AirBoss of America
Annual Report 2022

Plain-text annual report

CAPITALIZING ON EXPANDED CAPABILITIES 2022 ANNUAL REPORT TABLE OF CONTENTS 01 At a Glance 02 Message to Shareholders 04 AirBoss Defense Group 06 Airboss Rubber Solutions 08 AirBoss Engineered Products 10 Management’s Discussion and Analysis of Financial Condition and Results of Operations 25 Management’s Responsibility for Financial Reporting 26 Auditor’s Report to the Shareholders of AirBoss of America Corp. 29 Consolidated Financial Statements 33 Notes to Consolidated Financial Statements 64 Board of Directors 65 Corporate Information AT A GLANCE 2022 PRESENTED MANY CHALLENGES FOR AIRBOSS AS WE FOCUSED ON MANAGING CORPORATE AND OPERATIONAL RISKS WHILE EXECUTING OUR STRATEGIC PLAN TO DELIVER STRONG RESULTS FROM OUR EXPANDED OPERATING PLATFORM. AS OUR TEAM NAVIGATED RECURRING OBSTACLES RELATED TO SUPPLY CHAIN AND LOGISTICS, WE BEGAN TO SEE MODEST RELIEF FROM PREVIOUS RECORD RAW MATERIAL PRICE INCREASES. AIRBOSS MADE IMPORTANT PROGRESS IN SECURING NEW CONTRACT WINS AND SUCCESSFULLY RE-POSITIONING SPECIFIC BUSINESS UNITS FOR IMPROVED CONTRIBUTIONS TO OUR FINANCIAL PERFORMANCE. HIGHLIGHTS (cid:129) Record annual revenue and gross margins from Rubber Solutions supported by improved operating efficiency, enhanced compounding capabilities, and expanded geographic reach (cid:129) Completed our integration of Ace Elastomer, surpassing initial performance expectations and solidifying our leading role in the North American color and specialty rubber compounding space (cid:129) Secured new contract awards within our Defense Group to manufacture and supply Husky 2G vehicles (cid:129) Leveraging our Made in America capabilities, secured an agreement within our Defense Group to support the delivery of COVID testing kits to the Defense Logistics Agency in the U.S. (cid:129) Concluded our first major competition for our Blast Gauge, which was developed to monitor impulse noise and concussive impacts, in the fourth quarter of 2022 (cid:129) AirBoss Engineered Products successfully concluded contract negotiations with key customers and suppliers, the impacts of which were evident in Q4 segmented results NET SALES1 ($MM) ADJUSTED EBITDA1, 2 ($MM) PROFIT TO SHAREHOLDERS ($MM) $586.9 $501.6 $477.2 10% CAGR1 $328.1 $316.6 $700 $600 $500 $400 $300 $200 $100 $0 $105.6 $80.3 $45.3 14% CAGR1 $32.2 $26.1 $120 $100 $80 $60 $40 $20 $0 $70 $60 $50 $40 $30 $20 $10 $0 -$10 -$20 -$30 -$40 $46.7 $33.7 $47.4 $36.1 $10.2 $8.5 $8.9 $10.9 $12.6 -$31.9 2018 2019 2020 2021 2022 2018 2019 2020 2021 2022 2018 2019 2020 2021 2022 2018 2019 2020 2021 2022 1. CAGRs are calculated for the period 2018 – 2022 inclusive. 2. Adjusted EBITDA and Adjusted Profit are non-IFRS financial measures. Please see our financial disclosures below and on page 12 of this Annual Report for further information. In thousands of US dollars EBITDA: Profit Finance costs Depreciation, amortization, and impairment Income tax expense EBITDA ADG transaction fees Insurance provision Adjusted EBITDA 2019 2018 10,219 3,831 8,536 2,921 13,716 10,966 4,316 3,252 32,082 25,675 390 1,401 (1,287) – 32,196 26,065 In thousands of US dollars Adjusted profit: Profit ADG transaction fees Insurance provision Adjusted profit 2019 2018 ADJUSTED PROFIT2 10,219 1,401 (672) 10,948 8,536 390 – 8,926 A N N U A L R E P O R T 11 MESSAGE TO SHAREHOLDERS ON THE HEELS OF A RECORD YEAR OF FINANCIAL PERFORMANCE AND CORPORATE GROWTH IN 2021, OUR FOCUS THROUGHOUT AIRBOSS IN 2022 WAS ON INTEGRATION AND EXECUTION FROM OUR NEWLY EXPANDED OPERATING PLATFORM. OUR STRATEGIC OBJECTIVES CENTERED ON USING OUR STRENGTHENED PRODUCTION CAPABILITIES AND INNOVATIVE PRODUCT PORTFOLIO TO SECURE NEW BUSINESS AND ADDING CUSTOMER RELATIONSHIPS TO DIVERSIFY OUR MARKET ACCESS. AT THE SAME TIME, WE CONTINUED TO MANAGE WITHIN THE CHALLENGING BUSINESS ENVIRONMENT FACED BY GLOBAL MARKETS – ONGOING DISRUPTIONS TO THE GLOBAL SUPPLY CHAIN AND PERSISTENT, HIGH LEVELS OF COST INFLATION CREATED A BACKDROP OF BUSINESS UNCERTAINTY. As we felt the impact of these business conditions coupled with a post-pandemic decline in the nitrile glove market, it underscored the importance of our work to improve the factors over which we had a degree of control. Throughout our business, we accelerated efforts to capture production and cost efficiencies, while successfully completing steps to strengthen the positioning and profitability within specific business units. We are pleased to have made meaningful strategic advancements across many parts of our business in 2022. CAPITALIZING ON OUR CAPABILITIES WITHIN RUBBER SOLUTIONS Past investments made within AirBoss Rubber Solutions (“ARS”) to improve automation and efficiency and expand the array of compounds and colors available to our customers led to record revenue and gross margin contributions in 2022. These performance improvements were supported by production capacity additions, new compounding expertise, and expanded access