Spectra7 Microsystems Inc.

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Spectra7 Microsystems Inc.

Management’s Discussion & Analysis

For the Year Ended December 31, 2019

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Management’s Discussion and Analysis For the Year Ended December 31, 2019

This management’s discussion and analysis (“MD&A”) of financial condition and results of operations of Spectra7 Microsystems Inc. (“Spectra7” or the “Company”) was prepared by management as at April 30, 2020. Throughout this MD&A, unless otherwise specified, “Spectra7”, “the Company”, “we”, “us” or “our” refer to Spectra7 Microsystems Inc. and its subsidiaries. This MD&A should be read in conjunction with the audited consolidated financial statements of the Company and notes thereto as at December 31, 2019 (the “Financial Statements”). In preparing this MD&A, we have taken into account information available to us up April 30, 2020 unless otherwise stated.

The Financial Statements have been prepared by management in accordance with International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”) and interpretations of the International Financial Reporting Interpretations Committee (“IFRIC”). All amounts are expressed in U.S. dollars unless otherwise noted. Other information contained in this document has also been prepared by management and is consistent with information included in the Financial Statements. You will find the Financial Statements on SEDAR at www.sedar.com.

This MD&A contains commentary from the Company’s management regarding the Company’s strategy, operating results, financial position and outlook. Management is responsible for the accuracy, integrity, and objectivity of the MD&A, and develops, maintains and supports the necessary systems and controls to provide reasonable assurance as to the accuracy of the comments contained herein.

The Audit Committee and the Board of Directors provide an oversight role with respect to all public financial disclosures by the Company. The Board of Directors approves the Financial Statements and MD&A after the completion of its review and recommendation for approval by the Audit Committee, which meets periodically to review all financial reports, prior to filing.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This MD&A contains certain forward-looking information and statements relating, but not limited to, the Company’s future financial position and results of operations, strategies, plans, objectives, goals, targets, and future developments in the markets where the Company participates or is seeking to participate. Forward-looking information typically contains statements with words such as “consider”, “anticipate”, “believe”, “expect”, “plan”, “intend”, “may”, “likely”, or similar words suggesting future outcomes or statements regarding an outlook, or other expectations, beliefs, plans, objectives, assumptions, intentions or statements about future events or performance. Readers should be aware that these statements are subject to known and unknown risks, uncertainties and other factors that could cause actual results, performance or achievements of the Company to differ materially from those suggested by the forward- looking information and statements, some of which may be beyond the control of management.

Although the Company believes that the expectations, estimates, and projections reflected in such forward-looking information and statements are reasonable, such forward-looking information and statements involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forwardlooking information and statements. On this basis, readers are cautioned not to place undue reliance on such forward looking information and statements.

Factors which could cause actual results to differ materially from current expectations include, but are not limited to:

the adverse impact of COVID-19 on our staffing, revenue, operations, manufacturing supply chain, project development and customer demand;
the degree of competition in the business areas in which we operate;
• our ability to secure orders from a limited number of customers;

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our ability to make the substantial research and development investments required to remain competitive;
our ability to charge prices that will result in favorable gross margins;
our ability to introduce new or enhanced products on a timely basis;
market demand and penetration of new markets for our products and services;
our reliance on a limited number of third party manufacturers;
the absence of long-term supply contracts with any of the Company’s third-party vendors and potential disruption in supply of products or materials;
our ability to contain and appropriately budget expenses, due to our limited operating history;
the length of the sales cycle required to establish design wins and bring design wins to production;
• reliance on distributors;
our ability to deliver our products in the correct product mix required by our customers and ability to control order and shipment uncertainties;
the substantial quarterly and annual fluctuations in our operating results;
our dependence on existing members of the senior management team;
our ability to attract and retain qualified employees and contain payroll costs;
unforeseen delays, expenses and damage to reputation caused by defects or bugs;
potential claims of intellectual property infringement;
our ability to protect our intellectual and intangible properties;
the use of open source software;
reliance on third parties to provide services and technology;
going concern risk;
impact of negative cash flow from operating activities;
potential losses to our facilities or distribution system due to catastrophes;
compliance with various governmental regulations and related costs of compliance;
cyclicality in the semiconductor industry;
conformity of the Company’s products to industry standards;
unanticipated changes in our tax rates;
fluctuation of share price;
decline in share price due to the absence of, or negative reports, about the business by securities or industry analysts;
adverse international economic conditions adversely affect consumer spending;
general political and economic conditions in the countries in which we operate;
strain on our resources as a result of the requirements of being a public company;
litigation risk;
market price volatility and potential impact on share price;
our potential need for additional financings in order to meet future capital requirements for our operations;
our potential to breach certain covenants, representations and warranties in our loan arrangements;
our ability to declare dividends;
our ability to meet significant research and development milestones; and
our ability to enter into agreements with CRX Consortium (as defined in the Company’s most recent Annual Information Form) members or the adoption of interconnects that use the Company’s active copper cable technology.

We caution that this list is not exhaustive of all possible factors. For a detailed description of risk factors associated with the Company, refer to the “Risk Factors” section of the Company’s Annual Information Form filed on SEDAR on April 30, 2020, which is available on SEDAR at www.sedar.com.

The forward-looking information and statements in this MD&A are, unless otherwise indicated, stated as of the date hereof and are presented for the purpose of assisting investors and others in understanding our financial position and results of operations as well as our objectives and strategic priorities, and may not be appropriate for other purposes. The Company does not undertake any obligation to update publicly or to revise any forwardlooking information and statements, whether as a result of new information, future events or otherwise, except as required by law.

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OVERVIEW OF THE COMPANY

Background

The Company is a high performance analog semiconductor company targeting large, high growth markets in virtual reality (“VR”), augmented reality (“AR”), data centers, and consumer connectivity.

The Company was incorporated on October 12, 2010 as a capital pool company named “Chrysalis Capital VIII Corporation” (“Chrysalis”) pursuant to the filing of articles of incorporation under the “Canada Business Corporations Act” . The articles of incorporation of the Company were amended by the filing of articles of amendment dated April 19, 2011 to remove certain provisions. On February 5, 2013, the Company’s articles were amended to consolidate its common shares by a ratio of 3.86364:1 and to change its name to “Spectra7 Microsystems Inc.”.

On February 5, 2013, the Company, then named Chrysalis Capital VIII Corporation, completed a reverse takeover transaction whereby Chrysalis acquired all of the issued and outstanding shares of Spectra7 Microsystems Corp. (formerly Fresco Microchip Inc.) (“Fresco”), a company incorporated in Ontario, and Spectra7 Microsystems (Ireland) Limited (formerly RedMere Technology Limited) (“RedMere”), a company incorporated in Ireland. As a result of such transaction, which constituted the Company’s qualifying transaction under the policies of the TSX Venture Exchange, the former shareholders of Fresco acquired control of the Company (the “Qualifying Transaction”). From February 19, 2013 until July 22, 2015, the common shares of the Company were listed for trading on the TSX Venture Exchange under the symbol “SEV”. On July 23, 2015, the common shares commenced trading on the Toronto Stock Exchange (the “Exchange”).

