Cymat Technologies : MD&A for the year ended April 30 2020

Cymat Technologies Ltd.

Management's Discussion and Analysis ("MD&A")

As at April 30, 2020

August 27, 2020

The following discussion and analysis of Cymat Technologies Ltd. ["Cymat" or the "Company"] financial condition and results of operations should be read in conjunction with the audited comparative consolidated financial statements of the Company for the year ended April 30, 2020, and the associated notes to the consolidated financial statements.

The Company prepares its consolidated financial statements in accordance with International Financial Reporting Standards ("IFRS") as set out in the Handbook of The Chartered Professional Accountants of Canada ("CPA Handbook"). All financial information contained in this MD&A and in the audited consolidated financial statements has been prepared in accordance with IFRS.

This MD&A is dated August 27, 2020 and all amounts herein are denominated in Canadian dollars, unless otherwise stated. This MD&A reflects the accounts of Cymat and its wholly-owned subsidiary, ALU-MMC Hungary, Zrt.

The information below contains certain forward-looking statements that reflect the current view of Cymat with respect to future events and financial performance. Wherever used, the words "may", "will", "anticipate", "intend", "expect", "plan", "believe", and similar expressions identify forward-looking statements. Any such forward-looking statements are subject to risks and uncertainties, and the Company's actual results of operations could differ materially from historical results or current expectations. The Company will review the forward-looking information in the preparation of the MD&A on a quarterly basis and, where appropriate, provide updated forward-looking statements based on the most current view of Cymat.

1. Company Overview and Business of Company

Cymat was incorporated on June 13, 2006 under the Business Corporations Act (Ontario) and is the successor to Duntroon Energy (formerly Cymat Corp.) which was incorporated on June 30, 1998 under the Business Corporations Act (Ontario).

Cymat develops innovative materials for industry. The Company has worldwide rights, through patents and licenses, to produce Stabilized Aluminum Foam ("SAF"). This ultra-light metallic foam is produced using a proprietary, versatile process in which gas is bubbled into molten-alloyed aluminum containing a dispersion of fine ceramic particles to create foam that is then cast into either flat panels or near-net shapes. The result is a material, which is recyclable, with a wide array of features including very low density, mechanical energy absorption, thermal and acoustic insulation, time and temperature insensitivity and has a relatively low cost of production. The technology is focused on producing products for 4 major markets: automotive, architecture, defense and general industrial markets seeking energy management

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sytems. Cymat markets architectural material under the trademark, "Alusion™" and energy management products under the "SmartMetal™" trademark.

2. Summary of Market and Industry Environment

In December 2019, a new strain of coronavirus ("COVID-19") was reported in Wuhan, China. By March 2020, the World Health Organization ("WHO") had declared COVID-19 to constitute a "Public Health Emergency of International Concern" and had categorized the outbreak as a pandemic. Covid-19 has been, and continues to be, highly disruptive to the global economy and has the potential to negatively impact all of the markets for Cymat's SAF. In addition to the effects of the pandemic on this discussion of the market and industry environment, its impact is also reflected in the below discussions of results of operations (Sections 3 and 6), the going concern uncertainty (Section 7), the use of estimates and judgements (Section 10), risks and uncertainties (Section 13) and the discussion of the Company's outlook (Section 15).

Architecture

The market for architectural and construction materials is characterized by a highly competitive environment with numerous solutions competing for high profile projects. COVID-19 as well as escalating international trade tensions, such as those between the United States and China, has created an environment of global trade uncertainty. Such volatility can have unfavourable effects upon the timing and budgets for large architectural projects. While Cymat's architectural line of products is not among the lowest cost cladding options, its light weight can lead to significant construction savings as it may require less robust, hence less expensive, hanging systems. Europe remains a key market for AlusionTM, some high-profile orders are expected for the United States, and the Far East continues to demonstrate increased demand for Cymat's architectural line of products.

Defense and Law Enforcement

Regions of conflict and unrest continue to present military forces and homeland law enforcement agencies with challenges for the safe movement of personnel and the deployment of valuable assets. The asymmetrical nature of these conflicts presents unique threats such as those created by Improvised Explosive Devices ("IED's"). Lightweight, high-energy absorption materials such as SmartMetal are elements being used by military and police forces and OEM manufacturers to counter these IED threats. SmartMetal™ blast mitigation capabilities, its high strength to weight ratio and its ability to maintain its physical properties over time and over a wide temperature range, make it an attractive solution for blast mitigation applications. Test results have confirmed that the use of SmartMetal™, in conjunction with other materials, offers a lower weight solution that significantly reduces mortality and serious injury for the vehicle occupants. While threats from these types of attacks continue, the sales cycle associated with these types of customers is a lengthy one. Often the process that commences with vehicle system design, progresses through system validation and testing, the competitive bidding and contract awarding process and finally arrives at budget allocation and purchase approval can span several years. COVID-19 relief efforts have placed significant pressure on government budgets; accordingly military and police budgets continue to be challenged. On the other hand, government adoption of infrastructure stimulus to combat the economic effects of COVID-19 may have potential to positively impact large defense equipment orders.

