ZTEST Electronics Inc. — Audit Report / Information 2019

Dec 15, 2020

ZTEST Electronics Inc.

Consolidated Financial Statements June 30, 2019 and 2018 (Stated in Canadian Dollars)

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Independent Auditors' Report

To the Shareholders of ZTEST Electronics Inc.:

Opinion

We have audited the consolidated financial statements of ZTEST Electronics Inc. (the "Company"), which comprise the consolidated statement of financial position as at June 30, 2019 and 2018, and the consolidated statements of changes in equity, comprehensive loss, and cash flows for the years then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as at June 30, 2019 and 2018, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards (IFRS).

Basis for Opinion

We conducted our audits in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the consolidated Financial Statements section of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Other information

Management is responsible for the other information. The other information comprises:

 Management’s Discussion and Analysis

Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.

We obtained Management’s Discussion and Analysis prior to the date of this auditor's report. If, based on the work we have performed on this other information, we conclude that there is a material misstatement of this other information, we are required to report that fact in this auditor’s report. We have nothing to report in this regard.

Responsibilities of Management and Those Charged with Governance for the consolidated Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, management is responsible for assessing the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Company’s financial reporting process.

Auditor’s Responsibilities for the Audit of the consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

• Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control.

• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

• Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern.

• Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

The engagement partner on the audit resulting in this independent auditors' report is Kevin Ramsay.

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Markham, Ontario October 25, 2019

Chartered Professional Accountants Licensed Public Accountants

ZTEST Electronics Inc.

Consolidated Statements of Financial Position

(Stated in Canadian Dollars)

June 30, 2019 and 2018

		2019		2018
Assets
Current assets
Accounts receivable	$	591,575	$	479,621
Inventories_(note 4)_		636,894		563,237
Prepaid expenses		7,960		19,502
		1,236,429		1,062,360
Equipment_(note 5)_		258,976		321,012
Investments_(note 6)_		737,640		807,749
Lease deposit_(note 9)_		35,000		35,000
	,
	$	2,268,045	$	2,226,121
Liabilities
Current liabilities
Bank indebtedness_(note 7)_	$	83,372	$	157,374
Accounts payable and accrued liabilities_(note 11)_		857,322		546,845
Customer deposits		-		36,895
Current portion of long-term debt_(note 8)_		3,291		39,493
		943,985		780,607
Long-term debt_(note 7)_		-		3,291
		943,985		783,898
Commitment (note 9)
Shareholders’ Equity
Share capital_(note 10)_		23,394,174		23,215,877
Warrants_(note 10)_		182,956		137,470
Contributed surplus_(note 10)_		1,533,373		1,531,134
Deficit		(23,786,443)		(23,442,258)
		1,324,060		1,442,223
	$	2,268,045	$	2,226,121

The accompanying notes are an integral part of these consolidated financial statements

Approved by the Board:

Signed: “ Steve Smith”

Signed: “K. Michael Guerreiro”

Director

Director

ZTEST Electronics Inc.

Consolidated Statement of Changes in Equity

(Stated in Canadian Dollars) June 30, 2019

	Share		Contributed,
	Capital	Warrants	Surplus	Deficit		Total
Balance, June 30, 2017	$ 22,418,782 $	105,376 $	955,168 $ (22,558,502)		$	920,824
Stock options exercised	37,085	-	(17,085)	-		20,000
Warrants exercised	165,131	(39,131)	-	-		126,000
Warrants expired	-	(1,055)	1,055	-		-
Private placement	405,679	72,280	-	-		477,959
Shares issued as consideration
for investment	189,200	-	-	-		189,200
Share-based payments	-	-	591,996	-		591,996
Net loss for the year	-	-	-	(883,756)		(883,756)
Balance, June 30, 2018	23,215,877	137,470	1,531,134	(23,442,258)		1,442,223
Stock options exercised	27,426	-	(12,426)	-		15,000
Private placement	150,871	60,151	-	-		211,022
Warrants expired	-	(14,665)	14,665	-		-
Net loss for the year	-	-	-	(344,185)		(344,185)
Balance, June 30, 2019	$ 23,394,174 $	182,956 $	1,533,373 $ (23,786,443)		$	1,324,060

The accompanying notes are an integral part of these consolidated financial statements

ZTEST Electronics Inc.

Consolidated Statements of Comprehensive Loss

(Stated in Canadian Dollars)

For the years ended June 30, 2019 and 2018

		2019		2018
Product sales	$	4,399,062	$	3,686,132
Cost of product sales(note 4)		3,182,586		2,564,147
		1,216,476		1,121,985
Expenses
Selling, general and administrative_(note 12)_		1,450,077		1,375,951
Stock-based compensation_(notes 10 and 11)_		-		591,996
Interest expense - long-term debt		1,260		3,092
Interest expense - other		10,254		4,034
Financing fees_(note 11)_		19,283		-
Depreciation of equipment		4,938		5,208
Foreign exchange gain		4,749		(1,982)
		1,490,561		1,978,299
Loss before other income and provisions, and income taxes		(274,085)		(856,314)
Other income and provisions
Interest income		9		9
Equity in loss of Conversance Inc.(note 6)		(70,110)		(27,451)
		(70,101)		(27,442)
Loss before provision for income taxes		(344,186)		(883,756)
Provision for income taxes_(note 13)_		-		-
Net loss and comprehensive loss for the year	$	(344,186)	$	(883,756)
Net loss per share
Basic	$	(0.02)	$	(0.05)
Fully diluted	$	(0.02)	$	(0.05)
Weighted average shares outstanding
Basic		20,632,025		18,611,710
Fully diluted		20,632,025		18,611,710

The accompanying notes are an integral part of these consolidated financial statements

ZTEST Electronics Inc.

Consolidated Statements of Cash Flows

(Stated in Canadian Dollars)

For the years ended June 30, 2019 and 2018

		2019		2018
Cash flow from operating activities
Net loss for the year	$	(344,186)	$	(883,756)
Items not involving cash
Stock-based compensation		-		591,996
Depreciation of equipment		63,978		78,188
Equity in loss of Conversance Inc.		70,110		27,451
		(210,098)		(186,121)
Changes in non-cash working capital items
Accounts receivable		(111,954)		164,345
Inventories		(73,657)		(51,211)
Prepaid expenses		11,542		(4,400)
Customer deposits		(36,895)		(46,256)
Accounts payable and accrued liabilities		310,477		(150,415)
		(110,585)		(274,058)
Cash flow from investing activities
Purchase of equipment		(1,942)		(8,776)
Investment in Conversance		-		(646,000)
		(1,942)		(654,776)
Cash flow from financing activities
Proceeds from bank operating loan, net		40,000		110,000
Repayment of long-term debt		(39,493)		(39,493)
Proceeds from share issuances		226,022		623,959
		226,529		694,466
Increase (decrease) in cash		114,002		(234,368)
Cash (deficiency), beginning of year		(47,374)		186,994
Cash (deficiency), end of year	$	66,628	$	(47,374)
Supplemental Disclosure of Cash Flow Information:
During the year the Company had cash flows arising from interest and income taxes		paid as follows:
Interest	$	11,590	$	7,197
Income taxes	$	-	$	-

The accompanying notes are an integral part of these consolidated financial statements

ZTEST Electronics Inc.

(Stated in Canadian Dollars) June 30, 2019 and 2018

Notes to Consolidated Financial Statements

1. Business of the Company

ZTEST Electronics Inc. (“the Company”) amalgamated under the laws of Ontario and carries on business at 523 McNicoll Avenue, Toronto, Ontario designing, developing, and assembling printed circuit boards and other electronic equipment. The Company's shares trade on the Canadian Securities Exchange (“CSE”) under the symbol "ZTE".

2. Significant Accounting Policies

Statement of compliance

The Company has prepared these consolidated financial statements in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). These consolidated financial statements were authorized for issuance by the Board of Directors of the Company on October 25, 2019.

The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements.

Basis of presentation and going concern considerations

These consolidated financial statements have been prepared on a historical cost basis using the accrual basis of accounting, except for cash flow information, and in accordance with IFRS applicable to a “going concern”. Should the Company be unable to continue as a going concern, it may be unable to realize the carrying value of its assets and to meet its liabilities as they become due. If the going concern assumption were not appropriate for these consolidated financial statements then adjustments would be necessary in the carrying values of assets and liabilities, the reported revenues and expenses, and the statement of financial position classifications used.

Basis of consolidation

These consolidated financial statements include the accounts of the Company as well as the following subsidiaries' assets and liabilities and revenues and expenses, arising subsequent to the date of acquisition:

Permatech Electronics Corporation (“PEC”)	- 100%	owned
Twenty49 Ltd	- 100%	owned
Northern Cross Minerals Inc.	- 66.7%	owned (inactive)

Significant accounting judgments and estimates

The preparation of these consolidated financial statements requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual outcomes could differ from these estimates. These consolidated financial statements include estimates which, by their nature, are uncertain. The impacts of such estimates are pervasive throughout the consolidated financial statements, and may require accounting adjustments based on future occurrences. Revisions to accounting estimates are recognized in the period in which the estimate is revised and also in future periods if the revision affects both current and future periods. These estimates are based on historical experience, current and future economic conditions, and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

Significant estimates and judgments include, but are not limited to, the assessment of the Company as a going concern, recoverability of inventory, the inputs used in applying the Black-Scholes valuation model, and the recognition and valuation of deferred tax amounts.

Impairment of non-financial assets

At the end of each reporting period, the Company reviews the carrying amounts of its non-financial assets with finite lives to determine whether there is any indication that those assets have suffered an impairment loss.

ZTEST Electronics Inc.

