Total Telcom Inc. — Management Reports 2021

Mar 1, 2021

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MANAGEMENT’S DISCUSSION AND ANALYSIS (“MD&A”) FOR THE SIX MONTHS ENDED DECEMBER 31, 2020

The following discussion and analysis is intended to provide additional information with regard to the operations, business environment and factors that may affect the business and financial results of Total Telcom Inc. (“Total” or the “Company”).

The discussion and analysis as provided by Management should be read in conjunction with the unaudited condensed interim consolidated financial statements and related notes for the quarter ended December 31, 2020 and the audited consolidated financial statements, related notes and MD&A for the year ended June 30, 2020.

The unaudited condensed interim consolidated financial statements for the quarter ended December 31, 2020 have been prepared in accordance with International Financial Reporting Standards (IFRS) and are presented in Canadian dollars unless specifically otherwise stated.

The unaudited interim consolidated financial statements for the quarter ended December 31, 2020 have not been reviewed by the Company’s auditors, BDO Canada LLP.

This document contains forward-looking statements that are subject to future events. Management formulates estimates and assumptions based on the expectations of future outcomes. However, actual results may differ materially from those expectations and estimates due to inherent uncertainty and general nature of the business.

This Management Discussion and Analysis is presented with information available up to and including February 26, 2021.

INTRODUCTION

Total Telcom Inc. is a reporting issuer in Alberta, British Columbia and Ontario. The shares of the Company trade on the TSX Venture Exchange (symbol TTZ ).

The Company, through its wholly owned subsidiary ROM Communications Inc. (ROM) is a leading developer and provider of remote asset monitoring and tracking products and services throughout North America. ROM specializes in the development of innovative wireless communications that provide low cost, high tech monitoring, tracking and remote control solutions for commercial, industrial and consumer applications. ROM is uniquely positioned and qualified to deliver complete web to wireless solutions that enable companies and organizations to remotely monitor, track and control their fixed and mobile assets with a web browser from any Internet enabled PC. Products and services are based on ROM’s web to wireless technology and proprietary 2[nd] generation hardware & software marketed as TextAnywhere, ROM Heater Controllers, ROMTraX, MotoTraX, TraX, DataTrax and Alarm Point. These modules are wireless modems that utilize microcomputers integrated with sensors, GPS engines and various inputs and outputs and interfaced by the user through the Internet. ROM is an authorized airtime reseller and hardware developer for satellite, cellular and wireless IP Networks.

The following sections provide Management’s review of operations for the quarter ended December 31, 2020. Balance sheet comparisons are made to the year ended June 30, 2020 while income statement and cash flow comparisons are made to the quarter ended December 31, 2019. Additional information about Total Telcom Inc. can be found on SEDAR at www.sedar.com.

FORWARD LOOKING STATEMENTS

Any statements in this document that may be considered forward-looking are based on current expectations that involve a number of risks and uncertainties, which could cause actual results to differ from those anticipated.

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OVERALL PERFORMANCE

The following table sets forth the Company’s selected consolidated financial data. This information has been derived from the Company’s unaudited interim consolidated financial statements and should be read in conjunction with, and is qualified entirely by, the more detailed information in the unaudited interim consolidated financial statements.

	Three months ending December 31	Three months ending December 31	Six months ending	December 31
	2020	2019	2020	2019
($ except as noted)
Consolidated figures
Revenue	$ 313,025	$ 272,293	$ 800,242	$ 692,640
Net income (loss)	$ 29,701	$ (2,250)	$ 137,231	$ 108,507
Net Earnings (loss) per share	$ 0.001	$ (0.000)	$ 0.005	$ 0.004
Shares outstanding at end of period	24,965,014	24,965,014	24,965,014	24,965,014
Cash from (used in) operations	$ 120,995	$ (78,736)	$ 281,239	$ 109,861
Cash from (used in) financing activities	$ (16,345)	$ (15,399)	$ (32,403)	$ (30,516)
Cash from (used in) investing activities	$ (61,894)	$ (95,697)	$ (162,870)	$ (213,661)
Net Cash Inflow (Outflow)	$ 42,756	$ (189,832)	$ 85,966	$ (134,316)
			December 31,	June 30,
			2020	2020
Consolidated figures
Cash			$ 1,520,628	$ 1,434,662
Working capital			$ 1,618,894	$ 1,563,954
Total assets			$ 3,332,960	$ 3,256,331
Total liabilities			$ 450,858	$ 511,460

Revenues for the second quarter of fiscal 2021 increased by approximately $41,000 compared to the second quarter of fiscal 2020. This increase was a result of the Company continuing to see increasing hardware sales from new product developments that have been completed over the past couple years. In addition, there was increased rental revenue as the rental fleet was more utilized in the second quarter with additional races being monitored this year. This increasing revenue trend continued from the first quarter resulting in a total increase in revenue compared to the first two quarters of fiscal 2020 of $108,000 (16% increase).

