TerraVest Industries — Management Reports 2020

Dec 16, 2020

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MANAGEMENT’S DISCUSSION AND ANALYSIS For the year ended September 30, 2020 Dated: December 15, 2020

INTRODUCTION AND FORWARD-LOOKING STATEMENTS

This Management’s Discussion and Analysis (“MD&A”) presents management’s view of the financial position and performance of TerraVest Industries Inc. (“TerraVest” or the “Company”) for the year ended September 30, 2020 and should be read in conjunction with TerraVest’s audited consolidated financial statements for the years ended September 30, 2020 and 2019. The financial information in this MD&A has been prepared in accordance with International Financial Reporting Standards (“IFRS”). All amounts are stated in thousands of Canadian dollars, except share and per share amounts or unless otherwise stated. This discussion is prepared as at December 15, 2020 and has been prepared with all available information up to and including the date of this report. This document should be read in full including the definitions of non‐IFRS measures such as Adjusted earnings before interests, income taxes, depreciation and amortization (“EBITDA”), Cash Available for Distribution, Dividend Payout Ratio, Maintenance Capital Expenditures and Working Capital which are found in the following section of this MD&A.

This MD&A sets out management’s assessment of TerraVest’s future plans and operations and contains forward-looking statements as defined under applicable Canadian securities legislation. These forward-looking statements often contain words such as “anticipates”, “does not anticipate”, “believes”, “estimates”, “forecasts”, “intends”, “expects”, “does not expect”, “could”, “may”, “will”, “should”, “plans” or similar terms or variations of these words and contain estimates or assumptions about the outcome of future events. These forward-looking statements are provided in the interest of providing readers with information regarding TerraVest. Readers are cautioned that management’s expectations, estimates and assumptions, although considered reasonable, may prove to be incorrect and readers should not place undue reliance on forward-looking statements which are subject to risks, uncertainties, and other factors that could result in the outcome of these events being materially different from those anticipated in this MD&A. These factors and assumptions include, but are not limited to: levels of business activity in TerraVest’s segments, political conditions and events, competitive pressures, changes in government policy or regulations, commodity pricing, and general economic conditions. TerraVest’s actual results may differ materially from those expressed in, or implied by these forward-looking statements. The forward-looking information contained in the MD&A is expressly qualified by the cautionary statement. TerraVest does not undertake any obligation to update or release any revisions to these forward-looking statements to reflect events or circumstances, unanticipated events or circumstances, or should its estimates or assumptions change, after the date hereof, except as expressly required by law. Additional information relating to TerraVest and the risks to which its business is subject is contained in its Annual Information Form (“AIF”), which is available on SEDAR at www.sedar.com.

NON‐IFRS FINANCIAL MEASURES

Adjusted EBITDA, Cash Available for Distribution, Dividend Payout Ratio, Maintenance Capital Expenditures and Working Capital are not recognized measures under IFRS and do not have standardized meanings prescribed by IFRS. TerraVest’s definitions may differ from those of other issuers and therefore may not be comparable to similarly titled measures used by other issuers.

Adjusted EBITDA : is defined as net income adjusted for income tax expense, financing costs, depreciation, amortization, gains or losses on disposal of property, plant and equipment and on disposal of assets held for sale, change in fair value of derivative financial instruments, change in fair value of investment in equity instruments, gains or losses on foreign exchange, nonrecurring acquisition-related costs, impairment charges and other non-recurring and/or non-operations related items that do not reflect the current ongoing operations of TerraVest. Management believes this is a useful metric in evaluating the ongoing operating performance of TerraVest. Readers are cautioned that adjusted EBITDA should not be construed as an alternative to net income determined in accordance with IFRS as an indicator of TerraVest’s performance.

Cash Available for Distribution : is defined as cash flow from operating activities adjusted for changes in non-cash operating working capital, maintenance capital expenditures and repayment of lease liabilities. Management believes that cash available for distribution, as a liquidity measure, is a useful metric that provides an indication of the cash available from ongoing operations that can be distributed to shareholders as a dividend. Readers are cautioned that cash available for distribution should not be construed as an alternative to cash flow from operating activities determined in accordance with IFRS as an indicator of TerraVest’s liquidity and cash flows.

Dividend Payout Ratio : is defined as dividends paid in cash during the period divided by cash available for distribution for the period. Management believes that dividend payout ratio is a useful metric as it provides an indication of TerraVest’s ability to sustain its current dividend policy. There is no directly comparable IFRS measure for dividend payout ratio.