to key markets in the United States. Within 2022, the ARS team focused on the seamless integration of our 2 acquisition of Ace Elastomer. Since our acquisition in 2021, the value added by the Ace team has surpassed our expectations and has helped to solidify our leading role in the North American color and specialty rubber compounding space. Ace’s rubber-compounding capabilities and geographic reach combined with the skills and talent added to our team have been an excellent addition to AirBoss. From an operations and execution perspective, we are grateful to the entire ARS team for the strong improvements made in our business practices, and we believe we are well-equipped to carry these capabilities into the coming year and beyond. The longer-term priorities for our ARS team remain intact – to deliver growth through our positioning as a leading specialty supplier and supply chain partner in North America. ADG POSITIONED TO PROVIDE VALUABLE SUPPORT TO THE FRONT LINES Within our AirBoss Defense Group, or “ADG”, while the cadence of contract awards meant that our annual sales performance did not match the record sales from this business segment in 2021, we regained important momentum in the latter part of 2022 with new contract awards. ADG’s track record of on-time, on-budget execution using Made in America production capabilities supported its success in securing new business that demonstrates the diverse array of technologies provided to customers. In December, we announced an agreement to support the delivery of COVID testing kits to the Defense Logistics Agency in the U.S. These kits are expected to be a strategic part of the U.S. Military’s ability to effectively respond to future national emergencies. Earlier in the fourth quarter of 2022, we also announced new contracts to manufacture and supply Husky 2G vehicles. These counter-improvised explosive device, or C-IED vehicles, are equipped with industry-recognized route clearance and threat detection systems, which are a key part of ADG’s suite of survivability solutions. We believe these contract wins are tangible evidence of the technology, manufacturing, and execution strengths we bring to our role as a key supplier to large-scale customers. These awards also show our commitment to cultivating industry partnerships to advance our technology offerings and market access. As we exited 2021, we were clear in our commitment to working with AEPs partners and customers to resume a more stable financial footing for its continued operation. The strong long- term relationships built in this business provided essential support to our efforts to modify our agreements with key customers in a manner that allowed for improved recognition of rapidly rising costs related to personnel, logistics, and raw materials. We are excited to report the successful conclusion of this contract renewal process, which along with our cost improvement and market diversification initiatives are expected to support improved financial performance within AEP in the future. LOOKING FORWARD AirBoss continues to press ahead against a backdrop of general macroeconomic uncertainty, which we expect will have varying degrees of impact on customer demand levels in the coming year. Throughout our business segments, the final weeks of 2022 and the start of 2023 showed signs of slowing business activity, while expert projections of a potential economic slowdown remain divided. For our business units, productivity for ARS was strong in 2022, so a downturn in customer demand could potentially affect its results and offset our efforts to increase our throughput and gain market share. Having now re-gained stable footing for AEP, we continue to see opportunities to improve its financial performance, both through increased sales to our core customers and through further expansion of our opportunity set into non-automotive applications. For ADG, we expect that the main market drivers for its technology solutions are intact, and we are optimistic that our clients remain focused on advancing their bid processes and awarding new business following multiple delays as governments grappled with their response to the Russian invasion of Ukraine. On the M&A front, we continue to monitor potential acquisitions with a focus on building our product portfolio, advancing our technical capabilities, and expanding our geographic reach. During 2022, our operations team was focused on completing the integration of BlackBox Biometrics, or B3, into the ADG operating platform. B3 has brought valuable engineering and technical bench strength along with access to product innovations focused on noise and impact detection and monitoring, which are now core parts of ADG’s suite of survivability solutions. Looking forward, we believe ADG remains competitively positioned to win new survivability and healthcare sales opportunities. In 2022, our AirBoss 100 Half Mask Respirator, which is a more cost-effective and portable