(Stated in Canadian Dollars) June 30, 2019 and 2018

Notes to Consolidated Financial Statements

2. Significant Accounting Policies - continued

Impairment of non-financial assets – continued

Where such an indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss. The recoverable amount is the higher of an asset’s fair value less cost to sell or its value in use. Fair value is determined as the amount that would be obtained from the sale of the asset in an arm’s length transaction between knowledgeable and willing parties. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount and the impairment loss is recognized in the income for the period.

Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset in prior years. A reversal of an impairment loss is recognized immediately in income for the period.

Inventories

Inventories are valued at the lower of cost and net realizable value. Cost is determined using the weighted average cost method. Net realizable value is the amount, net of the estimated costs to complete assemblies and sell them, which the Company expects to realize from the sale of inventory in the ordinary course of business. An assessment of net realizable value is completed at the end of each reporting period and any resulting writedowns, or recovery of previous write-downs, are reflected in income for the period. Current assessments have determined that net realizable values equal or exceed the corresponding costs and accordingly all inventories are currently carried at cost.

Investments

Non-controlling interests, which are not financial instruments, and are less than a 20% ownership interest, are initially recorded at the cost of acquisition plus any directly attributable transaction costs. Subsequent to the acquisition date the investment is carried at amortized value, representing the initial carrying value net of any impairment provisions. An investment of this type is considered impaired when its carrying amount exceeds its recoverable amount.

Non-controlling interests, which are not financial instruments, and are equal to or exceeding a 20% ownership interest (an equity instrument), are initially recorded at the cost of acquisition plus any directly attributable transaction costs. Subsequent to the acquisition date the investment is adjusted for the post-acquisition change in the investor’s share of the investee’s net assets and for any impairment provisions.

An equity instrument is considered impaired if, and only if, there is objective evidence of impairment as a result of one or more events that occur after the initial recognition of the asset (a 'loss event') and that loss event, or events, has an impact on the estimated future cash flows of the non-controlling interest that can be reliably estimated. Losses expected as a result of future events, no matter how likely, are not recognized.

Some items that may be taken into consideration in determining whether a loss event has occurred include significant financial difficulty of the investee, a breach of contract such as a default or delinquency in payments by the investee, it becomes probable that the investee will enter bankruptcy or other financial reorganization, or significant changes with an adverse effect that have taken place in the technological, market, economic or legal environment in which the investee operates, and such changes indicate that the cost of the equity instrument may not be recovered.

Equipment

Equipment is stated at cost. Depreciation is provided over the related assets' estimated useful lives using the following methods and annual rates:

Computer equipment	-	30 %	declining balance
Office equipment	-	20 %	declining balance
Manufacturing equipment	-	20 %	declining balance
Leasehold improvements	-	10 yrs	straight-line

ZTEST Electronics Inc.

(Stated in Canadian Dollars) June 30, 2019 and 2018

Notes to Consolidated Financial Statements

2. Significant Accounting Policies - continued

Equipment - continued

The Company reviews the estimated useful lives, residual values and depreciation method at the end of each reporting period, accounting for the effect of any changes in estimate on a prospective basis.

Revenue recognition

Revenue is recognized when the risks and rewards of ownership pass to the customer, the amount of revenue can be measured reliably, and the ability to collect is reasonably assured, which typically arises when the product is delivered.

Share based payment transactions

The fair value of share options granted to employees is recognized as an expense over the vesting period with a corresponding increase in equity. An individual is classified as an employee when the individual is an employee for legal or tax purposes (direct employee) or provides services similar to those performed by a direct employee, including directors of the Company.

The fair value is measured at grant date and recognized over the period during which the options vest. The fair value of the options granted is measured using the Black Scholes option pricing model, after considering the terms and conditions upon which the options were granted. At the end of each financial reporting period, the amount recognized as an expense is adjusted to reflect the actual number of share options that are expected to vest.

Foreign exchange

As at the transaction date all asset, liability, revenue, and expense amounts denominated in foreign currencies are translated into Canadian dollars using the exchange rate in effect as at that date. At the end of each financial reporting period all monetary assets and liabilities are translated into Canadian dollars using the exchange rate in effect as at that date. The resulting foreign exchange gains and losses are included in income for the period.

Income taxes

Income tax expense consists of current and deferred tax expense. Income tax expense is recognized in profit and loss except to the extent that it relates to items recognized directly in equity or other comprehensive income.

Current tax is recognized and measured at the amount expected to be recovered from or payable to the taxation authorities based on the income tax rates enacted or substantively enacted at the end of the reporting period and includes any adjustment to taxes payable in respect of previous years.

Deferred tax is recognized on any temporary differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable earnings. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period when the asset is realized and the liability is settled. The effect of a change in the enacted or substantively enacted tax rates is recognized in profit and loss and comprehensive (loss) income or in equity depending on the item to which the adjustment relates.

Deferred tax assets are recognized to the extent future recovery is probable. At the end of each financial reporting period, deferred tax assets are reduced to the extent that it is no longer probable that sufficient taxable earnings will be available to allow all or part of the asset to be recovered.

Loss per share

The Company presents basic and diluted loss per share data for its common shares, calculated by dividing the loss attributable to common shareholders of the Company by the weighted average number of common shares outstanding during the financial reporting period. Diluted loss per share is determined by adjusting the loss attributable to common shareholders and the weighted average number of common shares outstanding for the effects of all dilutive potential common shares.

Stock options and warrants outstanding are excluded from the computation of diluted loss per share if their inclusion would increase the income per share, or decrease the loss per share, or if their exercise price exceeds the average market price of the Company’s shares for the financial reporting period.

ZTEST Electronics Inc.

(Stated in Canadian Dollars) June 30, 2019 and 2018

Notes to Consolidated Financial Statements

2. Significant Accounting Policies - continued

Segment disclosure

The Company has a single location and operating segment accordingly, all revenues are generated in Canada and all assets are located in Canada.

3. Changes in Accounting Policies

The Company’s accounting policies will typically change only when there is a change in IFRS. Effective July 1, 2018 the Company has adopted:

• IFRS 9 Financial instruments, which uses a single approach to determine whether a financial asset is measured at amortized cost or fair value, replacing multiple rules in IAS 39

• IFRS 15 Revenue from contracts with customers, which replaces existing revenue standards and interpretations with a single standard and provides additional guidance on revenue recognition for contracts with customers.

IFRS 9 Financial instruments

The approach in IFRS 9 is generally based on how an entity manages its financial assets in the context of its business model and the contractual cash flow characteristics of the financial assets. Impairment of financial assets is determined using a single impairment model that requires entities to recognize expected credit losses without requiring a triggering event to occur. The new impairment model applies to financial assets measured at amortized cost. IFRS 9 largely retains the existing requirements under IAS 39 for the classification and measurement of financial liabilities.

This standard has been applied retrospectively, resulting in no changes to any amounts presented in prior periods.

We have assessed the classification and measurement of our financial instruments under IFRS 9, with reference to the former classification under IAS39, as follows:

Financial Assets	IFRS 9	IAS39
Cash	Amortized cost	Fair Value through profit and loss
Accounts receivable	Amortized cost	Loans and receivables
Financial Liabilities
Bank indebtedness	Amortized cost	Other financial liabilities
Accounts payable and accrued liabilities	Amortized cost	Other financial liabilities
Customer deposits	Amortized cost	Other financial liabilities
Long-term debt	Amortized cost	Other financial liabilities

Amortized cost – The amount at which a financial asset or financial liability is measured at initial recognition minus the principal repayments, plus or minus the cumulative amortization using the effective interest method of any difference between that initial amount and the maturity amount and, for financial assets, adjusted for any expected credit losses.

The effective interest method - The effective interest method is a method of calculating the amortized cost of a financial asset or liability and of allocating interest and any transaction costs over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts or payments through the expected life of the financial asset or liability to the net carrying amount on initial recognition.

ZTEST Electronics Inc.

(Stated in Canadian Dollars) June 30, 2019 and 2018

Notes to Consolidated Financial Statements

3. Changes in Accounting Policies - continued

Impairment

IFRS 9 requires an ‘expected credit loss’ model to be applied which requires a loss allowance to be recognized based on expected credit losses. This applies to financial assets measured at amortized cost. The expected credit loss model requires an entity to account for expected credit losses and changes in those expected credit losses at each reporting date to reflect changes in initial recognition.

IFRS 15 Revenue from contracts with customers

IFRS 15 provides a definition of what constitutes a contract with customers as well as differentiating between changes to an existing contract and the commencement of a new contract. It also requires the determination of performance criteria which then trigger the recognition, subject to additional criteria, of revenue at various times throughout a contract or at the end of a contact. Revenue is to be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods and services.

This standard has been applied retrospectively, resulting in no changes to any amounts presented in prior periods, but it has resulted in the modification of how the Company’s revenue recognition policy is characterized. The new policy is described as follows:

Revenue recognition - Revenue is recognized when the Company has satisfied its performance obligations, the consideration to be received can be measured reliably, and the ability to collect is probable, which typically arises when the product is delivered.

Accounting standards effective for future periods

IFRS16, Leases: effective for annual periods beginning on or after 1 January 2019, replaces existing standards, eliminating the classification of leases as either operating leases or finance leases. The Standard provides a single lessee accounting model, specifying how leases are recognized, measured, presented and disclosed. The Company intends to adopt IFRS 16 in its financial statements for the annual period beginning on July 1, 2019 and continues to assess the impact it will have on the consolidated financial statements.

