Pivot Technology Solutions, Inc. — Interim / Quarterly Report 2020

May 13, 2020

Interim Condensed Consolidated Financial Statements

(unaudited)

2020 Q1

Dated: May 12, 2020

Interim Condensed Consolidated Statements of Financial Position

(unaudited)

		March 31,	December 31,	January 1,
(in thousands of Canadian dollars, except otherwise noted)	notes	2020	2019	2019
			(re‐presented,	(re‐presented,
			note 5)	note 5)
ASSETS
Current
Cash and cash equivalents		15,641	35,430	20,881
Accounts receivable		380,554	295,389	313,536
Income taxes recoverable		7,951	4,087	3,923
Inventories		77,342	51,329	73,367
Deferred contract costs		31,655	25,494	25,692
Other current assets		3,854	3,897	5,373
Total current assets		516,997	415,626	442,772
Property, plant and equipment	7	23,163	22,460	8,638
Goodwill	8	63,414	58,865	61,608
Other intangible assets	9	20,124	21,684	33,656
Deferred tax assets		11,628	10,639	14,054
Deferred contract costs		16,626	17,413	13,115
Other non‐current assets		636	709	709
Total assets		652,588	547,396	574,552
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Bank indebtedness		11,335	19,682	24,780
Accounts payable and accrued liabilities	10	346,114	289,234	346,966
Income taxes payable		818	187	865
Deferred revenue and customer deposits		9,731	9,048	9,354
Deferred contract revenue		35,767	29,669	28,586
Other financial liabilities	11	195,284	144,510	136,621
Total current liabilities		599,049	492,330	547,172
Deferred tax liabilities		637	500	525
Deferred contract revenue		17,622	18,525	14,069
Other financial liabilities	11	15,553	14,999	1,606
Other non‐current liabilities		–	–	1,297
Total liabilities		632,861	526,354	564,669
Shareholders' equity
Share capital	13	80,945	83,176	83,550
Contributed surplus		6,883	6,562	6,062
Foreign exchange translation reserve		9,379	8,212	9,052
Accumulated deficit		(80,988)	(80,229)	(92,432)
Equity attributable to shareholders		16,219	17,721	6,232
Non‐controlling interest		3,508	3,321	3,651
Total shareholders' equity		19,727	21,042	9,883
Total liabilities and shareholders' equity		652,588	547,396	574,552

See accompanying notes to consolidated financial statements.

Contingencies (note 11).

Interim Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) (unaudited)

		Three months ended March 31,
(in thousands of Canadian dollars, except per share amounts)	notes	2020	2019
			(re‐presented,
			note 5)
Revenue	14	376,807	389,861
Cost of sales	15	324,717	341,170
Gross profit		52,090	48,691
Selling, general and administrative expenses	15	46,699	44,251
Income before depreciation and amortization, finance expense, change
in fair value of liabilities and other expenses		5,391	4,440
Depreciation and amortization		4,691	4,995
Finance expense	16	1,744	2,216
Change in fair value of liabilities	17	9	308
Other expenses	18	447	4,145
Loss before income taxes		(1,500)	(7,224)
Income tax recovery	19	(2,484)	(1,907)
Net income (loss) for the period		984	(5,317)
Other comprehensive income (loss)
Items that may be reclassified subsequently to income (loss):
Exchange gain (loss) on translation of foreign operations		1,167	(313)
Total comprehensive income (loss)		2,151	(5,630)
Attributable to:
Shareholders		1,964	(5,076)
Non‐controlling interest		187	(554)
Total comprehensive income (loss)		2,151	(5,630)
Attributable to shareholders:
Earnings (loss) attributable to shareholders	13	797	(4,763)
Earnings (loss) per common share
Basic ($)	13	$0.02	($0.12)
Diluted ($)	13	$0.02	($0.12)

See accompanying notes to consolidated financial statements.

Certain comparative information has been reclassified to conform to current year presentation.

Interim Condensed Consolidated Statements of Changes in Shareholders' Equity

(unaudited)

				Foreign
			Non‐	currency
	Share	Contributed	controlling	translation	Accumulated
(in thousands of Canadian dollars)	capital	surplus	interest	reserve	deficit	Total
					(all amounts in 2019 and January 1, 2020 are re‐presented, note 5)
Balance, January 1, 2019	83,550	6,062	3,651	9,052	(92,432)	9,883
Shared‐based compensation	–	166	–	–	–	166
Dividends declared (note 13)	–	–	–	–	(1,579)	(1,579)
Loss on translation of foreign operations	–	–	–	(313)	–	(313)
Net loss for the period	–	–	(554)	–	(4,763)	(5,317)
Balance, March 31, 2019	83,550	6,228	3,097	8,739	(98,774)	2,840
Balance, January 1, 2020	83,176	6,562	3,321	8,212	(80,229)	21,042
Shared‐based compensation	–	143	–	–	–	143
Purchase of shares for cancellation	(2,313)	202	–	–	–	(2,111)
Stock options exercised	82	(24)	–	–	–	58
Dividends declared (note 13)	–	–	–	–	(1,556)	(1,556)
Gain on translation of foreign operations	–	–	–	1,167	–	1,167
Net income for the period	–	–	187	–	797	984
Balance, March 31, 2020	80,945	6,883	3,508	9,379	(80,988)	19,727

See accompanying notes to consolidated financial statements.