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Maintenance Capital Expenditures : is defined as capital expenditures made to sustain the operations of TerraVest’s operating businesses and to maintain the productive capacity of the businesses over an economic cycle, whether or not they yield significant cost or production efficiencies. Management believes that maintenance capital expenditures should be funded by cash flow from existing operating activities and, therefore, deducted in determining cash available for distribution. There is no directly comparable IFRS measure for maintenance capital expenditures.

Working Capital : is calculated by subtracting current liabilities from current assets. Management uses working capital as a measure for assessing overall liquidity. There is no directly comparable IFRS measure for working capital.

BUSINESS OVERVIEW

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

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

Fuel Containment Segment

Through wholly-owned subsidiaries, TerraVest’s Fuel Containment segment is a leading provider of products and services to a variety of industries across Canada and the United States. The Fuel Containment segment manufactures products including: bulk LPG transport trailers, LPG delivery and service trucks, bulk LPG storage tanks, residential and commercial LPG tanks and dispensers, custom pressure vessels, commercial and residential refined fuel tanks, and furnaces and boilers. This segment sells its products direct to end user and through various distribution networks. The end users of the products are fuel distributors, transportation companies and industrial, commercial and residential consumers.

Processing Equipment Segment

Through subsidiaries, TerraVest’s Processing Equipment segment is a leading fabricator of equipment for various end-markets including: upstream and midstream oil and gas processing, agriculture, transportation and mining. The Processing Equipment segment manufactures and sells a wide array of equipment such as: wellhead processing equipment and tanks, wellhead desanding units, central facilities processing equipment, NGL and LPG storage tanks, anhydrous ammonia storage tanks, bulk NGL and LPG transport trailers, bulk ammonia transport trailers and wagons, compressed gas transport trailers and a wide variety of customized processing equipment for various applications. This segment’s products and services are primarily sold to oil and gas producers, midstream companies, engineering companies, propane distributors, fertilizer distributors and transportation companies.

Service Segment

TerraVest’s Service segment provides well servicing to the oil and gas sector and is a market-leader in South‐Western and Central Saskatchewan. The Service segment has been providing well servicing to major oil and gas producers in Saskatchewan for many years and is a well‐recognized name. The Service segment currently operates 21 service rigs giving it the critical mass to service the needs of the largest oil and gas producers in the area.

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FOURTH QUARTER AND YEAR END REVIEW AND OUTLOOK

Business Performance

Management believes that there are certain non‐IFRS financial measures that can be used to assist shareholders in analyzing the performance of TerraVest. The table below highlights certain financial results and reconciles net income to adjusted EBITDA for the fourth quarter and year ended September 30, 2020 and the comparative periods in fiscal 2019.

Fourth quarters ended Years Sept. 30, 2020 Sept. 30, 2019 Sept. 30, 2020	ended Sept. 30, 2019
$ $ $ Sales 68,231 80,345 304,253	$ 306,286
Net Income 11,082 6,308 26,628 Add (subtract): Income tax expense 3,652 2,120 8,870 Financing costs 1,038 1,348 5,240 Depreciation and amortization 5,308 2,866 18,867 Change in fair value of derivative financial instruments (800) 323 127 Change in fair value of investment in equity instruments (1,760) - (1,713) (Gain) loss on foreign exchange 490 8 (604) Acquisition-related cost 280 98 451 (Gain) loss on disposal of property, plant and equipment (255) 68 (555) (Gain) loss on disposal of assets held for sale - (302) (931) (Gain)loss on contingent considerations (1,587) 457 (1,648)	22,555 8,397 5,769 11,705 629 - (298) 98 (18) (302) 457
Adjusted EBITDA 17,448 13,294 54,732	48,992

Sales for the fourth quarter ended September 30, 2020 were $68,231 versus $80,345 for the prior comparable quarter. This represents a decrease of 15%. However, TerraVest acquired all of the assets of Argo Sales Inc. (“Argo”) and Iowa Steel Fabrication, LLC (“ISF”) of which only ISF partially contributed to the prior comparable quarter. Excluding Argo and ISF, sales for the fourth quarter ended September 30, 2020 were $54,293 versus $78,590 for the prior comparable period. This represents a decrease of 31% for TerraVest’s base portfolio (excluding Argo and ISF).

Sales for the year ended September 30, 2020 were $304,253 versus $306,286 for the prior comparable period. This represents a decrease of less than 1%. Excluding Argo and ISF, sales for the year ended September 30, 2020 were $245,291 versus $304,531 for the prior comparable period. This represents a decrease of 19% for TerraVest’s base portfolio (excluding Argo and ISF).

