Jemtec Inc. — Management Reports 2021

Nov 27, 2021

JEMTEC Inc.

Management Discussion & Analysis

JEMTEC INC.

Management Discussion and Analysis July 31, 2021

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JEMTEC Inc.

Management Discussion & Analysis

This management discussion and analysis (“MD&A”) of JEMTEC Inc. (“Jemtec” or the “Company”) provides analysis of Jemtec’s financial results for the fiscal year ended July 31, 2021. The following information should be read in conjunction with the accompanying audited financial statements and the notes to the audited financial statements as at July 31, 2021.

The item numbering in this discussion refers to the numbering and headings as per the Form 51102F1. Inapplicable items have been omitted.

This discussion includes statements about the Company’s expectations for the future. The Company’s management team believes that these expectations are reasonable; however, actual outcomes may differ materially from these expectations due to changes in operating performance, unexpected competition and other technical, market and economic factors.

Item 1. Date: November 25, 2021

This Management Discussion and Analysis, dated November 25, 2021, accompanies the audited financial statements of the Company for the fiscal year ended July 31, 2021.

Item 2. Overall Performance and Description of Business

JEMTEC is incorporated under the laws of Ontario, Canada. The Company is the leading provider of integrated technology systems for community-based corrections in Canada. The Company’s core business is the provision of services and technology for offender monitoring in Canadian federal and provincial correctional departments.

The common shares of JEMTEC Inc. trade through the facilities of the TSX-Venture Exchange under the symbol JTC.

JEMTEC’s mission is to lead the Canadian criminal justice market by providing our customers integrated services and state-of-the-art technology systems. Our vital essence as a company is to make our society a better and safer place. Each of our technologies and programs is designed with this corporate mission in mind and we believe that working together with criminal justice professionals, we can help ensure public protection and the delivery of effective and accountable correctional services.

The management approach of offering different levels of technology allows corrections, courts and police to select from a variety of options ensuring the correct level of offender control at the lowest overall cost. Offender location detection/verification technologies include: offender reporting via telephone contact, offender reporting kiosks with integrated database, GPS active and passive tracking, voice verification, electronic monitoring house arrest systems, remote alcohol in-home monitoring and private monitoring services.

JEMTEC’s business model is project driven. Since 1987, the Company has provided Canadian federal and provincial government agencies with offender monitoring services and technologies under project agreements with terms of 1 to 7 years.

Over the past year, most of the Company’s agreements have been renewed and/or extended.

On March 5, 2015, Public Works and Government Services Canada (“PWGSC”) confirmed that Jemtec’s solution had been evaluated as the winning proposal to provide Correctional Services of Canada (“CSC”) Electronic Monitoring services throughout Canada effective immediately for its propose Electronic Monitoring Research Pilot. The contract is for an initial three-year period with two additional one-year options selectable by CSC. In March 2019, PWGSC confirmed that it was going to exercise the additional (second) one-year option. In March 2020, following a competitive RFP process, PWGSC issued a new contract to Jemtec for one year with up to four additional one-year extensions. In March 2021, the current agreement was extended for one year from April 1, 2021 to March 31, 2022.

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JEMTEC Inc.

Management Discussion & Analysis

On February 12, 2016, Nova Scotia Department of Justice, Correctional Services (“Correctional Services”) confirmed that Jemtec has been selected to provide offender monitoring services. The initial contract had a three-year term with an option for two additional two years extensions for a possible seven-year term. In March 2019, NS Correctional Services sent the Company an extension agreement for signature outlining its plan to exercise its first two-year additional extension. In January 2021, NS Correctional Services sent the Company another extension agreement for signature outlining its plan to exercise its second two-year additional extension until February 28, 2023.

In February 2017, the Company extended its agreement with the Province of Saskatchewan for a threeyear term to March 31, 2020 with two optional extensions of up to one year each. In March 2020, the current agreement was extended for one year from April 1, 2020 to March 31, 2021. In March 2021, the current agreement was extended for another one year from April 1, 2021 to March 31, 2022.