alternative to competing products, underwent field testing, and customer-specific modifications were made. Our Blast Gauge, which was developed to monitor over-pressure events, concluded its first major competition with the submission of final prototypes in the fourth quarter of 2022. These technologies along with others within ADG diversify the solutions we can provide and should competitively position this business to secure new business in the coming year. RENEWED OPPORTUNITIES WITHIN ENGINEERED PRODUCTS Having faced multiple challenges over the 2021 and 2022 timeframe, we are confident that our Engineered Products business has taken valuable strategic steps to improve its financial performance. AEP experienced acute problems from rapidly escalating raw material prices, supply chain disruptions, and specific issues due to global shortages of the computer chips required by auto OEMs. Similar to our ARS business, AEP’s operations team focused on upgrading capabilities and expanding sales opportunities. Its use of automation technology increased, efforts to reduce operating expenses accelerated, and innovative new products were introduced to diversify its customer reach into new non- automotive industries and enhance margins. The changes made by our AEP team in 2022 have meaningfully improved the positioning and resilience of this business. A N N U A L R E P O R T In closing, we have increased confidence that we have re-gained the high ground for each of our businesses from a product, production, and execution perspective. From this improved vantage point, we will focus on leveraging our core expertise to win new business and expand our market share. We want to thank our shareholders for their support as we continue our work to strengthen and grow our business. Our thanks also go to our Board of Directors for their commitment to the strategic direction of AirBoss. And finally, we extend our thanks to our employees for their dedication to building our capabilities, resilience, and ability to capture new opportunities, all while cultivating a safe, diverse, and inclusive working environment. These factors are at the core of AirBoss’ ability to succeed in the future. P.G. Schoch Chairman and CEO Chris Bitsakakis President and COO 3 AirBoss Defense Group (“ADG”) is a diversified developer, manufacturer, and supplier of survivability solutions for military, first response and healthcare applications. Our products range from personal protective equipment (“PPE”) for military and healthcare settings; to masks, boots, gloves, shelters and isolation products for industrial and military-grade protection against chemical, biological, radioactivity and nuclear (“CBRN”) threats; and blast monitoring and route clearance solutions for military personnel on active duty. BLACKBOX BIOMETRICS ADG has taken important steps to fortify its competitive positioning in the survivability solutions market. With its 2021 acquisition of Black Box Biometrics®, Inc. (“B3”), ADG gained skills and products including the Blast Gauge® System of lightweight, wearable blast overpressure sensors, which has been outfitted on Special Forces, Army and SWAT units across the U.S. We believe significant potential exists for deployment of this innovative technology, both domestically and around the world. As global militaries advance their practices and the assets they rely on during active combat and training exercises, it is essential to ensure the safe ongoing use of the tools required to get the job done. If not monitored and managed, blast overpressure induced by many modern weapon systems can negatively impact service member health and overall force readiness. The Blast Gauge® System is operationally proven to help modern militaries safely and effectively employ these critical combat capabilities. Through B3, ADG also gained expertise in the next generation of detection and monitoring solutions, including those for impulse noise (e.g. medium caliber firearms) and concussive impact (e.g. full body contact sports like football, hockey, etc.). 4 THE HUSKY 2G VEHICLE SYSTEMS IN THE FIELD ADG’s Husky 2G is a blast-survivable, mission-configurable vehicle platform that employs a range of radar and sensor systems for countermine and non- conventional explosive detection. Approximately 1,500 Husky systems are deployed to military customers globally and have survived more than 8,000 blasts without a single soldier fatality. In November, ADG announced the latest order for our Husky 2G vehicles, along with comprehensive training and sustainment supplies. Through these contracts, ADG will provide critical, best-in-class route clearance and threat detection and interrogation capabilities that enable a rapid response to the growing international demand for survivability solutions delivered by ADG. The two-operator Husky 2G clearance vehicle was developed to meet the operational requirement for longer, more complex, mounted clearance missions