The decrease in sales for TerraVest’s base portfolio for the fourth quarter ended September 30, 2020 continues to be explained by lower demand for TerraVest’s NGL storage and distribution equipment, oil and gas processing equipment and well service product lines in Western Canada, which is the result of the impact of the COVID-19 pandemic and commodity prices on an already challenged industry. The decrease in sales for TerraVest’s base portfolio for the fourth quarter was partially offset by increased sales in the fuel containment segment.

The decrease in sales for TerraVest’s base portfolio for the year ended September 30, 2020 is a result of the reasons explained above, partially offset by increased demand for LPG storage and distribution equipment and home heating product lines during the fiscal year.

Net income for the fourth quarter and year ended September 30, 2020 was $11,082 and $26,628 versus $6,308 and $22,555 for the prior comparable periods. This represents increases of 76% and of 18% respectively. The increases are a result of more favourable product mix, government wage subsidies to help maintain employment during the COVID-19 pandemic and cost control measures put in place, partially offset by decreased sales activities for TerraVest’s base portfolio as explained above, as well as the variations highlighted in the table above.

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Adjusted EBITDA for the fourth quarter and year ended September 30, 2020 were $17,448 and $54,732 versus $13,294 and $48,992 for the prior comparable periods. This represents increases of 31% and of 12% respectively, which are primarily the result of the additions of Argo and ISF, more favourable product mix, government wage subsidies, as well as the adoption on IFRS 16 Leases on October 1, 2019, for which rent is no longer included in adjusted EBITDA. Instead, an interest expense is recognized on lease liabilities and a depreciation expense is recognized on right-of-use assets. Rent payments were $5,058 for the year ended September 30, 2020. During the fiscal year, TerraVest received $13,393, of which $12,553 has been recognized in net income, in relation to the Canada Emergency Wage Subsidy (“CEWS”) as part of the Federal Government’s response to the COVID-19 pandemic. Had the CEWS program not been available, TerraVest would have made incremental significant personnel reductions to mitigate reduced business activity.

The table below reconciles cash flow from operating activities to cash available for distribution for the fourth quarter and year ended September 30, 2020 and the comparative periods in fiscal 2019.

	Fourth quarters ended	Fourth quarters ended	Years	ended
	Sept. 30, 2020	Sept. 30, 2019 Sept. 30, 2020		Sept.	30, 2019
	$	$	$		$
Cash Flow from Operating Activities	16,657	12,248	64,876		30,977
Add (subtract):
Change in non-cash operating working capital items	(3,474)	(2,050)	(21,435)		4,261
Maintenance capital expenditures	(581)	(1,082)	(3,221)		(4,459)
Repayment of lease liabilities	(1,032)	-	(3,603)		-
Cash Available for Distribution	11,570	9,116	36,617		30,779
Dividends Paid in the Period	1,868	1,732	7,337		6,929
Dividend Payout Ratio	16%	19%	20%		23%

Cash flow from operating activities for the fourth quarter and year ended September 30, 2020 were $16,657 and $64,876 versus $12,248 and $30,977 for the prior comparable periods. This represents increases of 36% quarter over quarter and 109% year over year. The increased cash flow is a result of a reduction of working capital as a result of reduced business activity in the Western Canadian businesses, deferred tax installments throughout the year and government wage subsidies.

Maintenance capital expenditures were $581 for the fourth quarter versus $1,082 for the prior comparable period representing a decrease of 46%, which is mainly explained by the timing of maintenance capital expenditures. During the fourth quarter ended September 30, 2020, TerraVest’s total purchases of property, plant and equipment were $3,362 of which $2,781 are considered growth capital. The growth capital incurred during the fourth quarter was used to add to the Company’s equipment rental fleet and to improve some production process in order to be more efficient and increase capacity.

Cash available for distribution for the fourth quarter and year ended September 30, 2020 increased by 27% and by 19% respectively versus the prior comparable periods. These increases are a result of reasons explained above and previously in this MD&A.

The dividend payout ratio for the fourth quarter and year ended September 30, 2020 were 16% and 20% versus 19% and 23% for the prior comparable periods.

Outlook

The current global pandemic has created a challenging business environment for TerraVest on many fronts. TerraVest continues to operate its plants across North America as an essential equipment and service provider to many critical industries, including residential and commercial heating, propane and fertilizer storage and distribution and energy production and processing. Across all of our businesses, we have implemented new operating procedures in effort to keep our employees, customers and vendors safe. Additionally, TerraVest has undertaken significant cost reduction measures in an effort to mitigate the economic slowdown that has resulted from the COVID-19 pandemic, as well as measures to permanently improve its manufacturing efficiency and capacity.