4 Inventories

The carrying value of inventories is comprised of:

Inventories The carrying value of inventories is comprised of:
		2019		2018
Raw materials and supplies(1)	$	609,921	$	529,192
Work in process		22,615		17,060
Finished goods		4,358		16,985
	$	636,894	$	563,237

(1) Raw materials and supplies is presented net of provisions for obsolete and/or slow-moving items in the amount of $25,413 (2018 - $10,935). Management makes estimates of future demand when establishing appropriate provisions. To the extent that actual inventory losses differ from these estimates both inventories and net loss will be affected.

Inventory utilization during the year was as follows:

and net loss will be affected. Inventory utilization during the year was as follows:
		2019		2018
Raw materials and supplies used	$	2,136,502	$	1,672,413
Labour costs		800,911		730,614
Depreciation		59,040		72,980
Repairs and maintenance		51,748		17,594
Stencils and tooling		31,182		19,931
Shipping costs		79,051		58,757
Packaging costs		17,080		10,583
Net change in finished goods and work in process		7,072		(18,725)
Cost of product sales	$	3,182,586	$	2,564,147

ZTEST Electronics Inc.

Notes to Consolidated Financial Statements

(Stated in Canadian Dollars) June 30, 2019 and 2018

5. Equipment

Equipment
		Computer	Office Manufacturing		Leasehold
		Equipment	Equipment	Equipment Improvements			Total
Cost:
Balance, June 30, 2017	$	181,402 $	71,277 $	2,587,172 $	84,143	$	2,923,994
Additions		1,704	-	7,072	-		8,776
Balance, June 30, 2018		183,106	71,277	2,594,244	84,143		2,932,770
Additions		1,942	-	-	-		1,942
Balance, June 30, 2019	$	185,048 $	71,277 $	2,594,244 $	84,143	$	2,934,712
		Computer	Office Manufacturing		Leasehold
		Equipment	Equipment	Equipment Improvements			Total
Accumulated Depreciation:
Balance, June 30, 2017	$	(174,298) $	(69,660) $	(2,225,138) $	(64,474)	$	(2,533,570)
Depreciation		(2,387)	(323)	(73,164)	(2,314)		(78,188)
Balance, June 30, 2018		(176,685)	(69,983)	(2,298,302)	(66,788)		(2,611,758)
Depreciation		(2,217)	(259)	(59,188)	(2,314)		(63,978)
Balance, June 30, 2019	$	(178,902) $	(70,242) $	(2,357,490) $	(69,102)	$	(2,675,736)
Carrying Amounts:
June 30, 2018	$	6,421 $	1,294 $	295,942 $	17,355	$	321,012
June 30, 2019	$	6,146 $	1,035 $	236,754 $	15,041	$	258,976

6. Investments

The Company holds a non-controlling interest in Conversance Inc., a private Canadian technology company. The shares of Conversance Inc. are subject to a hold period and, unless permitted under securities legislation, the shares may not be traded before the date that is four months and a day after the issuer becomes a reporting issuer in any province or territory.

Conversance Inc. is engaged in the development of its proprietary technology and has not yet produced any revenues. The timing of such revenues, if any, is not currently determinable.

The Company has determined as at June 30, 2019 that there has been no loss event and accordingly no test for impairment was completed. In prior fiscal years, when the Company held a 15.05% interest, it was determined that the carrying amount of the investment exceeded the recoverable amount resulting in an impairment provision of $294,562.

2019 155,000 Class A common shares representing a 15.05% interest $ 294,562 62,500 Class A common shares representing a 4.86% interest 330,450 78,750 Class A common shares representinga 5.38% interest 504,750 Investment representing a 25.29% interest (2018 – 25.29%) 1,129,762 Impairment provision (294,562) Equityinpost-acquisition loss (97,560) Aggregate investment $ 737,640	2018 $ 294,562 330,450 504,750 1,129,762 (294,562) (27,451) $ 807,749

ZTEST Electronics Inc.

Notes to Consolidated Financial Statements

(Stated in Canadian Dollars) June 30, 2019 and 2018

7. Bank indebtedness

2019 Cash (deficiency), inclusive of outstanding payments $ 66,628 Line of credit, which can be drawn to a maximum of $250,000, bears interest at the TD Bank prime lending rate plus 2.5%, is due upon demand, and is secured by a general security agreement covering the assets of PEC. (150,000) $ (83,372)	2018 $ (47,374) $ (110,000) $ (157,374)

8. Long-Term Debt

		2019		2018
Term loan bearing interest at the TD Bank prime lending rate plus 1.75%
matures July 2019. Monthly payments of $3,291, plus interest, are
required until maturity.	$	3,291	$	42,784
Less: Current portion		3,291		39,493
	$	-	$	3,291
The minimum annual future principal repayments are as follows:
2020			$	3,291

9. Commitment

The Company leases its operating facility under a lease that is due to expire March 31, 2021. A lease deposit in the amount of $35,000 was paid and will be applied at the end of the lease. Minimum monthly rental payments of $8,979 are required over the remaining term of the lease as follows:

2020	$	107,743
2021		80,807
	$	188,550

10. Share Capital

Authorized:

Unlimited Common shares Unlimited Preferred shares in one or more series.

Issued:

		2019		2018
Common shares	$	23,394,174	$	23,215,877
		Number of
Common shares:		Shares(1)		Amount
Balance June 30, 2017		17,173,696	$	22,418,782
Exercise of stock options		200,000		37,085
Exercise of warrants		1,900,000		165,131
Private placement(2)		625,000		405,679
Investment		275,000		189,200
Balance June 30, 2018		20,173,696	$	23,215,877

ZTEST Electronics Inc.

Notes to Consolidated Financial Statements

(Stated in Canadian Dollars) June 30, 2019 and 2018

10. Share Capital - continued

Share Capital - continued
	Number of
Common shares - continued:	Shares(1)		Amount
Balance June 30, 2018	20,173,696	$	23,215,877
Exercise of stock options	150,000		27,426
Privateplacement(3)	780,000		150,871
Balance June 30, 2019	21,103,696	$	23,394,174

• (1) Following the 2013 conversion of Class A Special Shares to common shares, 8,246 common shares remain reserved to be issued if and when the remaining Class A shareholders identify themselves to the Company.

• (2) The Company completed a private placement transaction whereby it issued 625,000 working capital units for gross proceeds of $531,250. Each unit consisted of one common share and one-half common share purchase warrant. Each full common share purchase warrant originally entitled the holder to acquire one additional common share of the Company at a price of $1.10 until January 31, 2019 however the expiry was extended until January 31, 2020. The Company paid finders’ fees of $37,188, incurred other costs of $16,140, attributed a value of $57,615 to the common share purchase warrants, and issued 43,750 broker warrants valued at $14,665. Each broker warrant entitles the holder to acquire 1 common share of the Company for $0.85 until January 30, 2019.

• (3) The Company completed a private placement transaction, through two closings, whereby an aggregate of 780,000 working capital units were issued for gross proceeds of $234,000. In the first closing 440,000 units where issued for gross proceeds of $132,000 and in the second 340,000 units where issued for gross proceeds of $102,000. Each unit consisted of one common share and one-half common share purchase warrant. Each full common share purchase warrant entitles the holder to acquire one additional common share of the Company at a price of $0.40 until eighteen months following the closing date. Through the two closings the Company paid aggregate finders’ fees of $11,760, incurred other costs of $11,218, attributed a value of $51,176 to the common share purchase warrants, and issued 39,200 broker warrants valued at $8,975. Each broker warrant entitles the holder to acquire one common share of the Company for $0.30 until eighteen months following the closing date.

Details of warrants outstanding:

Details of warrants outstanding:
		Number	of Warrants		Amount
Balance June 30, 2017			4,900,000	$	105,376
Warrants issued via private placement			312,500		57,615
Broker warrants issued via private placement			43,750		14,665
Warrants exercised			(1,900,000)		(39,131)
Warrants expired			(100,000)		(1,055)
Balance June 30, 2018			3,256,250		137,470
Warrants issued via private placement			390,000		51,176
Broker warrants issued via private placement			39,200		8,975
Warrants expired			(43,750)		(14,665)
Balance June 30, 2019			3,641,700	$	182,956
	Number of		Exercise
	Warrants		Price		Expiry Date
Issued Dec. 15, 2016	2,900,000	$	0.06		Dec. 15, 2021
Issued Jan. 30, 2018(1)	312,500	$	1.10		Jan. 31, 2020
Issued Dec. 28, 2018	220,000	$	0.40		June 28, 2020
Issued Dec. 28, 2018	23,800	$	0.30		June 28, 2020
Issued Jan. 31, 2019	170,000	$	0.40		July 31, 2020
Issued Jan. 31, 2019	15,400	$	0.30		July 31, 2020

(1) During the reporting period the Company obtained regulatory approval for the expiry date of these warrants to be extended by one year, to January 31, 2020.

ZTEST Electronics Inc.

(Stated in Canadian Dollars) June 30, 2019 and 2018

Notes to Consolidated Financial Statements

10. Share Capital - continued

Details of warrants outstanding - continued:

Share Capital - continued Details of warrants outstanding - continued:
	Number of	Weighted Average		Weighted Average
	Warrants	Price per Warrant		Expiry Date
Beginning of the year	3,256,250	$	0.17	Sep. 26, 2021
Issued during the year	429,200	$	0.39	July 12, 2020
Expired during the year	(43,750)	$	0.85	Jan. 31, 2019
Expiry date extended during the year	(312,500)	$	1.10	Jan. 31, 2019
Expiry date extended during the year	312,500	$	1.10	Jan. 31, 2020
End of year	3,641,700	$	0.19	Aug. 16, 2021

The following weighted average assumptions were used to calculate the fair value of the warrants issued during the year:

the year:
				2019	2018
Dividend yield				Nil	Nil
Risk free interest rate (%)				1.76 - 1.84	1.61
Expected stock volatility (%)			116.25 – 116.52		70.49
Expected life (years)				1.5	1
Details of options outstanding:
	Common Shares	Number of		Exercise
	Under Option	Options Vested		Price	Expiry Date
Granted Mar. 3, 2016	400,000(1)	400,000	$	0.05	Mar. 3, 2021
Granted December 21, 2016	150,000(1)	150,000	$	0.15	July 9, 2019
Granted December 21, 2016	50,000	50,000	$	0.15	Dec. 21, 2021
Granted January 12, 2018	50,000(1)	50,000	$	0.95	July 9, 2019
Granted January 12, 2018	550,000(1)	550,000	$	0.95	Jan. 12, 2023

(1) Directors, former directors, and/or Officers of the Company hold these options.