In March 2017, Jemtec signed an agreement with Ontario Ministry of the Solicitor General (“SOLGEN”) to provide electronic monitoring equipment, technology, central monitoring software and technical services in support of its electronic Supervision Program. This agreement is for a four-year term with two optional extensions of up to one year each. In January 2021, SOLGEN sent the Company an extension agreement for signature outlining its plan to exercise its first one-year additional extension until March 31,2022. In September 2021, SOLGEN put out an RFB for GPS technology and has indicated that the new program will replace the Supervision Program described above however a firm start-up date for the new program was not available from SOLGEN. The Company plans to support the existing program as long as it runs and will bid on the new program.

Item 3. Selected Annual Information

We have summarized selected information from the Company’s audited financial statements, which are prepared in Canadian dollars and in accordance with International Financial Reporting Standards (“IFRS”).

			For the years ended July 31, 2021 2020 2019	For the years ended July 31, 2021 2020 2019	For the years ended July 31, 2021 2020 2019
Revenue Expenses Income tax Net income Earnings per share Basic Diluted			$ 2,566,970 1,890,360 (115,000)	$ 2,367,179 1,788,449 (170,000)	$ 2,330,206 1,771,996 (68,000)
			561,610	408,730	490,210
			$ 0.201 $ 0.197	$ 0.148 $ 0.142	$ 0.190 $ 0.173

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JEMTEC Inc.

Management Discussion & Analysis

Item 4 and 5. Discussion of Operations and Summary of Quarterly Results

Unaudited summarized income statement information for the last eight quarters is as follows:

	July 31 2021	April 30 2021	Quarters Ended January 31 2021 October 31 2020 July 31 2020	April 30 2020 January 31 2020 October 31 2019
Revenue Expenses Income tax Net income Earnings per share Basic Diluted	$ 689,264 521,061 9,000	$ 609,984 483,534 (31,000)	$ 656,562 $ 611,160 $ 591,257 462,166 423,599 422,103 (45,000) (48,000) (45,000)	$ 564,390 $ 604,440 $ 607,092 442,543 464,569 459,234 (35,000) (45,000) (45,000)
	$ 177,203	$ 95,450	$ 149,396 $ 139,561 $ 124,154	$ 86,847 $ 94,871 $ 102,858
	$ 0.063 $ 0.062	$ 0.034 $ 0.033	$ 0.054 $ 0.050 $ 0.046 $ 0.053 $ 0.049 $ 0.043	$ 0.031 $ 0.034 $ 0.037 $ 0.030 $ 0.033 $ 0.036

Revenues

Revenues have increased by 8% during the year ended July 31, 2021 compared to for the year ended July 31, 2020 primarily due to increased revenues from CSC. The Company earned revenues on its agreements with the Provinces of Saskatchewan, Nova Scotia as well as the CSC and SOLGEN. The Company also earned revenues from private bail clients by presenting the release plans for court cases.

	Years Ended July 31, 2021 2020 2019
Revenue Leasing, monitoring and activation Bail Interest income Total revenue	$ 2,482,649 $ 2,204,963 $ 2,123,876 81,216 143,700 187,132 3,105 18,516 19,198
	$ 2,566,970 $ 2,367,179 $ 2,330,206

Monitoring and activation income is recognized pursuant to various lease and rental agreements which specify the terms and conditions of the equipment provided and of the services to be performed. Rental and bail income is recognized on a straight-line basis over the terms of the leases. Revenue from the sale of parts which are required to repair and maintain the monitoring equipment is recognized upon delivery to the customer. Maintenance and monitoring service income is recognized when the services are performed.

The Company recognizes sales, leasing and rental revenue over the term of the applicable operating services agreements. The usual term of service agreements is one to seven years. Generally, customers have the option to renew or cancel the lease. Rental and service agreements upon the expiration of each term, or in certain circumstances, may be cancelled upon specific notice provided to the Company. In situations where agreements are terminated, and the monitoring equipment is rented on a daily basis, it is returned to the Company with no further obligation on behalf of the customer.

