Photon Control : MD&A Q4 2020

Management's Discussion and Analysis

For the three months and year ended December 31, 2020

(in Canadian dollars, amounts in thousands except number of shares and per share amounts)

DATED March 18, 2021

This Management's Discussion and Analysis ("MD&A") provides information for the three months and year ended December 31, 2020. This MD&A is prepared in accordance with National Instrument 51-102F1, and should be read in conjunction with Photon Control Inc.'s (the "Company" or "Photon Control") consolidated financial statements and accompanying notes for the fiscal year ended December 31, 2020. These documents, along with additional information about the Company, including the Annual Information Form ("AIF"), are available atwww.photoncontrol.com andwww.sedar.com.

This MD&A contains forward-looking information within the meaning of Canadian securities laws, and the use of non-GAAP measures. Refer to "Cautionary Statement Regarding Forward-Looking Statements" and "Cautionary Statement Regarding Certain Non-GAAP Performance Measures" included within this MD&A.

The financial data contained in this report and in the consolidated financial statements and accompanying notes of the Company for the year ended December 31, 2020 have been prepared in accordance with International Financial Reporting Standards ("IFRS") and are stated in Canadian dollars, unless otherwise noted.

Table of Contents

• 1 OVERVIEW AND HIGHLIGHTS ..................................................................................................... 3

• 1.1 Photon Control ............................................................................................................................ 3

  • 1.2 2020 Highlights and Outlook ....................................................................................................... 3

  • 1.3 Industry, Market and Products .................................................................................................... 5

• 2 DECEMBER 2020 FINANCIAL PERFORMANCE OVERVIEW ............................................................. 7

  • 2.1 Revenue and Cost of Sales ........................................................................................................... 8

  • 2.2 Operating Expenses ..................................................................................................................... 9

  • 2.3 Net Income and Adjusted EBITDA ............................................................................................. 10

• 3 REVIEW OF QUARTERLY PERFORMANCE ................................................................................... 11

  • 3.1 Revenue and Cost of Sales ......................................................................................................... 11

  • 3.2 Operating Expenses ................................................................................................................... 12

  • 3.3 Net Income ................................................................................................................................ 13

• 4 FINANCIAL POSITION ............................................................................................................... 14

  • 4.1 Assets ......................................................................................................................................... 14

  • 4.2 Other Assets .............................................................................................................................. 15

  • 4.3 Liabilities .................................................................................................................................... 15

  • 4.4 Working Capital ......................................................................................................................... 16

  • 4.5 Equity ......................................................................................................................................... 17

  • 4.6 Related Party Transactions ........................................................................................................ 17

  • 4.7 Other .......................................................................................................................................... 18

• 5 CRITICAL ACCOUNTING ESIMATES AND POLICIES AND RISK MATTERS ....................................... 18

  • 5.1 Non-GAAP Measures ................................................................................................................. 18

  • 5.2 Critical Accounting Policies and Estimates ................................................................................ 18

  • 5.3 Disclosure Controls and Procedures and Internal Controls over Financial Reporting .............. 19

  • 5.4 Outstanding Share Data ............................................................................................................ 20

  • 5.5 Risks and Uncertainties ............................................................................................................. 20

  • 5.6 Cautionary Note Regarding Forward Looking Statements ........................................................ 21

1

OVERVIEW AND HIGHLIGHTS

1.1

Photon Control

Photon Control was incorporated on September 6, 1988 and designs, manufactures and distributes a wide range of optical sensors and systems to measure temperature and position. These products improve performance and enable innovation for our customers and are used in the semiconductor industry. Photon Control's products provide industry-leading accuracy, reliability and quality in the most extreme conditions and are backed by a team of experts providing a variety of on-site and remote services including custom design, installation, training, and support. The Company is headquartered in an ISO 9001:2015 manufacturing facility in Richmond, British Columbia, Canada, has manufacturing, sales and research and development offices in California, and a sales distribution network across the globe. Photon Control is listed on the Toronto Stock Exchange (the "TSX"), trading under the symbol "PHO".

1.2 2020 Highlights and Outlook

The following highlights the most recent significant corporate and financial events of the Company:

• • In March 2021, the Company reported record annual revenues and net income of $64,658 and $14,074, respectively, and fourth quarter revenues of $14,917 and net income of $1,157.