	Common Shares	Weighted Average	Weighted Average	Weighted Average
	Under Option		Price/Option	Expiry Date
Beginning of the year	1,500,000	$	0.43	Aug. 2, 2021
Exercised during the year	(150,000)	$	0.10	Dec. 31, 2018
Expired during the year	(150,000)	$	0.10	Dec. 31, 2018
Expiry date reduced during the year(1)	(200,000)	$	0.35	Mar. 27, 2022
Expiry date reduced during the year	200,000	$	0.35	July 9, 2019
End of year	1,200,000	$	0.52	Mar. 26, 2022

(1) The holder of these options was not re-elected as a director of the Company at the shareholders meeting held January 9, 2019. In accordance with the option agreement the term of these options is reduced to be six months from the date the individual ceased to be a director. These options expired subsequent to the financial reporting date.

The following weighted average assumptions were used to calculate the fair value of the stock options granted during the year:

	2019	2018
Dividend yield	None issued	Nil
Risk free interest rate (%)	None issued	1.62 – 1.98
Expected stock volatility (%)	None issued	99.36 - 154.07
Expected life (years)	None issued	1 - 5

ZTEST Electronics Inc.

(Stated in Canadian Dollars) June 30, 2019 and 2018

Notes to Consolidated Financial Statements

10. Share Capital - continued

Share based payment transactions and contributed surplus

The Company has a stock option plan. The aggregate number of common shares reserved for issuance under this plan cannot exceed 20% of the aggregate number of common shares of the Company that are issued and outstanding. The Company has granted options for the purchase of common shares to employees, directors, officers and other service providers. The fair values of stock options granted have been determined using the Black-Scholes model and are added to contributed surplus as follows:

		2019		2018
Contributed surplus, beginning of year	$	1,531,134	$	955,168
Stock options granted		-		591,996
Stock options exercised		(12,426)		(17,085)
Warrants expired		14,665		1,055
Contributed surplus, end of year	$	1,533,373	$	1,531,134

11. Related Party Transactions and Balances

The Company had transactions during the period with key management personnel and with 1114377 Ontario Inc., a company controlled by the spouse of a director of Permatech Electronics Corporation.

All expenses and year end balances with related parties are at exchange amounts established and agreed to by the related parties. All transactions with related parties are in the normal course of operations and have been carried out on the same terms as those accorded to unrelated parties.

Description		2019		2018
Employee and consultant compensation	$	499,711	$	399,698
Professional fees		37,954		69,052
Finance fees		19,283		-
Professional fees classified as cost of investment		-		4,750
Professional fees classified as share issuance costs		10,318		16,250
	$	567,266	$	489,750
Stock-based compensation	$	-	$	493,017

As at June 30, 2019 $352,759 (2018 - $169,370) was payable to key management personnel and included in accounts payable and accrued liabilities.

12. Selling, general and administrative expenses

Selling, general and administrative expenses are comprised of the following amounts:

		2019		2018
Employee and consultant compensation_(note 11)_	$	1,005,099	$	896,089
Insurance		31,931		30,945
Occupancy costs		260,270		263,446
Professional fees_(note 11)_		66,979		99,998
Shareholder services		25,071		26,121
Other		60,727		59,352
	$	1,450,077	$	1,375,951

ZTEST Electronics Inc.

(Stated in Canadian Dollars) June 30, 2019 and 2018

Notes to Consolidated Financial Statements

13. Income Taxes

Current Income Taxes

A reconciliation of combined federal and provincial corporate income taxes at the Company’s effective tax rate of 26.50% (2018 – 26.50%) is as follows:

		2019		2018
Net loss before income taxes	$	(344,186)	$	(856,305)
Expected income tax recovery	$	(91,209)	$	(226,921)
Expenses not deductible for income tax purposes		18,910		157,537
Change in tax benefits not recognized		72,299		69,384
Income tax expense	$	-	$	-

Deferred Tax

The following table summarizes the components of deferred tax:

		2019		2018
Deferred tax assets:
Non-capital losses carried forward	$	2,673	$	7,643
Deferred tax liabilities:
Temporary timing differences		(2,673)		(7,643)
Net deferred tax liabilities	$	-	$	-

Unrecognized Deferred Tax Assets

Deferred taxes are provided as a result of temporary differences that arise due to the differences between the income tax values and the carrying amount of assets and liabilities. Deferred tax assets have not been recognized in respect of the following deductible temporary differences:

		2019		2018
Inventory	$	25,413	$	10,935
Share issuance costs		53,378		47,162
Intangible assets		-		30,110
Property, plant and equipment		46,409		25,394
Resource related expenditures		349,050		349,050
Scientific research and experimental development		1,050,618		1,050,618
Non-capital loss carry-forwards		2,068,522		1,790,025
Net capital loss carry-forwards		15,592,989		15,592,989

Share issue costs expire from 2021-2023 and non-capital loss carry-forwards expire as disclosed below. The remaining deductible temporary differences may be carried forward indefinitely but net capital loss carryforwards can only be used to reduce capital gains. Deferred tax assets have not been recognized in respect of these items because it is not probable that future taxable profit will be available against which the group can utilize the benefits therefrom.

Tax Loss Carry-Forwards

The potential income tax benefits resulting from the application of income tax losses have not been recognized in these consolidated financial statements. The following losses, which may be subject to verification by Canada Revenue Agency, will expire at the end of the taxation years as follows:

ZTEST Electronics Inc.

(Stated in Canadian Dollars) June 30, 2019 and 2018

Notes to Consolidated Financial Statements

13. Income Taxes

Tax Loss Carry-Forwards - continued

Income Taxes Tax Loss Carry-Forwards - continued
Year
2027	$	186,700
2030		174,603
2031		577,958
2032		14,862
2033		76,561
2034		125,170
2035		136,504
2036		69,013
2037		184,366
2038		294,158
2039		344,142
	$	2,184,037

14. Capital disclosures

The Company’s objective when managing capital is to ensure its ability to meet operating commitments as they become due and to provide return for shareholders. This is achieved by continuously monitoring actual and projected cash flows and making adjustments to capital as necessary. Except for the repayment terms associated with long-term debt instruments, there are no externally imposed capital requirements.

		2019		2018
Long-term debt	$	3,291	$	42,774
Share capital		23,394,174		23,215,877
Warrants		182,956		137,470
Contributed surplus		1,533,373		1,531,134
Deficit		(23,786,443)		(23,414,807)
Net capital under management	$	1,327,351	$	1,512,448

15. Financial risk factors

The Company is exposed in varying degrees to the following financial instrument related risks:

Credit risk

Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. The Company’s primary exposure to credit risk is in its accounts receivable. In an effort to mitigate this risk, management actively manages and monitors its receivables and obtains prepayments where warranted. It has been determined that no allowance is required, as all amounts outstanding are considered collectible. The Company incurred no bad debts during the years ended June 30, 2019 and June 30, 2018 .

Concentration of credit risk

Concentration of credit risk arises when one or more customers, defined as a major customer, individually account for 10% or more of the Company’s revenues during a reporting period. During the current year the Company had two major customers which represented 14% and 12% of total revenues. In the prior year three major customers accounted for 12%, 12% and 10% of total revenues. Amounts due from major customers represented 9% of accounts receivable at June 30, 2019 (2018 - 27%). The loss of a major customer, or significant curtailment of purchases by such customer, could have a material adverse effect on the Company's results of operations and financial condition. The Company monitors the relationship with all customers closely and ensures that every customer is subject to the same risk management criteria.

ZTEST Electronics Inc.

(Stated in Canadian Dollars) June 30, 2019 and 2018

Notes to Consolidated Financial Statements

15. Financial risk factors - continued

Liquidity risk

Liquidity risk arises through the excess of financial obligations over available financial assets due at any point in time. At June 30, 2019 the Company had current financial assets of $591,575 (2018 - $479,621) available to settle current financial liabilities of $943,985 (2018 - $780,607). The Company manages its liquidity risk through the management of its capital (note 14) which incorporates the continuous monitoring of actual and projected cash flows to ensure that it has sufficient liquidity to meet its operating commitments without incurring unacceptable losses or risking damage to the Company’s reputation.

Market risks

The Company is exposed to interest rate risk due to two obligations that have floating interest rates as well as currency risk related to cash, accounts receivable, prepaid expenses, customer deposits and accounts payable denominated in US dollars. Market risks give rise to the potential for future cash flows to fluctuate because of changes in interest rates or foreign exchange rates. Market risks are closely monitored and attempts are made to match foreign cash inflows and outflows. During the current fiscal year, the Company has reported a foreign exchange loss of $4,749 (2018 – gain of $1,982).

Sensitivity to market risks

At June 30, 2019 the Company had $3,291 (2018 – $42,784) which bears interest at the TD Bank prime lending rate plus 1.75%. A 1% increase in the TD Bank prime lending rate, as at the financial reporting date, would result in additional interest expense of $3 over the next 12 month period.

