of financial position date. The measurement of deferred income tax assets and liabilities reflects the income tax consequences that would follow from the manner in which TerraVest expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities.

2.13 Earnings per share

Basic earnings per share is calculated using the net income attributable to shareholders of TerraVest’s divided by the weighted average number of common shares outstanding in the period.

Diluted earnings per share is determined using the same method as basic earnings per share, except that the weighted average number of shares outstanding is adjusted for the effects of all dilutive instruments outstanding.

2.14 Cash

Cash is comprised of cash on hand and bank balances. Bank overdrafts are presented as current liabilities.

TERRAVEST INDUSTRIES INC. Notes to the Consolidated Financial Statements For the year ended September 30, 2020 (In thousands of Canadian dollars, except share and per share amounts)

2.15 Inventories

Inventories are measured at the lower of cost and net realizable value. Cost includes all costs of purchase, manufacturing costs and other costs incurred to bring the inventories to their present location and condition. Manufacturing costs includes a pro rata share of production overheads based on normal production capacity. The cost of certain inventories is based on weighted average cost while the cost of other inventories is determined using a first-in, first-out (“FIFO”) method. Net realizable value is the estimated selling price in the ordinary course of business less all estimated costs of completion and costs necessary to make the sale.

2.16 Assets held for sale

Non-current assets and associated liabilities are classified as held for sale when their carrying amount will be recovered principally through a sale transaction rather than continuing use and a sale is highly probable. Assets designated as held for sale are accounted for at the lower of their carrying amount at designation and fair value less costs to sell. Depreciation is not recognized for property, plant and equipment (“PP&E”) classified as held for sale.

2.17 Property, plant and equipment

PP&E are measured at cost less accumulated depreciation and impairment. Cost includes acquisition costs or manufacturing costs and any costs directly attributable to bring the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Financing costs are added to the cost of the asset when funds are borrowed specifically for the construction of the asset. When components of an item of PP&E have different useful lives, they are accounted for as separate items of PP&E. The costs of the day-to-day maintenance of PP&E are recognized in profit or loss as incurred.

The gain or loss on disposal or retirement of an item of PP&E is determined as the difference between the proceeds from disposal and the carrying amount of the asset and is recognized in the consolidated statement of income as other (gains) losses.

PP&E are depreciated over the estimated useful life of the specific asset as follows:

PP&E are depreciated over the estimated useful life	of the specific asset as follows:
Categories	Estimated useful lives
Land and buildings
Land	-
Buildings	10 to 25 years
Leasehold improvements	Lesser of estimated economic life or lease term
Machinery and equipment
Production, shop and rental equipment	5 to 10 years
Service rigs	Hours of operation – useful life 2,000 to 48,000 hours
Others
Vehicles	5 to 15 years
Office equipment and furnishings	3 to 10 years
Computer hardware and software	1 to 3years

Land is not depreciated. An item of PP&E is not depreciated until it can be operated in the manner intended by management. The depreciation methods, estimated useful lives and residual values are reassessed annually, with the effect of any changes in estimates being accounted for on a prospective basis.

2.18 Intangible assets

Identifiable intangible assets acquired in a business combination are recognized separately from goodwill if they meet the definition of intangible asset and if their fair value can be measured reliably. The cost of these intangible assets equals their acquisition-date fair value. After initial recognition, intangible assets are recorded at cost less accumulated amortization, if they are amortizable, and less accumulated impairment.

TERRAVEST INDUSTRIES INC. Notes to the Consolidated Financial Statements For the year ended September 30, 2020 (In thousands of Canadian dollars, except share and per share amounts)

Intangible assets with a finite useful life are amortized on a straight line-basis over their estimated useful lives from the date they are available for use as follows:

date they are available for use as follows:
Categories	Estimated useful lives
Customer-related
Sales order backlog	5 to 13 months
Customer relationships	7 to 10 years
Technology-based
Technologies and technical drawings	5 years
Patents	10 to 15 years
Non-compete agreements	3 to 5years

The amortization method and estimated useful lives are reassessed annually, with the effect of any changes in estimates being accounted for on a prospective basis.

Intangible assets with indefinite lives are trademarks. They are not amortized but are tested annually for impairment. The useful life of an intangible asset with an indefinite life is reviewed annually to determine whether indefinite life assessment continues to be supportable. If not, the change in the useful life assessment from indefinite to finite is accounted for on a prospective basis.

2.19 Investment in an associate

Investment in an associate is accounted for using the equity method.

2.20 Goodwill

After initial recognition, goodwill is measured at cost less any accumulated impairment.

2.21 Impairment of non-financial assets

An impairment loss is recognized whenever the carrying amount of an asset or its cash-generating unit (CGU) exceeds its recoverable amount. Impairment are recognized in profit or loss. An impairment loss is reversed only if there is an indication that the impairment loss may no longer exists and there has been a change in the estimates used to determine the recoverable amount, however, not to an amount higher than the carrying amount that would have been determined (net of depreciation or amortization) and no impairment loss had been recognized in previous years.

Property, plant and equipment, right-of-use assets and intangible assets with finite useful lives

The carrying amounts of TerraVest's assets are reviewed at each reporting period to determine whether there is any indication of impairment. If such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any. Where it is not possible to estimate the recoverable amount of an individual asset, TerraVest estimates the recoverable amount of the CGU to which the asset belongs. Where a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual CGUs, or otherwise they are allocated to the smallest group of CGUs for which a reasonable and consistent allocation basis can be identified.

The recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. For an asset that does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the CGU to which the asset belongs.

Goodwill and intangible assets with indefinite lives

Goodwill and intangible assets with indefinite lives are allocated to each of TerraVest’s CGUs that are expected to benefit from the business combination, irrespective of whether assets or liabilities of the acquiree are assigned to those units. CGUs to which goodwill has been allocated are tested for impairment annually, or more frequently if events and circumstances indicate that the asset may be impaired.

TERRAVEST INDUSTRIES INC. Notes to the Consolidated Financial Statements For the year ended September 30, 2020 (In thousands of Canadian dollars, except share and per share amounts)

2.22 Leases

2.22.1 Leases – Accounting policies applied to the year ended September 30, 2020

At the inception of a contract, TerraVest assesses whether the contract is, or contains, a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Leases are recognized in the statement of financial position through the recognition of a right-of-use asset and a lease liability, except for leases with a term of 12 months or less and leases for which the underlying asset is of low value, which are recognized in profit or loss on a straight-line basis over the lease term.

The lease liability is initially measured at the present value of future lease payments using the implicit rate of the lease, if it can be readily determined, or using TerraVest subsidiary’s incremental borrowing rate. Future lease payments include fixed payments, variable payments that depend on an index or rate, and payments for extension and termination or purchase options that are reasonably certain to be exercised. When lease payments include amounts relating to non-rental components, they are included in the calculation of the lease liability. The lease liability is then measured at amortized cost using the effective interest rate method.

The right-of-use asset is measured at cost, which corresponds to the initial measurement of the lease liability. Cost also includes any initial direct costs incurred, an estimate of any costs to dismantle and remove the asset at the end of the lease and any lease payments made in advance of the lease commencement date, net of any incentives received. The right-of-use asset is included in PP&E in the consolidated statement of financial position. It is then measured at cost less accumulated depreciation and impairment losses. Depreciation is calculated over the lesser of the lease term or the estimated useful life on a straight-line basis.

Variable lease payments not included in the lease liability are recognized in the profit or loss of the period in which the expense occurred.

If a lease is modified or if the lease term is revised, the lease liability is remeasured and a corresponding adjustment is made to the right-of-use asset. If the lease modification represents a decrease in the scope of a lease, the difference between the adjustment to the lease liability and the right-of-use asset, if any, is accounted for as a gain or loss upon lease modification. If the lease modification represents a separate lease component, it is accounted for as a separate lease.

2.22.2 Leases – Accounting policies applied to the year ended September 30, 2019

Leases are classified as finance leases whenever terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.

Payments under operating leases are recognized in profit or loss on a straight-line basis over the term of the lease. Lease incentives received or granted are recognized in profit or loss as a part of the total lease expense or revenue.

2.23 Provisions

Provisions are recognized when TerraVest has a present obligation, legal or constructive, as a result of a past event, if it is more likely than not that TerraVest will be required to settle the obligation, and if a reliable estimate can be made of the amount of the obligation.

2.24 Share premium

Share premium includes the amount paid in excess of, or less than the carrying value of the common shares when TerraVest repurchases its common shares and the difference between the amount paid for the convertible debentures and the carrying value of the liability and equity components of the convertible debentures when TerraVest repurchases its convertible debentures.

2.25 Share-based payments

Equity-settled share-based payments are measured at fair value at grant date. The value of the compensation for the stock option plan is measured using a Black-Scholes option pricing model. The effect of any change in the number of options that are expected to vest is accounted for in the period in which the estimate is revised. Compensation expense

TERRAVEST INDUSTRIES INC. Notes to the Consolidated Financial Statements For the year ended September 30, 2020 (In thousands of Canadian dollars, except share and per share amounts)

is recognized on a straight-line basis over the vesting period of the stock option, with a corresponding increase in the share-based payments reserve in shareholder’s equity. Any consideration paid by plan participants on the exercise of stock options is credited to share capital up to the nominal value of the shares issued with any excess being recorded as share premium.

2.26 Financial instruments

Recognition and initial measurement

A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. Financial assets and financial liabilities, including derivatives, are recognized in the consolidated statement of financial position when, and only when, TerraVest becomes a party to the contractual provisions of the instrument and are measured initially at fair value plus, in the case of a financial asset or financial liability not at fair value through profit or loss (“FVTPL”), transaction costs that are directly attributable to the acquisition or issue of the financial instrument.

Derecognition

Financial assets are derecognized when the contractual rights to the cash flows from the financial asset expire, or when the financial asset and substantially all the risks and rewards of ownership are transferred. Financial liabilities are derecognized when they are extinguished, discharged, cancelled or expired.

Classification

On initial recognition, all financial instruments are measured at fair value. Financial assets are subsequently classified and measured at amortized cost, at fair value through other comprehensive income or at FVTPL. TerraVest classifies its financial assets according to the business model used to manage these financial assets and to the contractual cash flow characteristics of the financial assets. Financial liabilities are classified and subsequently measured at amortized cost or at FVTPL.