and the employment of more sophisticated vehicle payloads. Built with a unique V-shaped hull and modular design, the Husky 2G C-IED protects operators from blast impacts, small arms fire, and challenging terrain while supporting sensor systems for threat detection, identification, and mitigation. HUSKY 2G THE HUSKY 2G CAN BE EQUIPPED WITH A FULL COMPLEMENT OF DETECTION SYSTEMS AND PERIPHERY SUBSYSTEMS INCLUDING: GROUND PENETRATING RADAR (“GPR”) M20 INTERROGATION ARMS ROLLOVER DETECTION SYSTEMS 360 CAMERA SYSTEM RPG-DEFEAT NETTING ADG’S 2022 LAUNCH OF THE AIRBOSS 100 In May of 2022, ADG introduced its AirBoss 100™ Half Mask Respirator ("AirBoss 100"), with applications in industries including healthcare and medical providers, law enforcement, and first responders. Approved by the National Institute of Occupational Safety and Health (NIOSH), the AirBoss 100 is lightweight and comfortable, reducing the burden typically associated with long-term respirator wear. Some of the key features of the AirBoss 100 include superior filtration and protection, low breathing resistance, comfortable extended wear, and low-cost cleaning and maintenance. To augment our current business platform, ADG’s strategic focus is on opportunities to broaden our suite of survivability solutions and complement our existing product offering, targeting medical professionals, first responders, special tactics teams, and militaries around the globe. A N N U A L R E P O R T “AirBoss Defense Group is growing its worldwide leadership in survivability solutions, ranging from IED detection to high-risk environment personal protective equipment. The Husky 2G is a cornerstone product in our portfolio of survivability solutions and is the most survivable vehicle available on the battlefield, providing unparalleled route clearance capabilities to U.S allies around the world.” Patrick Callahan, CEO of AirBoss Defense Group. ADG NET SALES ($MM) ADG GROSS PROFIT ($MM) $116.7 $112.0 $329.9 $302.3 $133.2 $350 $300 $250 $200 $150 $100 $85.6 $50 $0 $140 $120 $100 $80 $60 $40 $20 $0 -$20 $21.8 -$11.0 2019 2020 2021 2022 2019 2020 2021 2022 5 AirBoss Rubber Solutions (“ARS”) is North America’s second-largest custom compounder with more than 500 million pounds of annual capacity. ARS produces over 2,000 proprietary compounds for customers in the industrial, defense, and resource sectors, for use in tires, rollers, conveyor belting, and numerous other commercial applications. ARS’ strategic focus is on expanding its compounding capabilities with an emphasis on high-value compounds and specialty, high-performance elastomers; broadening its access to key end-use markets in North America; and augmenting its market position through an emphasis on technical expertise and innovation. 500 million pounds annual capacity 2,000 proprietary compounds 6 SOLIDIFYING OUR LEADERSHIP IN RUBBER COMPOUNDING Our focus on operating efficiency combined with continued efforts to strengthen our technical expertise and manufacturing capabilities contributed to ARS’ delivery of record financial performance in 2022. A combination of organic investments in our technical skills and production assets, our August 2021 acquisition of Ace Elastomer, and a focus on leveraging the capabilities of our newly expanded platform each played an important role in ARS’ record financial performance during the year. capabilities. As well, investments in new equipment have supported gains in operating efficiency through higher levels of production automation, which have enabled larger batch sizes and shorter production cycles. The addition of white/colour and tilt mixing lines in our Kitchener facility has strengthened AirBoss’ ability to provide U.S.-based customers with domestically produced color and specialty compounded rubber products. The overall expansion of ARS has created important new opportunities to capture operational efficiencies and reduce costs across our larger platform, with improved raw materials purchasing power and enhanced manufacturing and material handling Alongside this growth, recent investments in our R&D technical Center and Laboratory in our Kitchener, ON facility also ensured that as we expanded production into new colours, products, and formulations, we successfully maintained high levels of quality and consistency in our finished products. Ace has played an important part in the strategic efforts within ARS. Through the Ace acquisition, we gained valuable access to its leading position in the design, formulation development and custom mixing of proprietary elastomer compounds across the natural and synthetic polymer range, including a variety of custom mix compounds. In addition to offering custom molding and extrusion applications, Ace is a market leader in rubber rollers and serves the belting and printing segments. Geographically, Ace expanded ARS’ U.S. presence in the Southeast while adding new access in the Midwest, improving proximity to key markets and