The Company commonly experiences variation in Bail/Immigration revenue including but not limited to: seasonal fluctuations, court delays, and immigration policy changes.

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JEMTEC Inc.

Management Discussion & Analysis

Expenses

During the year ended July 31, 2021, expenses increased by 6% compared to the year ended July 31, 2020 primarily due to the fluctuations in depreciation, directors’ fees, foreign exchange, monitoring and activation fees, office, repairs and maintenance, salaries and benefits and program delivery.

Category		Changes – fiscal year ended July 31, 2021 compared to fiscal year ended July 31, 2020
Depreciation		Decrease: Saskatchewan equipment fully depreciated.
Directors’fees		Increase: New director compensation.
Foreign exchange		Decrease: Due to fluctuations of foreign exchange rate.
Monitoring and activation fees		Increase: CSC and SOLGEN program growth.
Office		Increase: Greater use of courier services by CSC and SOLGEN.
Repairs and maintenance		Decrease: Decrease in repairs
Salaries and benefits		Increase: Bonus under an incentive bonus plan.
Programdelivery		Increase: Different equipment deliverymethods employed.

Income Tax

For the fiscal year ended July 31, 2021, the Company recognized a current income tax expense of $166,000 (2020 - $170,000) and a deferred income tax recovery of $51,000 (2020 - $Nil). The current income tax expense was related to income tax in Canada. The deferred income tax recovery was related to unrecognized deferred tax assets.

Net Income

For the year ended July 31, 2021, the Company recorded a net income of $561,610, compared to a net income of $408,730 during the year ended July 31, 2020. This increase in net income is primarily due to increase in monitoring and activation revenues and deferred income tax recovery.

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JEMTEC Inc.

Management Discussion & Analysis

Item 6 and 7. Liquidity and Capital Resources

Liquidity

As at July 31, 2021, the Company had cash and cash equivalents of $1,662,606 and working capital of $1,738,595. All cash and cash equivalents are on deposit with a Schedule I bank in Canada in current or interest accruing accounts.

	As at July 31, 2021	As at July 31, 2020
Current assets Equipment Deferred income tax assets Total assets Current liabilities Non-current liabilities Total liabilities Shareholders’ equity Working capital	$ 2,050,883 33,718 51,000 2,135,601 312,288 3,704 315,992 $ 1,819,609 $ 1,738,595	$ 2,318,813 18,250 -
		2,337,063
		413,007 7,035
		420,042
		$ 1,917,021
		$ 1,905,806

Working capital components include cash and cash equivalents in current or interest-bearing accounts, accounts receivable, prepaid expenses and deposits, accounts payable and accrued liabilities, deferred revenue, income tax payable and current portion of lease liability.

Accounts receivable and accounts payable are expected to increase or decrease as sales volumes change. Deferred revenue will fluctuate in relation to the Company’s private bail project. Private bail clients typically pay in advance for one or more months’ monitoring.

The Company continues to monitor expenses, while at the same time is experiencing greater fluctuations in revenues from quarter to quarter. These fluctuations come as more customers move to rental agreements compared to lease agreements. Rental agreements allow Provincial and Federal customers the risk reduction and flexibility to start programs that in some cases would not have happened without the rental component. A combination of an 8% increase in revenues and a 6% increase in expenses resulted in a net income of $561,610 for the year ended July 31, 2021 after a tax provision of $115,000, compared to a net income of $408,730 for the year ended July 31, 2020 with a tax provision of $170,000.

During its fiscal year ending July 31, 2022, the Company anticipates being profitable excluding expenses that may be incurred in connection with a potential acquisition or business combination and any revenues or expenses resulting from an expansion of the Company’s business or acquisition program.

Except as described, the Company’s management is not aware of any other trends or other expected fluctuations in its liquidity that would create any deficiencies. The Company’s’ management believes that its cash balances will be sufficient to meet the Company’s short-term goals however loss of one of the Company’s agreements may require a review of long-term requirements for ongoing operations and planned growth.

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JEMTEC Inc.