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Business Combination

On December 13, 2019, a subsidiary of TerraVest acquired all the assets of Argo, a privately-owned Alberta based company primarily focused on manufacturing wellhead processing and production equipment for the Canadian oil and gas market. The business combination has been accounted for using the acquisition method with the results of operations included in earnings from the date of acquisition. For information regarding the fair value of the consideration transferred, the assets acquired and the liabilities assumed at the acquisition date, please refer to Note 5 of the audited consolidated financial statements for the year ended September 30, 2020, available on SEDAR.

CONSOLIDATED RESULTS OF OPERATIONS

The following section provides the financial results of TerraVest’s operations for the fourth quarter and year ended September 30, 2020 and the comparative periods in fiscal 2019.

The following section provides the financial results of TerraVest’s operations for the fourth quarter September 30, 2020 and the comparative periods in fiscal 2019.	and year ended
Fourth quarters ended Years Sept. 30, 2020 Sept. 30, 2019 Sept. 30, 2020	ended Sept. 30, 2019
$ $ $ Sales 68,231 80,345 304,253 Cost of sales 48,854 61,617 231,990	$ 306,286 235,544
Grossprofit 19,377 18,728 72,263	70,742
Administration expenses 6,314 7,223 31,164 Selling expenses 1,174 1,311 5,656 Financing costs 1,038 1,348 5,240 Share of an associate’s net income 29 (136) 29 Other(gains)losses (3,912) 554 (5,324)	28,152 5,537 5,769 (136) 468
4,643 10,300 36,765	39,790
Earnings before income taxes 14,734 8,428 35,498 Income tax expense 3,652 2,120 8,870	30,952 8,397
Net Income 11,082 6,308 26,628 Allocated to non‐controllinginterest (91) (12) (211)	22,555 60
Net income attributable to common shareholders 11,173 6,320 26,839	22,495
Weighted average shares outstanding – Basic 18,681,250 17,390,014 18,486,064 Weighted average shares outstanding – Diluted 18,926,946 19,115,542 19,030,735 Net income per share – Basic $0.60 $0.36 $1.45 Net incomeper share – Diluted $0.59 $0.34 $1.42	17,239,597 19,116,577 $1.30 $1.24

Sales for the fourth quarter decreased by 15% quarter over quarter, while sales for the year ended September 30, 2020 were relatively flat year over year. The reasons for the variations have been explained previously in this MD&A.

Gross profit for the fourth quarter and year ended September 30, 2020 increased by 3% and by 2% respectively versus the prior comparable periods. This is primarily explained by the contribution of ISF and Argo, more favourable product mix, as well as government wage subsidies and cost control measures, partially offset by decreased sales volume for TerraVest’s base portfolio.

Administration expenses for the fourth quarter and year ended September 30, 2020 decreased by 13% quarter over quarter and increased by 11% year over year. The variations are mainly the result of government wage subsidies combined with the effect of non-recurring expenses incurred in fiscal 2019 associated to the transfer of petroleum tank production into a new facility, offset by the addition of ISF and Argo to TerraVest’s results and acquisition-related expenses incurred in fiscal 2020.

Selling expenses for the fourth quarter and year ended September 30, 2020 decreased by 10% quarter over quarter but remained relatively flat year over year. This is a result of reduced travelling expenses during the last six months of the fiscal year due to travel restrictions and cost control initiatives partially offset by the addition of ISF and Argo to TerraVest’s results.

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Financing costs for the fourth quarter and year ended September 30, 2020 decreased by 23% and by 9% respectively versus the prior comparable periods. The decreases are primarily explained by lower interest expense because of the prime rate reductions in March 2020 and April 2020 and by reduced debt balances, partially offset by interest expense on lease liabilities following the adoption of IFRS 16 Leases on October 1, 2019.

Other (gains) losses variance for the fourth quarter and year ended September 30, 2020 is a result of favourable changes in fair value of derivative financial instruments and investment in equity instruments, as well as a gain on contingent considerations.

Income tax expense for the fourth quarter and year ended September 30, 2020 increased versus the prior comparable periods, which is the result of increased taxable earnings partially offset by a reduction of the tax rates for certain subsidiaries of TerraVest. TerraVest has income tax loss carry-forward which are available to shelter income taxes in certain subsidiaries.

As a result of the above, net income attributable to common shareholders for the fourth quarter and year ended September 30, 2020 increased by 77% and by 19% respectively versus the prior comparable periods.