Net Income for the second quarter increased as the increased sales resulted in increased income from operations of $51,000. However, this income was offset by $21,000 in financing losses primarily relating to foreign exchange losses incurred on US dollar cash held by the Company.

Net cash inflows for the second quarter were just under $43,000. This was primarily a result of the Company generating positive cash flow from operations while still investing resources to complete product development projects where specific customer application opportunities have been identified.

Working capital at December 31, 2020 increased by approximately $55,000 compared to the working capital at June 30, 2020, which is consistent with the increase in cash flow, discussed above.

Total assets have increased by approximately $77,000 as the Company continuing to invest in new Product Developments. Total liabilities decreased by approximately $61,000 as the Company pays down the lease liability and has less trade payables due to the timing of inventory purchases compared to last year.

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RESULTS OF OPERATIONS

Three months ended December 31 Six months ended December 31,

		2020		2019	2020		2019
Consolidated operating results
Sales	$	313,025	$	272,293$	800,242	$	692,640
Gross profit		169,691		117,223	429,246		341,562
General & administrative expenses		70,716		81,525	161,739		171,304
Amortization of Right of Use Asset		17,251		17,488	34,738		34,975
Interest on Lease Liability		3,897		4,842	8,079		9,966
Government Grant		20,000		0	20,000		0
Finance income net of finance costs		(41,633)		(2,481)	(62,473)		8,520
Amortization of product development cost		26,000		12,600	44,000		24,300

Sales increased by approximately $108,000 in the first two quarters of fiscal 2021 compared to fiscal 2020. Hardware sales increased by approximately $114,000 as the Company is seeing more market acceptance of its new product developments. In particular, the new heater controller sales have seen significant growth. The Company also saw an increase in equipment rental revenue of approximately $115,000 as there was increased utilization of the rental fleet with more races occurring this year and increased participation in the off road race occurring in the first two quarters of fiscal 2021. These increases were offset somewhat by a $122,000 decline in communication revenues as the Company had a significant customer deactivate a number of environmental monitoring units as they look for alternative monitoring solutions for certain of their end users.

Gross Profit margins have increased by approximately 4% in the first two quarters of fiscal 2021 due to the change in the sales mix this year. This is primarily a result of the increased utilization of the rental fleet as there are certain fixed costs associated with depreciation of the rental fleet.

General and administrative expenses have decreased by approximately $10,000 compared to the first two quarters of fiscal 2020. This is primarily a result of the Company being able offset a portion of its administrative wages by accessing the Canada Emergency Wage Subsidy program in the second quarter.

Amortization of the right of use asset and interest on the lease liability have remained consistent with the first two quarters of fiscal 2020.

Amortization of product development costs increased as the Company starts amortizing product development costs as new products are completed and become available for commercial deployment.

Foreign exchange losses occurred as the Company continues to hold approximately half of its cash resources in US dollars and the US dollar has weakened significantly compared to the Canadian dollar in the first two quarters of fiscal 2021. These finance losses were offset somewhat as the Company realized a $20,000 gain on the fair market value adjustment to its long term debt as the government grant portion of the Canada Emergency Business Account loan was realized in the second quarter.

SUMMARY OF QUARTERLY RESULTS

**SUMMARY OFQU **	ARTERLYRESULTS	ARTERLYRESULTS
CONSOLIDATED FIGURES	FISCAL2021			FISCAL2020			FISCAL2019
($EXCEPT AS NOTED)	Q2	Q1	Q4	Q3	Q2	Q1	Q4	Q3
SALES	313,025	487,217	369,307	444,851	272,293	420,347	370,846	319,447
NET INCOME (LOSS)	29,701	107,530	46,700	166,231	(2,250)	110,757	109,708	33,663
EARNINGS (LOSS)PER SHARE	0.001	0.004	0.002	0.007	(0.000)	0.004	0.005	0.001

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SUMMARY OF QUARTERLY RESULTS (CONTINUED)

The results of the first two quarters reflect increased revenues as the Company continues to roll out some of it new products that have been developed. Net income for these quarters did not increase as much as would be expected from the increased in sales as increases in operating income were offset by a foreign exchange losses.

The quarterly results show that the Company is exposed to fluctuations in both revenues and profitability depending on the level of commercial acceptance received from the new products that are being rolled out. The results also show the seasonal fluctuations that can occur depending on the utilization of the rental fleet and timing of heater controller sales. In addition, the results show how the Company is exposed to exchange rate fluctuations between the US and Canadian dollars.

In the past, the Company was exposed to seasonal fluctuations as its ROM Heater Controller units were primarily in demand in the fall and winter seasons. The impact of this seasonality has been reduced somewhat as the heater business has expanded into the recreational industry which is expected to provide a more steady demand for units throughout the year. The rental fleet is also being used on short term rental basis and seasonal fluctuations currently occur, as the rental fleet is not fully utilized in the summer months. There are no contracts in place to guarantee the rental revenue will be recurring.