Interim Condensed Consolidated Statements of Cash Flows

(unaudited)

		Three months ended March 31,
(in thousands of Canadian dollars)	notes	2020	2019
			(re‐presented,
			note 5)
OPERATING ACTIVITIES
Net income (loss) for the period		984	(5,317)
Add (deduct) items not involving cash
Depreciation and amortization		4,691	4,994
Share‐based compensation	12	143	166
Change in provision for accounts receivable		17	–
Deferred income taxes		(15)	21
Amortization of loan fees	11	(81)	108
Change in fair value of liabilities	17	9	308
Changes in non‐cash working capital	20	(50,317)	(47,260)
Cash used in operating activities		(44,569)	(46,980)
INVESTING ACTIVITIES
Payments made on contingent consideration		(134)	(332)
Capital expenditures		(1,134)	(221)
Other intangible assets		(5)	(919)
Other investing activities		48	44
Cash used in investing activities		(1,225)	(1,428)
FINANCING ACTIVITIES
Net change in debt facilities		37,823	39,984
Net change in flooring arrangements		(20)	1,424
Net change in bank indebtedness		(9,537)	(3,377)
Payment of lease liabilities		(1,197)	(1,432)
Dividends paid		(1,556)	(1,579)
Purchase of shares for cancellation		(2,111)	–
Stock options exercised		58	–
Other financing activities		95	(1,307)
Cash provided by financing activities		23,555	33,713
Net decrease in cash during the period		(22,239)	(14,695)
Cash and cash equivalents, beginning of period		35,430	20,881
Foreign exchange gain (loss) on cash held in foreign currency		2,450	(69)
Cash and cash equivalents, end of period		15,641	6,117

See accompanying notes to consolidated financial statements.

1.	GENERALINFORMATIONANDNATUREOFTHEBUSINESS7
2.	BASISOFPREPARATION7
3.	SIGNIFICANTACCOUNTINGPOLICIES7
4.	CRITICALJUDGMENTSANDESTIMATES8
5.	CHANGEINACCOUNTINGPOLICYANDNEWACCOUNTINGPOLICIESADOPTED10
6.	FUTURECHANGESINACCOUNTINGPOLICIES13
7.	PROPERTY,PLANTANDEQUIPMENT14
8.	GOODWILL14
9.	OTHERINTANGIBLEASSETS15
10.	ACCOUNTSPAYABLEANDACCRUEDLIABILITIES15
11.	OTHERFINANCIALLIABILITIES16
12.	SHARE‐BASEDCOMPENSATION18
13.	SHARECAPITAL20
14.	REVENUE22
15.	EMPLOYEECOMPENSATIONANDBENEFITS23
16.	FINANCEEXPENSE24
17.	CHANGEINFAIRVALUEOFLIABILITIES24
18.	OTHEREXPENSES24
19.	INCOMETAXES25
20.	CHANGESINNON‐CASHWORKINGCAPITAL25
21.	FINANCIALINSTRUMENTS26
22.	RELATEDPARTYTRANSACTIONS28
23.	SEGMENTINFORMATION28

1. GENERAL INFORMATION AND NATURE OF THE BUSINESS

Pivot Technology Solutions, Inc. is a Canadian public company that provides mission critical information technology ("IT") products and servicesto the world's leading companies. Pivot Technology Solutions, Inc. is listed on the Toronto Stock Exchange ("TSX") and trades under the symbol "PTG". Its registered office is located at 55 Renfrew Drive, Suite 200, Markham, Ontario, Canada, L3R 8H3. Pivot Technologies Solutions, Inc. and its subsidiaries are together referred to in these interim condensed consolidated financial statements as the "Company" or "Pivot".

2. BASIS OF PREPARATION

a) Statement of Compliance

The interim condensed consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IAS") 34 "Interim Financial Reporting", as issued by the International Accounting Standards Board ("IASB"), and were approved by the board of directors of Pivot (the "Board") on May 12, 2020.

The interim condensed consolidated financial statements do not include all of the information required for full annual financial statements, and should be read in conjunction with Pivot's 2019 annual consolidated financial statements prepared in accordance with International Financial Reporting Standards ("IFRS"). Certain comparative information has been reclassified to conform to the current year presentation.

b) Basis of Presentation

The interim condensed consolidated financial statements have been prepared on a historical cost basis except for certain financial assets and financial liabilities classified at fair value through profit or loss.

Prior to 2020, Pivot's consolidated financial statements were expressed in United States (U.S.) dollars (USD). Commencing 2020, the consolidated financial statements are expressed in Canadian dollars (CAD), as further described in note 5. The USD remains to be the parent company's functional currency. All financial information presented in dollars has been rounded to the nearest thousand, unless otherwise noted.

3. SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies followed in these interim condensed consolidated financial statements are consistent with those applied in the Company's audited consolidated financial statements as at and for the year ended December 31, 2019, except as described below, and the impact of this change is identified in note 5.

New Accounting Policy – Presentation Currency

The functional currency of each entity in the consolidated group is U.S. dollars, with the exception of TeraMach, one of the Company'ssubsidiaries in Canada. The functional currency of TeraMach is Canadian dollars.

Functional and presentation currency

Items included in the financial statements of each entity within the Company are measured using the functional currency, which is the currency of the primary economic environment in which the entity operates. Functional currency is the currency in which revenue and expenses from operating activities are incurred, and financing activities are generated.

The financial statements are presented in Canadian dollars, unless otherwise noted.

The financial statements of the entities that have a functional currency different from the presentation currency of the Company ("foreign operations") are translated into Canadian dollars as follows:

• assets and liabilities of foreign operations are translated at exchange rates at the reporting date;
• revenue and expenses of foreign operations are translated at average rates for the period;
• shareholders' equity are translated at the exchange rate at the date of the transaction using historical foreign exchange rates in effect on the date the transactions occurred; and
• the resulting foreign exchange differences are recognized in foreign currency translation adjustment as part of the other comprehensive income (loss).

When such foreign operation is disposed of, the related foreign currency translation reserve is recognized in net income (loss) as part of the gain or loss on disposal.

Transactions

Foreign currency transactions are translated into an entity's functional currency at exchange rates at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of foreign currency transactions and from the translation at period end exchange rates of monetary assets and liabilities denominated in currencies other than an operation's functional currency are recognized in net income (loss), reflected as part of other expenses (income).

4. CRITICAL JUDGMENTS AND ESTIMATES

The preparation of the Company's interim condensed consolidated financial statements requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts and disclosures made in the interim condensed consolidated financial statements and accompanying notes. Due to the inherent uncertainty in making these critical judgments and estimates, actual outcomes could be different.

Estimates and assumptions are based on a set of underlying data that may include management's historical experience, knowledge of current events and conditions and other factors that are believed to

be reasonable under the circumstances. Management evaluates the judgments and estimates it uses on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.