The registered office of the Company is located at 181 Bay Street, Suite 1800, Toronto, Ontario Canada, M5J 2T9 and its head office is in San Jose, California. The Company also has design centers in Little Rock, Arkansas, Cork, Ireland and a sales office in Dongguan, China. The Company is currently a reporting issuer in each of the provinces of Canada, excluding Québec.

Products

The Company’s family of products features a patented signal processing technology used in the design of “active” cables and specialty interconnects which enable longer, thinner and lighter interconnects for VR, AR, in data centers, and for consumer connectivity products. The Company holds approximately 55 patents relating to its products.

Virtual Reality (VR)

The Company’s next-generation VR products include the VR7050 which the Company believes to be the industry’s first chip capable of enabling lightweight, ultra-thin active interconnects for gesture recognition and motion control backhaul. When used in conjunction with Spectra7’s VR7100 high speed video chip, the chipset delivers ultrahigh bandwidth data, video, audio and power in a unified, ultra-light, super-thin wearable interconnect while achieving the low latency for a truly immersive VR experience.

Augmented Reality (AR)

The Company has also developed AR products that provide similar benefit to the VR Products on thinner, shorter ‘wearable’ interconnects.

AR-Connect™ is an AR interconnect product line that is powered by the Company’s patented wearable network signal processing technology. The Company believes its patented AR-Connect™ is the industry’s first integrated cable, connector and embedded chipset product line for AR vision systems and wearable computing devices. ARConnect™ enables AR glasses to connect to a smart phone, proprietary processing device or a desktop GPU/laptop processing unit, with a single unified and ultra-thin link.

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DreamWeVR ™

DreamWeVR™ is an extensive product line targeted at next generation 4K Ultra-HD and 5K resolution VR and AR platforms for gaming, health care, architecture and business telepresence applications. The product line includes four new chips (VR8181, VR8050, VR8200 and VR8300) featuring SpectraLinear™ technology, new VRspecific connectors and three new head-mounted display (“HMD”) interconnect configurations to support highbandwidth (up to 50Gbps), near-zero latency VR HMDs and AR glasses with reduced weight and complexity.

Data Centers

GaugeChanger™ is an innovative and disruptive silicon technology that allows copper to extend much longer lengths without the cost and power penalty of optics that are used in data centers today. It works equally well at 25 Gbps NRZ and 50 Gbps PAM-4 enabling new connector standards of 100, 200 and 400 Gbps.

At present, optics are the primary alternative for data centers seeking high speed, at lengths longer than a few meters. GaugeChanger™, however, extends the life of copper with interconnects that are as fast and as thin as fiber, but at dramatically lower cost and power consumption.

USB 3.2 consumer interconnects

The Company’s active VR8050 and VR8051 chips are the industry’s first for ultra-thin implementations of USB 3.2 consumer interconnects, reducing the conductor cross section by up to 90% compared to passive cable implementations. Applications for this interconnect implemented with the new Type-C connector include ultra-thin laptops, tablets, mobile devices, solid state disks and wearable computing devices. The resulting ultra-thin cable enabled by this new Spectra7 technology allows the cable to transfer data at supercomputer speeds (up to 10 times faster) with a plug shell or over-mold and cable strain relief dimension that is thinner than the mobile device itself, a critical dimension when implementing Type-C connectors in tablets and smart phones, and up to 90% lighter than passive cable conductors that would need to be much larger in diameter.

Overall Financial Performance

Net loss for the three and twelve months ended December 31, 2019 was $2.7 million and $11.0 million respectively, compared to a net loss of $4.6 million and $15.2 million in the same periods in the prior year. Revenue for the three and twelve month periods ended December 31, 2019 decreased by 36% and increased by 10%, respectively, compared to the same periods in the prior year. The sequential revenue decrease was driven primarily by lower VR shipments and softness in the VR market. The annual revenue increase was driven primarily by the continued recovery of Spectra7’s core VR business coupled with revenue from its patented Active Copper Cable solutions for the Data Center market.

Gross margin percentage for the three month period ended December 31, 2019 decreased from the same period in 2018 by approximately 2%, driven by lower shipments of higher margin VR and consumer products, and increased by approximately 2% in the twelve month period ended December 31, 2019 due to higher shipment of data center products. Expenditures during the three and twelve month periods ended December 31, 2019 are approximately $3.2 million and $13.6 million respectively, representing a decrease of 40% and 22% from the previous reporting periods, due to operating expense discipline.

Impact of COVID-19 outbreak

In December 2019, the novel coronavirus (COVID-19) surfaced in Wuhan, China. The World Health Organization declared a global emergency on January 30, 2020 with respect to the outbreak, then characterized it as a pandemic on March 11, 2020. The outbreak has now spread throughout the world, causing companies and various international jurisdictions to impose restrictions, such as quarantines, closures, cancellations and travel restrictions. The duration of the business disruptions internationally and related financial impact cannot be reasonably estimated at this time nor can we estimate the extent of this outbreak and potential financial impact At this point, it is uncertain the extent of which our consolidated results in 2020 may be negatively impacted by this event. The impacts of the pandemic are unknown and rapidly evolving.

The impact of COVID-19 has significantly impacted the Company and its impact on the data center programs is uncertain as a majority of the world was sheltered in place with no clear date for reopening. On March 16, 2020,

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a shelter in place order was placed in the County of Santa Clara in California and, subsequently, on March 19, 2020, the State of California issued a statewide shelter in place order, which impacted the Company’s primary operations in San Jose, California. While demand for the Company’s new data center products remains strong, Spectra7 is currently experiencing significant staffing issues, customer disruptions, and supply chain challenges caused by the spread of COVID-19 and associated shut downs that are impacting overall revenues in the near term. The Company continues to pursue the best available paths to manage operational risk and preserve capital during this very difficult time.