customers. Given these factors, Ace is closely aligned with ARS’s long-term strategy of diversifying our core compounding capabilities and expanding our geographic presence. ENHANCING OUR LONG-TERM POSITIONING IN THE RUBBER BUSINESS From its expanded platform, AirBoss remains focused on maintaining its leadership position in high-volume black rubber and further expanding its capabilities in higher- margin white/colour compounds and specialty, high-performance elastomers. From an organic perspective, our efforts will center on ongoing research and development, industry partnerships for applied development of customer solutions, and new investment to improve our manufacturing capabilities. We expect that over the long- term our organic growth initiatives will continue to enable us to grow volumes at rates exceeding industry levels, and our prioritization of operational efficiency will support the price competitiveness of our products. We also continue to believe in the value to be gained through acquisitions - accessing our available liquidity to pursue accretive acquisitions to expand our regional footprint, add expertise, and build our industry relationships and product portfolio. Our longer-term strategy is to continue our pursuit of further growth of ARS using these same two primary channels. ARS NET SALES ($MM) ARS GROSS PROFIT ($MM) $33.1 $20.5 $20.8 $18.6 $236.1 $171.6 $137.5 $119.1 $250 $225 $200 $175 $150 $125 $100 $75 $50 $25 $0 $35 $30 $25 $20 $15 $10 $5 $0 2019 2020 2021 2022 2019 2020 2021 2022 7 A N N U A L R E P O R T As one of the industry’s leading custom molders, AirBoss Engineered Products (“AEP”) manufactures customized rubber-based products used in noise, vibration, and harshness (NVH) reduction applications across the automotive, electric vehicle, heavy truck & off-highway, and defense industries, in addition to industrial and commercial products for non-automotive manufacturers. AEP’s research & development, design, and manufacturing resources are headquartered at our US-based location in Auburn Hills, Michigan. AEP NET SALES ($MM) AEP GROSS PROFIT ($MM) $6.5 $5.3 $132.5 $116.6 $114.6 $135 $130 $124.9 $125 $120 $115 $110 $105 $7 $6 $5 $4 $3 $2 $1 $0 -$1 -$2 $2.0 -$1.2 2019 2020 2021 2022 2019 2020 2021 2022 8 PERSEVERANCE AGAINST A CHALLENGING BUSINESS BACKDROP Over the past two years, global businesses have contended with operational impacts from several sources including the COVID-19 pandemic, rising inflation, global supply chain disruptions, and the effects of higher borrowing rates. For AEP, these market factors placed upward pressure on commodity prices, reduced supply of key inputs, escalated labour cost and availability issues, and led to ongoing logistics challenges. These factors were also having a pronounced effect on AEP’s key customers and supply chain partners, which added to the problems faced by this business segment. Following the 2020/2021 timeframe during which AEP was most significantly impacted by these business challenges, efforts to pursue operating efficiencies, expand and improve our product portfolio, and renew long-standing customer agreements led to positive momentum in the financial performance of AEP through the end of 2022. The work we completed with AEP’s long- standing partners in the automotive industry was a prime example of the issues we continued to manage and the strategies being employed to manage them. AEP continued its work to improve product availability, drive higher levels of production efficiency, and use our ability to innovate to address changing customer requirements. Efforts focused on new engineering solutions to create production efficiencies and offset input cost increases, and leveraging the expertise of our ARS material science team to introduce compounds that improve performance while reducing risks related to raw materials availability and pricing. AEP’s U.S. manufacturing base also provided essential support to efforts to localize the production of key parts from overseas, which has led to new business wins. Our investments in new injection presses and two robotic work cells increased our throughput and reduced our labour costs. These internal initiatives and collaboration with supply chain partners have meaningfully strengthened the long-term capabilities and competitiveness of AEP. ADVANCING OUR PARTNERSHIPS AND PRODUCTS FOR GROWTH The strategic goals for AEP include expanding our market access and product portfolio to while establishing and maintaining supplier and customer agreements that create long-term opportunities and mitigate risks for those involved. AEP continues to be a leading supplier to the automotive industry with a focus on the passenger automobile and light truck sectors – this is a core part of our business. As part our overall plan to deliver stable, long-term growth, AirBoss continues to investigate ways to diversify its business toward solutions for companies participating in new end markets, including