The areas that require significant judgments and estimates include the following:

Assessment of impact from global pandemic

On March 11, 2020, the World Health Organization declared a global pandemic related to coronavirus ("COVID‐19") resulting in continued and uncertain economic and business impact on a global scale. As a result, the Company has reviewed its estimates, judgments and assumptions used in the preparation of its interim condensed consolidated financial statements, including with respect to the determination of whether indicators of impairment exist for its tangible and intangible assets, including goodwill and the credit risk of its counterparties.

Based on this analysis, the Company has determined that no significant revisions to estimates, judgments or assumptions were required; however, the continuing uncertainty associated with the COVID‐19 pandemic may require changes in future periods. Any such changes to estimates, judgements or assumptions could have a material impact on the Company's financial position and results of operations.

To date, the current conditions related to COVID‐19 has not had a material impact on the Company's business; however, the situation is dynamic and the impact of COVID‐19 on its results of operations and financial condition cannot be reasonably estimated at this time. Management continues to monitor and evaluate the situation and its impact on the Company's business.

Determination of whether a promise to deliver goods and services is considered distinct

Individual products and services are accounted for separately if they are distinct (i.e., if a product or service is separately identifiable from other items in the bundled package and if the customer can benefit from it). The consideration is allocated between separate products and services in a bundle based on their stand‐alone selling prices.

Determination of costs to obtain or fulfill a contract

Judgment is required to determine the timing and amount of costs that the Company will incur to obtain or fulfill a contract that meets the deferral criteria within IFRS 15, Revenue from Contracts with Customers.

Determination of the transaction price

The transaction price is the amount of consideration that is enforceable and to which the Company expects to be entitled in exchange for the goods and services it has promised to its customer. The Company determines the transaction price by considering the terms of the contract and business practices that are customary within that particular line of business. Discounts, rebates and other incentives are reflected in the transaction price at contract inception.

Determination of the stand‐alone selling price and the allocation of the transaction price

The transaction price is allocated to performance obligations based on the relative stand‐alone selling prices of the distinct goods or services in the contract. The Company estimates the stand‐alone selling price based on the price of a good or service when it sells that good or service separately in similar circumstances and to similar customers.

Determination of the recoverable amount of CGUs subject to an impairment test

Impairment exists when the carrying amount of a cash generating unit ("CGU") exceeds its recoverable amount, which is the higher of its fair value less costs to sell or its value in use. Significant judgment is required for the key assumptions utilized to determine the recoverable amounts for the different CGUs.

Valuation of deferred tax assets

Deferred tax assets are recognized for all unused tax losses to the extent that it is probable that taxable income will be available against which the losses can be utilized. Significant management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and the level of future taxable income together with future tax planning strategies. Estimates of future taxable income are based on forecasted cash flows from operations and the application of existing tax laws in each jurisdiction. To the extent that future tax rates and taxable income differ significantly from estimates, the ability of the Company to realize the net deferred tax assets recorded at the reporting date could be impacted.

5. CHANGE IN ACCOUNTING POLICY AND NEW ACCOUNTING POLICIES ADOPTED

Change in presentation currency

Prior to January 1, 2020, the Company reported its annual and quarterly consolidated statements of financial position and the related consolidated statements of income (loss) and cash flows in USD. Effective January 1, 2020, the Board elected to change the Company's presentation currency from USD to CAD. The change in presentation currency is to improve investors' ability to compare the Company's financial results with other Canadian publicly traded businesses.

The Company has applied the change retrospectively asif the new presentation currency had always been the Company's presentation currency. The consolidated financial results for all periods presented in the interim condensed financial statements are in CAD. USD continues to be the parent company's functional currency. The financial statements of entities with CAD as their functional currency have been carried forward into the consolidated results. The financial statements of the parent company and the entities with a functional currency other than CAD have been translated into CAD as follows:

• assets and liabilities presented and previously reported in USD have been translated into CAD using period end exchange rates of 1.4062 (March 31, 2020), 1.2990 (December 31, 2019) and 1.3637 (January 1, 2019);

• consolidated statements of income and other comprehensive income have been translated using the average foreign exchange rates of 1.3449 and 1.3295 (three months ended March 31, 2020 and 2019, respectively);

• shareholders' equity has been translated using historical foreign exchange rates in effect on the date the transactions occurred; and

• resulting exchange differences have been recorded within the foreign currency translation reserve.

Impacts on financial statements

The impacts of the changes in presentation currency on the consolidated financial statements are indicated below.

Condensed consolidated statements of financial position:

		As at December 31, 2019		As at January 1, 2019
	Reported	Re‐presented	Reported	Re‐presented
(in thousands)	USD	CAD	USD	CAD
ASSETS
Current	319,958	415,626	324,685	442,772
Non‐current	101,440	131,770	96,634	131,780
Total assets	421,398	547,396	421,319	574,552
LIABILITIES AND SHARHOLDERS' EQUITY
Current	379,007	492,330	401,240	547,172
Non‐current	26,193	34,024	12,831	17,497
Total liabilities	405,200	526,354	414,071	564,669
Shareholders' equity
Share capital	82,414	83,176	82,705	83,550
Contributed surplus	5,010	6,562	4,631	6,062
Foreign exchange translation reserve	(27)	8,212	53	9,052
Accumulated deficit	(73,915)	(80,229)	(83,106)	(92,432)
Equity attributable to shareholders	13,482	17,721	4,283	6,232
Non‐controlling interest	2,716	3,321	2,965	3,651
Total shareholders' equity	16,198	21,042	7,248	9,883
Total liabilities and shareholders' equity	421,398	547,396	421,319	574,552

Interim condensed consolidated statements of loss and comprehensive loss:

	Three months ended March 31, 2019
	Reported	Re‐presented
(in thousands except per share amounts)	USD	CAD
Revenue	293,239	389,861
Cost of sales	256,615	341,170
Gross profit	36,624	48,691
Selling, general and administrative expenses	33,284	44,251
Income before depreciation and amortization, finance expense, change in
fair value of liabilities and other expense	3,340	4,440
Depreciation and amortization, finance expense, and change in fair value
of liabilities	5,656	7,519
Other expenses	3,118	4,145
Income tax recovery	(1,434)	(1,907)
Net loss	(4,000)	(5,317)
Other comprehensive income (loss)
Items that may be reclassified subsequently to income (loss):
Exchange loss on translation of foreign operations	(45)	(313)
Total comprehensive loss	(4,045)	(5,630)
Attributable to:
Shareholder	(3,628)	(5,076)
Non‐controlling interest	(417)	(554)
Total comprehensive loss	(4,045)	(5,630)
Attributable to shareholders:
Loss attributable to shareholders	(3,583)	(4,763)
Loss per common share
Basic ($)	($0.09)	($0.12)
Diluted ($)	($0.09)	($0.12)

Certain comparative information has been reclassified to conform to current year presentation.