Management Discussion & Analysis

Capital Requirements and Resources

The Company anticipates that it will have little need to acquire property and equipment over the next year. If the Company is required to purchase additional equipment to service an agreement, the Company would utilize its available cash to finance these capital expenditures.

Item 9. Transactions with Related Parties

There are standard compensation arrangements under which the directors of the Company are compensated for services in their capacity as directors (including any additional amounts payable for committee participation or special assignments). An annual payment of $20,000 (2020 - $10,000) is made to three directors, $25,000 (2020 - $15,000) is made to the Chairman and a fee of $1,000 (2020 - $1,000) is paid per Board meeting attended. In addition to these amounts, the Chair of the Audit Committee is paid an additional $4,000 (2020 - $4,000) per year for the review of interim and annual financial reports. The directors did not receive compensation for services as consultants during the years ended July 31, 2021 and 2020.

Nature of expenditure	July 31, 2021	July 31, 2020
Accounting and administration fees Directors’ fees Salary and benefits Share-based payments	$ 39,500 98,404 339,179 -	$ 36,000 87,480 285,929 5,695
	$ 477,083	$ 415,104

During the year ended July 31, 2021, $98,404 (2020 – $87,480) was accrued or paid to the directors of the Company as directors’ fees.

During the year ended July 31, 2021, accounting fees of $39,500 (2020 – $36,000) was accrued or paid to a Firm where a Partner in the Firm is an officer of the Company. As at July 31, 2021, $3,500 (2020 – $3,150) is owing to this officer and is included in accounts payable and accrued liabilities.

During the year ended July 31, 2021, $50,000 (2020 – $Nil) was accrued to the President of the Company under an incentive bonus plan.

These transactions with related parties have been valued in these financial statements at the exchange amount, which is the amount of consideration established and agreed to by the parties. All amounts due to related parties are unsecured, non-interest bearing and have no specific repayment terms.

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JEMTEC Inc.

Management Discussion & Analysis

Item 10. Fourth Quarter

	For the fourth quarters ended July 31, 2021 2020	For the fourth quarters ended July 31, 2021 2020
Revenue Leasing, monitoring and activation Interest income		$ 688,622 $ 590,208 642 1,049
Expenses Accounting and administration fees Consulting fees Depreciation Directors’ fees Equipment rent and installation Foreign exchange gain/loss Lease interest Monitoring and activation fees Office Professional fees Repairs and maintenance Salaries and benefits Share-based payments Shareholder communications Travel		689,264 591,257 10,500 9,000 30,000 30,000 20,728 2,742 28,654 31,230 12,912 12,313 3,237 1,194 1,019 108 236,500 190,890 28,393 31,562 7,750 5,319 5,763 22,974 121,748 73,770 - 198 5,034 2,671 8,823 8,132
		521,061 422,103
Income before income taxes Income tax (recovery) expense		168,203 169,154 9,000 (45,000)
Net income and comprehensive income for the period		$ 177,203 $124,154
Earnings per share Basic Diluted		$ 0.06 $ 0.05 $ 0.06 $0.04
Weighted-average number of shares outstanding Basic Diluted		2,794,679 2,716,874 2,854,785 2,863,944

Item 12. Critical Accounting Estimates

The preparation of financial statements in accordance with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expense during the reported periods. Actual results could differ from those estimates.

Reference should be made to Note 3 - Significant Accounting Policies - in the notes to the Company’s audited financial statements for the years ended July 31, 2021 and 2020 for more information concerning the accounting principles used in the preparation of the Company’s audited financial statements.

Item 13. Changes in Accounting Policies and Future Accounting Changes

The Company has adopted IFRS 16 Leases effective August 1, 2019 using the modified retrospective method. IFRS 16 introduces new or amended requirements with respect to lease accounting. It introduces significant changes to the lessee accounting by removing the distinction between operating

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JEMTEC Inc.

Management Discussion & Analysis

and finance leases and requiring the recognition of a right-of-use asset and a lease liability at the lease commencement for all leases, except for short-term leases and leases of low value assets. In contrast to lessee accounting, the requirements for lessor accounting have remained largely unchanged.