military, heavy truck, bus, electric vehicle, construction, agriculture and recreational vehicles. Led by management team members within AEP that are specifically tasked with expanding our non-automotive presence, commercial sales of our first non-automotive product commenced in 2020, and work continued on product applications in the semi-truck as well as other markets market in 2022. A N N U A L R E P O R T Leveraging AirBoss’ market presence in serving military customers, AEP has also launched new parts for military vehicles. Our first non-vehicle products, including AEP’s RamGuard which is a reinforced guard for industrial racking, have also been introduced. We remain committed to increasing AEP’s sales success in non-automotive applications over the longer term. In 2022, essential progress was made toward our goal to establish supplier and customer agreements that create long-term opportunities while mitigating risk. AEP successfully concluded a series of arrangements with key suppliers and customers that serve to strengthen our financial situation, and management expects that these negotiations should support the delivery of improved financial results going forward. For AEP, our long-term strategy remains focused on capturing operational improvements and using our core technical and manufacturing capabilities to diversify our product lines and strengthen our presence in sectors adjacent to the automotive space, all in support of strengthening our leading market position. 9 2022 Management’s Discussion and Analysis of Financial Condition and Results of Operations The following Management’s Discussion and Analysis of Financial Condition and Results of Operations of AirBoss of America Corp. (“AirBoss” or the “Company”) has been prepared as of March 13, 2023 and should be read in conjunction with the Consolidated Financial Statements and Notes for the year ended December 31, 2022 prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board. All dollar amounts are shown in thousands of US dollars, except per share amounts, unless otherwise specified. Additional information regarding the Company, including its Annual Information Form, can be found on SEDAR at www.sedar.com and on the Company’s website at www.airboss.com. FORWARD-LOOKING INFORMATION Certain statements contained or incorporated by reference herein, including those that express management’s expectations or estimates of future developments or AirBoss’ future performance, constitute “forward-looking information” or “forward-looking statements” within the meaning of applicable securities laws, and can generally be identified by words such as “will”, “may”, “could” “expects”, “believes”, “anticipates”, “forecasts”, “plans”, “intends” or similar expressions. These statements are not historical facts but instead represent management’s expectations, estimates and projections regarding future events and performance. Statements containing forward-looking information are necessarily based upon a number of opinions, estimates and assumptions that, while considered reasonable by management at the time the statements are made, are inherently subject to significant business, economic and competitive risks, uncertainties and contingencies. AirBoss cautions that such forward-looking information involves known and unknown contingencies, uncertainties and other risks that may cause AirBoss’ actual financial results, performance or achievements to be materially different from its estimated future results, performance or achievements expressed or implied by the forward-looking information. Numerous factors could cause actual results to differ materially from those in the forward-looking information, including without limitation: impact of general economic conditions, notably including their impact on demand for rubber solutions and products; dependence on key customers; global defense budgets, notably in the Company’s target markets, and success of the Company in obtaining new or extended defense contracts; cyclical trends in the tire and automotive, construction, mining and retail industries; sufficient availability of raw materials at economical costs; weather conditions affecting raw materials, production and sales; AirBoss’ ability to maintain existing customers or develop new customers in light of increased competition; AirBoss’ ability to successfully integrate acquisitions of other businesses and/or companies or to realize on the anticipated benefits thereof; changes in accounting policies and methods, including uncertainties associated with critical accounting assumptions and estimates; changes in the value of the Canadian dollar relative to the US dollar; changes in tax laws; current and future litigation; ability to obtain financing on acceptable terms; environmental damage and non-compliance with environmental laws and regulations; impact of global health situations; potential product liability and warranty claims and equipment