At June 30, 2019 the Company had cash of US $38 (2018 – US $16,417 overdraft) included in bank indebtedness or cash. A 5% increase in the value of the Canadian dollar relative to the US dollar would result in a reduction of $2 in carrying value.

At June 30, 2019 the Company had US $Nil (2018 – US $4,634) included in prepaid expenses. A 5% increase in the value of the Canadian dollar relative to the US dollar would result in a recognition of $Nil in additional future expenses.

At June 30, 2019 the Company had US $63,433 (2018 –US $63,433) included in accounts receivable. A 5% increase in the value of the Canadian dollar relative to the US dollar would result in a reduction of $3,172 in future cash inflow.

At June 30, 2019 the Company had US $Nil (2018 – US $27,879) included in customer deposits. A 5% increase in the value of the Canadian dollar relative to the US dollar would result in a reduction of $Nil in future revenue.

At June 30, 2019 the Company had US$155,987 (2018 – US$119,219) included in accounts payable. A 5% decrease in the value of the Canadian dollar relative to the US dollar would result in an increase of $7,799 in future cash outflow.

Based upon observations of recent market trends management believes that each of these outcomes is possible.

ZTEST Electronics Inc. Management’s Discussion and Analysis For The Year Ended June 30, 2018 (Prepared as at October 25, 2018)

General

The following management’s discussion and analysis (“MD&A”) of the financial condition and results of operations of ZTEST Electronics Inc. (“ZTEST” or the “Company”) constitutes management’s review of the factors that affected the Company’s consolidated financial and operating performance for the year ended June 30, 2019. The MD&A was prepared as of October 25, 2019 and was approved by the Board of Directors on October 25, 2019. It should be read in conjunction with the consolidated financial statements of the Company for the year ended June 30, 2019, including the notes thereto. Unless otherwise stated, all amounts discussed herein are denominated in Canadian dollars.

Additional information about the Company can be found at www.sedar.com.

The Company

ZTEST is located at 523 McNicoll Avenue, Toronto, Ontario. Through its wholly-owned subsidiary, Permatech Electronics Corporation (“PEC”), the Company operates a single business segment designing, developing, and assembling printed circuit boards and other electronic equipment. The Company’s shares trade on the Canadian Securities Exchange under the symbol "ZTE".

The Company held its annual general meeting on January 8, 2019 resulting in the election, or re-election, of the Board members noted below. The inaugural meeting of this Board was held immediately following the annual general meeting, during which the Officers of the Company were reappointed and the subcommittee noted below was formed.

Name	Position(s)
Steve Smith(1)	Chairman, President & Chief Executive Officer
K. Michael Guerreiro(1*)	Director (Independent), and Director of subsidiary
Brendan Purdy (1)	Director(Independent)
Michael D. Kindy, CPA, CA	VP Finance & Chief Financial Officer
William R. Johnstone,LLB	Corporate Secretary
Wojciech Drzazga	Director and Officer of subsidiary
John Perreault	Officer of subsidiary
William J. Brown	Director of subsidiary

• Acts as Committee Chair

(1) Member of the audit committee

Corporate Performance

The final fiscal quarter of 2019 saw the recent trend, since Q3 2018, of improved operations continue. Revenues for the quarter were more than 25% greater than during the final quarter of 2018 and 2019 annual revenues were more than 19% ahead of 2018 results. The revenue growth realized in 2019 was an encouraging first step to allow the Company to continue on its path to improved operating results but there are no assurances this trend will continue.

Revenue growth may be the first step however gross margins are a very close second. The gross margins for the 2019 year were up by more than 8% in comparison to one year prior. Overall margin growth is a positive result but that progression is tempered by a decline in margins as a percentage of revenues. While still lagging the percentage of revenue realized in the final quarter of 2018, the fact that margins in Q4 2019 were 31.1% of revenues, as compared to 27.7% for the year, is contemplated as a possible break in the trend towards lower margins that has plagued the industry for some time.

In addition to its core operations, the Company continues to recognize its proportionate share in the losses of Conversance Inc. Conversance is a Waterloo based company that is developing its proprietary artificial-intelligence supported distributed ledger technologies but has not yet commenced commercial operations. For the 2019 fiscal year, the Company’s 25.29% interest in the losses of Conversance amounted to $70,110. For 2018, the year in which the Company increased its holdings from 15.05%, first to 19.91% and then to 25.29%, the loss amounted to $27,451. Although Conversance appears to be progressing towards revenue generation it remains uncertain when, or if, revenue generation will commence or if it will be of sufficient magnitude to make it commercially successful.

Page 1 of 13

ZTEST Electronics Inc. Management’s Discussion and Analysis For The Year Ended June 30, 2018 (Prepared as at October 25, 2018)

Corporate Performance - continued

During the year the Company also completed a financing and raised net proceeds of $211,022. This financing was completed, in part, to fund a $112,000 investment into Twenty49 Ltd., a start-up data collection company. The investment amount was forwarded to Twenty49 in March of 2019 however certain terms of the Company’s subscription agreement were not satisfied, including the acquisition of proprietary technologies and the funding of investments by other parties. At June 30, 2019 the Company was the only shareholder of Twenty49 Ltd. and accordingly has consolidated 100% of the assets and losses of Twenty49 Ltd. Subsequent to the year end the Company announced that it had terminated its subscription agreement and ceased its relationship with Twenty49 after recouping approximately $73,000 of its original investment.

The following data may provide some additional insights relative to the Company’s operating performance and financial position:

financial position:
		For the fiscal years	ended:
	June 2019	June 2018	June 2017
Total Revenues	4,399,062	3,686,132	3,754,883
Net loss from operations	(274,085)	(856,314)	(203,576)
Per share - basic	(0.013)	(0.046)	(0.014)
Net loss for the year	(344,186)	(883,756)	(497,880)
Per share - basic	(0.017)	(0.047)	(0.035)
Total assets	2,268,045	2,226,121	1,783,512
Total long-term financial liabilities	-	3,291	42,784
Total liabilities	943,985	783,898	862,688

		For the fiscal	quarters ended:
	June 2019	Mar. 2019	Dec. 2018	Sept. 2018
Total Revenues	1,269,697	1,065,043	1,097,839	966,483
Net income (loss) from operations	5,518	(102,068)	(73,351)	(104,184)
Per share - basic	0.000	(0.005)	(0.004)	(0.005)
Net income (loss) for the period	(11,385)	(127,279)	(87,749)	(117,773)
Per share - basic	(0.001)	(0.006)	(0.004)	(0.006)
Total assets	2,268,045	2,463,838	2,373,935	2,287,820
Total long-term financial liabilities	-	-	-	-
Total liabilities	943,985	1,128,394	1,004,124	956,800
		For the fiscal	quarters ended:
	June 2018	Mar. 2018	Dec. 2017	Sept. 2017
Total Revenues	1,010,852	729,743	800,502	1,145,035
Net income (loss) from operations	(12,076)	(741,021)	(148,014)	44,797
Per share - basic	(0.001)	(0.038)	(0.008)	0.003
Net income (loss) for the period	(29,583)	(750,957)	(148,013)	44,797
Per share - basic	(0.001)	(0.038)	(0.008)	0.003
Total assets	2,226,121	2,224,813	1,399,349	1,662,504
Total long-term financial liabilities	3,291	13,164	23,037	32,911
Total liabilities	783,898	753,008	544,242	686,883

There were no cash dividends paid or accrued during any of the periods noted above.

Page 2 of 13

ZTEST Electronics Inc. Management’s Discussion and Analysis For The Year Ended June 30, 2018 (Prepared as at October 25, 2018)

Results of Operations

Revenues for the final quarter of 2019, and for the 2019 fiscal year, were each significantly greater than they had been for the comparable periods in 2018. Unfortunately, the cost of product sales grew at a faster rate than revenues thereby compressing gross margins. The gross margins were 31.1% of revenues in 2019, off 2% from corresponding 2018 levels, while the 2019 annual gross margins were 27.7% of revenues or 2.7% lower than they had been in 2018. There are many factors contributing to this including product mix, smaller order sizes, more aggressive competition, and the lingering effects of legislated labour cost increases. Management is continuously investigating all product costs and alternatives for enhancing margins as a percentage of periodic revenues.

The different elements of cost of product sales, and the changes realized, are as follows:

Years ended		June 19		June 18		Change
Raw materials and supplies consumed	$	2,136,502	$	1,672,413	$	464,089
Labour costs incurred		800,911		730,614		70,297
Depreciation		59,040		72,980		(13,940)
Repairs and maintenance		51,748		17,594		34,154
Other costs		127,313		89,271		38,042
Net change in finished goods and work in process		7,072		(18,725)		25,797
Total cost of product sales	$	3,182,586	$	2,564,147	$	618,439
Three month periods ended		June 19		June 18		Change
Raw materials and supplies consumed	$	564,255	$	417,680	$	146,575
Labour costs incurred		210,236		195,204		15,032
Depreciation		14,760		18,334		(3,574)
Repairs and maintenance		15,184		7,681		7,503
Other costs		33,134		23,155		9,979
Net change in finished goods and work in process		36,161		14,346		21,815
Total cost of product sales	$	873,730	$	676,400	$	197,330

Raw materials and supplies consumed increased more than 35% in the final quarter, and almost 28% for the year, in comparison to 2018 levels. These costs equated to 48.6% of annual revenues in 2019 even though the costs for the final quarter were only 44.4% of revenues for that period. For the 2018 fiscal year, these costs were equivalent to 45.4% of annual revenues including 41.3% in Q4. Rising market costs for componentry, along with a higher complexity of finished products, have certainly contributed to the increases realized in 2019. The Company continues to promote the supply of components as an effective solution for its customers, who also have the option to contract for the assembly of materials that they themselves supply. The existence of this customer option means that costs incurred in one period, or costs as a percentage of periodic revenues, are not necessarily indicative of future periods.