We rely on third-party suppliers and manufacturers. Currently, the Company’s silicon products are manufactured at foundries by companies in Taiwan and the United States, and are packaged and tested in Taiwan and China. PCBs for active cable products are manufactured by a corporation in Hong Kong, China. The Company also uses third-party contractors for assembly of active cable products including contractors in China and Taiwan. This pandemic has resulted in the extended shutdown of certain businesses in certain jurisdictions, which may in turn result in disruptions or delays to our supply chain. These may include disruptions from the temporary closure of third-party supplier and manufacturer facilities, interruptions in product supply or restrictions on the export or shipment of our products. As a result of COVID-19, we have been unable to satisfy certain customer orders for our products and our customers have experienced delays in receiving our products. There is uncertainty around the duration and breadth of the COVID-19 pandemic, and therefore the ultimate impact on our business, financial condition and operating results cannot be reasonably estimated at this time. The outbreak of COVID-19 may also impact customer demand, the availability of key components sourced from certain jurisdictions, logistics flows and the availability of other resources to support critical operations in the Asia Pacific region.

The Company may incur expenses or delays relating to such events outside of our control, which could have a material adverse impact on our business, operating results and financial condition. The future impact of the pandemic is highly uncertain and cannot be predicted, and there is no assurance that the pandemic will not have a material adverse impact on the future results of the Company. The extent of the impact, if any, will depend on future developments, including actions taken to contain COVID-19.

Key Customers

During the three and twelve month periods ended December 31, 2019, the Company derived approximately 98% of its revenue from three customers (three months ended December 31, 2018 – 93% from five customers) and 96% from four customers (twelve months ended December 31, 2018 – 96% from five customers) respectively.

Selected Financial Information

The table below sets forth certain key financial results for the three and twelve month periods ended December 31, 2019 and 2018.

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Three Months Ended December 31,

Years Ended December 31,

Three Mont	hs Ended December 31, Years Ended December 31,	hs Ended December 31, Years Ended December 31,	hs Ended December 31, Years Ended December 31,	hs Ended December 31, Years Ended December 31,	hs Ended December 31, Years Ended December 31,	hs Ended December 31, Years Ended December 31,
*(In thousands,* Revenue Cost of sales Gross margin Expenses Net loss Other comprehensive loss Total comprehensive loss Basic and diluted loss per share Weighted average number of shares outstanding	*except for loss per share)* *(In thousands, except for loss per share)* 2019 2018 Change 2019 2018 Change $ $ $ % $ $ $ % 928 1,441 (513) (36%) 4,645 4,221 424 10% 457 672 (215) (32%) 2,072 1,978 94 5% 471 769 (298) (39%) 2,573 2,243 330 15% 3,179 5,325 (2,146) (40%) 13,615 17,432 (3,817) (22%) (2,708) (4,556) 1,848 (41%) (11,042) (15,189) 4,147 (27%) (171) 678 (849) (125%) (254) 575 (829) (144%)
	$ 928 457 471 3,179	$ 1,441 672 769 5,325	$ % (513) (36%) (215) (32%) (298) (39%) (2,146) (40%)		$ 4,221 1,978
					2,243 17,432
	(2,708)	(4,556) 678	1,848 (41%) (849) (125%)		(15,189) 575
	(171)
	(2,879)	(3,878)	999 (26%)	(11,296)	(14,614)	3,318 (23%)
	(0.01)	(0.02)		(0.04)	(0.08)
	405,355	222,159		298,520	191,090

As at

		As at	As at
Total assets Total liabilities Equity Total liabilities and equity		*(In thousands)*
	December 31, 2019 $ 2,992 14,815 (11,823) 2,992	December 31, 2018 $ 4,259 11,238 (6,979) 4,259	Change
			$ % (1,267) (30%)
			3,577 32% (4,844) 69%
			(1, 267) (30%)

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Revenue and Gross Margin

The table below sets forth the details of revenue and gross margin for the three and twelve month periods ended December 31, 2019 and 2018.

Three Months Ended December 31, *(In thousands)* 2019 2018 Change $ $ $ % 928 1,441 (513) (36%) 457 672 (215) (34%) 471 769 (298) (37%) 51% 53% (2)%	Three Months Ended December 31, *(In thousands)* 2019 2018 Change $ $ $ % 928 1,441 (513) (36%) 457 672 (215) (34%) 471 769 (298) (37%) 51% 53% (2)%	Twelve Months Ended December 31, *(In thousands)* 2019 2018 Change $ $ $ % 4,645 4,221 424 10% 2,072 1,978 94 5% 2,573 2,243 330 15% 55% 53% 2%	Twelve Months Ended December 31, *(In thousands)* 2019 2018 Change $ $ $ % 4,645 4,221 424 10% 2,072 1,978 94 5% 2,573 2,243 330 15% 55% 53% 2%
2019 $ 928 457 471 51%	2018 $ 1,441 672 769 53%	2019 $ 4,645 2,072 2,573 55%	2018 $ 4,221 1,978 2,243 53%

Revenue for the three and twelve months ended December 31, 2019 decreased by $513,000 and increased by $424,000 respectively, representing a decrease of 36% driven primarily by lower VR and consumer shipments and an increase of 10% over the same periods in the previous year reflecting higher revenue from its patented Active Copper Cable solutions for the Data Center market. The decrease can be attributed primarily to weakness in the VR market. The VR market is a speculative, emerging market where demand and adoption rates with consumers can be volatile.

Gross margin percentage for the three month period ended December 31, 2019 decreased from the same period in 2018 by approximately 2% driven by lower shipments of higher margin VR and consumer products, and increased by approximately 2% in the twelve month period ended December 31, 2019 due to higher shipment of data center products

Gross margin is a non-IFRS measure that does not have a standardized meaning prescribed by IFRS. Gross margin provides additional information to readers of the MD&A and Financial Statements to enhance their understanding of the Company’s financial performance. Gross margin comprises of revenue less cost of sales.

Expenses

The table below set forth the details of expenses for the three and twelve month periods ended December 31, 2019 and 2018.

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Three Months Ended December 31,

(In thousands)

Research and development, net of investment tax credits and including amortization of licenses Sales and marketing General and administrative Depreciation of right-of-use assets Depreciation of property and equipment Share-based compensation Interest on lease obligation of right-of-use assets Accretion expense Change in fair value of derivative liability Loss on disposal of capital equipment Foreign exchange gain (loss) Impairment of equipment	2019 $ 1,352 348 614 103 86 184 (12) 511 - 3 (11) - 3,178	2018 $ 1,431 389 643 - 136 450 - 439 (5) - (39) 1,881 5,325	Change
			$ % (79) (5%) (41) (11%) (29) (5%) 103 100% (50) (37%) (266) (59%) (12) 100% 72 16% 5 (100%) 3 (100%) 28 (71%) (1,881) (100%)
			(2,147) (40%)

Twelve Months Ended December 31,

(In thousands)

Research and development, net of investment tax credits and including amortization of licenses Sales and marketing General and administrative Depreciation of right-of-use assets Depreciation of property and equipment Share-based compensation Interest on lease obligation of right-of-use assets Accretion expense Change in fair value of derivative liability Extinguishment of Loan Facility Loss on disposal of capital equipment Foreign exchange gain (loss) Impairment of equipment	2019 $ 5,364 1,704 2,853 341 395 1,076 71 1,864 - - 3 (57) - 13,614	2018 $ 5,761 1,695 3,181 - 648 1,714 - 1,654 (181) 902 235 (58) 1,881 17,432	Change
			$ % (397) (7%) 9 1% (328) (10%) 341 100% (253) (39%) (638) (37%) 71 100% 210 13% 181 (100%) (902) (100%) (232) (99%) 1 (2%) (1,881) (100%)
			(3,818) (22%)

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Research and Development

Research and development expenses consist of salaries and related expenses, design software tool costs, travel, consumable materials used in product development, such as experimental wafers, non-production tape-out costs, technical services costs and contracted technical personnel.