TerraVest has made the following classifications:

Cash, accounts receivable, bank overdrafts, revolving credit facilities, accounts payable and accrued liabilities, dividend payable, long-term debt as well as convertible debentures are classified as subsequently measured at amortized cost using the effective interest rate method; and
Derivative financial instruments, investment in equity instruments and contingent considerations are classified as subsequently measured at FVTPL. Gains and losses arising from periodic remeasurement are recognized in profit or loss in other (gains) losses.

Impairment of financial assets

On initial recognition and at each reporting date, TerraVest estimates expected credit losses for financial assets classified at amortized cost. These expected credit losses are measured using historical credit loss experience and are adjusted to reflect receivable-specific factors, general economic conditions, and an assessment of both the current and projected direction of economic conditions at the reporting date, including the time value of money, if applicable. The net change in expected credit losses on financial assets classified at amortized cost is recognized in profit or loss.

For financial assets carried at amortized cost, the amount of the impairment is the amount equal to lifetime expected credit losses.

If, in a subsequent period the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed through profit or loss to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortized cost would have been had the impairment not been recognized.

TERRAVEST INDUSTRIES INC. Notes to the Consolidated Financial Statements For the year ended September 30, 2020 (In thousands of Canadian dollars, except share and per share amounts)

Equity instruments

Common shares are classified as equity in share capital. Incremental costs attributable to the issuance of common shares are recognized as a deduction from share capital in equity, net of any income tax effects.

Convertible debentures

Convertible debentures are classified according to their liability and equity components using the residual approach, whereby TerraVest estimates the fair value of the liability component and assigns the residual value of the convertible debentures to the equity component. Transaction costs related to the issuance of convertible debentures are allocated to the liability and equity components in proportion to the initial carrying values. The liability component is classified as convertible debentures and the equity component is classified as a conversion option and recorded in shareholder’s equity as the equity component of convertible debentures, net of income tax effects.

The discount is amortized using the effective interest rate method over the term of the related liability and recognized in the consolidated statement of income as financing costs. The unamortized discount is accounted for as a reduction of the convertible debentures liability.

Upon conversion of debentures to common shares, a pro rata portion of the convertible debenture liability, convertible debenture equity as well as accrued but unpaid interest, will be transferred to share capital. Upon repurchase of debentures by TerraVest, a pro rata portion of the convertible debenture liability, convertible debenture equity as well as accrued but unpaid interest, will be deducted from the purchase price and the difference reflected in the consolidated statements of income and in share premium. If any convertible debentures mature without being converted, the remaining conversion option balance will remain in shareholders’ equity in accumulated deficit.

Derivative financial instruments

TerraVest uses derivative financial instruments to manage its foreign currency exposure and interest rate risk. Gains and losses arising from periodic remeasurement of derivative financial instruments that are economic hedges but that do not qualify for hedge accounting are recognized in the consolidated statements of income as other (gains) losses.

3. ACCOUNTING JUDGMENTS AND SOURCES OF ESTIMATION UNCERTAINTY

The preparation of financial statements in accordance with IFRS requires management to make judgments, estimates and assumptions that may affect the reported amounts of assets, liabilities, revenues and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for estimates about carrying values of assets and liabilities that are not readily apparent from other sources. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised. The actual results of items subject to estimates and assumptions may differ from these estimates and assumptions.

The main judgments, estimates and assumptions are as follows:

3.1 Business Combinations

Valuations techniques are used when determining fair values of certain assets and liabilities acquired in a business combination. Estimates that have an impact on the determination of fair values include the selected weighted average cost of capital, growth rate, and forecast of future cash flows. Refer to Note 5 for more information on valuation techniques used in business combinations.

3.2 Income tax expense

Current and deferred income tax expense, assets and liabilities may require estimates and interpretations of federal and provincial income tax rules and regulations, and judgments as to their interpretation and application to each jurisdiction where TerraVest operates. Determination of deferred income tax assets and liabilities requires judgment as to the reversal of the underlying temporary differences between accounting values and income tax attributes resulting in the deferred income tax assets or liabilities and estimates as to the appropriate income tax rates to apply to determine the future income tax assets or liabilities.

TERRAVEST INDUSTRIES INC. Notes to the Consolidated Financial Statements For the year ended September 30, 2020 (In thousands of Canadian dollars, except share and per share amounts)

3.3 Impairment of non-financial assets and goodwill

In assessing impairment, TerraVest estimates the recoverable amount of each asset or CGU based on expected future cash flows and uses an interest rate to calculate present value. Estimation uncertainty relates to the assumptions about future operating results, growth rate and the determination of a suitable discount rate. Refer to Note 12 for the goodwill impairment test disclosures.

3.4 Right-of-use assets and lease liabilities

Future lease payments used to calculate the value of the right-of-use asset and lease liability include payments for lease extension and termination or purchase options that are reasonably certain to be exercised. Determining the economic benefits of exercising these options requires the use of assumptions and estimates such as the future expected use of the leased asset and future market conditions. Whether or not future lease payments relating to the extension, termination or purchase options are taken into account can have a significant impact on the value of the right-of-use asset and the lease liability.

4. ADOPTION OF NEW ACCOUNTING STANDARDS

4.1 Leases

On October 1, 2019, TerraVest adopted IFRS 16 Leases (“IFRS 16”) using the modified retrospective method, with recognition of transitional adjustments in retained earnings on the date of initial application, subject to permitted practical expedients, without restatement of comparative figures. IFRS 16 was effective for annual periods beginning on or after January 1, 2019.

Under IFRS 16, a lessee is required to recognize: 1) an asset and a liability for every lease with a term of more than twelve months, unless the underlying asset is of low value and 2) depreciation of lease assets separately from interest on lease liabilities in the consolidated statement of income.

As part of the adoption of IFRS 16, TerraVest applied the following practical expedients:

did not reassess whether a contract is, or contains, a lease at the date of initial application. TerraVest applied IFRS 16 to contracts that were previously identified as leases in accordance with IAS 17 “Leases” (“IAS 17”);
relied on its assessment of whether leases were onerous as at September 30, 2019 in accordance with IAS 37 “Provisions, Contingent Liabilities and Contingent Assets” instead of performing an impairment review under IAS 36 “Impairment of Assets”;
excluded initial direct costs from the measurement of the right-of-use asset at the date of initial application;
leases with a term of 12 months or less at the date of initial application were accounted for as short-term leases and thereby recognizing rent payments in profit or loss on a straight-line basis over the lease term; and
applied the recognition exemption for leases of low value.

Impact on date of initial application

For leases classified as operating leases under IAS 17, TerraVest recognized a lease liability measured at the present value of the remaining lease payments, discounted using TerraVest subsidiary’s incremental borrowing rate as at October 1, 2019. Right-of-use asset was measured at its carrying amount as if IFRS 16 had been applied since the commencement date of each lease, discounted using TerraVest subsidiary’s incremental borrowing rate as at October 1, 2019, adjusted by the amount of any prepaids or accrued lease payments. In the consolidated statement of income, rent expense is replaced by depreciation expense of the right-of-use asset and by interest on the lease liability calculated using the effective interest rate method. TerraVest had no leases classified as finance leases.

TERRAVEST INDUSTRIES INC. Notes to the Consolidated Financial Statements For the year ended September 30, 2020 (In thousands of Canadian dollars, except share and per share amounts)

As at October 1, 2019, TerraVest recognized right-of-use assets in PP&E and corresponding lease liabilities, the difference is represented in accumulated deficit as follows:

	As at October	1, 2019
	$
Property, plant and equipment		27,085
Deferred income tax assets		257
Current portion of lease liabilitiesi)		2,486
Lease liabilitiesi)		26,469
Deferred income tax liabilities		(206)
Accumulated deficit		(1,407)

i) The weighted average incremental borrowing rate applied to the lease liabilities is 4.11%.

The reconciliation between the operating lease commitments disclosed in accordance with IAS 17 as at September 30, 2019 and the lease liabilities recognized as at October 1, 2019 in accordance with IFRS 16 is as follows:

	As at October	1, 2019
	$
Future minimum operating lease payments as at September 30, 2019		36,482
Other operatinglease commitments as at September 30,2019		89
Commitments under operatingleases as at September 30,2019		36,571
Future minimum operating lease payments as at September 30, 2019		36,482
Recognition exemption for leases with a term of 12 months or less		(283)
Recognition exemption for leases of low value		(190)
		36,009
Impact of discountingat the incremental borrowingrate		(7,054)
Lease liabilities as at October 1,2019		28,955

5. BUSINESS COMBINATIONS

2020 Business Combination

5.1 Acquisition of Argo Sales Inc.

On December 13, 2019, a subsidiary of TerraVest entered into an acquisition agreement to acquire all of the assets of Argo Sales Inc. (“Argo”), a privately-owned Alberta based company primarily focused on manufacturing wellhead processing and production equipment for the Canadian oil and gas market.

The business combination has been accounted for using the acquisition method with the results of operations included in earnings from the date of acquisition. Acquisition-related cost of $409 were incurred and recognized as administration expense during the year ended September 30, 2020.

Fair value of the consideration transferred at the acquisition date

*Fair value of the consideration transferred at the acquisition date*
	Final
	$
Cash paid	11,083
Assumption of Argo’s revolvingcredit facility	4,708
Fair value of the consideration transferred	15,791

TERRAVEST INDUSTRIES INC. Notes to the Consolidated Financial Statements For the year ended September 30, 2020 (In thousands of Canadian dollars, except share and per share amounts)

Assets acquired and liabilities assumed at the acquisition date

The final fair value allocation of the identifiable assets acquired and liabilities assumed as at December 13, 2019 acquisition date is as follows:

	Final
	allocation
	$
ASSETS
Cash	422
Accounts receivable	20,779
Inventories	4,706
Prepaid expenses	357
Property, plant and equipment	8,966
Intangible assets	1,734
	36,964
LIABILITIES
Accounts payable and accrued liabilities	10,210
Deferred revenues	4,849
Lease liabilities	6,384
	21,443
Net identifiable assets acquired	15,521

Determination of fair value

The fair value of assets acquired and liabilities assumed at the acquisition date was determined based on TerraVest’s assumptions and estimates.

