Composite Alliance Group — Interim / Quarterly Report 2021

May 26, 2021

Composite Alliance Group Inc.

MANAGEMENT DISCUSSION & ANALYSIS FORM 51-102F1 For the Quarter Ended March 31, 2021

This Management Discussion and Analysis (“ MD&A ”) is dated May 26, 2021.

This MD&A of the financial condition of Composite Alliance Group Inc. (“ CAG ” or the “ Company ”) and results of operations supplements but does not form part of the financial statements and accompanying notes of the Company for the quarter ended March 31, 2021. Consequently, the following discussion and analysis of the results of operations and the financial condition of the Company should be read in conjunction with Composite Alliance Group Inc.’s annual audited consolidated financial statements for the year ended December 31, 2020 and the unaudited condensed consolidated interim financial statements for the quarter ended March 31, 2021. Additional information can be found on CAG on the SEDAR website (www.sedar.com).

FORWARD LOOKING STATEMENTS

This MD&A may contain forward-looking statements. Forward looking statements include, but are not limited to, words such as “believes” “expects”, “will”, “intends”, “projects”, “anticipates”, “estimates”, “continues”, “plans” or similar words thereof. These forward statements reflect the Company’s future financial position, future growth, business strategy, budgets, internal projects and objectives of management based on information currently available to the Company.

The Company believes that the expectations represented in such forward-looking statements are reasonable. However, the Company cannot assure that the plans, intentions or expectations upon which these forward looking statements are based will prove to be correct as they are subject to risks, uncertainties and assumptions.

Any such forward-looking statements are expressly qualified in their entirety by this cautionary statement. Moreover, the Company does not assume responsibility for the accuracy or completeness of such forwardlooking statements. The forward-looking statements included in this MD&A are made as of the date of this MD&A. The Company undertakes no obligation to publicly update or revise forward-looking statements, other than as required by applicable law. The reader should not place undue reliance on forward- looking statements.

CORPORATE STRUCTURE

The Company was incorporated on June 26, 2008 under the Business Corporation Act (Alberta). The Company’s head office is located at Suite 1600, 333 – 7 Avenue S.W., Calgary, Alberta, Canada.

The Company owns 100% of Techni-Modul Engineering (“ TME ”), an S.A.S company registered in France, through a reverse takeover in February 2019.

The Company conducts its sales activities in North America through its Dallas based subsidiary, Composite Alliance Corp (“ CAC ”), which the Company owns 90% of the equity capital.

In September 2019, the Company established Composite Alliance Asia Limited in Hong Kong (“ CAA ”). The Company plans to position CAA as its sales and after-sales hub for Asian customers in the future. As of the date of this MD&A, CAA has not yet engaged in any business activities.

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BUSINESS FOCUS

The Company’s subsidiary in France, TME, specializes in industrial turn-key solutions by designing and manufacturing the machines and processes that it sells to customers whom use those machines and processes to fabricate composite materials for the aerospace and automotive industries and is located in Coudes, France.

The Company’s subsidiary in the USA, CAC, serves as the sales office for TME and other strategic partners in Europe and is located in Dallas, Texas.

Starting from the fourth quarter of 2019, the Company entered into a new business of distributing dispensing equipment of Magnus Venus Products (“ MVP ”) in the People’s Republic of China (the “ Territory ”) through sub-contractors.

SUMMARY OF ANNUAL FINANCIAL RESULTS

The annual financial information of the reverse takeover acquirer, TME, have been presented below for all periods prior to the reverse takeover transaction effected on February 12, 2019. The quarterly financial information presented ended March 31, 2021 is comprised of the consolidated financial information of Composite Alliance Group Inc. and its legal subsidiaries TME and CAC. All the financial information below is reported in Canadian Dollars (“ CAD ”). Figures are reported in accordance with International Financial Reporting Standards (“ IFRS ”).

ANNUAL	December 31, 2020 Audited	December 31, 2019 Audited	December 31, 2018 Audited
Total Revenue Total expenses Other expenses (income) Net income (loss) Basic earnings (loss) per share Diluted earnings (loss) per share Comprehensive income (loss) Current Assets Non-current Assets Total Assets Current Liabilities Non-current Liabilities Total Liabilities	6,779,139 9,179,980 979,734 (3,380,575) (0.03) (0.03) (3,470,876) 9,491,277 2,476,457 11,196,734 5,938,999 7,690,475 13,629,474	$14,734,750 13,689,719 4,127,363 (3,082,332) (0.03) (0.03) (3,192,303) 8,591,490 3,176,813 11,768,303 5,114,930 5,509,083 10,624,013	$ 10,391,612 9,608,650 272,711 510,251 0.01 0.01 535,853 8,253,530 2,743,040 10,996,570 5,532,587 4,250,998 9,783,585

