Inventronics Limited — Interim / Quarterly Report 2020

May 28, 2020

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INVENTRONICS LIMITED

2020 FIRST QUARTER FINANCIAL REPORT

MANAGEMENT’S DISCUSSION & ANALYSIS

For the period ended March 31, 2020

2020 First Quarter Financial Report – March 31, 2020 Management's Discussion and Analysis

This Management’s Discussion and Analysis (“MD&A”) is dated May 28, 2020 and was prepared based on information available to Inventronics Limited (referred to herein as “Inventronics” or the “Corporation”) as of this date to help readers interpret Inventronics’ financial results for the three month period ended March 31, 2020. This financial report, including the Statement of Financial Position, Statement of Comprehensive Income, Statement of Cash Flows, Statement of Changes in Equity, and Notes to the Financial Statements (collectively referred to as the “financial statements”) and this MD&A, should be read in conjunction with the Corporation’s audited annual financial statements and accompanying MD&A for the year ended December 31, 2019, which are available on the SEDAR website at www.sedar.com under the Inventronics profile. All dollar amounts within this report are expressed in Canadian dollars ("CAD") unless otherwise stated.

Forward-looking information advisory. Certain statements contained in this report, including this MD&A, contain forward-looking information that represents the Corporation’s internal projections, expectations, estimates or beliefs concerning, among other things, the Corporation's expectations, perceptions and/or beliefs with respect to: economic and/or political conditions and the related impact on the Corporation's customers and/or demand for the Corporation's products; how its customers plan and execute their purchasing decisions and what factors might impact those decisions; its working capital position and its sufficiency to support the Corporation's current operations; and its forecast financial results. All statements other than statements of historical fact may be forwardlooking statements. In some cases, forward-looking statements can be identified by terminology such as “may”, “will”, “should”, “expects”, “projects”, “plans”, “anticipates”, and similar expressions. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties, which could cause actual results to differ materially from those anticipated in these forward-looking statements. These risks and uncertainties include, but are not limited to: general economic conditions; foreign currency fluctuations; actions by government authorities; competitor activity; indebtedness of the Corporation; availability of future financing; customer concentration risks; changes in the price of raw materials; interest rates; and changes in the communications, power and cable industries. Although management of the Corporation believes such statements are reasonable, undue reliance should not be placed on forward-looking information as the Corporation can give no assurance that such assumptions will prove to be correct. The forward-looking information has been included herein to provide shareholders with a more complete outlook on the Corporation's future business and operations and this information may not be appropriate for other purposes. The Corporation does not undertake to update the forwardlooking information contained herein except as required by applicable laws.

1. Corporation Overview

Founded in 1970 in Brandon, Manitoba, Canada, Inventronics designs, manufactures and markets protective enclosures for use in utility-type infrastructures. The Corporation’s products are typically found in telecommunication networks, cable television networks, electric power distribution networks and oil and gas installations where they are utilized in both outdoor and indoor applications to house and protect passive and/or active electrical and electronic components. Although the Corporation’s products have been primarily placed in service throughout North America, it is not uncommon to find Inventronics enclosures in other international infrastructures as well. The majority of Inventronics' revenues are generated from the sale of standard products which are sold directly to utilities, original equipment manufacturers and/or through distributors. For customers with specialty requirements, the Corporation designs and manufactures products designed to suit the customer's particular needs. This can range from the modification of an existing Inventronics cabinet to the conceptualization and manufacture of a new enclosure.

Inventronics operates from its ISO 9001:2015 certified facility located in Brandon, Manitoba where product design, manufacturing, corporate administration and sales functions are performed. The Corporation’s production employees are organized under the United Steelworkers Union (“USW”). The Corporation is incorporated in the Province of Alberta, Canada, has no subsidiaries and its shares are publicly traded on the TSX Venture Exchange under the symbol IVX.

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2. Selected Annual Financial Information

Selected Annual Financial Information

(in thousands of dollars, except per share amounts)

Selected Annual Financial Information (in thousands of dollars, except per share amounts)
For the years ended December 31	2019	2018	2017
Revenue	5,656	4,616	4,480
EBITDA1	452	257	321
Net income	195	16	81
Total assets	3,292	3,637	3,228
Long-term debt, excluding current portion	2,108	2,143	2,164
Basic and diluted earningsper share	4.4¢	0.4¢	1.8¢

Note 1. See "Non-IFRS Measures" below.

3. Summary of Financial Results

As many of the Corporation's products are incorporated in outdoor installations, revenues are subject to seasonal fluctuations. The variability of weather conditions in the first quarter often limits the volume of installations that can be completed during this period. General economic conditions in Canada also contribute to the quarterly variation of results presented in the following table.