Research and development expenses for the three and twelve month periods ended December 31, 2019 decreased by 5% and 7% respectively from the same periods the previous year due primarily to decreased product development expenses and tighter cost controls over engineering expenses.

The Company is eligible for Irish refundable Scientific Research and Experimental Development (“SR&ED”) investment tax credits for certain eligible expenditures incurred in Ireland. These tax refunds are netted against the Company’s research and development expenses.

Sales and Marketing

Sales and marketing expenses consist primarily of salaries and related expenses, travel and the cost of trade shows, product promotion, customer technical support and market research.

Sales and marketing expenditures for the three and twelve month periods ended December 31, 2019 decreased by 11% and increased by 1%, respectively, from the same periods the previous year. The decrease for the three month period was due primarily to tighter cost controls and the slight increase for the twelve month period was due primarily to higher marketing promotional spending.

General and Administrative

General and administrative expenses relate to finance and administration and consist of salaries and related expenses, legal and audit fees, insurance, expenses related to public reporting and compliance, travel and other corporate expenses.

General and administrative expenses for the three and twelve month periods ended December 31, 2019 decreased by 5% and 10%, respectively as compared to the same periods the previous year. The decrease during the three and twelve month periods are due primarily to lower personnel expenses, tighter expense controls, and to a reduction in rent expense due to the change in the accounting treatment starting January 1, 2019 of the Company’s office leases in Little Rock and San Jose. The Company adopted IFRS 16 - Leases on January 1, 2019, which eliminates the classification of leases as either operating leases or finance to the lessee. The Company has elected the Modified Retrospective Approach in applying IFRS 16 retrospectively without restating the 2018 comparative information but with the cumulative effect of initially applying IFRS 16 recognized as an adjustment to opening deficit.

Depreciation of Right-of-use Assets

The Company’s right-of-use assets recognized on adoption of IFRS 16 on January 1, 2019 are amortized over their remaining lease term. There is no similar depreciation in the prior year since the comparative figures are not restated under the Modified Retrospective Approach.

Depreciation of Property and Equipment

Depreciation of property and equipment for the three and twelve month periods ended December 31, 2019 compared to the same periods the previous year decreased by 37% and 39%, respectively. The lower depreciation expense is due to fewer capital investments made in 2019 as compared to previous years. In 2019, the Company invested $84,000 in production masks, leasehold improvements, laboratory and general office equipment compared to an investment of $328,000 in 2018.

Share-based Compensation

Share-based compensation recognizes the expense associated with the fair value of stock options and restricted share units (“RSUs”) granted to employees, officers, directors and consultants which are estimated at the date

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of grant using the Black Scholes option pricing model and recognized over the period in which the options vest.

Share-based compensation expense for the three and twelve months ended December 31, 2019 decreased by 59% and 37% respectively over the same periods the previous year due to cancellation of options and restricted share units resulting from employee terminations during the first quarter of 2019.

Accretion Expense

Accretion expense represents the change in the stated value of the Loan Facility (as defined below) and Convertible Debentures (as defined below) measured at amortized cost and also includes interest expense for the period. The Loan Facility was settled on January 9, 2018 upon the issuance of the Convertible Debt Units (as defined below). The Convertible Debentures are carried at amortized cost at an effective interest rate of 18.79%. Under the effective interest rate method, the accretion becomes higher as maturity approaches.

Change in Derivative Liability

The derivative liability relates to the Lender Warrants and Waiver Warrants (both as defined below) issued to the lender of the Loan Facility (as defined below). The number of common shares to be issued by the Company upon the exercise of the Lender Warrants and Waiver Warrants are not fixed and failed the "fixed for fixed" criteria for equity classification. The warrants are therefore classified as a derivative liability and accounted for separately from the Loan Facility. The derivative liability is revalued at each reporting date with the change in value recognized in the statement of loss and comprehensive loss.

On January 9, 2018, the Loan Facility was fully repaid, the Lender Warrants were cancelled and the Waiver Warrants were issued pursuant to the Waiver (as defined below). The derivative liability on the statement of financial position as at March 31, 2019 relates only to the Waiver Warrants. The change in fair value of the derivative liability for the three and month periods ended December 31, 2019 represents the decline in the value of the Waiver Warrants since December 31, 2018 whereas the prior year change represents the decline in value from their date of issue on January 8, 2018 to March 31, 2018. The sharper change recorded in the prior year’s three and twelve month periods reflects the volatility of the price of the common shares during that period.

Foreign Exchange Loss

The loss or gain on foreign exchange is caused by changes in the value of the Canadian dollar, Euro and Chinese Yuan relative to the US dollar, the amount of exposed assets and liabilities such as cash, accounts receivables and accounts payable and the difference in exchange rate at the time expenses in Canadian dollars, Euros and Chinese Yuan are booked and paid. Gains occur when the non-US currency strengthens and the Company holds exposed net assets in those funds or when the non-US currency weakens and the Company holds net exposed liabilities. Conversely, losses occur when the non-US currency weakens and the Company holds net exposed assets in those funds or when the non-US strengthens and the Company holds net exposed liabilities.

Impairment of Equipment

Impairment of equipment during the three and twelve month periods ended December 31, 2018 resulted from the disposal of equipment no longer in use.

Extinguishment of Loan Facility

Extinguishment of Loan Facility for the twelve month period ended December 31, 2018 includes one-time expenses related to the settlement of the Loan Facility on January 9, 2018. The one-time expenses consisted of the reduced exit fee of $0.5 million, other closing costs of $0.02 million, the difference of $0.20 million between the principal balance repaid of $5.9 million, the unamortized book value of the Loan Facility of $5.7 million and an additional loss of $0.13 million resulting from the de-recognition of the cancelled Lender Warrants and recognition at fair value of the Waiver Warrants issued to the lender as consideration for entering the Waiver agreement.