Interim condensed consolidated statements of cash flow:

	Three months ended March 31, 2019
	Reported	Re‐presented
(in thousands)	USD	CAD
Cash used in operating activities	(35,336)	(46,980)
Cash used in investing activities	(1,074)	(1,428)
Cash provided by financing activities	25,681	33,713
Net decrease in cash during the period	(10,729)	(14,695)
Cash and cash equivalents, beginning of period	15,312	20,881
Foreign exchange gain on cash held in foreign currency	(1)	(69)
Cash and cash equivalents, end of period	4,582	6,117

Amendments to IFRS 3, Business Combinations ("IFRS 3") – Definition of a Business

In October 2018, the IASB issued amendments to the definition of a business in IFRS 3 to help entities determine whether an acquired set of activities and assets is a business or not. The amendments clarify the minimum requirements for a business, removed the assessment of whether market participants are capable of replacing any missing elements, added guidance to help entities assess whether an acquired process is substantive, narrowed the definitions of a business and of outputs, and introduced an optional fair value concentration test. Effective January 1, 2020, the Company adopted the amendments to IFRS 3, with no material impact on its interim condensed consolidated financial statements.

Amendments to IAS 1, Presentation of Financial Statements ("IAS 1"); and IAS 8, Accounting policies, changes in accounting estimates and errors ("IAS 8") – Definition of Material

In October 2018, the IASB issued amendmentsto IAS 1 and IAS 8 to align the definition of "material" across the standards and to clarify certain aspects of the definition. The new definition states that, information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financialstatements make on the basis of those financialstatements, which provide financial information about a specific reporting entity. Effective January 1, 2020, the Company adopted the amendments to IAS 1 and IAS 8, with no material impact on its interim condensed consolidated financial statements.

6. FUTURE CHANGES IN ACCOUNTING POLICIES

Amendments to IAS 1 – Presentation of financial statements: classification of liabilities as current or non‐current

In January 2020, the IASB issued amendments to clarify the requirements for classifying liabilities as current or non‐current. The amendments specify that the conditions that exist at the end of a reporting period are those which will be used to determine if a right to defer settlement of a liability exists. The amendments also clarify the situations that are considered a settlement of a liability. The amendments are effective January 1, 2022, with early adoption permitted. The amendments are to be applied retrospectively. The Company does not intend to early adopt these amendments, and is currently assessing the impact of these amendment on its consolidated financial statements.

7. PROPERTY, PLANT AND EQUIPMENT

	March 31,	December 31,
	2020	2019
Cost
Balance, beginning of period	36,862	39,378
Additions	1,134	1,279
Disposals	(163)	(435)
Write‐off of fully depreciated assets	(7,901)	–
Reclassifications	–	(3,653)
Foreign currency translation	2,267	293
Balance, beginning of period	32,199	36,862
Accumulated depreciation
Balance, beginning of period	14,402	9,758
Depreciation	2,011	7,890
Disposals	(163)	(3,147)
Write‐off of fully depreciated assets	(7,901)	–
Reclassifications	(299)	(161)
Foreign currency translation	986	62
Balance, end of period	9,036	14,402
Carrying amount, end of period	23,163	22,460

Property, plant and equipment includes right‐of‐use ("ROU") assets, which represent office and warehouse space.

8. GOODWILL

		March 31, December 31,
	2020	2019
Balance, beginning of period	58,865	58,685
Foreign currency translation	4,549	180
Balance, end of period	63,414	58,865

9. OTHER INTANGIBLE ASSETS

		March 31, December 31,
	2020	2019
Cost
Balance, beginning of period	120,843	120,165
Additions	5	4,427
Disposals	–	(3,973)
Foreign currency translation	9,578	224
Balance, beginning of period	130,426	120,843
Accumulated amortization
Balance, beginning of period	99,159	88,106
Amortization	2,680	11,521
Disposals	–	(310)
Reclassifications	299	–
Foreign currency translation	8,164	(158)
Balance, end of period	110,302	99,159
Carrying amount, end of period	20,124	21,684

10. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

	March 31,	December 31,
	2020	2019
Accounts payable	290,036	243,092
Accrued liabilities	56,078	46,142
	346,114	289,234

A subsidiary of the Company entered into a secured flooring agreement with IBM Global Finance ("IBM"), whereby approved vendorssend invoices directly to IBM for payment and IBM bills the Company monthly for vendor invoices received. The agreement allows for up to US$2.5 million in advances on purchases from approved vendors, and the maximum advance amount may be changed by IBM in its discretion. The Company incurs interest on the outstanding balance at LIBOR plus 4.5% after a free financing period of 60 days, but the interest rate and free financing period may be changed in IBM's discretion. Included within accounts payable, amounts outstanding related to the IBM secured flooring agreement were $0.9 million (US$0.6 million) and $0.9 million (US$0.7 million) as at March 31, 2020 and December 31, 2019, respectively.