Segmented Results

• a) Fuel Containment

Fuel Containment
	Fourth quarters ended		Years	ended
	Sept. 30, 2020	Sept. 30, 2019 Sept. 30, 2020		Sept.	30, 2019
	$	$	$		$
Sales	43,161	41,534	158,996		154,911
Net Income	8,552	4,377	21,524		15,298
Add (subtract):
Income tax expense	3,827	1,253	8,232		5,414
Financing costs	521	662	2,468		2,675
Depreciation and amortization	1,995	1,671	7,952		6,347
Change in fair value of derivative
financial instruments	(800)	323	127		629
(Gain) loss on foreign exchange	237	(16)	(518)		(330)
(Gain) loss on disposal of property, plant
and equipment	(210)	67	(222)		189
Gain (loss) on disposal of assets held for sale	-	(352)	180		(352)
Gain(loss)on contingent consideration	-	457	(61)		457
Adjusted EBITDA	14,122	8,442	39,682		30,327

Sales for the fourth quarter and year ended September 30, 2020 were $43,161 and $158,996 versus $41,534 and $154,911 for the prior comparable periods. This represents increases of 4% and of 3% respectively. The increases in sales are the result of stronger demand for certain home heating product lines and increased demand in both Canada and the United States for this segment’s LPG storage and distribution equipment products as this segment is heading into its winter heating season. The increases in sales were partially offset by a slowdown of the economy due to the COVID-19 pandemic reducing third quarter sales of fiscal 2020 and impacting the fourth quarter sales as well.

Net income for the fourth quarter and year ended September 30, 2020 were $8,552 and $21,524 versus $4,377 and $15,298 for the prior comparable periods. This represents increases of 95% and of 41% respectively. The increases are primarily a result of a change in the fair value of derivative financial instruments and non-recurring expenses related to the transfer of petroleum tank production to a new facility in fiscal 2019, as well as cost reduction measures and government subsidies. The increases in net income are partially offset by the decrease in sales activity during the third quarter of fiscal 2020 and increased income tax expense.

Adjusted EBITDA for the fourth quarter and year ended September 30, 2020 were $14,122 and $39,682 versus $8,442 and $30,327 for the prior comparable periods. This represents increases of 67% and of 31% respectively, which are a result of the reasons highlighted above.

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b) Processing Equipment

Sept. 30, 2020 Sept. 30, 2019 Sept. 30, 2020	Sept. 30, 2019
$ $ $ Sales 22,349 34,861 134,295	$ 134,508
Net Income 484 3,054 4,404 Add (subtract): Income tax expense 18 763 1,091 Financing costs 463 252 2,171 Depreciation and amortization 2,939 1,010 9,420 (Gain) loss on foreign exchange 26 (5) 32 Acquisition-related costs 375 - 375 (Gain) loss on disposal of property, plant and equipment (45) 1 (332) Gain(loss)on contingent consideration (1,587) - (1,587)	12,403 2,742 973 3,797 3 - (178) -
Adjusted EBITDA 2,673 5,075 15,574	19,740

Sales for the fourth quarter and year ended September 30, 2020 were $22,349 and $134,295 versus $34,861 and $134,508 for the prior comparable periods. This represents decreases of 36% for the quarter while sales remained relatively flat year over year. Excluding Argo and ISF, sales for the fourth quarter and year ended September 30, 2020 were $8,409 and $75,240 versus $33,106 and $132,753 for the comparable periods. This represents decreases of 75% and of 43% respectively. The decreases are a result of weaker demand for energy processing equipment and NGL storage and distribution equipment in Western Canada, as both the COVID-19 pandemic and weak commodity pricing continue to have a major impact on this segment’s customers capital expenditure programs.

Net income for the fourth quarter and year ended September 30, 2020 were $484 and $4,404 versus $3,054 and $12,403 for the prior comparable periods. This represents decreases of 84% and 65% respectively. The decreases are explained by the overall decrease in this segment’s sales for the base portfolio of companies compared to the prior periods, and the increase in financing costs due to the acquisition of Argo, partially offset by cost control measures and government subsidies.