malfunction. The continued COVID-19 pandemic could also negatively impact the Company’s operations and financial results in future periods. There is increased uncertainty associated with future operating assumptions and expectations as compared to prior periods. As such, it is not possible to estimate the impacts the continued COVID-19 pandemic will have on the Company’s financial position or results of operations in future periods. While the direct impacts of COVID-19 are not determinable at this time, the Company has a credit facility that can provide financing up to $250,000. This list is not exhaustive of the factors that may affect any of AirBoss’ forward-looking information. All of the forward-looking information in this Annual Report is expressly qualified by these cautionary statements. Investors are cautioned not to put undue reliance on forward-looking information. All subsequent written and oral forward-looking information attributable to AirBoss or persons acting on its behalf are expressly qualified in their entirety by this notice. Forward-looking information contained herein is made as of the date of this Annual Report and, whether as a result of new information, future events or otherwise, AirBoss disclaims any intent or obligation to update publicly the forward-looking information except as required by applicable laws. Risks and uncertainties about AirBoss’ business are more fully discussed under the heading “Risk Factors” in our most recent Annual Information Form and are otherwise disclosed in our filings with securities regulatory authorities which are available on SEDAR at www.sedar.com. 10 AirBoss of America Corp. MD&A (cont’d) OVERALL PERFORMANCE Recent Highlights (In US dollars) • Record sales and profitability for the Rubber Solutions segment; • AirBoss Defense Group supported initial delivery of COVID-19 test kits to the US Government; • Adjusted EBITDA1 of $45.3 million (excluding the $57.0 million write-down of inventory) on Adjusted Profit1 of $12.6 million and a loss of $31.9 million; • Finished 2022 with a Net Debt to Adjusted EBITDA ratio1 of 2.43x; and • Declared a quarterly dividend of C$0.10 per common share. Selected Financial Information In thousands of US dollars, except share data For years ended December 31 2022 2021 2020 Financial results: Net sales Profit (loss) Profit (loss) attributable to owners of the Company Adjusted Profit attributable to owners of the Company1 Earnings (loss) per share (US$) – Basic – Diluted Adjusted earnings per share1 (US$) – Basic – Diluted EBITDA1 Adjusted EBITDA1 Net cash from operating activities Free cash flow1 Dividends declared per share (CAD$) Capital additions Financial position: Total assets Debt2 Net Debt1 Shareholders’ equity Outstanding shares* *27,092,041 at March 9, 2023 477,155 (31,892) (31,892) 12,558 (1.18) (1.18) 0.46 0.45 (12,769) 45,336 (30,775) (40,964) 0.40 10,212 586,858 46,703 46,703 47,374 1.73 1.65 1.76 1.67 79,591 80,341 2,023 (15,961) 0.37 22,585 501,572 56,262 33,703 36,087 1.40 1.35 1.50 1.45 103,211 105,595 104,399 89,965 0.28 15,606 440,766 143,642 110,083 196,997 27,092,041 443,264 80,563 56,033 235,148 26,993,181 367,369 90,734 (9,718) 194,588 26,908,802 1See Non-IFRS Financial Measures 2Debt includes $15,007 of lease liabilities (2021: $17,399; 2020: $13,482) A N N U A L R E P O R T 11 2022 MD&A (cont’d) NON-IFRS FINANCIAL MEASURES This MD&A is based on consolidated financial statements prepared in accordance with IFRS and uses Non-IFRS Financial Measures. Management believes that these measures provide useful information to investors in measuring the financial performance of the Company. These measures do not have a standardized meaning prescribed by IFRS and therefore they may not be comparable to similarly titled measures presented by other companies and should not be construed as an alternative to other financial measures determined in accordance with IFRS. These terms are not a measure of performance under IFRS and should not be considered in isolation or as a substitute for profit or loss under IFRS. EBITDA and Adjusted EBITDA are non-IFRS measures used to measure the Company's ability to generate cash from operations for debt service, to finance working capital and capital expenditures, potential acquisitions and to pay dividends. EBITDA is defined as earnings before income taxes, finance costs, depreciation, amortization, and impairment costs. Adjusted EBITDA is defined as EBITDA excluding acquisition costs, and non-recurring costs. A reconciliation of profit (loss) to EBITDA and Adjusted EBITDA is below. In thousands of US dollars EBITDA: Profit (loss) Finance costs Depreciation, amortization, and impairment Income tax expense (recovery) EBITDA Acquisition fees Prospectus fees Professional fees related to AEP negotiations Write-down of inventory Adjusted EBITDA 2022 2021 2020 (31,892) 5,738 21,905 (8,520) (12,769) – – 1,104 57,001 45,336 46,703 4,178 20,881 7,829 79,591 445 305 – – 56,262 