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QUARTERLY	3 Months Ended March 31, 2021 Unaudited	3 Months Ended March 31, 2020 Unaudited	3 Months Ended December 31, 2020 Unaudited	3 Months Ended December 31, 2019 Unaudited	3 Months Ended September 30, 2020 Unaudited	3 Months Ended September 30, 2019 Unaudited	3 Months Ended June 30, 2020 Unaudited	3 Months Ended June 30, 2019 Unaudited
Total Revenue Total operating expenses Other expenses Net income (loss) Comprehensive income (loss) Earnings per share: Basic Diluted	$2,069,473 2,307,621 128,489 (366,637) (367,143) (0.00) (0.00)	$2,393,086 3,210,469 327,346 (1,144,729) (1,034,895) (0.01) (0.01)	$2,342,951 2,259,846 471,801 16,473 (177,501) (0.00) (0.00)	$5,642,859 4,922,387 270,784 449,688 417,116 0.00 0.00	$1,034,894 1,728,224 327,540 (1,020,870) (1,000,393) (0.01) (0.01)	$4,630,919 3,739,940 259,643 631,335 579,802 0.01 0.01	$1,008,208 1,981,439 258,218 (1,231,449) (1,258,087) (0.01) (0.01)	$2,737,235 2,871,524 229,916 (364,205) (357,247) (0.00) (0.00)

Revenue

Total revenue declined by 13.5% in 1Q2021 to $2,069,473 from the same period in 2020, mainly due to the decline in machine sales.

Revenue Breakdown ($000) by Product

Product 1Q21 1Q20 Growth	Product 1Q21 1Q20 Growth
Machine sales – TME and CAC (gross)	$2,042.5 $2,383.8 -14.3%
MVP Products (net)	26.9 9.3 +189.2%
Total	2,069.5 2,393.1 -13.5%

(1) Machine sales – TME and CAC

Revenue from machine sales declined by 14.3% in the first quarter in 2021 from the first quarter in 2020 because of smaller order books possessed by the Company in late 2020 than in late 2019. As the global aeronautic sector which is TME and CAC’s main focus continues to suffer from the COVID-19 pandemic, a full recovery is likely to be a few years away. However, management of the Company observed more sales momentum in 2021 than 2020 in general.

(2) MVP Products

China’s market was extra-ordinarily quiet due to the lockdown imposed by the local government during the first quarter of 2020. Given a lower base in the first quarter of 2020, the MVP business more than doubled in the first quarter of 2021 when compared with the same period in 2020.

The management of the Company monitors the development of the business in the Territory closely through frequent discussions and communication with its sub-distributors to ensure steady business growth this year.

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Expenses

Purchases of raw materials and goods declined by 10.5% while purchases from sub-contractors also declined by 32.9% during the first quarter of 2021 from the first quarter of 2020. These two purchase costs (“ Total Purchases ”) together accounted for 60.0% of revenue (“ Total Purchase % ”) in the first quarter of 2021, compared to 65.8% in the same period of 2020. The improved margin was due to a different product mix delivered during the first quarter in 2021.

Payroll expenses and social security contributions declined by 30.5% in the first quarter in 2021 from the first quarter in 2020. The decrease was mainly due to a lower employee headcount in TME this year.

Selling, general and administration expenses decreased by 18.3% in the first quarter in 2021 over the same period in 2020 as the Company continued to scrutinize its expense during the industry downturn.

Breakdown of Operating Expense ($000)

Expense Items 1Q21 % to revenue 1Q20 % to revenue Growth	Expense Items 1Q21 % to revenue 1Q20 % to revenue Growth
Purchased raw materials and goods	$738.5 35.7% $825.4 34.5% -10.5%
Subcontractor	501.9 24.3% 748.3 31.3% -32.9%
Payroll expenses and social security contributions Subcontractor	636.3 30.7% 915.4 38.3% -30.5%
Selling, general and administrative	304.5 14.7% 364.3 15.6% -18.3%
Taxes and related payments	23.7 1.1% 30.3 1.3% -21.8%
Depreciation and amortization	248.8 12.0% 252.7 10.6% -1.5%
Provision variations	-146.2 -7.1% 65.6 2.7% N.A.
Total	2,307.6 111.5% 3,210.5 134.2% -34.2%

Other Expenses (Income)

While the Company didn’t issue any new stock based compensation in 2020 or the first quarter of 2021, the stock based compensation stayed rather flat in this quarter as a result of the amortization of stock based compensation issued in previous years.

Although the Company’s borrowing increased significantly as of March 31 2021 due to the COVID-19 relief loans backed by the French government, the increase in the finance costs was somewhat offset by the restructuring of the convertible debenture issued by CAG in November 2020, as well as the interest rate reduction on certain TME’s long-term borrowings starting from the beginning of 2021. As a result, the finance costs in the first quarter of 2021 declined by 26.9% from the same period in 2020.