However, the quarterly results do show that the Company has essentially reached the break-even point from its recurring business and barring any unforeseen circumstances, ensures that the Company should not incur any significant cash flow burn from operations as it continues to develop new markets in which to grow.

LIQUIDITY AND CAPITAL RESOURCES

	December 31,	June 30,
	2020	2020
Consolidated figures
Cash	$ 1,520,628	$ 1,434,662
Current assets	$ 1,848,034	$ 1,819,288
Current liabilities	$ 229,140	$ 255,334
Workingcapital	$ 1,618,894	$1,563,954

As of December 31, 2020 the Company had a $40,000 long term loan outstanding. This loan was obtained through the Canada Emergency Business Account (CEBA) program initiated by the Government of Canada to help businesses manage through business interruptions resulting from the Covid 19 pandemic. The Company received $60,000 in total proceeds under this program but $20,000 will be forgiven as a government grant provided that the Company repay $40,000 by December 31, 2022. This loan is interest free until December 31, 2022. The Company also reports a $181,718 long term portion of the lease liability for occupied office space. Terms of the lease liability are disclosed in note 8 to the December 31, 2020 condensed interim consolidated financial statements.

The Company’s cash resources have increased by approximately $86,000 since June 30, 2020 and working capital has increased by approximately $55,000. This is a result of the Company’s cash flow from operations exceeding the amount of resources invested into new product developments in the first two quarters.

The Company’s primary cash requirements are for the continued implementation of its marketing strategy to bring its new products to full commercialization. The Company will continue to invest resources in the development of new product and services for specific applications identified for potential new customers. In addition, the Company could have short term cash requirements in order to purchase inventory should larger sales opportunities be realized. The Company has sufficient cash resources to fund these initiatives and does not anticipate any immediate financing requirements.

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SECURITIES ISSUED AND OPTIONS GRANTED

At December 31, 2020 there were 24,965,014 common shares issued and outstanding. No shares were issued during the second quarter.

At December 31, 2020 there were 1,430,000 stock options outstanding and exercisable. No options were issued or exercised during the second quarter.

Subsequent to the end of the second quarter, 250,000 stock options were exercised for $25,000 and 250,000 new common shares were issued.

COMMITMENTS, GUARANTEES AND INDEMNIFICATIONS

The Company is not obligated under any guarantees, but has provided certain indemnifications as described in note 22 to the consolidated financial statements for the year ended June 30, 2020.

TRANSACTIONS WITH RELATED PARTIES

General and administrative expenses for the quarter include $7,500 ($15,000 for six months ended December 31, 2020) in management fees paid to a Company controlled by a director and $2,500 ($5,000 for six months ended December 31, 2020) in director fees expense. These transactions occurred in the normal course of business and are recorded at fair value. See note 13 to the condensed interim consolidated financial statements for details regarding key management personnel compensation.

FINANCIAL INSTRUMENTS AND OTHER INSTRUMENTS

Management has classified and measured the Company’s financial instruments as described in note 21 to the consolidated financial statements for the year ended June 30, 2020.

The declaration of the Covid 19 global pandemic has disrupted economic activities. Thus far, the Company has not felt major impacts from the pandemic, but it has resulted in declines in certain revenue streams and caused delays in certain product development initiatives. The duration of the pandemic and its long term economic impacts are uncertain at this time and the disruption to normal business activities has resulted in the Company having increased exposure to liquidity and credit risks.

The Company is exposed to concentration of credit risk with respect to its cash and accounts receivable. Management monitors this risk on an ongoing basis through review of specific accounts and cash management.

The Company is exposed to fluctuations in foreign exchange rate changes between the Canadian and United States dollars as a significant portion of the Company’s operations and cash resources are denominated in United States dollars.

CHANGES IN ACCOUNTING POLICIES

The condensed interim consolidated financial statements have been prepared using IFRS as described in note 3 to the consolidated financial statements for the year ended June 30, 2020.

Accounting policy developments and their potential impact on the Company in the future are described in note 4 to the consolidated financial statements for the year ended June 30, 2020. There we no changes in the accounting policies adopted for the second quarter.

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OUTLOOK AND FUTURE RISKS

Up to the end of fiscal 2017, management had been seeing a steady increase in its customer install base because of growth in the environmental monitoring sector. However, in 2018 the Company experienced some challenges in this market due to changes in the political environment occurring in the United States. The Company is seeing signs of recovery in this market and has started seeing new orders for its traditional environment monitoring products. In addition, the Company has been working on new product developments in the environmental monitoring market and has started seeing market acceptance of the new products. With the change in government in the United States and an emphasis on environmental monitoring, management is hopeful it will see continued recovery of the demand for our traditional products and further acceptance of our new products resulting in the Company seeing the significant growth in this environmental monitoring market over the next year.