Selected Quarterly Financial Information

(in thousands of dollars, except percentage and per share amounts)

Selected Quarterly Financial Information (in thousands of dollars, except percentage and per share amounts)	Selected Quarterly Financial Information (in thousands of dollars, except percentage and per share amounts)	Selected Quarterly Financial Information (in thousands of dollars, except percentage and per share amounts)
2020 2019 2018 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2
Revenue 1,044 Cost of sales as a percentage of Revenue 79% EBITDA1before Restructuring 110 Net income (loss) 44 Basic and diluted earnings(loss) per share 1.0¢	947 1,898 1,678 1,132 99% 76% 76% 85% (87) 261 197 80 (151) 192 134 20 (3.5)¢ 4.4¢ 3.0¢ 0.5¢	1,708 1,282 874 80% 79% 88% 249 216 14 189 (34) (47) 4.3¢ (0.8)¢ (1.1)¢

Note 1. See "Non-IFRS Measures" below.

4. Results of Operations

Revenue

Revenue for the first quarter of 2020 of $1,044,000 was $88,000, or 8%, lower than the $1,132,000 reported for the comparative quarter of 2019. The mix of product sales recognized in the first quarter of 2020 had better margin characteristics, which enabled the Corporation to report improved profitability compared to both the first and fourth quarters of 2019.

Cost of Sales

Cost of sales as a percentage of revenue for the three months ended March 31, 2020 of 79% was lower than the 85% reported for the comparative period of 2019 primarily as a result of select project pricing improvements. Production costs and efficiencies were relatively consistent in the first quarter of 2020 with those achieved in the same period of the prior year. Depreciation and amortization expense included in cost of sales of $20,000 was consistent with the $21,000 reported for the comparative period of 2019.

Selling and Administration Expense

Selling and administrative expenses for the first quarter of 2020 of $137,000 was $27,000 higher than the $110,000 for the comparative period of 2019. This increase in costs relates primarily to the timing of the recognition of certain fixed costs in Q1, 2020 as compared to 2019.

Interest

Interest expense for the three months ended March 31, 2020 of $42,000 was slightly higher than the $38,000 reported for the comparative period of the prior year due to the higher interest rate that was in effect on the long term debt during this period.

Net Income

Net income for the first quarter of 2020 was $44,000, or 1.0 cents per share, which is a modest improvement over the $20,000, or 0.5 cents per share, achieved in the same period last year. This improved profitability on lower revenues is directly attributable to the higher margins earned in the quarter.

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5. Income Taxes

At December 31, 2019, the Corporation had Canadian non-capital losses of $2,679,000 (2018 - $2,279,000). There were no Canadian non-capital losses that expired in 2019 (2018 - $0) and the remaining non-capital losses are scheduled to expire as follows:

(In thousands of dollars)
2026	$	268
2028		91
2034		50
2035		117
2037		925
2038		828
2039		400
Total	$	2,679

6. Liquidity and Capital Resources

Cash Flow from Operations

The Corporation considers a more useful measure of cash flow from operations to be cash flow from operating activities before changes in non-cash working capital balances. For the three months ended March 31, 2020, the Corporation's operations generated cash flow of $107,000 compared to $75,000 for the comparative quarter of the prior year.

Cash Flow from Operations

(in thousands of dollars)

For the three months ended March 31	2020	2019
Net income	44	20
Add: Interest on long-term debt1	38	33
Add: Depreciation	23	22
Add:Other itemsnotinvolving cash	2	-
Cash flow from Operations	107	75

Note 1. Interest on long-term debt considered a component of financing and therefore added back to net income (loss) to determine cash flow from operations.

Working Capital Position

As at March 31, 2020, the Corporation reported a working capital balance of $634,000, which represented an increase of $128,000 from the first quarter of 2019 and a working capital ratio of 1.54:1. It is management's belief that the Corporation's working capital position at March 31, 2020 is sufficient to support the current operating requirements of the business. The impact of the COVID-19 outbreak is certainly creating uncertainty and the market effects it will have on working capital are unpredictable. Management is monitoring the situation closely and intends to apply for any support programs that may be required as the situation continues to unfold.

Working Capital Position

(in thousands of dollars, except ratio calculation)

2020 At the end of Q1	2019 Q4 Q3 Q2 Q1	2018 Q4 Q3 Q2
Current assets 1,806 Current liabilities 1,172 Working capital 634 Workingcapital ratio 1.54 :1	1,147 1,705 2,133 1,410 527 921 1,500 904 620 784 633 506 2.18 :1 1.85 :1 1.42 :1 1.56 :1	1,460 1,538 1,134 968 1,226 902 492 312 232 1.51 :1 1.25 :1 1.26 :1

Working Capital Liquidity

Working capital liquidity for operating purposes has generally been provided through positive cash flow from operations and the Corporation’s operating credit facility. The Corporation’s operating credit facility limit is $850,000 and is margined on trade accounts receivable and inventories (see “Borrowing Arrangements and Covenants” below).

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7. Share Capital

An unlimited number of common shares are authorized for issue. The following table summarizes the authorized, issued and outstanding common shares of the Corporation.

Share Capital
(dollar amounts in thousands)
As at	March		31, 2020	December		31, 2019
	Shares		Amount	Shares		Amount
Authorized,issued and outstandingcommon shares	4,405,145	$	2,276	4,405,145	$	2,276

There was no change to the Corporation’s share capital during the three month period ended March 31, 2020 and there was no change to the Corporation's share capital since March 31, 2020.