During the first quarter of 2021, the Company posted other income of $129,073. Majority of this income resulted from the interest rate reduction on certain TME’s borrowings from a related party at the beginning of this year, which resulted in a gain on loan restructuring.

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Breakdown of Other Expense (Income) ($000)

Expense (Income) Item 1Q21 % to revenue 1Q20 % to revenue GROWTH	Expense (Income) Item 1Q21 % to revenue 1Q20 % to revenue GROWTH
Stock based compensation	160.3 7.7% $169.8 7.1% -5.6%
Foreign exchange gain	-27.7 -1.3% -13.2 -0.6% N.A.
Finance costs	124.9 6.0% 170.8 7.1% -26.9%
Other income	-129.1 -6.2% 0.0 0.0% N.A.
Total	128.5 6.2% 327.3 13.7% -60.7%

Profits

The Company posted an operating loss of $238,148 and a net loss of $366,637 in the first quarter of 2021, compared to an operating loss of $817,383 and a net loss of $1,144,729 in the same period of 2020.

CAPITAL RESOURCES MANAGEMENT

During the first quarter of 2021, the Company generated positive cash of $397,648 from operating activities, compared to positive cash flows of $543,950 during the same period of 2020. This lower cash inflow mainly resulted from more provisions and other income, as well as less accounts payable in 2021.

During the first quarter of 2021, the Company had negative cash flows of $17,509 from investing activities, compared to negative cash flows of $156,834 during the first three months of 2020. The lower cash outflows was mainly due to less hardware investment in 2021.

During the first quarter of 2021, the Company posted positive financing cash flows of $1,376,649, compared to positive cash flows of $813,530 during the same period of 2020. The higher cash inflow resulted from the additional financing acquired by the Company in France as well as less loan repayment in this year.

The Company’s capital structure is regularly reviewed and managed. Adjustments are made to the capital structure based on financing requirements as well as in response to economic conditions affecting the Company. As of March 31, 2021, the Company had cash of $4,484,221 and working capital of $3,161,723, compared to $2,929,679 and $3,552,278, respectively as of December 31, 2020. The increase in cash balance were resulted mainly from the increase in borrowings.

GOING CONCERN AND COVID-19

The world is still seriously affected by COVID-19 since the outbreak more than one year ago. Lockdowns, global travel bans and social distancing are still commonly seen in various countries. These measures could negatively impact the Company’s operations. The aeronautic sector which TME and CAC focus on continues to suffer from such downturn.

The Company’s going concern remains dependent upon its ability to generate enough operating cash flows from existing and new projects and/or raise or borrow additional funds. During the first quarter of 2021, the Company, through TME, has successfully acquired additional relief loans in the total amount of EUR 1,000,000 backed by the French government.

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As of the date of this MD&A, the Company does not foresee any significant risk in collecting its accounts receivable from customers, a primary source of its cash flows, and will continue watching the development of the pandemic closely in order to formulate effective counter measures on a timely manner.

FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

The Company is exposed to interest, credit and liquidity risks in the normal course of the Company's operations. These risks are mitigated by the Company's financial management policies and practices described below.

Interest Rate Risk

The Company is susceptible to interest rate cash flow risk and fair value risk on its fixed and floating rate financial liabilities.

Credit Risk

The Company is exposed to credit risk associated with cash and cash equivalent, accounts receivable, and other receivables. The risk is mitigated as the cash and cash equivalents are maintained with major financial institutions. The credit risk on accounts receivable is mitigated with a diverse customer base and close monitoring of the collection of the accounts receivable by the Company.

Liquidity Risk

The Company's policy is to regularly monitor current and expected liquidity requirements to ensure that it maintains sufficient reserves of cash to meet its liabilities when due. The Company had cash of $4,484,221 and working capital of $3,161,723 as of March 31, 2021.

ACCOUNTING POLICIES

Basis of Preparation

The financial statements have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“ IASB ”).

The financial statements are expressed in Canadian dollars unless otherwise stated.

Functional and Presentation Currency

These financial statements are presented in Canadian dollars (“ CAD ”), which is the Company’s presentation currency and is consistent with the functional currency of the Company. The functional currency of TME and CAC is Euro.

Measurement Uncertainty

The preparation of the financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying values of assets and liabilities that are not readily apparent from other resources. Actual results may differ from these estimates.

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The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.

Judgment is required in determining whether deferred tax assets are recognized on the statement of financial position. The discount rate used to determine the liability component of the convertible debentures is also subject to estimate. Measurement inputs used in determining the fair value of stock options are also subject to estimate by Management. The incremental borrowing rates used to determine the carrying value of the right-of-use assets and lease obligations are also subject to management estimate.