The Company introduced its new ROM Heater Controller product in 2016 with positive acceptance in the market. Management hoped to see expanded growth in this market in the fall and winter of 2017 but this growth was limited due to a North America wide shortage of heaters. The Company has completed product development initiatives around the heater controllers. As a result, the Company is seeing growth in new controller sales since the final two quarters of 2020 as new market opportunities are starting to be realized for this product. This growth continued in the first two quarters and therefore, management remains optimistic about the long term growth potential of this market.

The Company had seen growth from its rental fleet up to the end of fiscal 2018. However, there was a decline in in fiscal 2019 as less off-road races were monitored in that year. The Company has invested in new product developments that will allow for growth of the rental fleet through new tracking and race management applications. MotoTrax for motorbike race tracking was successfully introduced in the first quarter of fiscal 2020 resulting in increased equipment rental revenue. Management remains optimistic about the long term potential in this sector and its ability to grow the rental fleet utilization and thereby increase that recurring revenue base. However, the Company did experience a disruption of its rental revenue business in the fourth quarter due to the cancelation of two races due to the global Covid 19 pandemic. Races started again at the end of June 2020 and continued with the scheduled race occurring in throughout the fall of 2020. The Company saw increased rental revenue in the first two quarters as the number of races and registration for those races was higher than in the first two quarters of fiscal 2021. Therefore, management is hopeful that the pandemic will no longer disrupt this segment of the Company’s operations. However, a risk remains that future races could be canceled due to pandemic restrictions that could be implemented. Additional risk exists that there may be lower utilization of the rental fleet if more people practice social distancing and do not participate in the upcoming races.

In fiscal 2019 and 2020, the Company focused on the development of new product initiatives identified for customer specific applications. Management hopes to capitalize on global opportunities that have been identified for the following new products that have just recently completed development and are now ready to begin commercial deployment. These products include the following:

• 1) TextAnywhere II which management will market to the aviation industry and expand its environmental monitoring into additional applications such as air quality measurement.

• 2) DataTraX which allows for large message data processing which management will market to the forestry industry

• 3) Remote Motor Controllers that allows for monitoring and control of motors and pumps for a number of potential market applications.

• 4) SiteTraX that allows for tracking and monitoring in various industrial and remote settings.

In the first two quarters, the Company saw continued growth in market acceptance of the DataTraX product with new sales occurring in the forestry industry. The Company also saw increased customer interest in the Remote Motor Controller and SiteTraX prototypes that have been developed and management hopes to start commercial deployment of these products before the end of fiscal 2021. The Company is also starting to develop relationships with industry partners to begin marketing the TextAnywhere product into the private aviation industry.

As part of its expanded environmental applications and based on needs identified by potential customers, the Company has also started development of new water monitoring applications and hopes to complete initial development and begin field testing before the end of the fiscal year.

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OUTLOOK AND FUTURE RISKS (CONTINUED)

Management expects to continue to open new markets, as the Company is able to develop customer specific applications that tie into the platform of the Company’s core products. The challenge the Company faces is to effectively market these products. The Company will invest significant resources in continued customer specific product developments and implementing its marketing strategy. Management anticipates it will continue to invest similar amounts on Product development costs for the foreseeable future and believes it has the resources necessary to complete the full commercial deployment of its new product initiatives.

A significant number of customer sales and supplier purchases are denominated in US Dollars and the Company holds about half of its cash resources in US dollars. Therefore, the Company is exposed to risks associated with fluctuations between the Canadian and US dollar.

As discussed above, the rental revenue stream is at risk because of the Covid 19 pandemic. In addition, the Company has experienced lower communication revenue in the last three quarters as the economy slowed down. Risk exists that these recurring revenues may not completely come back until the economy fully recovers from the pandemic and business returns to more normal activity levels experienced in the past. The pandemic has also slowed certain development projects that the Company has been working on. However, no other significant risk factors have currently been identified where the pandemic may affect the Company’s operations in the short term. Starting in the second quarter the Company began accessing certain government wage and rent subsidies available to help offset the impact the slow down has had on the Company’s operations. Management is continues to monitor this issue as the longer the economies around the world are affected by the pandemic the more risk that it may affect the Company’s customers and suppliers and have longer term implications for the Company’s business.

Future risk factors include management’s ability to successfully market the products that have been developed, successfully integrate customer applications to the Company’s platform, attract and retain qualified personnel, maintain cost control and the potential for increased competition by companies that may have significantly greater financial resources and/or infrastructure. Furthermore, the company is entirely dependent upon third party satellite and cellular service providers to convey data from the field application to ROM’s operation center for further processing and distribution to its clients.

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