Labour costs for 2019 are up less than 10% in comparison to 2018 levels which is a favourable result given that revenues increased more than 19% in this same period. A closer look however reveals an increase of less than 8% in the final quarter of 2019, and less than 7% for the last half of the year, meaning that a disproportionate amount of the increase happened in the first half of the year. This is the effect of new labour rates that were legislated in as of January 1, 2018 so were not yet in effect during the first half of the 2018 fiscal year.

The net change in finished goods and work in process is a measure of the change in labour costs included in inventory and this must be combined with labour costs incurred to determine the total labour costs included in cost of product sales. The combined annual labour costs for 2019 are 13.5% greater than they had been during 2018 while the costs for the fourth quarter of 2019 are 17.6% greater than 2018 levels. Each of these remain as favourable results when compared to revenue increases of more than 19% for the year and 25% in the quarter. The Company will continue to manage labour to match, as closely as possible, labour supply with current and expected future demand.

Page 3 of 13

ZTEST Electronics Inc. Management’s Discussion and Analysis For The Year Ended June 30, 2018 (Prepared as at October 25, 2018)

Results of Operations - continued

Depreciation is a function of time and the carrying value of the manufacturing equipment in use. No significant additions have been necessary since the end of the 2014 fiscal year so depreciation costs continued to decline. Management continually evaluates equipment needs and monitors the equipment market for opportunities, but there are no major equipment additions currently being investigated.

Repairs and maintenance costs were considerably higher for the 2019 periods than they had been in 2018. However, it may be better to characterize them as having been lower in 2018 given that the 2019 expenses remain in line with historical norms. The Company conducts maintenance continually while repairs are conducted on an as-needed basis, or on a preventative basis when time permits. No significant repairs or maintenance were deferred during the recently concluded quarter.

Other costs include stencils and tooling, packaging, and freight costs net of amounts recovered. Each of these costs is incurred on an as-needed basis without any specific correlation with revenues. These costs are closely monitored and are within management’s expectations.

Selling, general and administrative expenses for the periods ended June 30 were as follows:

Years ended		June 19		June 18		Change
Employee and consultant compensation	$	1,005,099	$	896,089	$	109,010
Occupancy costs		260,270		263,446		(3,176)
Professional fees		66,979		99,998		(33,019)
Insurance		31,931		30,945		986
Shareholder services		25,071		26,121		(1,050)
Other costs		60,727		59,352		1,375
Total selling, general and administrative	$	1,450,077	$	1,375,951	$	74,126
Three month periods ended		June 19		June 18		Change
Employee and consultant compensation	$	269,925	$	217,438	$	52,487
Occupancy costs		66,719		65,915		804
Professional fees		17,303		26,055		(8,752)
Insurance		8,122		7,929		193
Shareholder services		3,233		3,222		11
Other costs		16,612		13,919		2,693
Total selling, general and administrative	$	381,914	$	334,478	$	47,436

Employee and consultant compensation costs, which include salaries, benefits, consulting fees, and independent directors’ fees, have risen more than 12% in 2019, including an increase of more than 24% in the final quarter, when compared to 2018 costs. Most individual elements of this cost category were quite comparable from one period to the other. The notable exceptions were that the Company retained a new CEO at the beginning of the 2019 fiscal year and almost $29,000 consulting costs arose in Twenty49 Ltd. which impact upon the final quarter.

Occupancy costs consist primarily of rent, common area costs, and utility charges for the Company’s operating facility. Basic rental charges increased by 1.0% in January 2018 and will now remain constant through the remainder of the lease term. The remaining variance is due to fluctuations in utility rates and usage, property tax rates, and other common area costs associated with the facility and its lease. The Company’s operating facility lease runs through March 2021 and occupancy costs are expected to remain generally comparable throughout that remaining lease term.

Page 4 of 13

ZTEST Electronics Inc. Management’s Discussion and Analysis For The Year Ended June 30, 2018 (Prepared as at October 25, 2018)

Results of Operations - continued

Professional fees are comprised of fees for legal services and a prorated portion of the estimated cost of the upcoming audit of the annual financial statements. Audit costs have remained consistent from 2018 to 2019. Legal fees were higher than usual in 2018 as a consequence of additional corporate administration and governance services but also because of diligence services made necessary by matters relating to the annual general meeting that was held December 17, 2017.

Shareholder services, insurance expense and other costs are all closely monitored, are within management expectations, and are reasonably consistent between the periods presented.

The Company’s financing costs for the periods were as follows:

Years ended		June 19		June 18		Change
Interest expense – long term	$	1,260	$	3,092	$	(1,832)
Interest expense – other		10,254		4,034		6,220
Financing fees		19,283		-		19,283
Total financing expenses	$	30,797	$	7,126	$	23,671
Three month periods ended		June 19		June 18		Change
Interest expense – long term	$	117	$	611	$	(494)
Interest expense – other		2,672		2,914		(242)
Financing fees		5,509		-		5,509
Total financing expenses	$	8,298	$	3,525	$	4,773

The Company has a single long-term debt instrument outstanding, being a commercial term loan used to finance a 2014 equipment acquisition. The term loan, which matures July 2019, has a declining balance as a result of monthly principal repayments, and this results in declining interest costs.

Interest expense – other represents interest arising from the use of the Company’s operating line as well as miscellaneous interest charges incurred. Throughout 2019, and the final quarter of 2018, the Company made relatively consistent use of its bank operating line while prior to that there was much more limited utilization.

During the first fiscal quarter the Company entered into an agreement with a related party whereby it may offer to sell specific accounts receivable to that related party. If the related party accepts then they assume all collection risks associated with that receivable in exchange for a discount from the face value of the receivable. The resulting discount is accounted for as financing fees at the time of the sale.

Liquidity

At June 30, 2019 the Company had working capital of $292,444 (2018- $281,753) and current financial assets of $591,575 (2018- $479,621) available to settle current financial liabilities of $943,985 (2018- $780,607). The Company also has access to a $250,000 bank operating line, of which $150,000 (2018 - $110,000) had been drawn as of June 30, 2019.

In addition, the Company must also address the payment of the following amounts as at June 30, 2019:

		Due by		Due by		Due by		Due after		Total
		June 2020		June 2021		June 2022		June 2022		Due
Long-term debt	$	3,291	$	-	$	-	$	-	$	3,291
Operating leases		107,743		80,807		-		-		188,550
	$	111,034	$	80,807	$	-	$	-	$	191,841

Page 5 of 13

ZTEST Electronics Inc. Management’s Discussion and Analysis For The Year Ended June 30, 2018 (Prepared as at October 25, 2018)

Capital Resources

In December 2018, the Company completed the first closing of a private placement transaction whereby it issued 440,000 working capital units for gross proceeds of $132,000. Each unit consisted of one common share and one-half common share purchase warrant. Each full common share purchase warrant entitles the holder to acquire one additional common share of the Company at a price of $0.40 until June 28, 2020. The Company paid finders’ fees of $7,140, incurred other costs of $6,450, attributed a value of $27,928 to the common share purchase warrants, and issued 23,800 broker warrants valued at $5,294. Each broker warrant entitles the holder to acquire one common share of the Company for $0.30 until June 28, 2020.

In January 2019, the Company completed the final closing of the private placement transaction whereby it issued 340,000 working capital units for gross proceeds of $102,000. Each unit consisted of one common share and one-half common share purchase warrant. Each full common share purchase warrant entitles the holder to acquire one additional common share of the Company at a price of $0.40 until July 31, 2020. The Company paid finders’ fees of $4,620, incurred other costs of $4,743, attributed a value of $23,249 to the common share purchase warrants, and issued 15,400 broker warrants valued at $3,682. Each broker warrant entitles the holder to acquire one common share of the Company for $0.30 until July 31, 2020.

The Company has a $250,000 commercial line of credit from which $150,000 (2018 - $110,000) was drawn as at June 30, 2019. The loan bears interest at the TD Bank prime lending rate plus 2.5%, is due upon demand, and is secured by a general security agreement covering the assets of PEC.

Related Party Transactions

The Company had transactions during the period with key management personnel and with 1114377 Ontario Inc., a company controlled by the spouse of a Director of Permatech Electronics Corporation. These include consulting fees paid to Steve Smith (President and CEO), consulting fees and accounting fees paid to Michael D. Kindy (CFO), Directors’ fees paid to independent Directors of the Company and its subsidiary, salaries and benefits paid to Wojciech Drzazga[(3) ] and John Perreault[(4) ] as officers of the subsidiary, legal fees paid to a legal firm in which William R. Johnstone (Corporate Secretary) is a partner, financing fees paid to 1114377 Ontario Inc., and share-based payments related to key management personnel. Compensation rates are agreed to by the related parties and are predicated upon prevailing market rates. The following expenses, involving these related parties, have arisen during the reporting periods:

Year ended June 30		2019		2018
Salaries and benefits(1)	$	269,927	$	270,858
Consulting fees(1)		188,969		73,200
Directors’ fees(1)		40,815		55,640
Legal fees(2)		34,454		65,552
Accounting fees(2)		3,500		3,500
Financing fees		19,283		-
Legal fees accounted for as investment acquisition costs		-		4,750
Legal fees accounted for as share issuance costs		10,318		16,250
Cash based expenditures	$	567,266	$	489,750
Share-based payments	$	-	$	493,017

(1) Reported in the consolidated financial statements as an element of employee and consultant compensation.

(2) Reported in the consolidated financial statements as an element of professional fees.

(3) Wojciech Drzazga is CEO of Permatech Electronics Corp. and was also CEO of ZTEST until June 15, 2018.