Accounts receivable

Receivables were recognized at their fair value, which is not substantially different from their gross contractual value and expected receipts.

Inventories

Inventories were recognized at their estimated fair value, which is the lower of cost and net realizable value at the transaction closing date. Cost includes all costs of purchase, manufacturing costs and other costs incurred to bring the inventories to their present location and condition.

Property, plant and equipment and lease liabilities

PP&E were recognized at their estimated fair value. TerraVest estimated their fair value based on their original cost, acquisition date and net carrying value at the transaction closing date.

TerraVest also recognized right-of-use assets and lease liabilities for acquired assets under leases. The right-of-use assets were measured at the same amount as the lease liabilities. The lease liabilities were measured at the present value of Argo’s future lease payments using its incremental borrowing rate as at December 13, 2019.

TERRAVEST INDUSTRIES INC. Notes to the Consolidated Financial Statements For the year ended September 30, 2020 (In thousands of Canadian dollars, except share and per share amounts)

Intangible assets

TerraVest estimated the fair value of intangible assets acquired using different valuation techniques, all primarily based upon discounted cash flow according to currently available information, such as historical and projected revenues, customer attrition rates and certain other relevant assumptions.

	Estimated	Final
	useful lives	fair value
		$
Customer relationships	7 years	1,250
Sales order backlog	13 months	266
Non-compete agreements	5years	218
Intangible assets		1,734

*Goodwill arising from the business combination*
	Final
Consideration transferred Less: Fair value of net identifiable assets acquired	$ 15,791 15,521
Goodwill	270

The acquisition was done in order to strengthen TerraVest’s presence in the Western Canadian’s oil and gas market. The goodwill associated with this acquisition is mainly attributable to brand recognition and an assembled workforce and is deductible for income tax purposes.

Argo contribution to TerraVest results

TerraVest’s consolidated net income during the year ended September 30, 2020 includes sales of $36,211 and a net loss of $764 generated from Argo’s result since the acquisition date of December 13, 2019.

Due to lack of IFRS-specific data prior to the acquisition of Argo, pro-forma revenue and profit or loss of the combined entity during the year ended September 30, 2020 cannot be determined reliably.

2019 Business Combination

5.2 Acquisition of Iowa Steel Fabrication, LLC

On August 30, 2019, a subsidiary of TerraVest entered into an acquisition agreement to acquire substantially all of the assets of Iowa Steel Fabrication, LLC (“ISF”), doing business as Countryside Tank and Majona Steel Corporation. ISF is an Iowa based company primarily focused on manufacturing transportation equipment for the propane and anhydrous ammonia markets as well as structural steel projects.

The business combination has been accounted for using the acquisition method with the results of operations included in earnings from the date of acquisition. Acquisition-related cost of $42 were incurred and recognized as administration expense for the year ended September 30, 2020 ($98 for the year ended September 30, 2019).

TERRAVEST INDUSTRIES INC. Notes to the Consolidated Financial Statements For the year ended September 30, 2020 (In thousands of Canadian dollars, except share and per share amounts)

Fair value of the consideration transferred at the acquisition date

	Preliminary	Final
	$	$
Cash paid	10,237	10,067
Consideration receivable from vendors	(218)	-
Contingent considerationpayable to vendorsi)	1,595	1,595
Fair value of the consideration transferred	11,614	11,662

i) The asset purchase agreement contains an “earn-out payment” clause to the vendors of a maximum amount of

US$1,200 related to future profitability of the acquired business. The acquisition-date fair value of the contingent consideration payable recognized was measured based on management’s estimate of budgeted earnings before interests, income taxes, depreciation and amortization (“EBITDA”) for the 12-month period following the business combination.

Assets acquired and liabilities assumed at the acquisition date

During the year ended September 30, 2020, TerraVest finalized the purchase price allocation resulting in an increase to the net identifiable assets acquired and a decrease of the goodwill. The final fair value allocation of the identifiable assets acquired and liabilities assumed is as follows:

	Preliminary	Final
	allocation	allocation
	$	$
ASSETS
Accounts receivable	1,384	1,384
Inventories	4,107	4,097
Prepaid expenses	47	57
Property, plant and equipment	3,637	3,637
Intangible assets	-	4,284
	9,175	13,459
LIABILITIES
Accounts payable and accrued liabilities	2,344	2,296
Deferred revenues	782	782
	3,126	3,078
Net identifiable assets acquired	6,049	10,381

Determination of fair value

The fair value of assets acquired and liabilities assumed at the acquisition date was determined based on TerraVest’s assumptions and estimates.

Accounts receivable

Receivables were recognized at their fair value, which is not substantially different from their gross contractual value and expected receipts.

Inventories

TERRAVEST INDUSTRIES INC. Notes to the Consolidated Financial Statements For the year ended September 30, 2020 (In thousands of Canadian dollars, except share and per share amounts)

Property, plant and equipment

PP&E were recognized at their estimated fair value. TerraVest appointed a third party to assist in the valuation of the acquired building. For the other PP&E acquired, TerraVest estimated their fair value based on their original cost, acquisition date and net carrying value at the transaction closing date.

Intangible assets

	Estimated	Final
	useful lives	fair value
		$
Customer relationships	7 years	2,845
Non-compete agreements	5 years	798
Sales order backlog	7 months	641
Intangible assets		4,284

Goodwill arising from the business combination

*Goodwill arising from the business combination*
	Preliminary	Final
	$	$
Consideration transferred	11,614	11,662
Less:
Fair value of net identifiable assets acquired	6,049	10,381
Goodwill	5,565	1,281

The acquisition was done in order to expand TerraVest’s market share, penetrate new markets and increase its presence in the United States and its economies of scale. The goodwill associated with this acquisition is deductible for income tax purposes and is mainly attributable to the value of an assembled workforce in the United States and a footprint in the Midwest of the United States.

6. FINANCIAL INSTRUMENTS

6.1 Fair value hierarchy

Financial instruments recorded at fair value on the consolidated statements of financial position and financial instruments measured at cost for which fair value is disclosed are classified using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy has the following levels:

Level 1: valuation based on quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2: valuation techniques based on inputs other than quoted prices included in level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and
Level 3: valuation techniques using inputs for the asset or liability that are not based on observable market data (unobservable inputs).

The fair value hierarchy requires the use of observable market inputs whenever such inputs exist. A financial instrument is classified to the lowest level of the hierarchy for which a significant input has been considered in measuring fair value.

TERRAVEST INDUSTRIES INC. Notes to the Consolidated Financial Statements

For the year ended September 30, 2020 (In thousands of Canadian dollars, except share and per share amounts)

6.2 Categories of financial instruments

TerraVest has classified its financial instruments as follows:

		As at	As at
	Level	September 30, 2020	September 30, 2019
		$	$
Financial assets
*At amortized cost*
Cash	2	27,452	9,442
Accounts receivable	2	44,610	50,337
		72,062	59,779
*Atfair value through profit or loss*
Investment in equityinstruments	1	6,273	-
Financial liabilities
*At amortized cost*
Bank overdrafts	2	735	349
Revolving credit facilities	2	864	-
Accounts payable and accrued liabilities	2	23,978	27,906
Dividends payable	2	1,868	1,764
Long-term debt (current and non-current)	2	103,651	109,812
Convertible debentures	2	-	9,943
		131,096	149,774
*At fair value through profit or loss*
Derivative financial instrumentsi)	2	558	663
Contingent considerations	3	-	3,534
		558	4,197

i) Derivative financial instruments are included in “Accounts payable and accrued liabilities”.

The fair values of revolving credit facilities, long-term debt and convertible debentures have been determined based on discounted cash flows using interest rates for similar instruments. The fair values of the financial instruments measured at amortized cost are not significantly different to their carrying values. The fair value of the investment in equity instruments has been determined based on the quoted price in active markets.

TerraVest’s derivative financial instruments are forward exchange contracts and interest rate swap agreement which are not traded in active markets. Forward exchange contracts have been fair valued using observable forward exchange rates and interest rates corresponding to the maturity of the contracts. The interest rate swap agreement has been fair valued using observable interest rates corresponding to the maturity of the agreement. The effects of non-observable inputs are not significant for forward exchange contracts and interest rate swap agreement.

The fair value of contingent considerations was determined based on management’s estimate of expected future cash outflows. The contingent considerations as at September 30, 2019 were current liabilities, therefore the expected future cash outflows were not discounted.

TERRAVEST INDUSTRIES INC. Notes to the Consolidated Financial Statements For the year ended September 30, 2020 (In thousands of Canadian dollars, except share and per share amounts)

7. ACCOUNTS RECEIVABLE

	As at	As at	As at	As at
	September	30, 2020	September	30, 2019
	$		$
Net trade receivables		40,424		49,240
Other receivables		4,186		1,097
		44,610		50,337

Allowance for doubtful accounts included in net trade receivables was $117 as at September 30, 2020 ($67 as at September 30, 2019).

8. INVENTORIES

	As at	As at	As at	As at
	September	30, 2020	September	30, 2019
	$		$
Raw materials		36,596		46,247
Work in progress		31,090		23,172
Finishedgoods		16,269		14,205
		83,955		83,624

Inventories expensed in cost of sales for the year ended September 30, 2020 totaled $217,836 ($215,713 for the year ended September 30, 2019), which includes an amount of $502 of inventory write-downs ($1,332 for the year ended September 30, 2019) .