11. OTHER FINANCIAL LIABILITIES

	March 31,	December 31,
	2020	2019
Current
Secured borrowings	188,427	138,651
Contingent consideration	2,132	2,250
Cash‐settled share‐based compensation	824	761
Lease obligations	4,681	4,283
Automatic share repurchase plan (note 13)	736	–
	196,800	145,945
Deferred loan costs	(1,516)	(1,435)
	195,284	144,510
Non‐current
Cash‐settled share‐based compensation	567	513
Lease obligations	14,986	14,486
	15,553	14,999
	210,837	159,509

Secured Borrowings

The Company has a credit facility from a lending group represented by JPMorgan Chase Bank, N.A. ("JPMC"), which provides the Company a US$225.0 million senior secured asset based revolving credit facility ("JPMC Credit Facility"). The JPMC Credit Facility may be used for revolving loans, letters of credit, protective advances, over advances, and swing line loans. Advances under the JPMC Credit Facility accrue interest at ratesthat are equal to, based on certain conditions, at the Company's election either (a) JPMC's "prime rate" as announced from time to time plus 0.0% to 0.25%, or (b) London Inter‐Bank Offered Rate ("LIBOR"), or a comparable orsuccessor rate that is approved by JPMC, for an interest period of one month plus 1.25% to 1.50%. The Company may also, upon the agreement of the existing lenders, increase the commitments under the credit facility by up to an additional US$75.0 million. The lenders under the JPMC Credit Facility are not under any obligation to provide any such additional commitments, and any increase in commitments is subject to several conditions precedent and limitations. The JPMC Credit Facility is scheduled to expire on May 14, 2024.

Under the terms of the JPMC Credit Facility, the covenants require that the Company maintain a fixed charge coverage ratio of at least 1.0 to 1.0 on a trailing 12‐month basis, triggered in the event that availability is less than 12.5% of the revolving commitment, until such time that availability has been greater than 12.5% of the revolving commitment for 60 consecutive days, in which case, the Company would no longer be subject to such fixed charge coverage ratio unless the availability were to again become lessthan 12.5% of the revolving commitment. The Company wasin compliance with all applicable covenants at March 31, 2020 and December 31, 2019.

Amounts owing under the Company's revolving credit facility were $188.4 million (US$134.0 million) and $138.7 million (US$106.7 million) as at March 31, 2020 and December 31, 2019, respectively. Average undrawn availability on the existing, secured credit facility was $71.1 million (US$50.5 million) and $84.8 million (US$65.3 million) million for the periods ended March 31, 2020 and December 31, 2019, respectively.

Contingent Consideration

	March 31, 2020					December 31, 2019
		TeraMach Cloudscapes	Total		TeraMach Cloudscapes	Total
Balance, beginning of period	2,000	250	2,250	2,896	824	3,720
Change in fair value (note 17)	–	9	9	1,464	142	1,606
Payments	–	(134)	(134)	(2,499)	(730)	(3,229)
Foreign currency translation	–	7	7	139	14	153
Balance, end of period	2,000	132	2,132	2,000	250	2,250

The contingent consideration is related to the obligations for contingent consideration in connection with the acquisitions of TeraMach in 2016 and Cloudscapes in 2017.

The payments of the TeraMach contingent consideration are dependent on the business achieving certain performance targets during the four consecutive 12‐month periods ending September 30, 2020. TeraMach has achieved all of the performance targets at September 30, 2019. As a result, the Company reached an agreement, in December 2019, to prepay the remaining consideration in full. The undiscounted value of $2.0 million will be paid by the end of May 2020.

The payments of the Cloudscapes contingent consideration are based on the achievement of certain gross margin targets. The Company was obligated to pay up to US$0.1 million per quarter for 11 quarters and a bonus of US$0.2 million, which commenced on October 1, 2017 and ending on April 30, 2020.

Lease Obligations

The following table presentsthe contractual undiscounted cash flowsfor lease obligations as at March 31, 2020:

Total undiscounted lease obligations	22,153
Over five years	2,763
Two to five years	7,572
One to two years	5,709
One year	6,109

Lease obligations outstanding as at March 31, 2020 include liabilities related to office and warehouse leases, discounted at a weighted average rate of 7.5%, with remaining lease terms ranging up to eight years.

Total cash outflow for leases was $1.7 million and $6.7 million for the three months ended March 31, 2020 and the year ended December 31, 2019, respectively. Variable lease payments were $0.4 million and $1.1 million for the three months ended March 31, 2020 and the year ended December 31, 2019, respectively. Expenses for short‐term leases and leases of low‐dollar value items are not material. All extension options have been considered in the measurement of lease obligations.

12. SHARE‐BASED COMPENSATION

The Company's share‐based compensation expense includes stock option and restricted stock unit ("RSU") plans. The expense was recognized in the consolidated statements of income (loss) as part of selling, general and administrative expense as follows:

	Three months ended March 31,
	2020	2019
Share‐based compensation on options	19	44
Share‐based compensation on RSUs	124	122
Total share‐based compensation expense	143	166

The carrying amounts of the Company's share‐based compensation arrangements were recorded on the consolidated statements of financial position as follows:

	March 31,
	2020	2019
Other financial liabilities (current) – stock options	824	761
Other financial liabilities (non‐current) – stock options	567	513
Contributed surplus – stock options	1,542	1,547
Contributed surplus – RSUs	354	230

Stock Options

The Company has an incentive share option plan under which directors, officers, employees and consultants of the Company and its subsidiaries are eligible to receive stock options. The aggregate number of common shares to be issued, upon exercise of all options granted under the plan, shall not exceed 10% of the issued common shares of the Company, at the time the options were granted. Employee options granted under the plan generally have a term of five or 10 years and vest either immediately or in specified increments, which is typically two to three years. The exercise price of each option is subject to Board approval, but shall not be less than the market price at the time of grant.

A summary of the Company's stock option plan activity is as follows:

	Three months ended March 31,			Year ended December 31,
	2020			2019
	Number	Weighted average		Weighted average
	of options	exercise price	of options	exercise price
Options outstanding, beginning of period	2,121,250	$1.77	2,118,750	$1.79
Options granted	–	–	195,000	$1.54
Options forfeited	(20,000)	$1.94	(130,000)	$1.79
Options expired	–	–	(62,500)	$1.65
Options exercised	(36,100)	$1.60	–	–
Options outstanding, end of period	2,065,150	$1.77	2,121,250	$1.77
Options exercisable, end of period	1,440,149	$1.77	1,476,249	$1.76

2020 Q1 I nt eri m Condensed Consol i dat ed Fi nanci al St at ement s Page 18

The fair value of each option granted is estimated on the date of grant using the Black‐Scholes option pricing model with weighted average assumptions for grants as follows. There were no options granted during the three months ended March 31, 2020.