(4) John Perreault is President and COO of Permatech Electronics Corp. and was also President and COO of ZTEST until December 19, 2017.

Page 6 of 13

ZTEST Electronics Inc. Management’s Discussion and Analysis For The Year Ended June 30, 2018 (Prepared as at October 25, 2018)

Related Party Transactions

The following balances are due to related parties, and were reported in the consolidated financial statements as an element of accounts payable and accrued liabilities, as at June 30 of each year:

	2019	2018
Salaries and benefits payable	15,273	10,161
Directors’ fees payable	47,020	18,264
Consulting fees payable	262,013	136,204
Legal fees payable	28,453	4,741

The following stock options have been issued to Directors, former Directors and/or Officers of the Company and were outstanding as at June 30, 2019:

outstanding as at June 30, 2019:
	Expiry	Common
Description	Date	Shares
Stock options @ $0.05 per share	Mar. 3, 2021	400,000
Stock options @ $0.15 per share	July 9, 2019	150,000
Stock options @ $0.95 per share	July 9, 2019	50,000
Stock options @ $0.95 per share	Jan. 12, 2023	550,000

During the year ended June 30, 2019, 150,000 stock options held by Directors and/or Officers of the Company were exercised, 150,000 expired, and no new stock options were granted. In July 2019, 200,000 stock options held by a former director expired.

Convertible Instruments and Other Securities

The Company has the following securities issued and outstanding:

Convertible Instruments and Other Securities The Company has the following securities issued and outstanding:
Shares issued	Quantity	Amount
Common shares as at June 30, 2017	17,173,696	$ 22,418,782
Common shares issued on exercise of stock options	200,000	37,085
Common shares issued on exercise of warrants	1,900,000	165,131
Common shares issued through private placement, net of costs(1)	625,000	405,679
Common shares issued as part of investment	275,000	189,200
Common shares as at June 30, 2018	20,173,696	23,215,877
Common shares issued on exercise of stock options	150,000	27,426
Common shares issued through private placement, net of costs(1)	780,000	150,871
Common shares as at June 30, 2019 and as at the date of this document	21,103,696	$ 23,394,174

(1) Costs include finders’ fees, legal and brokerage fees, and the value of the broker warrants as determined using the Black-Scholes valuation model.

The Company has the following common shares reserved to satisfy the potential exercise of the following:

	Expiry	Common
Shares reserved	Date	Shares
Common shares to be issued for Class A shares(1)		8,246
Stock options @ $0.15 per share	Jul. 2019	150,000
Stock options @ $0.95 per share	Jul. 2019	50,000
Warrants @ $1.10 per share	Jan. 2020	312,500
Warrants @ $0.40 per share	June 2020	220,000
Warrants @ $0.30 per share	June 2020	23,800
Warrants @ $0.40 per share	July 2020	170,000
Warrants @ $0.30 per share	July 2020	15,400
Balance forward		949,946

Page 7 of 13

Management’s Discussion and Analysis For The Year Ended June 30, 2018 (Prepared as at October 25, 2018)

ZTEST Electronics Inc.

Convertible Instruments and Other Securities - continued

Convertible Instruments and Other Securities- continued
Balance forward		949,946
Stock options @ $0.05 per share	Mar. 2021	400,000
Warrants @ $0.06 per share	Dec. 2021	2,900,000
Stock options @ $0.15 per share	Dec. 2021	50,000
Stock options @ $0.95 per share	Dec. 2023	550,000
Shares reserved as at June 30, 2019		4,849,946
Stock options @ $0.15 per share - expired	Jul. 2019	(150,000)
Stock options @ $0.95 per share - expired	Jul. 2019	(50,000)
Shares reserved as at the date of this document		4,649,946

(1) Following the 2013 conversion of Class A Special Shares to common shares, 8,246 common shares remain reserved to be issued if and when the remaining Class A shareholders identify themselves to the Company.

Fully diluted number of shares	Quantity
Shares issued at June 30, 2019	21,103,696
Shares reserved at June 30, 2019	4,849,946
Fully diluted number of shares at June 30, 2019	25,953,642
Change in shares reserved due to expiry of stock options	(200,000)
Fully diluted number of shares as at the date of this document	25,753,642

Additional disclosures relative to stock options are as follows:

The following weighted average assumptions were used to calculate the fair value of the stock options granted during the years ended June 30:

the years ended June 30:
	2019	2018
Dividend yield	None issued	Nil
Risk free interest rate (%)	None issued	1.62 – 1.98
Expected stock volatility (%)	None issued	99.36 - 154.07
Expected life (years)	None issued	1 - 5

The following provides additional details with respect to stock option changes:

			Weighted
			Average	Weighted
	Common Shares		Price per	Average
	Under Option		Option	Expiry Date
Beginning of the period	1,500,000	$	0.43	Aug. 2, 2021
Exercised during the period	(150,000)		0.10	Dec. 31, 2018
Expired during the period	(150,000)		0.10	Dec. 31, 2018
Expiry date reduced during the period(1)	(200,000)		0.35	Mar. 27, 2022
Expiry date reduced during the period	200,000		0.35	Jul. 9, 2019
End of the period and as at the date of this document	1,200,000		0.52	Mar. 26, 2022

(1) The holder of these options was not re-elected as a director of the Company at the shareholders meeting held January 9, 2019. In accordance with the option agreement the term of these options is reduced to be six months from the date the individual ceased to be a director.

Page 8 of 13

ZTEST Electronics Inc. Management’s Discussion and Analysis For The Year Ended June 30, 2018 (Prepared as at October 25, 2018)

Convertible Instruments and Other Securities - continued

As at the date of this document, the following stock options, each of which has vested, are outstanding. The Company has no ability to cause these options to be exercised:

	Common Shares		Exercise
	Under Option		Price	Expiry Date
Granted March 3, 2016	400,000(1)	$	0.05	Mar. 3, 2021
Granted December 21, 2016	150,000(1)	$	0.15	Jul. 9, 2019
Granted December 21, 2016	50,000	$	0.15	Dec. 21, 2021
Granted January 12, 2018	50,000(1)	$	0.95	Jul. 9, 2019
Granted January 12, 2018	550,000(1)	$	0.95	Jan. 12, 2023

(1) Directors, former directors, and/or officers of the Company hold these options.

All stock options have vested. The Company has no ability to cause these options to be exercised.

Additional disclosures relative to share purchase warrants are as follows:

The following weighted average assumptions were used to calculate the fair value of the warrants issued during the years ended June 30:

years ended June 30:
	2019	2018
Dividend yield	Nil	Nil
Risk free interest rate (%)	1.76 – 1.84	1.61
Expected stock volatility (%)	116.25 – 116.52	70.49
Expected life (years)	1.5	1

The following provides additional details with respect to warrant changes:

			Weighted
			Average	Weighted
	Number of		Price per	Average
	Warrants		Warrant	Expiry Date
Beginning of the period	3,256,250	$	0.17	Sep. 26, 2021
Issued during the period	429,200	$	0.39	July 12, 2020
Expired during the period	(43,750)	$	0.85	Jan. 31, 2019
Expiry date extended during the period	(312,500)	$	1.10	Jan. 31, 2019
Expiry date extended during the period	312,500	$	1.10	Jan. 31, 2020
End of the period and as at the date of this document	3,641,700	$	0.19	Aug. 16, 2021

As at the date of this document, the following share purchase warrants are outstanding:

	Number of		Exercise
	Warrants		Price	Expiry Date
Issued Dec. 15, 2016	2,900,000	$	0.06	Dec. 15, 2021
Issued Jan. 30, 2018	312,500	$	1.10	Jan. 31, 2020
Issued Dec. 28, 2018	220,000	$	0.40	June 28, 2020
Issued Dec. 28, 2018	23,800	$	0.30	June 28, 2020
Issued Dec. 28, 2018	170,000	$	0.40	July 31, 2020
Issued Dec. 28, 2018	15,400	$	0.30	July 31, 2020

Changes in Accounting Policy

The Company’s accounting policies will typically change only when there is a change in IFRS. Effective July 1, 2018 the Company has adopted:

• IFRS 9 Financial instruments, which uses a single approach to determine whether a financial asset is measured at amortized cost or fair value, replacing multiple rules in IAS 39

Page 9 of 13

ZTEST Electronics Inc. Management’s Discussion and Analysis For The Year Ended June 30, 2018 (Prepared as at October 25, 2018)

Changes in Accounting Policy - continued

• IFRS 15 Revenue from contracts with customers, which replaces existing revenue standards and interpretations with a single standard and provides additional guidance on revenue recognition for contracts with customers.

IFRS 9 Financial instruments:

The approach in IFRS 9 is generally based on how an entity manages its financial assets in the context of its business model and the contractual cash flow characteristics of the financial assets. Impairment of financial assets is determined using a single impairment model that requires entities to recognize expected credit losses without requiring a triggering event to occur. The new impairment model applies to financial assets measured at amortized cost. IFRS 9 largely retains the existing requirements under IAS 39 for the classification and measurement of financial liabilities.

This standard has been applied retrospectively, resulting in no changes to any amounts presented in prior periods.

We have assessed the classification and measurement of our financial instruments under IFRS 9, with reference to the former classification under IAS39, as follows:

Financial Assets	IFRS 9	IAS39
Cash	Amortized cost	Fair Value through profit and loss
Accounts receivable	Amortized cost	Loans and receivables
Financial Liabilities
Bank indebtedness	Amortized cost	Other financial liabilities
Accounts payable and accrued liabilities	Amortized cost	Other financial liabilities
Customer deposits	Amortized cost	Other financial liabilities
Long-term debt	Amortized cost	Other financial liabilities

Amortized cost – The amount at which a financial asset or financial liability is measured at initial recognition minus the principal repayments, plus or minus the cumulative amortization using the effective interest method of any difference between that initial amount and the maturity amount and, for financial assets, adjusted for any expected credit losses.