9. OTHER CURRENT ASSETS

$ Prepaid expenses 2,597 Other current assets 1,193	$ 2,627 1,138
3,790	3,765

10. PROPERTY, PLANT AND EQUIPMENT

	Property, plant	Right-of-use
	and equipment	assets	Total
	(10.1)	(10.2)
	$	$	$
Balance as at September 30, 2020
Cost	128,539	36,597	165,136
Accumulated depreciation	52,180	4,186	56,366
Net carryingvalue	76,359	32,411	108,770

For the year ended September 30, 2020 (In thousands of Canadian dollars, except share and per share amounts)

TERRAVEST INDUSTRIES INC. Notes to the Consolidated Financial Statements

10.1 Property, plant and equipment

*10.1 Property, plant and equipment*
Land and buildings Machinery and equipment Others Capital projects in progress	Total
$ $ $ $ Cost Balance as at September 30, 2018 20,313 76,389 7,207 2,970 Acquired in business combinations (Note 5) 2,360 1,277 - - Additions 5,608 9,940 1,324 1,798 Disposals/transfers (2,433) (3,461) (1,098) (3,076) Exchange difference 116 110 35 -	$ 106,879 3,637 18,670 (10,068) 261
Balance as at September 30, 2019 25,964 84,255 7,468 1,692 Acquired in business combinations (Note 5) 777 1,513 292 - Additions 378 7,892 695 995 Disposals/transfers (957) (858) (382) (1,306) Exchange difference 63 42 15 1	119,379 2,582 9,960 (3,503) 121
Balance as at September 30, 2020 26,225 92,844 8,088 1,382	128,539
Accumulated depreciation Balance as at September 30, 2018 2,659 38,589 4,557 - Depreciation for the year 959 5,794 925 - Disposals (1,657) (5,960) (991) - Exchange difference 10 2 24 -	45,805 7,678 (8,608) 36
Balance as at September 30, 2019 1,971 38,425 4,515 - Depreciation for the year 1,274 6,413 1,098 - Disposals (277) (944) (303) - Exchange difference 4 4 - -	44,911 8,785 (1,524) 8
Balance as at September 30, 2020 2,972 43,898 5,310 -	52,180
Net carrying value As at September 30, 2019 23,993 45,830 2,953 1,692 As at September 30, 2020 23,253 48,946 2,778 1,382	74,468 76,359

TERRAVEST INDUSTRIES INC. Notes to the Consolidated Financial Statements

For the year ended September 30, 2020

(In thousands of Canadian dollars, except share and per share amounts)

10.2 Right-of-use assets

*10.2 Right-of-use assets*
Land and buildings Others	Total
$ $ Cost Balance as at September 30, 2019 - - Adoption of IFRS 16 on October 1,2019(Note 4) 26,739 346	$ - 27,085
Adjusted balance as at October 1, 2019 26,739 346 Acquired in business combinations (Note 5) 6,322 62 Additions 3,222 166 Disposals (46) (182) Exchange difference (32) -	27,085 6,384 3,388 (228) (32)
Balance as at September 30, 2020 36,205 392	36,597
Accumulated depreciation Balance as at October 1, 2019 - - Depreciation for the year 4,045 178 Disposals (5) (32)	- 4,223 (37)
Balance as at September 30, 2020 4,040 146	4,186
Net carrying value As at September 30, 2020 32,165 246	32,411

For the year ended September 30, 2020 (In thousands of Canadian dollars, except share and per share amounts)

TERRAVEST INDUSTRIES INC. Notes to the Consolidated Financial Statements

11. INTANGIBLE ASSETS

Customer- related Technology- based Non-compete agreements Trademark	Total
$ $ $ $ Cost Balance as at September 30, 2018 33,493 3,009 4,915 1,460 Additions - - 590 - Exchange difference 207 - 27 -	$ 42,877 590 234
Balance as at September 30,2019 33,700 3,009 5,532 1,460	43,701
Acquired in business combinations (Note 5) 5,002 - 1,016 - Exchange difference 78 - 11 -	6,018 89
Balance as at September 30, 2020 38,780 3,009 6,559 1,460	49,808
Accumulated amortization Balance as at September 30, 2018 14,474 467 3,679 - Amortization for the year 3,373 140 449 - Exchange difference 72 - 11 -	18,620 3,962 83
Balance as at September 30, 2019 17,919 607 4,139 - Amortization for the year 4,743 317 669 - Exchange difference 7 - 3 -	22,665 5,729 10
Balance as at September 30, 2020 22,669 924 4,811 -	28,404
Net carrying value As at September 30, 2019 15,781 2,402 1,393 1,460 As at September 30, 2020 16,111 2,085 1,748 1,460	21,036 21,404

12. GOODWILL

Goodwill acquired in business combinations and intangible assets with indefinite lives have been allocated to three cash-generating units (“CGUs”) for impairment testing as follows:

Fuel Containment CGU
Processing Equipment CGU
Service CGU

TERRAVEST INDUSTRIES INC. Notes to the Consolidated Financial Statements

For the year ended September 30, 2020 (In thousands of Canadian dollars, except share and per share amounts)

12.1 Goodwill reconciliation and allocation table

*12.1 Goodwill reconciliation and allocation table*
	Fuel	Processing
	Containment	Equipment	Total
	$	$	$
Balance as at September 30, 2018	7,488	3,479	10,967
Acquired in business combinations (Note 5)	-	5,565	5,565
Exchange difference	99	(21)	78
Balance as at September 30,2019	7,587	9,023	16,610
Final purchase price allocation impact (Note 5)	-	(4,284)	(4,284)
Acquired in business combinations (Note 5)	-	270	270
Exchange difference	32	26	58
Balance as at September 30, 2020	7,619	5,035	12,654

The net carrying amount of the Service CGU goodwill is $nil and the carrying amount of indefinite life intangible asset attributable to Fuel Containment CGU is $1,460 as at September 30, 2020 ($1,460 as at September 30, 2019).

12.2 Impairment testing

TerraVest performed an annual goodwill impairment test. The recoverable values of the CGUs were determined based on value-in-use calculations, covering a five-year forecast, followed by an extrapolation of expected cash flows for the remaining useful lives. The recoverable values of the Fuel Containment and Processing Equipment CGUs exceeded their carrying amounts. Accordingly, no impairment loss was recognized on goodwill for the years ended September 30, 2020 and 2019.

Management’s primary assumptions about projected cash flows when determining value in use are as follows:

Projected growth over the 5-year forecast period takes into account factors such as the nature of the industry in which the CGU operates, market growth projections, market maturity and TerraVest’s strategic plan as set by management; and
The discount rate reflects appropriate adjustments relating to market risk and specific risk factors of each CGUs.

	As at September 30, 2020	As at September 30, 2020	As at September 30, 2019	As at September 30, 2019
	Fuel	Processing	Fuel	Processing
	Containment	Equipment	Containment	Equipment
	%	%	%	%
Projected growth – next fiscal year	2.00	0.00	2.00	2.00
Projected growth – thereafter	2.00	2.00	2.00	2.00
Discount rate	9.05	10.60	10.40	13.55

TerraVest projected no growth in the Processing Equipment CGU for fiscal 2021 as a conservative forecast for the goodwill impairment test due to the impact of COVID-19 and a return to usual projected 2% growth in fiscal 2022 and after with pre-COVID-19 sales level in fiscal 2023.

TERRAVEST INDUSTRIES INC. Notes to the Consolidated Financial Statements For the year ended September 30, 2020 (In thousands of Canadian dollars, except share and per share amounts)

13. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

As at September 30, 2020	As at September 30, 2019
$ Trades accounts payable 12,451 Accrued liabilities 11,441 Interest payable 86 Derivative financial instruments liability 558	$ 16,718 10,837 351 663
24,536	28,569

14. SHORT-TERM REVOLVING CREDIT FACILITIES AND LONG-TERM DEBT

14.1 Short-term revolving credit facilities

The maximum borrowing amount available based on margin requirements and the amount drawn were as follows:

	As at	As at
	September 30, 2020	September 30,	2019
	$	$
Revolving credit facilities
Amount drawn	864		-
Maximum amount	4,250		-

Upon the acquisition of Argo, a subsidiary of TerraVest operating in the Processing Equipment segment assumed Argo’s existing credit facility consisting of a revolving operating loan of $9,000 with a Canadian financial institution. Borrowing capacity is based on the margining of certain accounts receivable and inventories less certain accounts payable. The revolving operating loan can be used for general corporate purposes and bears interest at Canadian prime rate plus 100 basis points. As at September 30, 2020, the interest rate was 3.45%. The revolving operating loan is due on demand.

The revolving operating loan contains an obligation to comply with the following quarterly financial covenants:

	Required	As at
Financial covenants	measurements	September 30, 2020
Total debt to equity ratio	≤ 2.50:1	0.99
Current ratio	≥ 1.15:1	1.75

The revolving operating loan is secured by:

a first ranking security on all present and future personal property of a subsidiary operating in the Processing Equipment segment; and
an assignment of insurance policies.

(In thousands of Canadian dollars, except share and per share amounts)

TERRAVEST INDUSTRIES INC. Notes to the Consolidated Financial Statements

For the year ended September 30, 2020

14.2 Long-term debt

*14.2 Long-term debt*
			As at		As at
		Notes	September	30, 2020	September	30, 2019
			$		$
Revolving credit facilities:
Revolving credit facility, floating rate, maturing in
December 2022		14.2.1		64,740		68,221
Revolving credit facilities, interest at prime rate plus 0.25%,
maturing in February 2022		14.2.2		31,820		37,591
Interest bearing financing:
Loans, interest at 1%, payable	in 18 equal and consecutive
monthly instalments, starting	in November 2020 and final
payment for the remaining balance at maturity, maturing in
April 2022		14.2.3		3,122		-
Loans, interest at prime rate plus a margin of 0% or 0.20%,
payable in 72 equal and	consecutive monthly capital
instalments totaling $23	plus interest, maturing in
January 2025		14.2.4		1,181		1,321
Other		14.2.3		205		155
Non-interest bearing financing:
Loans, effective interest rates between 2.70% and 3.95%, payable
in 60 equal and consecutive monthly instalments totaling $20,
starting in January 2021, maturing in February 2026				1,107		1,076
Loans, effective interest rates between 3.45% and 3.95%, payable
in 72 equal and consecutive monthly instalments totaling $23,
startingin May2020,maturing	in July2026	14.2.4		1,476		1,448
			103,651		109,812
Currentportion of long-term debt				(5,251)		(2,368)
				98,400	107,444

Revolving credit facilities

14.2.1 Revolving operating credit facility

On December 12, 2019, certain subsidiaries of TerraVest operating in the Fuel Containment segment renegotiated their credit facility with a Canadian financial institution. The new credit facility includes a revolving operating loan of $100,000 ($70,000 as at September 30, 2019) and a derivative risk facility, revised in June 2020, in the amount of $7,000 ($4,000 as at September 30, 2019) granted to enter into forward exchange contracts and interest rate swap agreement.