	March 31,
	2020	2019
Expected volatility	–	47.60%
Rick‐free interest rate	–	1.51%
Dividend yield	–	10.39%
Forfeiture rate	–	5.50%
Expected life	–	3.4 years

The summary of the Company's options are as follows:

			March 31, 2020
	Number of	Weighted average	Number of
Exercisable price	options outstanding	remaining contractual life	options exercisable
1.54	195,000	4.6 years	–
1.60	1,020,150	6.2 years	1,020,150
1.68	466,666	3.4 years	159,998
2.47	373,334	2.5 years	253,334
2.61	10,000	2.4 years	6,667
	2,065,150		1,440,149
			December 31, 2019
	Number of	Weighted average	Number of
Exercisable price	options outstanding	remaining contractual life	options exercisable
1.54	195,000	4.9 years	–
1.60	1,056,250	6.5 years	1,056,250
1.68	480,000	3.7 years	159,998
2.47	380,000	2.5 years	253,334
2.61	10,000	2.7 years	6,667
	2,121,250		1,476,249

Restricted Stock Units

The Company has a restricted share plan that allows the Company to award RSUs to directors, officers, employees and consultants upon such conditions as the Board may establish. Shares issued pursuant to any RSU award may be made subject to vesting conditions based upon the satisfaction of service requirements, restrictions, time periods or other conditions established by the Board. The maximum aggregate number of shares that may be issued under the restated plan pursuant to the exercise of RSUs shall not exceed 1,250,000 shares. The maximum number of common shares, which may be reserved and set aside for issuance upon the grant or exercise of RSU or stock option awards under the plan, is 10% of the Company's common shares issued and outstanding from time to time on a non‐diluted basis. The fair value of RSUs is measured on the grant date based on the closing fair market value of the Company's common stock. The resulting cost is recognized over the period during which an employee is required to

provide service in exchange for the awards, usually the vesting period, which is generally one to three years for RSUs.

A summary of the Company's RSU plan activity is as follows:

	Three months ended March 31,			Year ended December 31,
		2020		2019
		Weighted average		Weighted average
		grant date		grant date
	Number of units	fair value	Number of units	fair value
Units outstanding, beginning of period	558,847	$1.88	697,538	$1.91
Units granted	–	–	75,000	$1.54
Units reinvested – dividends	12,890	$1.87	73,843	$1.94
Units released	–	–	(248,334)	$2.02
Units forfeited	(41,908)	$1.99	(39,200)	$1.99
Units outstanding, end of period	529,829	$1.87	558,847	$1.88

As at March 31, 2020 and December 31, 2019, there was $0.6 million and $0.9 million, respectively, of total unrecognized compensation cost related to unvested RSU arrangements. This expense is expected to be recognized over a weighted average period of 1.5 years.

Smart Edge Phantom Stock

In February 2019, Smart Edge, one of Pivot's subsidiaries, issued 536,000 shares of phantom stock to a former executive of Smart Edge. As of the grant date and December 31, 2019, the award was valued at $0.6 million (US$0.5 million), reflected as part of other financial liabilities. As a result of the sale of assets in Smart Edge, in October 2019, $0.5 million (US$0.4 million) vested immediately and was settled in cash during the first quarter of 2020, with the remainder $0.1 million (US$0.1 million) to be paid out by April 2021.

13. SHARE CAPITAL

The issued share capital amounted to $80.9 million and $83.2 million (US$82.4 million) as at March 31, 2020 and December 31, 2019, respectively. An unlimited number of both common and preferred shares, with no par value, are authorized for issuance. The changes in issued share capital for the three months ended March 31, 2020 and the year ended December 31, 2019 were as follows:

	Three months ended
	March 31,	Year endedDecember 31,
(number of common shares)	2020	2019
Balance, beginning of period	39,414,066	39,473,032
Stock options exercised	36,100	–
Share repurchases and subsequent cancellations	(824,115)	(237,310)
Shares issued in vesting RSUs	9	178,344
Balance, end of period	38,626,060	39,414,066

Pivot Technology Sol utions, Inc.

2020 Q1 I nt eri m Condensed Consol i dat ed Fi nanci al St at ement s Page 20

No preferred shares were issued or outstanding as at March 31, 2020 and December 31, 2019.

Normal Course Issuer Bid ("NCIB")

In the second quarter of 2019, the Company renewed its NCIB to purchase up to 3,791,395 common shares, representing approximately 10% of outstanding common shares. Subject to regulatory restrictions, the Company may purchase its common shares from time to time, between June 24, 2019 and June 23, 2020, or on such earlier date as the NCIB is complete, at prevailing market prices at the time of purchase, and any common shares purchased will be cancelled.

In December 2019, the Company entered into an automatic share purchase plan (ASPP) with Echelon Wealth Partners, Inc. ("Echelon") for the purpose of permitting the purchase of common shares under NCIB at times when the Company would not be permitted to purchase shares due to regulatory restrictions or blackout periods. Such purchases were determined by Echelon in its sole discretion based on parameters established prior to any blackout period, in accordance with the rules of the TSX and applicable securities laws. The amount deposited at Echelon in connection with the ASPP is reflected as current other financial liabilities, and a reduction to contributed surplus (note 11).

As at March 31, 2020, the Company has purchased and cancelled 1,061,425 common shares under its current NCIB.

Earnings (Loss) Per Share

Basic earnings (loss) per share ("EPS") is calculated by dividing the income (loss) attributable to shareholders for the period by the weighted average number of common shares outstanding during the year. Diluted EPS is calculated by adjusting the income (loss) attributable to shareholders and the weighted average number ofshares outstanding for the effects of all dilutive instruments. The Company's potentially dilutive instruments include stock options and unvested RSUs, which are excluded from the computation in periods when they are anti‐dilutive.