Stock option plan

Inventronics maintains a stock option plan providing the Corporation the ability to grant options to employees and directors to purchase one common share of the Corporation per option. At March 31, 2020, there were 400,000 options granted, outstanding and exercisable with an exercise price of $0.116 (December 31, 2019 - 400,000 options with an exercise price of $0.116). There was no activity with respect to the Corporation's stock option plan during the three months ended March 31, 2020. There was no activity related to the Corporation's stock option plan since March 31, 2020.

8. Borrowing Arrangements and Covenants

Operating credit

The Corporation maintains a demand operating credit facility in the form of an overdraft lending account, which provides an authorized limit of $850,000 with an interest rate of prime plus 2.50% (December 31, 2019 – prime plus 2.50%). At March 31, 2020, an amount of $575,000 under this facility was available, of which $420,000 was drawn (December 31, 2019 - $575,000 available and $Nil drawn). The credit facility is margined on the Corporation’s accounts receivable and inventory balances and secured by a general security agreement over those assets. There are two financial covenants pertaining to this demand operating credit facility that are tested annually at December 31: (i) working capital ratio; and (ii) debt to tangible net worth ("DTNW") ratio. The Corporation is in compliance with all covenants and obligations pertaining to this arrangement.

Long-term debt

The Corporation has a long-term lending agreement in the form of a fixed rate mortgage maturing in 2042; bearing interest of 7.0%; repayable monthly in blended principal and interest installments of $16,000; secured by a mortgage on the Corporation's production facility and land in Brandon, Manitoba, a general security agreement providing a security interest in all of the Corporation's present and after acquired personal property but accepting a subordinate position to all existing registered charges. Effective April 10, 2020, after a one-year period from the last rate reset, the Corporation selected a fourteen-year fixed interest rate term with an interest rate of 6.0% and blended monthly payments of $15,000. Although containing general performance conditions, the loan agreement does not contain any financial covenants that must be periodically tested. The Corporation is in compliance with all covenants and obligations pertaining to this arrangement.

9. Foreign Currency Exposure

For the three month period ended March 31, 2020, the Corporation did not have a significant direct exposure to foreign currency risk as a majority of its sales were delivered to the Canadian marketplace and denominated in Canadian dollars ("CAD"), a substantial majority of the Corporation's purchases were denominated in CAD and the Corporation maintained minimal United States dollar ("USD") cash balances.

10. Related Party Transactions

Three members of Inventronics' senior management team, as a group, control the corporation that owns approximately 69% of the outstanding common shares of the Corporation. These members of the senior management team are members of Inventronics' Board of Directors ("Board") and receive no compensation for their service as Board members. The Corporation pays fixed and variable compensation to its senior management team for their employment services. For the three months ended March 31, 2020, the Corporation expensed $96,000 (2019 - $102,000) related to those compensation arrangements.

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11. Governance

The Corporation’s Board is comprised of the four members of the Corporation's senior management team and two independent members. The Corporation's Chief Executive Officer and the two independent members comprise the Corporation's Audit Committee.

12. Non-IFRS Measures

EBITDA

Earnings before interest, tax, depreciation and amortization (“EBITDA”) is not a recognized measure under International Financial Reporting Standards ("IFRS"). However, management believes that EBITDA is a useful supplementary measure to net earnings, as it provides investors with an indication of cash earnings prior to debt service, capital expenditure, income tax and non-cash items. Readers should be cautioned, however, that EBITDA should not be construed as an alternative to net earnings determined in accordance with IFRS as an indicator of the Corporation’s performance or to cash flows from operating, investing and financing activities as a measure of liquidity or cash flows. The Corporation’s method of calculating EBITDA may differ from the methods by which other companies calculate EBITDA and, accordingly, the EBITDA used herein may not be comparable to measures used by other companies.

Reconciliation of EBITDA to Net Income

(in thousands of dollars)

For the three months ended March 31	2020	2019
EBITDA	110	80
Less: Depreciation and amortization	23	22
Less: Interest expense	43	38
Net income	44	20

13. Outlook

In addition to other sections of this MD&A, this section contains forward-looking information and actual outcomes may differ materially from those expressed or implied therein. Please see the forward-looking information advisory included in the opening section of this MD&A.

The first quarter of 2020 achieved more typical levels of revenue and improved profitability compared to both the first and fourth quarters of 2019. The impact of the COVID-19 outbreak late in the first quarter is creating significant uncertainty for the second and third quarters of 2020. It is extremely difficult to predict revenue or costs given the emergency measures that have been implemented to deal with this situation. The Corporation is a part of the supply chain to the construction and maintenance of communications infrastructures which is categorized as essential. If this sector continues to follow their capital spending budgets, the Corporation should continue to receive orders in a relatively consistent fashion. The key risks in this environment are changes in government regulation, illness of employees, reduced spending by customers and supply challenges. These risks are being addressed and mitigated to the extent possible but are largely beyond the Corporation’s control.

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