Adjusted EBITDA for the fourth quarter and year ended September 30, 2020 were $2,673 and $15,574 versus $5,075 and $19,740 for the prior comparable periods. This represents decreases of 47% and 21% respectively. These decreases are a result of the reasons explained above.

c) Service

Sept. 30, 2020 Sept. 30, 2019 Sept. 30, 2020	Sept. 30, 2019
$ $ $ Sales 2,721 3,950 10,962	$ 16,867
Net Income (loss) 510 494 (184) Add (subtract): Income tax expense (recovery) 56 (269) 18 Financing costs 61 89 333 Depreciation and amortization 374 185 1,494 (Gain) loss on disposal of property, plant and equipment - - (1)	(172) (91) 328 1,561 (29)
Adjusted EBITDA 1,001 499 1,660	1,597

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Sales for the fourth quarter and year ended September 30, 2020 were $2,721 and $10,962 versus $3,950 and $16,867 for the prior comparable periods. This represents decreases of 31% and 35% respectively. The decreases are a result of weaker rig utilization due to a general decline in customer’s capital spending in the regions where this segment operates combined with a major slowdown of the economy due to the COVID-19 pandemic during the last six months of fiscal 2020.

Net income (loss) for the fourth quarter and year ended September 30, 2020 were $510 and ($184) versus $494 and ($172) for the prior comparable periods. This represents an increase in net income of 3% and an increase in net loss of 7% and are a result of the reason explained above, offset by cost control measures and government subsidies.

Adjusted EBITDA for the fourth quarter and year ended September 30, 2020 were $1,001 and $1,660 versus $499 and $1,597 for the prior comparable periods. This represents increases of 101% and 4% respectively and are primarily a result of cost control measures and government wages subsidies, partially offset by a reduction in sales.

Quarterly Results

Quarterly Results
30-Sep-20	For the quarters ended 30-Jun-20 31‐Mar-20 31-Dec-19 30-Sep-19 30-Jun-19	31‐Mar-19 31-Dec-18
$ Sales 68,231 Adjusted EBITDA 17,448 Net income attributable to common shareholders 11,173	$ $ $ $ $ 61,019 86,751 88,252 80,345 70,751 11,854 10,853 14,577 13,294 10,599 3,882 5,323 6,461 6,320 4,610	$ $ 76,159 79,031 10,974 14,125 5,472 6,093
	0.21 0.28 0.36 0.36 0.27 0.20 0.28 0.35 0.34 0.25

TerraVest’s operating segments are seasonal in nature. The strongest quarters for TerraVest are its first and last quarters. The Processing Equipment and Service segments generally experience higher sales in the first and second quarters as majority of the drilling in Western Canada occurs during this period. The Fuel Containment segment generally experiences higher sales during the first and last quarters as demand for residential, commercial and industrial heating products increases heading into the winter months. The third quarter is typically the weakest across all segments. TerraVest takes advantage of this seasonality to build inventory levels during non-peak demand periods, thereby allowing TerraVest to more readily meet increased levels of demand during its regular peak demand periods.

CASH FLOW

The following table provides summary information with respect to consolidated cash flows from operating, investing and financing activities:

Years ended Sept. 30, 2020 Sept. 30, 2019	Years ended Sept. 30, 2020 Sept. 30, 2019
$ Cash flow from operating activities 64,876 Cash flow used in investing activities (22,642) Cash flow from(used in) financing activities (24,557)	$ 30,977 (26,344) 3,475
Net inflows for the year 17,677 Cash and bank overdrafts, beginning of year 9,093 Impact of foreign exchange on cash and bank overdrafts (53)	8,108 984 1
Cash and bank overdrafts,end ofyear 26,717	9,093

Cash Flow from Operating Activities

TerraVest generated $64,876 of cash flow from operating activities during the year ended September 30, 2020 compared to $30,977 for the prior comparable period. The increase is mainly attributable to a reduction in non-cash operating working capital items versus the prior comparable period and reduced income taxes paid compared to the prior comparable period.

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Cash Flow used in Investing Activities

Cash flow used in investing activities during the year ended September 30, 2020 was ($22,642) compared to ($26,344) for the prior comparable period. The decreased use of cash is primarily a result of a decrease in capital expenditures due to the completion in fiscal 2019 of a major capital project consisting of relocating the production of petroleum tanks to a new facility, partially offset by investment in equity instruments and the payment of a contingent consideration from a previous business combination.

Cash Flow from (used in) Financing Activities

Cash flow from (used in) financing activities during the year ended September 30, 2020 was ($24,557) compared to $3,475 for the prior comparable period. The difference is attributable to the use of cash flow used to reduce debt balances and repay lease liabilities.

DIVIDENDS

The following table outlines the dividends declared by TerraVest in fiscal 2020:

Record date	Payment date	Dividendper share	Type of Dividend
		$
September 30, 2020	October 9, 2020	0.10	Eligible
June 30, 2020	July 9, 2020	0.10	Eligible
March 31, 2020	April 10, 2020	0.10	Eligible
December 31,2019	January10,2020	0.10	Eligible

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

TerraVest expects to declare and pay a dividend on a quarterly basis. The dividend policy may be changed from time to time in the sole discretion of the Board of Directors. Accordingly, there can be no assurances as to the amount or timing of any dividend in the future. In assessing whether to pay a dividend and in determining the amount of the dividend, the Board of Directors will consider TerraVest’s financial condition and its then current business needs and other factors the Board of Directors may consider appropriate in the circumstances.