	Three months ended March 31,
	2020	2019
Earnings (loss) attributed to shareholders	797	(4,763)
Weighted average number shares outstanding (number of shares)
Basic	39,637,084	39,473,032
Dilutive effect of stock options(1)	27,377	–
Dilutive effect of RSUs	529,829	–
Diluted	40,194,290	39,473,032
Earnings (loss) per share (in dollars)
Basic	$0.02	($0.12)
Diluted	$0.02	($0.12)

(1)The calculation of diluted weighted average number of shares excludes 0.9 million and 2.1 million stock options for the three months ended March 31, 2020 and 2019, respectively, as the exercise price of these stock options was greater than the weighted average share prices.

Dividends

The declaration and payment of dividends on the Company's common shares are at the discretion of the Board, which takes into account the Company's financial results, capital requirements, available cash flows, and other relevant factors. The Company has declared a dividend of $0.04 every quarter for the past few years, including each of the three months ended March 31, 2020 and 2019. Total dividends paid were $1.6 million for the three months ended March 31, 2020 and $6.3 million for the year ended December 31, 2019.

Subsequent to March 31, 2020, the Board declared a quarterly dividend of $0.04 per common share, payable on June 15, 2020 to shareholders of record on May 29, 2020.

14. REVENUE

Types of goods and services:

Revenue from the U.S. and Canada presented below includes revenue from international locations.

			Three months ended March 31,
				2020
			Shared
	U.S.	Canada	Services	Total
Product sales	285,018	42,515	3	327,536
Pivot provided services	25,169	3,569	–	28,738
Third‐party services	18,232	2,301	–	20,533
Total revenue	328,419	48,385	3	376,807

Certain comparative information has been reclassified to conform to current year presentation.

			Three months ended March 31,
				2019
			Shared
	U.S.	Canada	Services	Total
Product sales	285,840	61,658	3	347,501
Pivot provided services	21,154	2,819	3	23,976
Third‐party services	16,487	1,897	–	18,384
Total revenue	323,481	66,374	6	389,861

Certain comparative information has been reclassified to conform to current year presentation.

Geographical markets:

		Three months ended March 31,
	2020	2019
United States	306,557	314,456
Canada	48,546	66,597
International	21,704	8,808
Total revenue	376,807	389,861

Certain comparative information has been reclassified to conform to current year presentation.

Timing of revenue recognition:

			Three months ended March 31,
				2020
			Shared
	U.S.	Canada	Services	Total
Goods transferred at a point in time	285,018	42,515	3	327,536
Services transferred at a point in time	30,102	4,570	–	34,672
Services transferred over time	13,298	1,301	–	14,599
Total revenue	328,418	48,386	3	376,807

Certain comparative information has been reclassified to conform to current year presentation.

			Three months ended March 31,
				2019
			Shared
	U.S.	Canada	Services	Total
Goods transferred at a point in time	285,840	61,658	3	347,501
Services transferred at a point in time	21,490	2,865	3	24,358
Services transferred over time	16,151	1,851	–	18,002
Total revenue	323,481	66,374	6	389,861

Certain comparative information has been reclassified to conform to current year presentation.

15. EMPLOYEE COMPENSATION AND BENEFITS

	Three months ended March 31,
	2020	2019
Employee compensation and benefits	7,081	9,252
Other cost of sales	317,636	331,918
Cost of sales	324,717	341,170

	Three months ended March 31,
	2020	2019
Employee compensation and benefits	37,977	36,488
Other selling, general and administrative expenses	8,722	7,763
Selling, general and administrative expenses	46,699	44,251

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2020 Q1 I nt eri m Condensed Consol i dat ed Fi nanci al St at ement s Page 23

16. FINANCE EXPENSE

		Three months ended March 31,
	2020	2019
Interest expenses, net	1,393	1,761
Accretion expense	351	455
	1,744	2,216

Lease liabilities are initially measured at the present value of lease payments that are not paid at the commencement date, and are subsequently increased by finance expense through accretion, and decreased by lease payments made.

17. CHANGE IN FAIR VALUE OF LIABILITIES

		Three months ended March 31,
	2020	2019
Contingent consideration	9	308

Contingent Consideration

Changes in the fair value of contingent consideration were related to the TeraMach acquisition in 2016 and the Cloudscapes acquisition in 2017 (note 11).

18. OTHER EXPENSES

		Three months ended March 31,
	2020	2019
Restructuring costs	4,179	3,057
Transaction costs	941	258
Foreign exchange loss (gain)	(4,781)	856
Other	108	(26)
	447	4,145

Restructuring costs incurred in Q1 2020 related to the merger of the wholly owned U.S. subsidiaries. The restructuring costsin Q1 2019 were in connection with the commercial transformation and cost reduction initiatives.

The foreign exchange gain for the three months ended March 31, 2020 resulted from the strengthening of the U.S. dollar in 2020.

19. INCOME TAXES

Significant components of the income tax recovery are as follows:

		Three months ended March 31,
	2020	2019
Current tax recovery	(2,194)	(1,901)
Deferred tax recovery	(290)	(6)
	(2,484)	(1,907)

20. CHANGES IN NON‐CASH WORKING CAPITAL

Changes in non‐cash working capital balances consist of the following:

	Three months ended March 31,
	2020	2019
Accounts receivable	(58,156)	(38,786)
Income taxes recoverable	(2,784)	(2,636)
Inventories	(20,828)	9,509
Other assets	(1,326)	(5,664)
Accounts payable and accrued liabilities	31,592	(14,799)
Other liabilities	1,185	5,116
	(50,317)	(47,260)

Interest paid and income taxes paid classified as operating activities are as follows:

	Three months ended March 31,
	2020	2019
Interest paid	1,393	1,700
Income taxes paid	94	651

21. FINANCIAL INSTRUMENTS

Classification of Financial and Non‐Financial Assets and Liabilities and Fair Values

				Total	Fair
		Amortized	Non‐	carrying	value
As at March 31, 2020	FVTPL	cost	financial	amount	hierarchy
Cash and cash equivalents	–	15,641	–	15,641
Accounts receivable	–	380,554	–	380,554
Inventories	–	–	77,342	77,342
Other intangible assets	–	–	20,124	20,124
Goodwill	–	–	63,414	63,414
Deferred contract costs	–	–	48,281	48,281
Other non‐financial assets	–	–	47,232	47,232
Total assets	–	396,195	256,393	652,588
Bank indebtedness	–	11,335	–	11,335
Accounts payable and accrued liabilities	–	346,114	–	346,114
Deferred contract revenue	–	–	53,389	53,389
Contingent consideration(1)	2,132	–	–	2,132	Level 3
Cash‐settled share‐based compensation(1)	1,391	–	–	1,391	Level 3
Other financial liabilities(2)	–	207,314	–	207,314
Other non‐financial liabilities	–	–	11,186	11,186
Total liabilities	3,523	564,763	64,575	632,861