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Net Loss and Other Comprehensive Loss

Net loss for the three and twelve months ended December 31, 2019 was $2.7 million and $11.0 million, respectively, compared to a net loss of $4.6 million and $15.2 million in the same periods in the prior year. The decrease in net loss is attributed to higher revenue during the twelve months ended December 31, 2019 and lower operating costs during the three and twelve months ended December 31, 2019, and non-recurring expenses during the three month period ended March 31, 2018 such as the one-time costs associated with the extinguishment of the Loan Facility and the impairment of equipment. Other comprehensive loss relates to the unrealized foreign currency effect of translating the Company, whose functional currency is Canadian dollars, to US dollars for financial reporting purposes.

Loss per Share

Basic earnings and loss per share is calculated by dividing the profit and loss attributable to common shares of the Company by the weighted average number of common shares outstanding during the period. Diluted earnings and loss per share is calculated by adjusting the earnings and number of shares for the effects of dilutive options and other potentially dilutive securities. The weighted average number of common shares used as the denominator in calculating diluted loss per share excludes un-issued shares related to warrants, restricted share units and employee stock options, as they are anti-dilutive.

Basic and diluted loss per share for the year ended December 31, 2019 was $0.04, as compared to $0.08 per share for the year ended December 31, 2018.

Summary of Quarterly Data

The table below sets forth selected financial data for the most recent eight quarters ended December 31, 2019.

Revenue Cost of sales Gross margin Expenses Net loss Other comprehensive (loss) gain Total comprehensive loss Loss per share Basic and Dilutive	*(In thousands, except for loss per share)* Fiscal 2018 Mar 31 Jun 30 Sept 30 Dec 31 $ $ $ $ 921 807 1,052 1,441 418 367 521 672 503 440 531 769 5,023 3,590 3,494 5,325 (4,520) (3,150) (2,963) (4,556) (85) (3) (15) 678 (4,605) (3,153) (2,978) (3,878) (0.03) (0.02) (0.01) (0.02)
		Fiscal 2019
		Mar 31 Jun 30 Sept 30 Dec 31
		$ $ $ $

		1,381 966 1,370 928
		627 433 555 457
		754 533 815 471
		3,604 3,272 3,561 3,178
		(2,850) (2,739) (2,746) (2, 707)
		(128) (98) 143 (171)
		(2,978) (2,837) (2,603) (2,878)


		(0.01) (0.01) (0.01) (0.01)

Revenues in the consumer semiconductor industry are subject to seasonality driven by consumer purchasing cycles and manufacturers unique product development cycles.

Historically, the Company’s operating results have fluctuated on a quarterly basis and management believes they will continue to fluctuate. If anticipated sales and shipments in any quarter do not occur as and when expected, expenses and inventory levels can be disproportionately high and operating results for that quarter and future quarters may be adversely affected. In addition, because of historical variations in the operating results, the limited operating history of the Company and the rapid evolving nature of the business, period to period comparisons of

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the Company’s operating results, including gross margin and operating expenses as a percentage of total revenue, are not necessarily meaningful and should not be relied upon as indication of future performance.

Issued and Outstanding Share Capital

The Company’s authorized capital consists of an unlimited number of common shares, of which 510,731,783 common shares are issued and outstanding as of the date of this MD&A.

At the annual and special meeting of holders of common shares (the "Shareholders") held on June 15, 2017, Shareholders approved amendments to both the Company’s stock option plan (the “Stock Option Plan”) and the RSU plan (the “RSU Plan”) to provide that the combined maximum number of common shares reserved for issuance under both the Stock Option Plan and the RSU Plan, inclusive of existing stock options and RSUs, shall not exceed 29,450,000 common shares, representing approximately 12% of the issued and outstanding common shares as of the date of this MD&A.

At the annual and special meeting of shareholders in June 2019, shareholders approved amendments to both the Stock Option Plan and the RSU Plan to provide that the combined maximum number of common shares reserved for issuance under both the Stock Option Plan and the RSU Plan, inclusive of existing stock options and RSUs, shall not exceed 47,838,517 (December 31, 2018 29,450,000 common shares), representing approximately 12% of the issued and outstanding common shares as of the date of this MD&A. The combined aggregate number of common shares reserved under the Stock Option Plan and the RSU Plan at December 31, 2019 was 39,332,300 common shares (December 31, 2018 - 23,563,710 common shares).

As of the date of this MD&A, options to purchase an aggregate of 2,226,639 common shares are outstanding, 37,105,661 RSUs are outstanding, 19,245,705 common shares have been issued under the RSU Plan and an aggregate of 39,332,300 common shares are available for grant or award under the Stock Option Plan and/or the RSU Plan.

As of the date of this MD&A, there are Waiver Warrants (defined below) to purchase up to 2,205,010 common shares, January 2018 Warrants (define below) to purchase up to 22,182,975 common shares, July 2018 Warrants (defined below) to purchase up to 14,168,145 common shares, July 2018 Compensation Options (defined below) to purchase up to 497,137 common shares, October 2018 Warrants (defined below) to purchase up to 16,206,114 common shares, October 2018 Compensation Options (defined below) to purchase up to 1,447,051 common shares, August 2019 Warrants (defined below) to purchase up to 79,215,779 common shares, August 2019 Compensation Options (defined below) to purchase up to 6,665,531 common shares, and August 2019 Advisory Options to purchase up to 5,900,000 common shares.

Loan Facility and Equity Financings

On March 30, 2016, the Company closed a loan facility (the Loan Facility) with interest payable monthly in arrears at an annual rate of one month LIBOR plus 8.50%, subject to a LIBOR floor of 0.50%. Interest only was payable for the first 12 months of the term with the principal and interest thereafter amortized on a straight-line basis until the maturity date. The Loan Facility was secured by a first charge over all of the existing and subsequently acquired assets of the Company and each of its subsidiaries other than its subsidiary located in China. The Company used a portion of the net proceeds from the Loan Facility to repay the remaining indebtedness under the Company’s prior secured term loan.

Pursuant to the terms of the Loan Facility, the Company issued to the lenders an aggregate of 855,010 warrants (the “Facility Warrants”) with each Facility Warrant being exercisable into one common share until March 30, 2021 at a price of CDN$ 0.60 per share, subject to adjustment in certain circumstances.

On May 15, 2017, the Company signed the Amended Loan Facility that became effective on June 27, 2017 upon the satisfaction of certain conditions. In consideration for entering into the Amended Loan Facility, the Company issued warrants to purchase up to 750,000 common shares (the “Amendment Warrants”) with each Amendment Warrant being exercisable into one common share until June 27, 2022 at a price of CDN $0.39 per share, subject to adjustment in certain circumstances.