The revolving operating credit facility can be used to finance current operations, purchase PP&E and finance business acquisitions. It bears interest at Canadian or U.S. prime rate, depending on the currency of the borrowing, plus 0 to 75 basis points for open ended borrowings and/or bears interest at the financial institution offered rate, plus 140 to 265 basis points, upon the use of term borrowings. As at September 30, 2020, the interest rate on Canadian open ended borrowings was 2.45% (3.95% as at September 30, 2019). Interest rates margin varies based on a prescribed ratio. As at September 30, 2020 and 2019, the standby fee was $nil.

TERRAVEST INDUSTRIES INC. Notes to the Consolidated Financial Statements For the year ended September 30, 2020 (In thousands of Canadian dollars, except share and per share amounts)

The credit facility contains an obligation to comply with the following quarterly financial covenants:

	Required	As at
Financial covenants	measurements	September 30, 2020
Interest-bearing debt to EBITDA ratio	≤ 3.50:1	1.17
Interest coverage ratio	≥ 3.50:1	16.29

The credit facility is secured by:

a first ranking security in the amount of $110,000 over movable and immovable properties and movable assets, tangible and intangible, present and future of certain subsidiaries;
a first ranking collateral charge on the universality of certain subsidiaries real property;
a security agreement on machinery and equipment, inventory and accounts receivable of a specific subsidiary; and
an assignment of insurance policies.

The transaction costs of $178, incurred during the year ended September 30, 2020 to renegotiate the credit facility, were recorded as prepaid expenses and are amortized on a straight-line basis over the 36-month term.

14.2.2 Revolving credit facilities

On February 14, 2019, certain subsidiaries of TerraVest operating in the Processing Equipment and Service segments obtained credit facilities totaling $50,000 with a Canadian financial institution. The credit facilities include a revolving operating loan for a maximum available borrowing capacity of $30,000 and a revolving term loan of $20,000. Borrowing capacity for the revolving operating loan is based on the margining of certain accounts receivable and inventories less certain accounts payable. The credit facilities are committed for a term of 36 months ending on February 15, 2022 with two one-year renewal options.

The revolving operating loan can be used to finance current operations, including working capital requirements and permitted acquisitions. The revolving term loan can be used to refinance existing debt and to purchase PP&E. These credit facilities bear interest at Canadian or U.S. prime rate, depending on the currency of the borrowing, plus 25 basis points. As at September 30, 2020, the interest rate was 2.70% (4.20% as at September 30, 2019).

The credit facilities contain an obligation to comply with the following quarterly financial covenants:

	Required	As at
Financial covenants	measurements	September 30, 2020
Funded debt to EBITDA ratio	≤ 3.00:1	2.25
Fixed charge coverage ratio	≥ 1.15:1	1.22

The credit facilities are secured by:

a first ranking security on all present and future personal property and assets of certain subsidiaries operating in the Processing Equipment and Service segments and of TerraVest; and
an assignment of insurance policies.

Transaction costs of $168, incurred during the year ended September 30, 2020 ($344 during the year ended September 30, 2019) to obtain and amend the credit facilities, were recorded as prepaid expenses and are amortized on a straightline basis over the 36-month term of those facilities.

TERRAVEST INDUSTRIES INC. Notes to the Consolidated Financial Statements For the year ended September 30, 2020 (In thousands of Canadian dollars, except share and per share amounts)

Interest bearing and non-interest bearing financings

14.2.3 Government loans

During the year ended September 30, 2020, certain subsidiaries of TerraVest received US$2,341 in interest bearing loans from a United States Federal agency and $150 in non-interest bearing loans, repayable on December 31, 2022, from the Government of Canada. These loans were granted to ensure TerraVest’s subsidiaries would have access to capital in order to maintain employment during the COVID-19 pandemic. The United States Federal agency loans can be forgiven if employee retention criteria are met and funds are used for eligible expenses.

14.2.4 Loans

During the year ended September 30, 2019, a subsidiary of TerraVest received $796 in interest-bearing loans and $796 in non-interest-bearing loans related to financings granted on June 14, 2017 to acquire equipment. TerraVest measured the non-interest-bearing loans using the effective interest rate method, the result being a $126 decrease in long-term debt and PP&E.

The loans contain an obligation to comply with the following annual financial covenant:

	Required	As at
Financial covenant	measurement	September 30, 2020
Fixed charge coverage ratio	≥ 1.20:1	4.96

The loans are secured by:

a security in the amount of $4,008 over the universality of movable assets, tangible and intangible, present and future, of specific subsidiaries of TerraVest;
a security agreement of $3,340 from a specific subsidiary of TerraVest; and
an assignment of insurance policies.

14.3 Long-term debt maturities

The aggregate maturities of TerraVest’s long-term debt for each of the next five years and beyond are as follows:

		Total principal
		payments
		$
2021		5,334
2022		31,057
2023		65,825
2024		797
2025		600
Beyond	2025	315
		103,928

14.4 Covenants

As at September 30, 2020, TerraVest was in compliance with all of its financial and non-financial covenants.

For the year ended September 30, 2020 (In thousands of Canadian dollars, except share and per share amounts)

TERRAVEST INDUSTRIES INC. Notes to the Consolidated Financial Statements

15. LEASE LIABILITIES

	As at
	September 30, 2020
	$
Balance, beginning of year	-
Adoption of IFRS 16 on October 1,2019(Note 4)	28,955
Adjusted balance, beginning of year	28,955
Acquired in business combinations (Note 5)	6,384
Additions	3,388
Lease payments	(3,603)
Disposals	(195)
Exchange difference	(32)
	34,897
Currentportion of lease liabilities	(4,374)
Balance,end ofyear	30,523

Rent payments were $5,058 for the year ended September 30, 2020.

15.1 Lease liabilities maturities

The aggregate maturities of TerraVest’s lease liabilities for each of the next five years and beyond are as follows:

		Principal	Interests	Total
		$	$	$
2021		4,374	1,399	5,773
2022		4,518	1,203	5,721
2023		3,591	1,021	4,612
2024		3,399	876	4,275
2025		2,957	742	3,699
Beyond	2025	16,058	2,150	18,208
		34,897	7,391	42,288

For the detail on right-of-use assets, please refer to Note 10.2.

16. CONVERTIBLE DEBENTURES

On January 13, 2020, TerraVest redeemed all of its outstanding convertible debentures with a principal amount of $1,093 for total consideration of $1,096, including accrued and unpaid interest.

Changes in the liability and equity components of TerraVest’s convertible debentures were as follows:

	As at	September	30, 2020	As at September	30, 2019
	Liability		Equity	Liability	Equity
	$		$	$	$
Balance, beginning of year		9,943	1,451	14,935	2,203
Conversion of convertible debentures	(9,001)		(1,311)	(3,353)	(444)
Convertible debentures repurchased, net of
income tax	(1,064)		(140)	(2,276)	(308)
Accretion of liability		122	-	637	-
Balance,end ofyear		-	-	9,943	1,451

TERRAVEST INDUSTRIES INC. Notes to the Consolidated Financial Statements For the year ended September 30, 2020 (In thousands of Canadian dollars, except share and per share amounts)

As at September 30, 2020, interest payable on the convertible debentures in the amount of $nil ($183 as at September 30, 2019) has been included in accounts payable and accrued liabilities.

On October 22, 2018, TerraVest repurchased convertible debentures with a principal amount of $2,500 under a substantial issuer bid (“SIB”) for total consideration of $3,387, including $54 of accrued and unpaid interest outstanding on the convertible debentures repurchased. Transaction costs of $42 were incurred to perform the SIB and were accounted for as convertible debentures retirement costs in financing costs. The difference between the amount paid for the convertible debentures and the carrying value of the liability and equity components was recorded in share premium.

17. INCOME TAXES

17.1 Reconciliation between earnings before income taxes and income tax expense

The following is a reconciliation of income taxes, calculated at the Canadian combined federal and provincial income tax rate, to the income tax expense included in the consolidated statements of income:

	As at	As at	As at	As at
	September	30, 2020	September	30, 2019
	$		$
Earnings before income taxes		35,498		30,952
Income tax – statutoryrate		25.2%		26.8%
Income taxes at statutory rate		8,945		8,295
Income tax rates in other jurisdictions and rate changes		506		(58)
Non-taxable items		(265)		182
Change in unrecognized assets		(69)		119
Change in estimates related to prior years		(182)		(183)
Other		(65)		42
Income tax expense		8,870		8,397

17.2 Income tax expense

*17.2 Income tax expense*
	As at	As at
	September 30, 2020	September 30, 2019
	$	$
Current income tax expense
Currentyear	8,312	6,460
Deferred income tax expense
Origination and reversal of temporary differences	1,117	1,788
Change in income tax rates	(169)	117
Change in unrecognized deductible temporary differences	(69)	119
Adjustment for prior years	(299)	(118)
Other	(22)	31
	558	1,937
Income tax expense	8,870	8,397

Deferred income tax expense reflects the net effect of losses carried forward and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

TERRAVEST INDUSTRIES INC. Notes to the Consolidated Financial Statements

For the year ended September 30, 2020

(In thousands of Canadian dollars, except share and per share amounts)

17.3 Significant components of TerraVest’s deferred income tax assets and liabilities

*17.3 Significant components of TerraVest’s deferred income tax assets and liabilities*
As at September 30, 2020	As at September 30, 2019
$ Deferred income tax assets Inventories 256 Non-capital losses carried forward 4,031 Goodwill and intangible assets 6,992 Property, plant and equipment 126 Lease liabilities 8,516 Other 436	$ 149 3,506 7,114 213 - 478
Deferred income tax assets 20,357 Offset bydeferred income tax liabilities (11,770)	11,460 (3,008)
8,587	8,452
Deferred income tax liabilities Property, plant and equipment 18,177 Goodwill and intangible assets 1,391 Convertible debentures - Other 413	9,290 1,693 106 286
Deferred income tax liabilities 19,981 Offset bydeferred income tax assets (11,770)	11,375 (3,008)
8,211	8,367