LIQUIDITY AND CAPITAL RESOURCES

TerraVest’s objective in managing its capital resources is to ensure that there are adequate capital resources to support the operations of its various business segments and permit opportunistic acquisitions in order to maximize the return to shareholders. Management continually assesses TerraVest’s capital needs to meet its objectives.

TerraVest’s principal sources of liquidity are cash on hand, secured credit facilities and cash flow generated by its operations throughout the year. As at September 30, 2020, TerraVest’s cash position, net of bank overdrafts, was $26,717 compared to $9,093 as at September 30, 2019. As at September 30, 2020, TerraVest’s consolidated working capital, excluding short-term revolving credit facilities, was $105,105 compared to $94,615 as at September 30, 2019. TerraVest expects to be able to fund all working capital requirements, contractual obligations and capital expenditures from a combination of cash on hand, operating cash flows and existing credit facilities.

Revolving Operating Loans

TerraVest and its subsidiaries have access to revolving operating loans. Two of the revolving operating loans are based on margin requirements. The revolving operating loans are subject to certain financial covenants which are based on the results of the individual subsidiaries in which the credit facilities are held. The availability of the revolving operating loans at any given time may have an impact on TerraVest’s liquidity and available capital resources and its ability to fund its operating and future growth plans.

As at September 30, 2020, the maximum amount available was $124,664, of which $78,321 was drawn. TerraVest was in compliance with all of its financial and non-financial covenants.

For further information on the financial and non-financial covenants, please refer to Note 14 of TerraVest’s audited consolidated financial statements for the year ended September 30, 2020.

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Revolving Term Loan

Certain subsidiaries of TerraVest operating in the Processing Equipment and Service segments have access to a $20,000 revolving term loan that can be used to refinance existing debt and to purchase property, plant & equipment. As at September 30, 2020, $19,104 was drawn.

TerraVest was in compliance with all of its financial and non-financial covenants. For further information on the financial and non-financial covenants, please refer to Note 14 of TerraVest’s audited consolidated financial statements for the year ended September 30, 2020.

Convertible Debentures

On January 13, 2020, TerraVest redeemed all of its outstanding convertible debentures (was trading under the symbol “TVK.DB”) with a principal amount of $1,093 for total consideration of $1,096, including accrued and unpaid interest. There are no convertible debentures outstanding as at September 30, 2020.

Carrying Value

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

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

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

Share Capital

TerraVest’s common shares are listed on the Toronto Stock Exchange under the symbol “TVK”. Changes in the common shares issued and outstanding were as follows:

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

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

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

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

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Subsequent to the end of the year, TerraVest repurchased 203,400 common shares under its common shares NCIB for total consideration of $3,056. The number of common shares outstanding was 18,477,850 as at December 1, 2020.

Capital Structure

The capital structure of TerraVest consists of its revolving credit facilities, long-term debt, convertible debentures and shareholders’ equity attributable to common shareholders. The following table outlines TerraVest’s capital structure:

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

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

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

SHARE-BASED PAYMENTS

TerraVest has a stock option plan for which options are granted to key management personnel to purchase common shares of TerraVest. Of the 1,500,000 common shares reserved for issuance, 700,500 were available for issuance under the stock option plan as at September 30, 2020. Total expense arising from the share‐based payment transactions recognized during the year ended September 30, 2020 as compensation expense was $100 ($82 for the year ended September 30, 2019).

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

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

During the year ended September 30, 2020, 167,500 stock options were settled for total cash consideration of $1,178 and no stock options were exercised or forfeited. In addition, TerraVest granted 100,000 stock options to key management personnel.

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FINANCIAL INSTRUMENTS RISK

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

Market Risk

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

Foreign Currency Risk

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

• sales and operating expenses denominated in foreign currencies made by Canadian entities; and

• financial instruments denominated in foreign currency in Canadian entities.

TerraVest does not have a policy to hedge its foreign currency risk and manages its exposure to foreign currency risk by periodically entering into forward exchange contracts. Based on the net U.S. dollar exposure as at September 30, 2020, a one cent increase in the Canadian/U.S. dollar exchange rate would have had a favorable impact of $185 on net income ($44 for the year ended September 30, 2019). A one cent decrease in the Canadian/U.S. dollar exchange rate would have had an impact of a similar magnitude but in opposite directions on net income.