• • In November 2020, the Company reported its second highest ever revenues of $16,330 for the three months ended September 30, 2020 and net income of $3,607.

• • In September 2020, the Company entered into a distribution agreement withWoowon TechnologyCo., Ltd., a leading Korean distributor.

• • In August 2020, the Company reported its second highest ever revenues, prior to the release of Q3 2020 revenues, of $16,098 for the three months ended June 30, 2020 and net income of $2,673.

• • In July 2020, the Company announced the strategic partnership withFiSens GmbH ("FiSens") for a worldwide license and distribution agreement for Fiber Bragg Grating ("FBG") sensor solutions.

• • In May 2020, the Company announced theappointment of Damian Towns as itsnew Chief FinancialOfficer ("CFO") and Corporate Secretary.

• • In May 2020, the Company reported record quarterly revenues of $17,312 for the three months ended March 31, 2020 and net income of $6,639.

• • In April 2020, the Company completed the acquisition of certain tangible and intangible assets ofMicronor Inc. ("Micronor"), a supplier of fiber optic kinetic sensors based in Camarillo, California, United States for cash consideration of $844.

We continue to focus on three key areas: achieving our stated growth strategy, strengthening our underlying business and managing through the global COVID-19 pandemic.

Achieving our stated growth strategy

Our new product introduction ("NPI") funnel remains a key area of focus. We continue to progress with design wins for prototype introduction and our NPI revenues remain above 30% of overall revenues for three months and year ended December 31, 2020. In addition we are also investing in disruptive technologies such as FBG through theFiSens license agreement.Our growing investment in research and development reflects the number of opportunities being generated by our customers

and our continued commitment to growing the NPI funnel. The success of our products and our customers is at the forefront of our strategy.

The acquisition ofMicronor's assets is a complementary expansion to Photon Control's offering in the semiconductor and other high-tech industries as it provides a new range of fiber optic encoders and positioning and signaling sensors. This acquisition also provides us with a site located in Camarillo, California.

Our ability to benefit from the FiSens license agreement and Micronor acquisition has been impacted by the COVID-19 environment, primarily due to travel restrictions but we look forward to being able to fully leverage off these in due course.

We continue to grow organically and benefit from the current growth cycle in the semiconductor equipment industry, as it looks to address the unprecedented demands for chips throughout a number of key industries. In parallel, we are also actively looking for acquisition and partnership opportunities and other ways to further enhance value for our shareholders as we look to significantly grow our business.

Strengthening our underlying business

In May 2020, we augmented our team with the introduction of Damian Towns as CFO. In 2020, we also developed from within with the promotion of Eva Valencia to VP Semiconductor Sales and Phil Schick to VP Technology & Operations. Our 2020 revenues of $64,657 have exceeded our highest ever previously recorded revenues of $46,704, achieved in 2018. The principal driver of these record sales was attributable to strong capital expenditure in the semiconductor industry. Current industry estimates have Wafer Fabrication Equipment ("WFE") spend at about $68 billion in 2021. This compares to 2020 industry spend of $58.7 billion. We continue to strive to get our sensors designed into new process tools from the leading OEMs in order to further grow our market share. We believe our growth in revenues above and beyond the growth of the overall WFE market is reflective in our success in increasing our market share, combined with an element of our customers' reducing risks in their supply chains by holding more inventory due to COVID-19.

We are committed to reducing our impact on the planet by safeguarding the natural habitat in which we operate and supporting the continuous improvement for sustainable waste management initiatives at both of our office locations. We also support various social initiatives including diversity in the workplace. In 2021, as part of these ongoing initiatives we joined the Responsibility Business Alliance ("RBA"). The RBA is the world's largest industry coalition dedicated to corporate social responsibility in global supply chains where members, suppliers and stakeholders collaborate to improve working and environmental conditions and business performance through leading standards and practices.

Our focus going into 2021 will be on maintaining quality, on-time deliveries and development initiatives for our semiconductor customers, whilst integrating our new product lines from FiSens and Micronor that will serve as enablers in delivering our growth initiatives. We will also continue to build our team and underlying business in order to capitalize on the opportunities ahead, while actively looking at ways of enhancing shareholder value and utilizing our strong balance sheet.