Accordingly, under IFRS 16, the Company recognized a lease liability (Note 6) in relation to a vehicle lease and office space, which had previously been classified as operating lease under the principles of IAS 17 Lease with a corresponding right-of-use asset.

Certain pronouncements were issued by the IASB or the IFRIC that are mandatory for accounting periods commencing on or after January 1, 2022. Many are not applicable or do not have a significant impact to the Company and have been excluded. The following have not yet been adopted and are being evaluated to determine their impact on the Company.

IAS 1 – Presentation of Financial Statements (“IAS 1”) was amended in January 2020 to clarify the guidance for the classification of liabilities as current or non-current. It could affect the classification of liabilities, particularly for entities that previously considered management’s intentions to determine classification and for some liabilities that can be converted into equity. The amendment is effective for annual reporting periods beginning on or after January 1, 2023.

Item 14. Financial Instruments and Other Instruments

Details of the Company’s financial instruments, management’s assessment of their related risks and details of management of those risks are as follows:

Financial Risk Management

The Board of Directors has overall responsibility for the establishment and oversight of the Company’s risk management framework. The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities (excluding government service tax liabilities) and lease liabilities.

The Company maintains cash deposits with financial institutions, which, from time to time, may exceed federally insured limits. The Company believes it is not exposed to any significant credit risk from cash. At at July 31, 2021, the Company had $1,662,606 in cash balances.

The fair values of the Company’s financial instruments approximate their book values due to the shortterm nature of these instruments.

Financial Instruments Risk Exposure

The Company is exposed in varying degrees to a variety of financial instrument related risks. The Board approves and monitors the risk management processes. The Company does not have any asset backed commercial paper.

Credit Risk

The Company’s main exposure to credit risk is on its bank accounts. All cash balances are held in a Canadian Schedule I bank.

Liquidity Risk

The Company’s approach to managing liquidity is to ensure that it will have sufficient liquidity to settle obligations and liabilities when due. As at July 31, 2021, the Company had cash of $1,662,606 to settle $312,288 in current liabilities, which fall due for payment within twelve months of the statement of financial position.

The Company’s cash is invested in business accounts which are available on demand .

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JEMTEC Inc.

Management Discussion & Analysis

Market Risk

The market risk exposure to which the Company is exposed is interest rate risk. The Company’s bank account earns interest income at variable rates. The Company’s future interest income is exposed to short-term rate fluctuations. This is not a significant risk to the Company.

Foreign Exchange Risk

As at July 31, 2021, all the Company’s cash balances were held in Canada in Canadian dollars. As a result, the Company’s exposure to fluctuations in foreign exchange rates on cash is limited.

Item 15. Other Information

Share Capital

The Company has three classes of share capital: Common shares: Unlimited, no par value First preference shares: Unlimited, no par value, issuable in series – None issued as at July 31, 2021 and 2020 Second preference shares: 25,000 Series A, no par value, redeemable, $0.60 noncumulative dividend – None issued as at July 31, 2021 and 2020

As at July 31, 2021 and November 25, 2021, 2,794,679 common shares were outstanding.

Stock Options

The Company adopted a fixed stock option plan that permits the directors of the Company to grant incentive stock options to employees, directors and consultants of the Company. The maximum number of shares issuable under the plan, which follows the policies of the TSXV regarding stock option awards, is 471,118. Options granted under the plan vest in six equal instalments over a period of 18 months, with the first instalment vesting immediately and the remaining options vesting upon 6, 9, 12, 15 and 18 months after the date of grant. The option exercise price is generally set as the market price at the time of grant; however, a discount from the market price is permitted under the plan, subject to the policies of the TSXV.

On December 3, 2015, the Company granted 346,830 stock options to officers and directors, at a price of $0.345 per share, expiring on December 2, 2020. The fair value of the options granted was estimated on the date of grant at $62,350 using the Black-Scholes option-pricing model with the following assumptions: i) risk-free interest rate of 0.97%; ii) expected life of 5 years; iii) expected annualized volatility of 63.26%; and iv) no dividend yield. For the years ended July 31, 2016 and 2017, share-based payments were fully recognized in the Statement of Operations. As at July 31, 2020, all of the options were vested.