The effective interest method - The effective interest method is a method of calculating the amortized cost of a financial asset or liability and of allocating interest and any transaction costs over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts or payments through the expected life of the financial asset or liability to the net carrying amount on initial recognition.

IFRS 15 Revenue from contracts with customers:

IFRS 15 provides a definition of what constitutes a contract with customers as well as differentiating between changes to an existing contract and the commencement of a new contract. It also requires the determination of performance criteria which then trigger the recognition, subject to additional criteria, of revenue at various times throughout a contract or at the end of a contact. Revenue is to be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods and services.

This standard has been applied retrospectively, resulting in no changes to any amounts presented in prior periods, but it has resulted in modification of how the Company’s revenue recognition policy is characterized. The new policy is described as follows:

Page 10 of 13

ZTEST Electronics Inc. Management’s Discussion and Analysis For The Year Ended June 30, 2018 (Prepared as at October 25, 2018)

Changes in Accounting Policy - continued

IFRS 15 Revenue from contracts with customers - continued:

Revenue recognition - Revenue is recognized when the Company has satisfied its performance obligations, the consideration to be received can be measured reliably, and the ability to collect is probable, which typically arises when the product is delivered.

Accounting standards effective for future periods

IFRS16, Leases: effective for annual periods beginning on or after 1 January 2019, replaces existing standards, eliminating the classification of leases as either operating leases or finance leases. The Standard provides a single lessee accounting model, specifying how leases are recognized, measured, presented and disclosed. The Company intends to adopt IFRS 16 in its financial statements for the annual period beginning on July 1, 2019 and continues to assess the impact it will have on the consolidated financial statements.

Impairment of Non-financial Assets

At the end of each reporting period, the Company reviews the carrying amounts of its non-financial assets with finite lives to determine whether there is any indication that those assets have suffered an impairment loss.

Where such an indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss. The recoverable amount is the higher of an asset’s fair value less cost to sell or its value in use. Fair value is determined as the amount that would be obtained from the sale of the asset in an arm’s length transaction between knowledgeable and willing parties. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount and the impairment loss is recognized in the income for the period.

Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset in prior years. A reversal of an impairment loss is recognized immediately in income for the period.

The Company has assessed the assets of each of its operating entities and has determined that the fair value of its investment in Conversance Inc. (note 5) is not currently determinable resulting in an impairment provision of $294,562 to reduce the carrying value of the investment to $Nil.

Impairment of Investments

Non-controlling interests, which are not financial instruments, and are less than a 20% ownership interest, are considered impaired when its carrying amount exceeds its recoverable amount.

During the 2017 fiscal year the Company determined that the fair value of its investment in Conversance Inc. was not currently determinable resulting in an impairment provision of $294,562, to reduce the carrying value of the investment to $Nil.

Non-controlling interests, which are not financial instruments, and are equal to or exceeding a 20% ownership interest (an equity instrument) is considered impaired if, and only if, there is objective evidence of impairment as a result of one or more events that occur after the initial recognition of the asset (a 'loss event') and that loss event, or events, has an impact on the estimated future cash flows of the non-controlling interest that can be reliably estimated. Losses expected as a result of future events, no matter how likely, are not recognized.

Page 11 of 13

ZTEST Electronics Inc. Management’s Discussion and Analysis For The Year Ended June 30, 2018 (Prepared as at October 25, 2018)

Impairment of Investments - continued

Some items that may be taken into consideration in determining whether a loss event has occurred include significant financial difficulty of the investee, a breach of contract such as a default or delinquency in payments by the investee, it becomes probable that the investee will enter bankruptcy or other financial reorganization, or significant changes with an adverse effect that have taken place in the technological, market, economic or legal environment in which the investee operates, and such changes indicate that the cost of the equity instrument may not be recovered.

During the period ended March 31, 2019 the Company determined that no loss event had occurred and accordingly no test for impairment was completed.

Risk Factors

Events seemingly unrelated to the Company, or to its industry, may adversely affect its finances or operations in ways that are hard to predict or defend against. For example, credit contraction in financial markets may hamper the Company’s ability to access credit when needed or rapid changes in foreign exchange rates may adversely affect its financial results. Finally, a reduction in credit, combined with reduced economic activity, may adversely affect businesses and industries that constitute a significant portion of the Company’s customer base. As a result, these customers may need to reduce their purchases, or the Company may experience greater difficulty in collecting amounts due from them. Any of these events, or others caused by uncertainty in world financial markets, may have a material adverse effect on the Company’s business, operating results, and financial condition.

In addition to the foregoing, the Company is exposed to credit risk, concentration of credit risk, liquidity risk, and currency risk. The Company’s primary risk management objective is to protect earnings and cash flow and, ultimately, shareholder value. Risk management strategies, as discussed below, are designed and implemented to ensure that the Company’s risks and the related exposure are consistent with its business objectives and risk tolerance. There have been no changes to the risk management strategies during the current year.

Credit risk

Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. The Company’s primary exposure to credit risk is in its accounts receivable. In an effort to mitigate this risk, management actively manages and monitors its receivables and obtains pre-payments where warranted. It has been determined that no allowance is required, as all amounts outstanding are considered collectible. The Company incurred no bad debts during the years ended June 30, 2019 and June 30, 2018 .

Concentration of credit risk

Concentration of credit risk arises when one or more customers, defined as a major customer, individually account for 10% or more of the Company’s revenues during a reporting period. During the current year the Company had two major customers which represented 14% and 12% of total revenues. In the prior year three major customers accounted for 12%, 12% and 10% of total revenues. Amounts due from major customers represented 9% of accounts receivable at June 30, 2019 (2018 - 27%). The loss of a major customer, or significant curtailment of purchases by such customer, could have a material adverse effect on the Company's results of operations and financial condition. The Company monitors the relationship with all customers closely and ensures that every customer is subject to the same risk management criteria.

Liquidity risk

Liquidity risk arises through the excess of financial obligations over available financial assets due at any point in time. At June 30, 2019 the Company had current financial assets of $591,575 (2018 - $479,621) available to settle current financial liabilities of $943,985 (2018 - $780,607). The Company manages its liquidity risk through the management of its capital which incorporates the continuous monitoring of actual and projected cash flows to ensure that it has sufficient liquidity to meet its operating commitments without incurring unacceptable losses or risking damage to the Company’s reputation.

Page 12 of 13

ZTEST Electronics Inc. Management’s Discussion and Analysis For The Year Ended June 30, 2018 (Prepared as at October 25, 2018)

Risk Factors - continued

Market risks

The Company is exposed to interest rate risk due to two obligations that have floating interest rates as well as currency risk related to cash, accounts receivable, prepaid expenses, customer deposits and accounts payable denominated in US dollars. Market risks give rise to the potential for future cash flows to fluctuate because of changes in interest rates or foreign exchange rates. Market risks are closely monitored and attempts are made to match foreign cash inflows and outflows. During the current fiscal year, the Company has reported a foreign exchange loss of $4,749 (2018 – gain of $1,982).

Sensitivity to market risks

At June 30, 2019 the Company had:

• $3,291 (2018 – $42,784) which bears interest at the TD Bank prime lending rate plus 1.75%. A 1% increase in the TD Bank prime lending rate, as at the financial reporting date, would result in additional interest expense of $3 over the next 12 month period.

• cash of US $38 (2018 – US $16,417 overdraft) included in bank indebtedness or cash. A 5% increase in the value of the Canadian dollar relative to the US dollar would result in a reduction of $2 in carrying value.

• US $Nil (2018 – US $4,634) included in prepaid expenses. A 5% increase in the value of the Canadian dollar relative to the US dollar would result in a recognition of $Nil in additional future expenses.

• US $63,433 (2018 –US $63,433) included in accounts receivable. A 5% increase in the value of the Canadian dollar relative to the US dollar would result in a reduction of $3,172 in future cash inflow.

• US $Nil (2018 – US $27,879) included in customer deposits. A 5% increase in the value of the Canadian dollar relative to the US dollar would result in a reduction of $Nil in future revenue.

• US$155,987 (2018 – US$119,219) included in accounts payable. A 5% decrease in the value of the Canadian dollar relative to the US dollar would result in an increase of $7,799 in future cash outflow.

Based upon observations of recent market trends management believes that each of these outcomes is possible.

Forward-looking Information

Certain statements in this MD&A may constitute “forward-looking” statements which involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company and its subsidiary, or the industry in which they operate, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. When used in this report, the words “estimate”, “believe”, “anticipate”, “intend”, “expect”, “plan”, “may”, “should”, “will”, the negative thereof or other variations thereon or comparable terminology are intended to identify forward-looking statements. Such forwardlooking statements reflect the current expectations of the management of the Company with respect to future events based on currently available information and are subject to risks and uncertainties that could cause actual results, performance or achievements to differ materially from those expressed or implied by those forward-looking statements, such as reduced funding, long sales cycles, currency and interest rate fluctuations, increased competition and general economic and market factors and including the risk factors summarized above under the heading “Risk Factors”. New risk factors may arise from time to time and it is not possible for management of the Company to predict all of those risk factors or the extent to which any factor or combination of factors may cause actual results, performance or achievements of the Company to be materially different from those expressed or implied in such forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forwardlooking statements as a prediction of actual results.

Although the forward-looking statements contained in this MD&A are based upon what management believes to be reasonable assumptions, the Company cannot assure investors that actual results will be consistent with these forwardlooking statements. The forward-looking statements contained in this MD&A speak only as of the date hereof. The Company does not undertake or assume any obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, except as required by law.

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