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In December 2017, the Company had entered into a limited waiver (the “Waiver”) to the Loan Facility, which, among other things and subject to the satisfaction of certain conditions, (i) waived the amended applicable prepayment fee of 5% pursuant to the Loan Facility, and (ii) reduced the applicable exit fee in relation to the Loan Facility. In consideration for entering into the Waiver, the lender agreed, subject to the conditions set forth in the Waiver, to surrender to the Company for cancellation the Facility Warrants and the Amendment Warrants (together, the “Lender Warrants”) and the Company agreed to issue new warrants to purchase up to 2,205,010 common shares (the “Waiver Warrants”). Each Waiver Warrant is exercisable until February 24, 2022 into one common share at an exercise price of CDN $0.30 per share, subject to adjustment in certain circumstances.

On January 9, 2018, the Company closed a bought deal offering of 15,315 units (the “Convertible Debt Units”) of the Company at a price of CDN $1,000 per Convertible Debt Unit for aggregate gross proceeds of $12.3 million ( CDN $15.3 million) (the “January 2018 Offering”). Proceeds from the January 2018 Offering were used to repay the Amended Loan Facility and applicable exit fee. Each Convertible Debt Unit issued pursuant to the January 2018 Offering consists of one 7.0% senior unsecured convertible debenture of the Company (each, a “Convertible Debenture”) and 1,425 common share purchase warrants (each, a “January 2018 Warrant”). The principal amount of each Convertible Debenture is convertible into common shares at the option of the holder at any time prior to the close of business on the last business day immediately preceding the maturity date of January 9, 2021, at a conversion price of CDN $0.35 per share, subject to adjustment upon certain customary events. Holders converting their Convertible Debentures will receive accrued and unpaid interest thereon for the period from and including the date of the latest interest payment date to, but excluding, the date of conversion. Each January 2018 Warrant will entitle the holder to acquire one common share at a price of CDN $0.50 per share until January 9, 2021, subject to adjustment upon certain customary events. As of the date of this MD&A, CDN$ 2.54 million principal amount of the Convertible Debentures have been converted to 7,257,141 common shares.

In consideration for the services provided by the underwriter of the January 2018 Offering, the Company paid a cash commission of CDN $1.0 million and issued an aggregate of 3,063,000 non-transferable compensation options (the “2018 Compensation Options”) to the underwriter. The January 2018 Compensation Options were exercisable into common shares at a price CDN $0.35 per share they expired on January 9, 2020. Including the cash commission paid to the underwriter, the Company paid issuance costs of $1.3 million in connection to the January 2018 Offering.

On January 11, 2018, the Company closed a private placement for 252 Convertible Debt Units pursuant to the January 2018 Offering for aggregate gross proceeds of CDN $0.252 million.

On July 6, 2018, the Company closed a private placement (the “July 2018 Private Placement”) of 28,336,290 units (“July 2018 Units”) at a price of CDN$ 0.105 per Unit for gross proceeds of approximately CDN $2,975,310 ($2,261,905). Each 2018 July Unit consisted of one common share and one-half of one common share purchase warrant (each, a “July 2018 Warrant”), with each whole July 2018 Warrant exercisable into one common share at an exercise price of CDN$ 0.1575 until July 6, 2023, subject to adjustment upon certain customary events. The expiry date of the July 2018 Warrants can be accelerated by the Company at any time following November 7, 2018 and prior to the expiry date of the July 2018 Warrants if the volume-weighted average trading price of the common shares on the Toronto Stock Exchange is greater than CDN$ 0.25 for any 20 non-consecutive trading days. In addition to the July 2018 Units issued pursuant to the July 2018 Private Placement, an additional 114,846 common shares and warrants to purchase up to 497,137 common shares (the “July 2018 Compensation Options”) with the same terms as the July 2018 Warrants were issued to certain finders in consideration for the services provided by such finders.

On October 30, 2018, the Company closed a private placement (the “October 2018 Private Placement”) of 32,412,228 units (“October 2018 Units”) at a price of CDN $0.15 per October 2018 Unit for gross proceeds of approximately CDN $4,861,834 ($3,709,908). Each October 2018 Unit consists of one common share and onehalf of one common share purchase warrant (each, an “October 2018 Warrant”), with each whole October 2018 Warrant exercisable into one common share at an exercise price of CDN $0.225 for a period of five (5) years from the date of issuance, subject to adjustment upon certain customary events. The expiry date of the October 2018 Warrants can be accelerated by the Company at any time following March 4, 2019 and prior to the expiry date of the Warrants if the volume-weighted average price of the common shares on the Toronto Stock Exchange is greater than CDN $0.33 for any 20 non consecutive trading days. In addition, certain agents received an aggregate of 1,447,051 non-transferable compensation options (“October 2018 Compensation Options”). Each October 2018 Compensation Option is exercisable into one common share at a price of CDN $0.225 until October 30,

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2023.

On August 21, 2019, the Company closed a public offering of 65,255,480 units (“Units”) at a price of CDN$0.05 per Unit (the “Offering Price”) for gross proceeds to the Company of CDN $3,262,774 (the “Public Offering”). Each Unit consists of one common share and one half of one common share purchase warrant (each whole warrant, a “August 2019 Warrant”). Each August 2019 Warrant entitles the holder to acquire one common share at an exercise price of CDN $0.08 per share for a period of five years following the closing of the Public Offering. The expiry date of the August 2019 Warrants may be accelerated by the Company at any time if the volume weighted average trading price of the common shares on the facilities of the Toronto Stock Exchange (or such other exchange on which the common shares trade) is greater than CDN $0.16 for any 10 consecutive trading days following the date that is four months and one day after the closing of the Public Offering. In addition to the Public Offering, on August 21, 2019, the Company also closed a concurrent non brokered private placement of 93,176,081 Units for total gross proceeds of CDN $4,658,804 (the August 2019 Private Placement).

In consideration for the services provided by the Agents in connection with the Public Offering, the Company paid the Agents a cash commission equal to 6% of the gross proceeds raised under the Public Offering, paid in part by the issuance to the Agents of 2,020,600 common shares at the Offering Price and issued an aggregate of 4,567,883 non-transferable compensation options (the “August 2019 Compensation Options”). Each Compensation Option is exercisable into one common share at a price of $0.05 for a period of sixty months from the date of closing of the Public Offering. In connection with the provision of certain financial advisory services, the Company also paid Haywood Securities Inc. a cash advisory fee and issued an aggregate of 5,900,000 nontransferable advisory options (the “August 2019 Advisory Options”) on the same terms as the August 2019 Compensation Options. In consideration for the services provided by certain finders in connection with the August 2019 Private Placement, the Company issued an aggregate of 2,097,648 August 2019 Compensation Options and a cash commission payable by the issuance of 1,797,984 common share at a fair value equal to the Offering Price .