On January 7, 2019, 102,805 shares of these stock options granted were exercised at a price of $0.345 per share for consideration totaling $35,468. On April 11, 2019, 70,610 of these stock options granted were exercised at a price of $0.345 per share for consideration totaling $24,360. On April 24, 2019, 57,805 shares of these stock options granted were exercised at a price of $0.345 per share for consideration totaling $19,943. On December 2, 2020, 57,805 shares of these stock options granted were exercised at a price of $0.345 per share for consideration totaling $19,943 and 57,805 shares of these stock options granted were expired at a price of $0.345 per share.

On May 14, 2018, the Company granted 125,000 stock options to officers and directors, at a price of $0.75 per share, expiring on May 13, 2028. The fair value of the options granted was estimated on the date of grant at $62,000 using the Black-Scholes option-pricing model with the following assumptions: i) risk-free interest rate of 2.43%; ii) expected life of 10 years; iii) expected annualized volatility of 55.19%; and iv) no dividend yield. For the years ended July 31, 2018, 2019 and 2020, share-based payments were fully recognized in the Statement of Operations. As at July 31, 2021, all of the options were vested. On December 31, 2020, 20,000 shares of these stock options granted were exercised at a price of $0.75

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JEMTEC Inc.

Management Discussion & Analysis

per share for consideration totaling $15,000 and 5,000 options were forfeited. As at July 31, 2021, 100,000 shares of the options were outstanding.

Dividend

On January 8, 2020, the Company declared a special dividend in the aggregate amount of $679,219 ($0.25 per share) payable to the holders of the issued and outstanding common shares in the capital of the Company. The dividend was payable on February 10, 2020 to the shareholders on record of the Company as of January 17, 2020. On February 10, 2020, the Company distributed the dividend to a thirdparty company to release the dividend to shareholders. During the year ended July 31, 2020, $94 of the 2019 derecognized dividends was claimed and paid to a shareholder.

On December 22, 2020, the Company declared a special dividend in the aggregate amount of $693,670 ($0.25 per share) payable to the holders of the issued and outstanding common shares in the capital of the Company. The dividend was payable on February 10, 2021 to the shareholders on record of the Company as of January 6, 2021. On February 10, 2021, the Company distributed the dividend to a thirdparty company to release the dividend to shareholders. During the year ended July 31, 2021, $295 of the 2019 derecognized dividends was claimed and paid to a shareholder.

Warrants

None outstanding.

Disclosure Controls and Procedures

The Company has controls and procedures in place to provide reasonable assurance that all required disclosure under securities legislation is recorded, processed and reported within the applicable time periods and to ensure that required information is gathered and communicated to management so that decisions about timely disclosure can be made. The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the Company’s disclosure controls and procedures for the year ended July 31, 2021 and have found those controls to be adequate for the above purposes. There have been no significant changes in the Company’s disclosure controls or in other factors that could significantly affect disclosure controls subsequent to the date the Company carried out its evaluation.

Internal Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the Company’s internal controls and procedures for the year ended July 31, 2021. They have concluded that the Company’s disclosure controls and procedures were effective to provide reasonable assurance that all material financial information relating to the Company was made known to them by others within the Company in order for them to complete their analysis and review of the financial position and results of the Company.

This evaluation of the design of internal controls over financial reporting (“ICFR”) for the Company resulted in the identification of internal control deficiencies which are not atypical for a company of this size including lack of segregation of duties due to a limited number of employees dealing with accounting and financial matters and insufficient in-house expertise to deal with complex accounting, reporting and taxation issues. There have been no changes in the Company’s ICFR during the year ended July 31, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s ICFR.

Additional Information

Additional information relating to the Company is available on the SEDAR website at www.sedar.com and on the Company’s website at www.JEMTEC.ca.

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