17.4 Movement in deferred income tax assets and liabilities

				As at September 30, 2020	As at September 30, 2020
	Net assets				Net assets
	(liabilities),	Impact on	Recognized in		(liabilities),
	opening	adoption of	shareholders’	Recognized in	closing
	balance	new standard	equity	profit or loss	balance
	$	$	$	$	$
Non-capital losses carried forward	3,506	-	-	525	4,031
Goodwill and intangible assets	5,421	-	-	180	5,601
Property, plant and equipment	(9,077)	(6,666)	-	(2,308)	(18,051)
Inventories	149	-	-	107	256
Convertible debentures	(106)	-	386	(280)	-
Lease liabilities	-	7,129	-	1,387	8,516
Other	192	-	-	(169)	23
	85	463	386	(558)	376

For the year ended September 30, 2020

TERRAVEST INDUSTRIES INC. Notes to the Consolidated Financial Statements

(In thousands of Canadian dollars, except share and per share amounts)

			As at September 30, 2019	As at September 30, 2019
	Net assets			Net assets
	(liabilities),	Recognized in		(liabilities),
	opening	shareholders’	Recognized in	closing
	balance	equity	profit or loss	balance
	$	$	$	$
Non-capital losses carried forward	3,833	-	(327)	3,506
Goodwill and intangible assets	5,236	-	185	5,421
Property, plant and equipment	(7,377)	-	(1,700)	(9,077)
Inventories	148	-	1	149
Convertible debentures	(412)	415	(109)	(106)
Other	179	-	13	192
	1,607	415	(1,937)	85

17.5 Deferred income tax

As at September 30, 2020, TerraVest has non-capital losses carried forward of $16,589 ($13,961 as at September 30, 2019). These losses expire between 2030 and 2040. Deferred income tax assets have been recognized in respect of these losses as it is probable that future taxable profit will be available against which TerraVest can utilize these benefits.

TerraVest also has capital losses of $60,428 ($61,002 as at September 30, 2019) that are available for carry forward indefinitely. No deferred income tax asset has been recognized with respect to these capital losses.

18. SHARE CAPITAL AND SHARE-BASED PAYMENTS

18.1 Common shares

Changes in the common shares issued and outstanding were as follows:

	As at September	30, 2020	As at September	30, 2019
	Number	Amount	Number	Amount
		$		$
Balance, beginning of year	17,642,489	139,290	17,630,707	137,406
Issued on conversion of convertible debentures	1,125,931	10,690	433,691	3,957
Issued on exercise of stock options	‐	‐	205,098	2,815
Repurchased and cancelled	(87,170)	(696)	(627,007)	(4,888)
Balance,end ofyear	18,681,250	149,284	17,642,489	139,290

During the year ended September 30, 2020, TerraVest repurchased 87,170 common shares (7,100 during the year ended September 30, 2019) under its common shares normal course issuer bid (“NCIB”) for total consideration of $1,080 ($74 during the year ended September 30, 2019). The difference between the amount paid for the common shares and their carrying value was recorded in share premium.

On March 16, 2020, TerraVest renewed its common shares NCIB under which it may repurchase 937,316 common shares. The common shares NCIB expires on March 15, 2021. The remaining number of common shares available for repurchase under the current common shares NCIB was 872,246 as at September 30, 2020.

On October 22, 2018, TerraVest repurchased 619,907 common shares under an SIB for a cash consideration of $6,819. Transaction costs of $71 were incurred to perform the SIB and were accounted for as additional consideration to repurchase the shares.

TERRAVEST INDUSTRIES INC. Notes to the Consolidated Financial Statements For the year ended September 30, 2020 (In thousands of Canadian dollars, except share and per share amounts)

18.2 Share-based payments arrangement

TerraVest has a stock option plan for which options are granted to key management personnel to purchase common shares of TerraVest. Of the 1,500,000 common shares reserved for issuance, 700,500 were available for issuance under the stock option plan as at September 30, 2020.

Total expense arising from the share‐based payment transactions recognized during the year ended September 30, 2020 as compensation expense was $100 ($82 for the year ended September 30, 2019).

The stock options outstanding and the weighted average exercise prices as at September 30, 2020 were as follows:

	Opening balance Granted Settled or exercised Closing balance Vested and exercisable	Opening balance Granted Settled or exercised Closing balance Vested and exercisable
Feb. 9, 2017 Feb. 9, 2022 $9.10 Mar. 9, 2017 Mar. 9, 2024 $9.10 Jan.20,2020 Jan. 20,2027 $13.12	333,000 ‐ - 333,000 333,000 435,000 ‐ (167,500) 267,500 267,500 - 100,000 - 100,000 -	- - 100,000
	768,000 100,000 (167,500) 700,500 600,500	100,000
Weighted average exerciseprice	$9.10 $13.12 $9.10 $9.67 $9.10

During the year ended September 30, 2020, 167,500 stock options were settled for total cash consideration of $1,178 and no stock options were exercised or forfeited. In addition, TerraVest granted 100,000 stock options to key management personnel. The option grant price is equal to the volume weighted average trading price of the common shares of TerraVest on the Toronto Stock Exchange for the twenty trading days immediately preceding the date of grant. The stock options granted expire seven years from the grant date, may only be exercised for common shares of TerraVest and vest as follows:

1/3 on the first anniversary date of the grant date;
1/3 on the second anniversary of the grant date; and
1/3 on the third anniversary of the grant date.

The grant-date fair value of stock options granted during the period was $1.86 per option. The fair value of each option granted was determined using the Black-Scholes option pricing model which incorporates the following assumptions:

Options granted	100,000
Risk-free interest rate	1.58%
Expected dividend yield	3.05%
Expected volatilityi)	17.71%
Option life	7 years
Forfeiture rate	Nil
Liquidity discount	20%
Grant date share price	$14.96
Exercisepriceper share	$13.12

i) The underlying expected volatility was determined by reference to historical data of TerraVest’s shares price on the Toronto Stock Exchange.

During the year ended September 30, 2019, 398,000 stock options were exercised by way of cashless exercises. As a result, TerraVest issued 205,098 common shares at a weighted average share price of $12.99 per common shares based on the average trading price of the common shares on the Toronto Stock Exchange for the five trading days immediately preceding the exercise dates of the stock options. The total value of the issued common shares represented the intrinsic value of the 398,000 stock options at the exercise dates and was recorded in share premium.

TERRAVEST INDUSTRIES INC. Notes to the Consolidated Financial Statements For the year ended September 30, 2020 (In thousands of Canadian dollars, except share and per share amounts)

18.3 Dividends

During the year ended September 30, 2020, TerraVest has declared dividends totaling $0.40 per common share ($0.40 per common share during the year ended September 30, 2019). As at September 30, 2020, $1,868 was included in dividends payable.

Subsequent to the end of the year, TerraVest declared a cash dividend of $0.10 per common share payable on January 11, 2021 to shareholders of record on December 31, 2020.

19. EARNINGS PER SHARE

The following table provides a breakdown of the numerator and denominator used in the calculation of earnings per share and diluted earnings per share:

Years September 30, 2020	ended September 30, 2019
Numerator Net income attributed to common shareholders $26,839 Financingcosts on convertible debentures,net of income tax 203	$22,495 1,115
Diluted net income attributed to common shareholders $27,042	$23,610
Denominator Common shares, beginning of year 17,642,489 Weighted average shares issued 892,398 Weighted average shares repurchased (48,823)	17,630,707 196,661 (587,771)
Weighted average shares, end of year ‐ basic 18,486,064 Dilutive effect of convertible debentures 271,542 Dilutive effect of options 273,129	17,239,597 1,537,196 339,784
Weighted average shares,end ofyear ‐ diluted 19,030,735	19,116,577
Net income per share ‐ basic $1.45 Net incomeper share ‐ diluted $1.42	$1.30 $1.24

TERRAVEST INDUSTRIES INC. Notes to the Consolidated Financial Statements For the year ended September 30, 2020 (In thousands of Canadian dollars, except share and per share amounts)

20. OPERATING EXPENSES

		Years ended
	September	30, 2020 September	30, 2019
	$	$
Cost of sales
Personnel expenses		62,950	65,759
Depreciation of property, plant and equipment		11,211	4,844
Amortization of deferred development costs		130	65
Administration
Personnel expenses		17,590	13,073
Depreciation of property, plant and equipment		1,797	2,834
Amortization of finite life intangible assets		5,729	3,962
Selling
Personnel expenses		4,575	3,861

Government subsidies related to personnel expenses have not been included in the table above. Refer to Note 29 for complementary information.

21. FINANCING COSTS

Years ended September 30, 2020 September 30, 2019	Years ended September 30, 2020 September 30, 2019
$ Interest on revolving credit facilities and long-term debt 3,223 Interest on lease liabilities 1,455 Interest on convertible debentures 154 Accretion of convertible debentures 122 Amortization of financing costs 277 Convertible debentures retirement costs 9 Accretion of contingent considerations -	$ 3,781 - 886 637 167 147 151
5,240	5,769

22. OTHER (GAINS) LOSSES

Years ended September 30, 2020 September 30, 2019	Years ended September 30, 2020 September 30, 2019
$ (Gain) loss on foreign exchange (604) Change in fair value of derivative financial instruments 127 Change in fair value of investment in equity instruments (1,713) (Gain) loss on disposal of property, plant and equipment (555) (Gain) loss on disposal of assets held for sale (931) (Gain)loss on contingent considerations (1,648)	$ (298) 629 - (18) (302) 457
(5,324)	468

TERRAVEST INDUSTRIES INC. Notes to the Consolidated Financial Statements For the year ended September 30, 2020 (In thousands of Canadian dollars, except share and per share amounts)

23. SUPPLEMENTAL CASH FLOW INFORMATION

		Years ended
	September	30, 2020 September	30, 2019
	$	$
Adjustments for items not affecting cash
Depreciation of property, plant and equipment		13,008	7,678
Amortization of intangible assets		5,729	3,962
Amortization of deferred development costs		130	65
Amortization of financing costs		277	167
Share‐based compensation expense		100	82
Net change of inventory valuation allowance		(214)	(641)
Change in fair value of derivative financial instruments		127	629
Change in fair value of investment in equity instruments		(1,713)	-
(Gain) loss on disposal of property, plant and equipment		(555)	(18)
(Gain) loss on disposal of assets held for sale		(931)	(302)
(Gain) loss on contingent considerations		(1,648)	457
Deferred income tax expense		558	1,937
Accretion of convertible debentures		122	637
Accretion of contingent considerations		-	151
Share of an associate’s net income		29	(136)
Other		(187)	(64)
		14,832	14,604
Change in non‐cash operating working capital items
Accounts receivable		26,270	6,318
Inventories		4,650	(5,179)
Other current assets		392	394
Accounts payable and accrued liabilities		(13,170)	(2,715)
Deferred revenues		3,293	(3,079)
		21,435	(4,261)

23.1 Additional cash flow information

Leases, for which an amount of $9,772 was recognized in PP&E and lease liabilities during the year ended September 30, 2020 ($nil during the year ended September 30, 2019), had no cash impact on investing and financing activities. Purchase of PP&E of $219 was unpaid and recorded as accounts payable and accrued liabilities as at September 30, 2020 ($932 as at September 30, 2019).