As the aggregate number of common shares issuable in connection with the August 2019 Private Placement exceeded 25% of the number issued and outstanding common shares, immediately prior to the closing of the August 2019 Private Placement, and since greater than 10% of the number of common shares issued and outstanding immediately prior to the closing of the August 2019 Private Placement were issuable to insiders, the Company would ordinarily have been required to obtain shareholder approval pursuant to Sections 607(g)(i) and (ii) of the TSX Company Manual (the “Manual”). Pursuant to the provisions of Section 604(e) of the Manual, the Company applied for and received an exemption from shareholder approval requirements of the TSX, on the basis that the Company was in financial difficulty and that the August 2019 Private Placement was designed to improve the Company’s financial situation to meet its business objectives including its objectives in the growing data center market.

As a result of the application for reliance on the financial hardship exemption, the Company is the subject of a remedial delisting review by the TSX. It is routine for the TSX to require any issuer utilizing the financial hardship exemption to be the subject of such review. Pursuant to this delisting review, the TSX will require that the Company demonstrate to the TSX that the Company complies with all of the TSX requirements for continued listing after completion of the August 2019 Private Placement and the Public Offering.

The issuance of Units to insiders of the Company in the August 2019 Private Placement and the Public Offering is considered to be a “related party transaction” as defined Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions (“MI 61-101), however, the Company relied on exemptions from the formal valuation and minority shareholder approval requirements provided under MI 61-101 on the basis that the aggregate value of the Units issued to insiders did not exceed 25% of the fair market value of the Company’s market capitalization.

On April 20, 2020, the Company completed a private placement (the “2020 Private Placement”) of 99,999,998 common shares at a price of CDN $0.015 per common share for gross proceeds of approximately CDN $1,500,000 ($1,110,233).The issuance of common shares to insiders of the Company in the 2020 Private Placement is considered to be a “related party transaction” as defined MI 61-101, however, the Company relied on exemptions from the formal valuation and minority shareholder approval requirements provided under MI 61101 on the basis that the aggregate value of the common shares issued to insiders did not exceed 25% of the fair market value of the Company’s market capitalization.

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Liquidity and Capital Resources

Historically, the Company has funded its operations from the sale of equity securities and from debt financing.

The Company’s objectives are to grow revenue by expanding its product lines and entering new markets, to finance investment in research and development and to ensure that capital resources are readily available to meet obligations as they become due. Liquidity risk arises when the Company is challenged to fund its on-going operations through working capital or either the sale of equity or bank loans.

The Company may face challenges in generating sufficient amounts of cash and cash equivalents in the shortterm and potentially beyond due to such factors as:

challenges in the supply chain whereby lead times to secure components can run between 8-20 weeks and often require the Company to prepay or make deposits to secure the components;
delays in the development of new products which can delay market entry dates;
acceptance of new products in the market and sales volatility as a result of transitions to new product lines;
lower than expected adoption of the products of our end customers in newer markets could impact the orders received by the Company and its revenue outlook;
payments of accrued interest due on the conversions by the holders of the Convertible Debentures to common shares;
semi-annual interest payments which commenced on June 30, 2018 and end on December 31, 2020, including a semi-annual interest payment due on June 30, 2019 anticipated to be approximately $0.3 million; and
repayment of outstanding Convertible Debentures on January 9, 2021.

On April 23, 2020, the Company applied for enrollment in the Paycheck Protection Loan Program (“PPP”) formed under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The PPP provides funding by the U.S. Small Business Administration (“SBA”), an Agency of the United States of America, to incentivize small businesses to maintain employees on the payroll during the Coronavirus (COVID-19) pandemic. Under the terms of the PPP, the Company has received approval and funding from a US based bank and the SBA for $776,085 at an interest rate of 1.0% per annum and maturing in 24 months. Payments will not be due by the Company during the initial six-month period and, commencing one month after such six month period, the Company shall be responsible for monthly payments of principal and interest in equal amounts until the maturity date. Under the terms of the PPP, the amounts provided to the Company are to be forgiven if employees are kept on the payroll for eight weeks and the funds are used for qualified payroll-related expenses. The Company intends to use the funds for such purposes and apply for forgiveness of the amounts so funded under the PPP.

The following table summarizes the working capital and cash as at December 31, 2019 and December 31, 2018:

	As at *(In thousands)*
December 31, 2019 $ 1,433 14,517 (13,084) 71	December 31, 2018 $ 2,887 3,999 (1,112) 932	Change
		$ % (1,454) (50%)
		10,518 263%
		(11,972) 1077%
		(861) (92%)

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As of December 31, 2019, the Company had a working capital deficiency of $13 million, compared to negative working capital of $1.1 million as at December 31, 2018. Current assets at December 31, 2019 were lower due to decreases in cash balance, customer receivables, and inventory reserves. Current liabilities increased as a result of the lease obligation for the right-of-use assets recognized on adoption of IFRS 16 on January 1, 2019, the reclassification of the Convertible Debenture and from higher payables.

The Company is dependent on growth in revenue in the next year to fund future operations. Should expected revenues not materialize, the Company may require further sale of debt or equity securities, additional bank financing or other sources of funds in order to meet its obligations. See the section “Risk Factors” section of the Company’s most recent Annual Information Form.

The Company is actively considering different financing options to provide additional capital for the Company to meet its business objectives. Although the Company has, in the past, been successful in obtaining financing, there are inherent risks related to the Company’s ability to raise capital in the future and there is no assurance that the Company will be able to continue to do so in the future on similar terms as past financings, or at all.

The following table summarizes the cash inflows and outflows by activity for the periods indicated:

Twelve Months Ended December 31,

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----- Start of picture text -----

(In thousands)
2019 2018 Change
$ $ $ %
Cash generated by (used in)
Operating activities (5,923) (8,773) 2,850 (32%)
Financing activities 5,642 9,896 (4,254) (43%)
Investing activities (629) (365) (264) 72%
Effect of exchange rate changes 50 (167) 217 (130%)
Increase (Decrease) in cash (860) 591 (1,451) (246%)
----- End of picture text -----

Operating Activities

Cash used in operating activities for the years ended December 31, 2019 and 2018 were $5.9 million and $8.8 million, respectively as the Company paid down its accounts payable balance with the proceeds raised in the January 2018 Offering.

Without external sources of financing, the viability of the Company as an operating business is dependent on its ability to generate positive cash flows from operating activities in the short and long-term.

Financing Activities

Cash inflow from financing activities over the twelve month period ended December 31, 2019 was lower by $4.3 million as compared to the same period of the previous year. In January 2018, the Company closed an offering of Convertible Debt Units that raised $11.3 million and used to repay the $6.5 million Loan Facility plus the early repayment fee.