(1) Included in other financial liabilities

(2) Excluded contingent consideration and cash‐settled share‐based compensation presented separately above

				Total	Fair
		Amortized	Non‐	carrying	value
As at December 31, 2019	FVTPL	cost	financial	amount	hierarchy
Cash and cash equivalents	–	35,430	–	35,430
Accounts receivable	–	295,389	–	295,389
Inventories	–	–	51,329	51,329
Other intangible assets	–	–	21,684	21,684
Goodwill	–	–	58,865	58,865
Deferred contract costs	–	–	42,907	42,907
Other non‐financial assets	–	–	41,792	41,792
Total assets	–	330,819	216,577	547,396
Bank indebtedness	–	19,682	–	19,682
Accounts payable and accrued liabilities	–	289,234	–	289,234
Deferred contract revenue	–	–	48,194	48,194
Contingent consideration(1)	2,250	–	–	2,250	Level 3
Cash‐settled share‐based compensation(1)	1,274	–	–	1,274	Level 3
Other financial liabilities(2)	–	155,985	–	155,985
Other non‐financial liabilities	–	–	9,735	9,735
Total liabilities	3,524	464,901	57,929	526,354

(1) Included in other financial liabilities

(2) Excluded contingent consideration and cash‐settled share‐based compensation presented separately above

The Company used a fair value hierarchy to categorize the type of valuation techniques from which fair values are derived:

• Level 1 use of quoted market prices;
• Level 2 internal models using observable market information as inputs; and
• Level 3 internal models without observable market information as inputs.

The amortized costs of cash and cash equivalents, accounts receivable, bank indebtedness, accounts payable and accrued liabilities approximates fair value due to their short‐term nature. The amortized cost of secured borrowings included in other financial liabilities also approximates fair value because it bears a variable interest rate.

Contingent consideration payable was recorded as Level 3 as the amounts payable were not based on observable inputs. The fair value of the contingent consideration was calculated using forecasts based on financial plans prepared by management covering the periods under agreements. Amounts as at December 31, 2019 were adjusted to reflect the paymentsto be paid during 2020. The Company recorded a charge of $0.2 million and $0.3 million related to the change in fair value of the contingent consideration for the three months ended March 31, 2020 and 2019, respectively.

Cash‐settled share‐based compensation was also recorded as Level 3 as the amounts payable were not based on observable inputs.

There have been no transfers among any levels during the three months ended March 31, 2020 and the year ended December 31, 2019.

22. RELATED PARTY TRANSACTIONS

The Company has certain contractual arrangements with ProSys Information Systems Inc. ("ProSys") and Applied Computer Solutions Inc. ("Applied"), whose activities and results are consolidated with the Company. Under IFRS guidelines, the Company is deemed to have primary exposure for the significant risks and rewards associated with sales by ProSys and Applied to its third‐party customers.

These contractual arrangements accounted in aggregate for 28.6% and 37.2% of the Company's total revenue for the three months ended March 31, 2020 and 2019, respectively. The contractual arrangements with Applied may be terminated by either party on notice to the other.

23. SEGMENT INFORMATION

Segments

The Company's business activities are conducted through three reportable segments: U.S., Canada and Shared Services.

U.S.

Commencing 2020, with the integration efforts executed by the Company, the consolidation of operations has resulted in a single operating and reporting segment in connection with the U.S. business.

Operations in the U.S. provide IT solutions, IT infrastructure solutions and system integration services to enterprise, public sector and educational customers, and deploy customized leading‐edge solutions from premier technology vendors. These solutions include hardware, software, and professional services.

Canada

Operations in Canada provide technical solutions, services, staffing and cloud expertise to the Canadian federal and provincial governments, the Canadian public sector and commercial enterprises, reflecting different economic market and characteristics, competitive pressures, regulatory environments and customer profiles compared with those factors in the U.S.

Shared Services

The Shared Services segment consists of the Company's head office activities, including strategic leadership, finance, human resources, marketing and information systems.

Revenue and profit by segment

			Shared
Three months ended March 31, 2020	U.S.	Canada	Services	Total
Revenue	328,418	48,385	4	376,807
Cost of sales	285,310	39,083	324	324,717
Gross profit	43,108	9,302	(320)	52,090
Selling, general and administrative expenses	40,424	3,397	2,878	46,699
Income (loss) before depreciation and amortization,
finance expense, change in fair value of liabilities
and other expenses	2,684	5,905	(3,198)	5,391
Depreciation and amortization				4,691
Finance expense				1,744
Change in fair value of liabilities				9
Other expenses				447
Loss before income taxes				(1,500)

Certain comparative information has been reclassified to conform to current year presentation.

			Shared
Three months ended March 31, 2019	U.S.	Canada	Services	Total
Revenue	323,482	66,374	5	389,861
Cost of sales	283,896	56,666	608	341,170
Gross profit	39,586	9,708	(603)	48,691
Selling, general and administrative expenses	27,882	3,402	12,967	44,251
Income (loss) before depreciation and amortization,
finance expense, change in fair value of liabilities
and other expenses	11,704	6,306	(13,570)	4,440
Depreciation and amortization				4,995
Finance expense				2,216
Change in fair value of liabilities				308
Other expenses				4,145
Loss before income taxes				(7,224)

Certain comparative information has been reclassified to conform to current year presentation.

Assets and liabilities by segment

	March 31,	December 31,
	2020	2019
Assets
U.S.	580,607	503,822
Canada	62,979	19,924
Shared Services	9,002	23,650
	652,588	547,396
Liabilities
U.S.	457,236	401,944
Canada	65,169	24,928
Shared Services	110,456	99,482
	632,861	526,354

Pivot Technology Sol utions, Inc.

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