24. FINANCIAL INSTRUMENTS RISKS

TerraVest is exposed to various risks in relation to financial instruments. The main type of risks are market risk, credit risk and liquidity risk. An analysis of these risks as at September 30, 2020, is provided below.

24.1 Market risk

TerraVest is exposed to market risk, through its use of financial instruments, specifically to foreign currency risk, interest rate risk and certain commodity price risk.

TERRAVEST INDUSTRIES INC. Notes to the Consolidated Financial Statements For the year ended September 30, 2020 (In thousands of Canadian dollars, except share and per share amounts)

Foreign currency risk

Foreign currency risk arises from the fluctuation of foreign exchange rates and the degree of volatility of these rates relative to the Canadian dollar. TerraVest is subject to foreign currency risk for:

sales and operating expenses denominated in foreign currencies made by Canadian entities; and
financial instruments denominated in foreign currency in Canadian entities.

	As at	As at
	September 30, 2020	September 30, 2019
	US$	US$
Financial assets and liabilities exposure
Cash	14,477	3,737
Trade and other receivables	5,627	5,031
Investment in equity instruments	115	-
Accountspayable and accrued liabilities	(1,678)	(2,672)
	18,541	6,096

Based on the net U.S. dollar exposure as at September 30, 2020, a one cent increase in the Canadian/U.S. dollar exchange rate would have had a favorable impact of $185 on net income ($44 for the year ended September 30, 2019). A one cent decrease in the Canadian/U.S. dollar exchange rate would have had an impact of a similar magnitude but in opposite directions on net income.

TerraVest does not have a policy to hedge its foreign currency risk and manages its exposure to foreign currency risk by periodically entering into forward exchange contracts. As at September 30, 2020, TerraVest had forward exchange contracts totaling $29,792 ($30,928 as at September 30, 2019) outstanding to sell, at various rates and expiring on various dates up to and including July 28, 2023. The fair value of forward exchange contracts was a liability of $391 as at September 30, 2020 ($663 as at September 30, 2019) included in accounts payable and accrued liabilities.

Interest rate risk

TerraVest does not have a policy to hedge its interest rate risk and is exposed to interest rate risk arising from fluctuations in interest rates on revolving credit facilities and long-term debt at variable interest rates. On June 3, 2020, TerraVest entered into an interest rate swap agreement expiring on June 9, 2025 for the notional amount of $25,000. Under the interest rate swap agreement, TerraVest receives interest on the notional amount at the 1-month CDOR rate in exchange for payments at a fixed rate of 0.87%, plus 140 to 265 basis points based on a prescribed ratio. The fair value of the interest rate swap was a liability of $167 as at September 30, 2020 included in accounts payable and accrued liabilities.

For the year ended September 30, 2020, a 1% increase in the interest rate would have had an unfavorable impact of $676 on net income ($708 for the year ended September 30, 2019), calculated using the average outstanding balances during the year on revolving credit facilities and long‐term debt at variable interest rates. A 1% decrease in the interest rate would have had an impact of a similar magnitude but in opposite directions on net income.

Commodity price risk

TerraVest is sensitive to changes in commodity prices for crude oil and natural gas. Fluctuations in commodity prices for crude oil and natural gas have an indirect impact on TerraVest’s portfolio businesses operating in the oil and natural gas sectors. The indirect impact is the effect that the price variations have on activity levels for customers of those portfolio businesses and, therefore, the demand for goods and services. The indirect impact is not quantifiable.

24.2 Credit risk

Credit risk is the risk that a counterparty will fail to perform its obligations to TerraVest. TerraVest’s credit risk comes mainly from accounts receivable and is mitigated through credit policies that limit transactions according to counterparties’ creditworthiness, which is assessed by considering counterparties’ financial position, past experience and other factors. In addition, a large majority of TerraVest’s clients are well established companies with a history of prompt

TERRAVEST INDUSTRIES INC. Notes to the Consolidated Financial Statements For the year ended September 30, 2020 (In thousands of Canadian dollars, except share and per share amounts)

payment. Accounts receivable amounts are presented on the consolidated statements of financial position net of the allowance for doubtful accounts. In measuring the expected credit losses, the trade receivables have been assessed on a collective basis as they possess shared credit risk characteristics. They have been grouped based on the days past due. The expected loss rates are based on the payment profile for sales based on historical credit losses. Trade receivables are written off when there is no reasonable expectation of recovery. Failure to make payments within 180 days from the invoice date and failure to engage with TerraVest on alternative payment arrangement, amongst other, may be considered indicators of no reasonable expectation of recovery. The credit risk on cash is considered negligible since cash is held in reputable financial institutions with high quality external credit ratings. TerraVest’s maximum exposure to credit risk is $72,062 as at September 30, 2020 ($59,779 as at September 30, 2019).

24.3 Liquidity risk

Liquidity risk refers to the possibility of TerraVest not being able to meet its financial obligations when due. TerraVest’s objective is to maintain cash and cash availability to meet its liquidity requirements. TerraVest monitors its cash and trade receivable balances as well as cash flows generated from operations to meet its financial obligations. TerraVest also has access to various authorized revolving credit facilities to manage its liquidity need.

As at September 30, 2020 and 2019, TerraVest contractual financial liabilities maturities are as follows:

	Contractual cash flows
	Next 12 months 2 to 5years Beyond 5years	Totali)
$ Bank overdrafts 735 Revolving credit facilities 864 Accounts payable and accrued liabilitiesii) 23,978 Dividends payable 1,868 Long‐term debtiii) 103,651 Interest on long-term debt - Derivative financial instruments 558	$ $ $ 735 - - 864 - - 23,978 - - 1,868 - - 5,334 98,279 315 1,981 2,030 - 275 283 -	$ 735 864 23,978 1,868 103,928 4,011 558
As at September 30, 2020 131,654	35,035 100,592 315	135,942
As at September 30,2019 153,971	51,358 113,716 835	165,909

i) The amounts reflect the contractual undiscounted cash flows, which may differ from the carrying values of the liabilities at the reporting date.

ii) Excluding the derivative financial instruments liability of $558 as at September 30, 2020.

iii) Include current and non-current portion of long-term debt.

25. CAPITAL MANAGEMENT

The capital structure of TerraVest consists of its revolving credit facilities, long-term debt, convertible debentures and shareholders’ equity attributable to common shareholders as presented in the consolidated statements of financial position. TerraVest’s objective in managing its capital resources is to ensure that there are adequate capital resources to support the operations of its various business segments and maximize the return to shareholders. Management continually assesses TerraVest’s capital needs to meet its objectives. There were no significant changes in TerraVest’s capital management approach from the prior year.

TERRAVEST INDUSTRIES INC. Notes to the Consolidated Financial Statements For the year ended September 30, 2020 (In thousands of Canadian dollars, except share and per share amounts)

The following table outlines TerraVest’s capital structure:

	As at	As at
	September 30, 2020	September 30, 2019
	$	$
Bank overdrafts	735	349
Drawn on current revolving credit facilities	864	-
Available on current revolving credit facilities, net of amount drawn	3,386	-
Drawn on long-term operating loans	77,457	86,629
Available on long-term operating loans, net of amount drawn	42,957	9,113
Long‐term debt (current and non‐current)	26,194	23,183
Convertible debentures	-	9,943
Shareholders’ equityattributable to common shareholders	125,930	100,503
	277,523	229,720

Other than the financial covenants and restrictive non‐financial covenants contained in the loan agreements described in Note 14, TerraVest is not subject to any externally imposed capital restrictions.

The Board of Directors does not establish quantitative return on capital criteria for management. TerraVest intends to maintain a flexible capital structure that is consistent with its stated objectives and adjust it in the light of changes in economic conditions and the risk characteristics of the underlying instruments. In order to maintain or adjust its capital structure, TerraVest may, from time to time, acquire shares for cancellation in connection with an SIB or an NCIB, issue new shares, raise capital through various debt instruments or refinance current debt through instruments with different characteristics.

26. CONTINGENCIES

In the ordinary course of business, TerraVest is exposed to various proceedings and claims. TerraVest assesses the validity of these proceedings and claims. Provisions are made whenever a penalty seems probable and a reliable estimate can be made of the amount. Management believes that any settlement arising from these claims will not have a significant effect on TerraVest’s current consolidated financial position or on net income. Therefore, no provision has been recognized in these consolidated financial statements.

27. RELATED PARTY TRANSACTIONS

27.1 Identification

As at September 30, 2020, TerraVest common shares were held by multiple shareholders, none of whom controlled TerraVest or had significant influence over TerraVest. As at September 30, 2019, Clarke Inc. held over 20% of the voting rights of TerraVest and was considered an entity having significant influence over TerraVest.

An associate is an entity that TerraVest has significant influence over, by holding 20% or greater of the voting rights of the entity. Key management personnel includes members of the Board of Directors, the President and Chief Executive Officer, the Chief Investment Officer and the Chief Financial Officer. Other related parties include close family members of key management personnel and entities controlled by a key management personnel.