SmartMetal™'s unique properties also make it attractive for use in other innovative defense and law enforcement applications such as non-lethal bullets. Non-lethal bullets are primarily used for crowd control and as a deterrent in both civilian and military situations where less-than-lethal force is determined to be the best course of action. While rubber bullets have traditionally been used in these situations, there have been numerous instances where their use has resulted in serious physical harm and fatalities. As such, there is significant interest by law enforcement agencies and military forces around the world to find a suitable replacement. Cymat's customer, Nobel Sport, has received certification from the

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French Armed Forces for their non-lethal bullets that feature SmartMetalTM as a key component. Nobel Sport's international marketing efforts for this new product are ongoing.

Automotive

The automotive industry has experienced a substantial sales decline as a result of the pandemic. Despite the recent sales decline, automotive original equipment manufacturers ("OEMs") continue to focus efforts on developing electric and other green powered vehicles. Vehicle light-weighting is a key element in the successful execution of green vehicle design. These light-weighting projects have the potential to result in the addition of new materials, such as SAF, into the automotive design.

Additionally, crash performance standards for automotives continue to be strengthened. In order to meet these toughened safety standards, automotive OEM's continue to seek out innovative energy absorption design solutions. SmartMetalTM's energy absorption profile, combined with its low weight, can present an attractive solution for such crash management systems. In addition to its flat-panel SAF production line, Cymat has developed proprietary Low Pressure Foam Casting ("LPFCTM") aluminum foam technology which can produce near net shaped components that, among other uses, may have utility in automotive industry applications.

3. Operating Highlights and Year in Review Architecture

Sales of AlusionTM for fiscal 2020 were approximately $1.6 million compared to AlusionTM sales of $2.5 million for fiscal 2019. As the result of COVID-19, Asian sales orders for AlusionTM, in the approximate amount of $1.5 million, that were expected in the final part of fiscal 2020 were not realized.

Blast Mitigation and Energy Absorption

SmartMetal™ sales for fiscal 2020 were approximately $94,000 compared to sales of $177,000 for fiscal 2019. Business development initiatives regarding blast protection kits for military personnel transport vehicles and development of markets for non-lethal projectiles employing SmartMetalTM remained ongoing during fiscal 2020.

Automotive

Although not significantly represented in annual sales, Cymat continued its efforts to develop a market for SmartMetalTM within the automotive industry including applications for SmartMetalTM relating to crash management systems and vehicle light-weighting.

Other Highlights

During fiscal 2020 Cymat raised proceeds of $1.4 million from the private placement of equity.

Under the Government of Canada's Steel and Aluminum Initiative as administered by the Federal Economic Development Agency for Southern Ontario, Cymat received a grant of $157,000.

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4. Selected Financial Information

The following table presents selected annual financial information for the three most recent fiscal years, prepared in accordance with IFRS.

Selected Financial Information by Fiscal Year

All Items in $ 000's, except Net Loss per Share

The following tables present selected quarterly financial information for the eight most recent quarters for the period ended April 30, 2020.

Selected Financial Information by Fiscal Quarter

All Items in $ 000's, except Net Loss per Share

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5. Financial Condition

The following table presents significant changes in the Company's financial position from April 30, 2019 to April 30, 2020.

Cash and cash equivalents increase of $70,000: See Liquidity and Capital Resources section for an explanation of the change in cash and cash equivalents for fiscal 2020.

Restricted cash decrease of $1,000: Restricted cash is comprised of cash held in a Hungarian financial institution as the result of the incorporation of ALU-MMC Hungary Zrt. The decrease is a result of the payment of administrative expenses.

Trade and other receivables increase of $97,000: The increase in receivables was primarily the result of government grant/subsidy receivables of $121,000 at the end of fiscal 2020. No such government receivables existed at the end of fiscal 2019.

Inventory decrease of $36,000: The decrease in inventory is primarily the result of the expensing of research and development related inventory of $25,000.

Property, plant and equipment increase of $999,000: The change in accounting policy for leases created a right-of-use asset for the Company's building that had a net carrying value of $1,010,000 at the end of fiscal 2020. Other changes resulted from the purchase of production equipment ($48,000), offset by depreciation expense ($59,000).

Payables increase of $148,000: The increase in payables was primarily the result of an increase in unpaid royalties and an increase in sales commission payable.

Deferred revenue decrease of $72,000: Deferred revenue decreased as a result of the relatively higher volume of to orders shipping immediately after the fiscal 2019 year end.

Accrued royalties decrease of $65,000: The decrease was the result of a fair value adjustment recorded to reflect the present value of the estimated future royalty stream. The use of a higher discount rate reflecting the increased risk adjustment associate with the COVID-19 pandemic was the main driver behind the decrease.

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