Off-Balance Sheet Arrangements and Financing Facilities

As of March 31, 2021, the Company, through TME, received the following support from banks and financial institutions:

An aggregate credit line up to a maximum of €500,000 (CAD $737,950) for advanced payment refunds for its French customers that are due on demand, bear weighted average interest at 1.2% per annum (December 31, 2020 – limit of €500,000 at 1.2% per annum). These facilities will be used when the Company must produce letters of guarantees of restitution of deposit, good execution of contract or retention of guarantee for its French customers. As at March 31, 2021, CAD $nil (€nil) was outstanding on the facility (December 31, 2020 – CAD $nil (€nil)).

Credit facility up to a maximum of €550,000 (CAD $811,745), secured by 10% of the amount in factoring, due on the maturity of invoices issued to its customers and bears weighted average interest at 3-month Euribor rate plus 2.51% per annum. (December 31, 2020 – €550,000 at 3-month Euribor rate plus 2.51% per annum). This facility will be used to finance its working capital prior to the payment receipt from its French customers. As at March 31, 2021, CAD $nil (€nil) was outstanding on this facility (December 31, 2020- CAD $nil (€nil)).

Credit facility for an aggregated amount of €1,350,000 (CAD $1,992,465), unsecured, due on the maturity of invoices issued to its customers and bears weighted average interest at 1-month Euribor rate plus 1.80% per annum. (December 31, 2020 – €1,350,000 at 1-month Euribor rate plus 1.80% per annum). This facility will be used to finance its working capital prior to the delivery of goods to its foreign customers. As at March 31, 2021, CAD $nil (€nil) was outstanding on this facility (December 31, 2020 – CAD $nil (€nil)).

An aggregate bank guarantees up to a maximum of €1,100,000 (CAD $1,623,490) for advanced payment refunds for its foreign customers that are due on demand, bear weighted average interest at 1.72% per annum (December 31, 2020 – €1,100,000 at 1.72% per annum). These facilities will be used when the Company must produce letters of guarantees of restitution of deposit, good execution of contract or retention of guarantee for its foreign customers. As at March 31, 2021, there were $213,710 (€144,800) guarantees outstanding (December 31, 2020 - $174,497 (€111,800)).

An aggregate foreign exchange cover line up to a maximum of €4,500,000 (CAD $76,641,550) (December 31, 2020 – €4,500,000).

Import credit line up to a maximum of €nil (CAD $nil) to facilitate the negotiation of the purchases from suppliers by offering the certainty of payment through the drafting of an import credit line contract. (December 31, 2020 – €100,000) Each party is required to comply with the obligations outlined in the contract. The import credit line bears interest at 1.25% per annum. This facility was made available during 2020 and was cancelled during the year. As at March 31, 2021, CAD $nil (€nil) was outstanding on this facility (December 31, 2020– CAD $nil (€nil)).

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Transaction Between Related Parties

During the first quarter of 2021, the Company has the following related party transactions:

	Three months	Three months
	ended March 31,	ended March 31,
	2021	2020
Stock based compensation to directors and officers of the
Company	$2,532	$10,242
Director fees to non-executive directors	2,625	2,625
Salaries	234,185	242,845

The following is a summary of the Company’s other related party transactions during the period:

	Three months	Three months
	ended March 31,	ended March 31,
	2021	2020
Real property leases paid to a company controlled by a director
of the Company	$35,228	$28,528
Finance cost paid or accrued to a company controlled by a director of the Company	65,445	59,881
Finance cost paid or accrued to two of the directors of the Company	15,690	45,541
Stock based compensation to companies controlled by directors of the Company	157,808	159,562
Professional fees paid to a company controlled by a director of the Company	3,548	3,897
Commissions paid or accrued to the two companies controlled by two directors of the Company	18,992	71,374

The following is a summary of financial instruments held by related parties during the period:

	Three months ended March 31, 2021	December 31, 2020
Receivable from a company controlled by a director of the
Company	$292,151	$308,957
Convertible debentures issued to a company controlled by a director of the Company	2,301,353	2,391,863
Long term borrowing advanced from a company controlled by a director of the Company	1,693,126	1,896,321
Long term borrowing advanced from a company controlled by an officer of the Company	908,641	900,120
Convertible debentures issued to two of the directors of the Company	354,041	334,897

Changes in Accounting Policies

None.

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Disclosure of Share Information

Shares outstanding:

110,233,610 commons shares outstanding as at the date hereof

Stock options outstanding:

2,400,000 stock options to purchase common shares are outstanding as at the date hereof

APPROVAL

The Board of Directors have reviewed and approved this document pursuant to its mandate and charter.