For the year ended September 30, 2020 (In thousands of Canadian dollars, except share and per share amounts)

TERRAVEST INDUSTRIES INC. Notes to the Consolidated Financial Statements

27.2 Transactions and account balances

*27.2 Transactions and account balances*
	Year ended September 30, 2020
		Other related
	Associate	parties
	$	$
Transactions
Purchasesi)	14	-
Professional fees expensei)	-	158
Rental expensei)	-	21
Proceeds from disposal of assets held for saleii)	-	3,000
Account balances
Accountspayable and accrued liabilities	-	33

i) The related party transactions during the year ended September 30, 2020 were carried out under market terms and conditions and as part of ordinary course of business.
ii) On March 25, 2020, TerraVest sold an immovable property for a total consideration of $3,000 to Armco Rive Nord inc. (formerly 11925890 Canada inc.), an entity jointly controlled by the Chairman of TerraVest’s Board of Directors and by George Armoyan, a member of TerraVest’s Board of Directors. The transaction resulted in a gain on disposal of assets held for sale of $1,111 and was carried out under market terms and conditions.

		Year ended September 30, 2019	Year ended September 30, 2019
	Entity with
	significant	Key management	Other related
	influence	personnel	parties
	$	$	$
Transactions
Professional fees expensei)	-	-	263
Rental expensei)	25	-	-
Common shares repurchasedii)	-	440	-
Account balances
Accountspayable and accrued liabilities	5	40	15

i) The related party transactions during the year ended September 30, 2019 were carried out under market terms and conditions and as part of ordinary course of business.
ii) On October 22, 2018, TerraVest repurchased 40,000 common shares at $11.00 per common shares from key management personnel under an SIB for a total cash consideration of $440. For detailed information on the terms and conditions of the SIB, please refer to the Issuer Bid Circular available on SEDAR.

TERRAVEST INDUSTRIES INC. Notes to the Consolidated Financial Statements For the year ended September 30, 2020 (In thousands of Canadian dollars, except share and per share amounts)

27.3 Additional information on other related parties’ transactions

	Years ended
	September 30, 2020 September 30, 2019
	$	$
Professional fees expense
Pellerin Strategies Conseils Inc.i)	135	150
Armco Capital Inc.ii)	23	113
	158	263
Rental expense
Clarke Inc.ii), iii)	21	-

i) Controlled by the Chairman of TerraVest’s Board of Directors.

ii) Controlled by George Armoyan, a member of TerraVest’s Board of Directors.

iii) As at September 30, 2019, Clarke Inc. was presented as an entity with significant influence.

27.4 Compensation of key management personnel

	Years ended
	September 30, 2020 September 30, 2019
	$	$
Compensation expense including Directors’ fee	897	861
Share-based compensation expense	100	82
	997	943

28. SEGMENTED INFORMATION

28.1 Reportable segments

TerraVest determines its reportable segments based on the structure of its operations, which as at September 30, 2020 is divided into three operating business units: Fuel Containment, Processing Equipment and Service. Corporate is not a segment and is disclosed for reconciliation purposes.

The following tables also provide information on disaggregated revenue as part of its segmented information disclosure.

				Year ended September 30, 2020	Year ended September 30, 2020
	Fuel	Processing
	Containment	Equipment	Service	Corporate	Total
	$	$	$	$	$
Sales	158,996	134,295	10,962	-	304,253
Depreciation and amortization	7,952	9,420	1,494	1	18,867
Financing costs	2,468	2,171	333	268	5,240
Income tax expense (recovery)	8,232	1,091	18	(471)	8,870
Net income (loss)	21,524	4,404	(184)	884	26,628
Goodwill and intangible assets	18,154	15,904	-	-	34,058
Segment assets	164,119	124,736	19,107	11,663	319,625
Segment liabilities	105,050	70,635	15,151	2,647	193,483
Purchase of property, plant and
equipment,net ofproceeds	2,930	5,522	215	-	8,667

TERRAVEST INDUSTRIES INC. Notes to the Consolidated Financial Statements For the year ended September 30, 2020

(In thousands of Canadian dollars, except share and per share amounts)

				Year ended September 30, 2019	Year ended September 30, 2019
	Fuel	Processing
	Containment	Equipment	Service	Corporate	Total
	$	$	$	$	$
Sales	154,911	134,508	16,867	-	306,286
Depreciation and amortization	6,347	3,797	1,561	-	11,705
Financing costs	2,675	973	328	1,793	5,769
Income tax expense (recovery)	5,414	2,742	(91)	332	8,397
Net income (loss)	15,298	12,403	(172)	(4,974)	22,555
Goodwill and intangible assets	20,816	16,830	-	-	37,646
Segment assets	152,024	97,973	18,863	4,734	273,594
Segment liabilities	96,543	51,226	14,649	10,250	172,668
Purchase of property, plant and
equipment,net ofproceeds	10,628	5,321	369	3	16,321

For the years ended September 30, 2020 and 2019, no customer accounted for more than 10% of consolidated sales.

28.2 Geographical information

TerraVest generates revenue from two segmental regions. The concentration of TerraVest’s revenue is derived from Canadian and U.S. sales.

	Years ended
	September 30, 2020 September 30, 2019
	$	$
SALES
Canada	180,400	205,154
United States	123,853	101,132
	304,253	306,286

Certain non-current assets and goodwill by geographic segment:

		As at September 30, 2020	As at September 30, 2020
	Canada	United States	Total
	$	$	$
Property, plant and equipment	93,035	15,735	108,770
Intangible assets	13,948	7,456	21,404
Goodwill	6,915	5,739	12,654
	113,898	28,930	142,828

		As at September 30, 2019
	Canada	United States	Total
	$	$	$
Property, plant and equipment	60,481	13,987	74,468
Intangible assets	15,599	5,437	21,036
Goodwill	6,645	9,965	16,610
	82,725	29,389	112,114

TERRAVEST INDUSTRIES INC. Notes to the Consolidated Financial Statements For the year ended September 30, 2020 (In thousands of Canadian dollars, except share and per share amounts)

29. IMPACT OF COVID-19

In March 2020, the World Health Organization declared a global pandemic due to the novel COVID-19 which continues to spread in Canada and around the world. The situation is constantly evolving, and the measures put in place are having multiple impacts on local, provincial, national and global economies.

Management is closely monitoring the situation and has put various response plans in place to keep employees, customers and vendors safe and to continue operations. As at September 30, 2020, TerraVest is aware of changes in its operations as a result of the COVID-19 pandemic, including travel restrictions, reduced activities of some of its manufacturing facilities, temporary lay-offs of employees and temporary reduction of executive salaries and board of directors remuneration.

During the year ended September 30, 2020, certain Canadian subsidiaries of TerraVest’s received government subsidies totaling $13,393, of which $12,553 has been recognized in net income. Government subsidies helped maintain employment during a period where revenues have been temporarily reduced.

Management continues to monitor and assess the ongoing development and respond accordingly. The impacts, if any, will be accounted for when they are known and may be assessed.

30. FUTURE ACCOUNTING POLICIES

30.1 Business combination – Definition of a business

On October 22, 2018, the International Accounting Standards Board (“IASB”) issued amendments to IFRS 3 Business Combinations , that seek to clarify whether a transaction results in an asset or a business acquisition. The amendments apply to businesses acquired in annual reporting periods beginning on or after January 1, 2020. Earlier application is permitted. The amendments include an election to use a concentration test. This is a simplified assessment that results in an asset acquisition if substantially all of the fair value of the gross assets is concentrated in a single identifiable asset or a group of similar identifiable assets. If a preparer chooses not to apply the concentration test, or the test is failed, then the assessment focuses on the existence of a substantive process. TerraVest will adopt these amendments to business combinations for which the acquisition date is on or after October 1, 2020.

AI assistant

Draganfly Inc. — Audit Report / Information 2020

47836_rns_2020-12-16_62fa86be-0ad8-4e7a-87a9-8e9421d8eba4.pdf

CONSOLIDATED FINANCIAL STATEMENTS

Independent Auditor's Report

Opinion

Basis for opinion

Information other than the consolidated financial statements and the auditor’s report thereon

Responsibilities of management and those charged with governance for the consolidated financial statements

Auditor's responsibilities for the audit of the consolidated financial statements

TERRAVEST INDUSTRIES INC.

Consolidated Statements of Financial Position

On behalf of the Board:

TERRAVEST INDUSTRIES INC.

Consolidated Statements of Income

TERRAVEST INDUSTRIES INC.

Consolidated Statements of Comprehensive Income

TERRAVEST INDUSTRIES INC.

Consolidated Statements of Changes in Shareholders’ Equity

TERRAVEST INDUSTRIES INC.

Consolidated Statements of Changes in Shareholders’ Equity – Continued

TERRAVEST INDUSTRIES INC.

Consolidated Statements of Cash Flows

1. DESCRIPTION OF THE BUSINESS

2. ACCOUNTING POLICIES

2.1 Basis of presentation

2.2 Functional and presentation currency

2.3 Basis of consolidation

2.4 Foreign currency

Transactions and balances

Foreign operations

2.5 Business Combinations

2.6 Segment reporting

2.7 Revenue recognition

2.8 Employee benefits

2.9 Government grants

2.10 Deferred development costs

2.11 Borrowing costs

2.12 Income taxes

2.13 Earnings per share

2.14 Cash

2.15 Inventories

2.16 Assets held for sale

2.17 Property, plant and equipment

2.18 Intangible assets

2.19 Investment in an associate

2.20 Goodwill

2.21 Impairment of non-financial assets

Property, plant and equipment, right-of-use assets and intangible assets with finite useful lives

Goodwill and intangible assets with indefinite lives

2.22 Leases

2.22.1 Leases – Accounting policies applied to the year ended September 30, 2020

2.22.2 Leases – Accounting policies applied to the year ended September 30, 2019

2.23 Provisions

2.24 Share premium

2.25 Share-based payments

2.26 Financial instruments

Recognition and initial measurement

Derecognition

Classification

Impairment of financial assets

Equity instruments

Convertible debentures

Derivative financial instruments

3. ACCOUNTING JUDGMENTS AND SOURCES OF ESTIMATION UNCERTAINTY

3.1 Business Combinations

3.2 Income tax expense

3.3 Impairment of non-financial assets and goodwill

3.4 Right-of-use assets and lease liabilities

4. ADOPTION OF NEW ACCOUNTING STANDARDS

4.1 Leases

Impact on date of initial application

5. BUSINESS COMBINATIONS

2020 Business Combination

5.1 Acquisition of Argo Sales Inc.

Fair value of the consideration transferred at the acquisition date

Assets acquired and liabilities assumed at the acquisition date

Determination of fair value

Accounts receivable

Inventories

Draganfly Inc. Audit Report / Information 2020