Interest Rate Risk

TerraVest does not have a policy to hedge its interest rate risk and is exposed to interest rate risk arising from fluctuations in interest rates on revolving credit facilities and long-term debt at variable interest rates. During the year ended September 30, 2020, TerraVest has entered into an interest rate swap agreement for the notional amount of $25,000 to manage a portion of its exposure to interest rate risk.

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

Commodity Price Risk

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

Credit Risk

Credit risk is the risk that a counterparty will fail to perform its obligations to TerraVest. TerraVest’s credit risk comes mainly from accounts receivable and is mitigated through credit policies that limit transactions according to counterparties’ creditworthiness, which is assessed by considering counterparties’ financial position, past experience and other factors. In addition, a large majority of TerraVest’s clients are well established companies with a history of prompt payment. Accounts receivable amounts are presented on the consolidated statements of financial position net of the allowance for doubtful accounts. In measuring the expected credit losses, the trade receivables have been assessed on a collective basis as they possess shared credit risk characteristics. They have been grouped based on the days past due. The expected loss rates are based on the payment profile for sales based on historical credit losses. Trade receivables are written off when there is no reasonable expectation of recovery. Failure to make payments within 180 days from the invoice date and failure to engage with TerraVest on alternative payment arrangement, amongst other, may be considered indicators of no reasonable expectation of recovery. The credit risk on cash is considered negligible since cash is held in reputable financial institutions with high quality external credit ratings. TerraVest’s maximum exposure to credit risk is $72,062 as at September 30, 2020 ($59,779 as at September 30, 2019).

As at September 30, 2020, 91% (93% as at September 30, 2019) of TerraVest’s accounts receivable were less than 90 days past invoice date. TerraVest recognizes an allowance for doubtful accounts when it believes that the expected recoverable amount is lower than the actual amount of the trade receivables.

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Liquidity Risk

TerraVest’s objective is to maintain cash and cash availability to meet its liquidity requirements. TerraVest monitors its cash and trade receivable balances as well as cash flows generated from operations to meet its financial obligations. TerraVest also has access to various authorized revolving credit facilities to manage its liquidity need. For a more detailed discussion on liquidity risk, refer to the section entitled “Liquidity and Capital Resources” in this MD&A.

SIGNIFICANT ACCOUNTING POLICIES AND NEW STANDARDS

TerraVest prepares its financial statements in accordance with IFRS. TerraVest’s accounting policies under IFRS are disclosed in Note 2 of TerraVest’s audited consolidated financial statements for the year ended September 30, 2020.

New Standards Adopted

For a detailed discussion of new accounting standards adopted, please refer to Note 4 of TerraVest audited consolidated financial statements for the year ended September 30, 2020.

Standards and Interpretations Not Yet Adopted

For a detailed discussion of new accounting pronouncements, please refer to Note 30 of TerraVest’s audited consolidated financial statements for the year ended September 30, 2020.

CRITICAL ACCOUNTING ESTIMATES

For a detailed discussion on the use of estimates and judgments, please refer to Note 3 of TerraVest’s audited consolidated financial statements for the year ended September 30, 2020.

CONTROLS AND PROCEDURES

As at September 30, 2020, TerraVest’s Chief Executive Officer and Chief Financial Officer, have certified that the disclosure controls and procedures, and that the internal controls over financial reporting are effective and that during the period covered by this report, TerraVest did not make any changes in internal controls over financial reporting that materially affected or are reasonably likely to materially affect TerraVest’s internal controls over financial reporting.

Exception

TerraVest acquired Argo in December 2019. Management has not yet completed its assessment of the design or operating effectiveness of Argo’s disclosure controls and procedures and internal controls over financial reporting.

The following table provides significant financial information of Argo as at and for the year ended September 30, 2020:

	Argo
	$
Total assets	24,923
Total liabilities	14,457
Sales	36,211
Net(loss)	(764)

RELATED PARTY TRANSACTIONS

For detailed information on related party identity, relationship and transactions, please refer to Note 27 of TerraVest’s audited consolidated financial statements for the year ended September 30, 2020.

RISK FACTORS

For a detailed discussion of the risk factors related to the businesses and to the structure of TerraVest, please refer to the AIF of TerraVest under the heading “Risk Factors”, which is incorporated herein by reference.

ADDITIONAL INFORMATION

Additional information relating to TerraVest, including the AIF of TerraVest, is available on SEDAR at www.sedar.com.

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