Investing Activities

The Company did not invest in any laboratory and manufacturing equipment during the year ended December 31,

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Off-Balance Sheet Arrangements

The Company currently has no off-balance sheet arrangements.

Transactions Between Related Parties

The Company transacts with key individuals from management and its directors who have authority and responsibility to plan, direct and control the activities of the Company. The nature of these dealings was in the form of payments for services rendered in their capacity as employees and as directors of the Company.

The Company's key management personnel are comprised of the Board of Directors and current and former members of the executive team of the Company.

Key management personnel compensation is comprised of the following:

	Three Months Ended	December 31, Twelve Months Ended	December 31, Twelve Months Ended	December 31,
	2019	2018	2019	2018
	$	$	$	$
Salaries, fees and short-term benefits	767,789	401,451	2,257,166	1,854,859
Share-based benefits	159,971	287,262	867,353	1,345,139
	927,760	688,713	3,124,519	3,199,998

The issuance of Units to insiders of the Company in the Private Placement and the Public Offering is considered to be a “related party transaction” as defined in MI 61-101, however, the Company relied on exemptions from the formal valuation and minority shareholder approval requirements provided under MI 61-101 on the basis that the aggregate value of the Units issued to insiders did not exceed 25% of the fair market value of the Company’s market capitalization.

During the year ended December 31, 2019, the Company received loans of $1,342,106 from the directors of the Company represented by non-interest bearing promissory notes due August 31, 2020 and December 31, 2020, respectively. The issuance of such promissory notes is considered to be a “related party transaction” as defined under MI 61-101 however, the Company is relying on exemptions from the formal valuation and minority shareholder approval requirements provided under MI 61-101 on the basis that the aggregate value of the promissory notes does not exceed 25% of the fair market value of the Company’s market capitalization.

The issuance of common shares to insiders of the Company in the 2020 Private Placement is considered to be a “related party transaction” as defined MI 61-101, however, the Company relied on exemptions from the formal valuation and minority shareholder approval requirements provided under MI 61-101 on the basis that the aggregate value of the common shares issued to insiders did not exceed 25% of the fair market value of the Company’s market capitalization

Critical Accounting Estimates

The Company’s significant accounting policies and accounting estimates under IFRS are contained in the Financial Statements (see Note 3 to the Financial Statements). Certain of these policies involve critical accounting estimates as they require us to make particularly subjective or complex judgments about matters that are

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inherently uncertain and because of the likelihood that materially different amounts could be reported under different conditions or using different assumptions.

Changes in Accounting Policies

The Statements are prepared in accordance with IFRS. The Company adopted and implemented IFRS 16 Leases on January 1, 2019. Please refer to Note 3 of the Financial Statements that reports updates for accounting policies and for accounting standards.

Financial Instruments and Risk Management

The Company may be exposed to risks of varying degrees of significance that affect its ability to achieve its strategic objectives. The main objectives of the Company’s risk processes are to ensure that the risks are properly identified and that the capital base is adequate in relation to those risks. The principal risks to which the Company is exposed to are as follows:

Fair value

The fair value of cash and cash equivalents, trade and other receivables, investment tax credits, accounts payable and accrued charges, obligations under finance lease and license liabilities approximate their carrying values due to their immediate or short-term maturity.

Foreign currency risk

The Company’s revenues and cost of sales are denominated in United States dollars. The Company incurs expenses in United States dollars, Euros, Canadian dollars and Chinese Yuan. The Company has historically raised capital denominated in Canadian dollars. The term loan and Loan Facility were in United States dollars. The Company is therefore exposed to gains or losses due to fluctuations in foreign currency exchange rates. Management believes the foreign exchange risk derived from currency conversions is currently low and therefore does not actively hedge its foreign currency risk.

Interest rate risk

Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate due to changes in market interest rates. Interest rate risk associated with the Company’s Convertible Debentures arises from fluctuations in interest rates and the degree of volatility of these rates. The Convertible Debentures provides for an annual rate of 7%. The Company does not use derivative financial instruments to reduce its exposure to interest rate risk.

Credit risk

Credit risk is the risk of loss associated with counterparty’s inability to fulfill its payment obligations. The Company’s credit risk is primarily attributable to trade and other receivables and money held in the Company’s bank accounts. The Company mitigates this risk by monitoring the credit worthiness of its customers and only dealing with creditworthy counterparties.

Liquidity risk

The Company’s objective in managing liquidity risk is to maintain sufficient readily available reserves in order to meet its liquidity requirements at any point in time. The Company achieves this by maintaining sufficient cash, managing cash from operations and if required through financing activities.

Disclosure Controls and Procedures

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– In accordance with the requirements of National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings (“NI 52-109”), the Company’s management, including the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), have evaluated the effectiveness of the Company’s disclosure controls and procedures. Based upon the results of the evaluation, the Company’s CEO and CFO have concluded that as at December 31, 2019, the Company’s disclosure controls and procedures to provide reasonable assurance that the information required to be disclosed by the Company in reports it files is recorded, processed, summarized and reported within the appropriate time periods and forms were effective.

Internal Control over Financial Reporting

Internal control over financial reporting (“ICFR”) is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with applicable IFRS. Internal control over financial reporting should include those policies and procedures that establish the following:

maintenance of records in reasonable detail, that accurately and fairly reflect the transactions and dispositions of assets;
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with applicable IFRS;
receipts and expenditures are only being made in accordance with authorizations of management or the Board of Directors; and
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial instruments.

The Company’s management, with the participation of the CEO and CFO, assessed the effectiveness of the Company’s internal controls over financial reporting and concluded that as at December 31, 2019, the Company’s internal control over financial reporting was effective.

During the year ended December 31, 2019, the Company did not make any significant changes to its internal controls over financial reporting that would have materially affected, or reasonably likely to materially affect, its internal controls over financial reporting.

Limitations of Disclosure Controls and Procedures and Internal Control over Financial Reporting

The Company’s management, including the CEO and CFO, believe that due to inherent limitations, any disclosure controls and procedures or internal control over financial reporting, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that any design will not succeed in achieving its stated goals under all potential future conditions. Accordingly, because of the inherent limitations in a cost effective control system, misstatements due to error or fraud may occur and not be detected. Additionally, management is required to use judgment in evaluating controls and procedures.

Additional Information

Additional information relating to the Company can be found on SEDAR at www.sedar.com.

Approval

The Board of Directors of the Company has approved the disclosure contained in this MD&A.

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AI assistant

Spectra7 Microsystems Inc. — Management Reports 2020

46740_rns_2020-04-30_ffbd04a6-24e8-4073-80cb-24f497dd94c7.pdf