3,368 21,014 22,567 103,211 2,384 – – – 80,341 105,595 Adjusted profit attributable to owners of the Company is a non-IFRS measure defined as profit (loss) before acquisition costs and non-recurring costs. This measure and Adjusted earnings per share are used to evaluate operating results of the Company. A reconciliation of Profit attributable to owners of the Company to Adjusted profit attributable to owners of the Company and Adjusted earnings per share is below. In thousands of US dollars 2022 2021 2020 Adjusted profit attributable to owners of the Company: Profit (loss) attributable to owners of the Company Acquisition fees Prospectus fees (after tax) Professional fees related to AEP negotiations (after tax) Write-down of inventory (after tax) Adjusted profit attributable to owners of the Company Basic weighted average number of shares outstanding Diluted weighted average number of shares outstanding Adjusted earnings per share (in US dollars): Basic Diluted (31,892) – – 844 43,606 12,558 27,071 28,109 0.46 0.45 46,703 445 226 – – 47,374 26,970 28,298 1.76 1.67 33,703 2,384 – – – 36,087 24,032 24,901 1.50 1.45 Net Debt measures the financial indebtedness of the Company assuming that all cash on hand is used to repay a portion of the outstanding debt. A reconciliation of loans and borrowings to Net Debt is below. In thousands of US dollars Net debt: Loans and borrowings - current Loans and borrowings - non-current Leases included in loans and borrowings Cash and cash equivalent Net debt 2022 2021 2020 2,286 141,356 (15,007) (18,552) 110,083 2,356 78,207 (17,399) (7,131) 56,033 27,083 63,651 (13,482) (86,970) (9,718) The Company has a Net Debt to trailing twelve-month Adjusted EBITDA ratio of 2.43x (2021: 0.70x, 2020: (0.09)x) 12 AirBoss of America Corp. MD&A (cont’d) Free cash flow is a non-IFRS measure used to evaluate cash flow after investing in the maintenance or expansion of the Company's business. It is defined as cash provided by operating activities, less cash expenditures on long-term assets. A reconciliation of net cash provided by (used in) operating activities to free cash flow is below. In thousands of US dollars 2022 2021 2020 Free cash flow: Net cash provided by (used in) operating activities Acquisition of property, plant and equipment Acquisition of intangible assets Proceeds from government grant Proceeds from disposition Free cash flow Basic weighted average number of shares outstanding Diluted weighted average number of shares outstanding Free cash flow per share (in US dollars): Basic Diluted (30,775) (8,800) (1,392) – 3 (40,964) 27,071 27,071 (1.51) (1.51) 2,023 (16,912) (1,081) – 9 (15,961) 26,970 26,970 (0.59) (0.59) 104,399 (14,215) (719) 500 – 89,965 24,032 24,901 3.74 3.61 OVERVIEW 2022 was a challenging year for AirBoss as the company focused on managing risks at the corporate level and in each segment, while continuing to execute our strategic plan to deliver strong operational and financial results. The Company navigated significant and extensive obstacles including supply chain and logistics challenges, while beginning to see some modest improvements from previous record raw material price increases. AirBoss also worked diligently to address and mitigate the impact of uncertain economic conditions on its business and that of its customers during Q4 2022, including risk mitigation plans within its supply chain and a focus on growth initiatives and key investments, while maintaining its focus on a safe work environment for its employees. The Rubber Solutions and AirBoss Defense Group ("ADG") segments experienced residual softness in Q4 2022, while the Engineered Products segment was able to work with its key suppliers and customers to strengthen its financial situation and management expects this segment to deliver improved financial results in 2023. The continued recovery in volumes in 2023 for each segment will remain subject to the ongoing management of the stable and sustained operations of businesses globally, which remains complex and volatile considering evolving and ongoing challenges such as continued inflation pressure and the ongoing war in Ukraine, and successful conversion of opportunities. For the Rubber Solutions segment, 2022 was a record year from a sales and EBITDA perspective, with strong momentum during the first three quarters and some pronounced softness experienced at the end of Q4 2022 as sales were impacted by customers focused on reducing inventory levels. Despite these headwinds, the segment remains focused on executing on its strategy to deliver strong results with specialized products, expanded production of a broader array of compounds (white and color) and enhanced flexibility in attracting and fulfilling new business through identified synergies and margin expansion. As a segment, Rubber Solutions continued to invest in research and development to support enhanced collaboration with customers and remained focused on integrating Ace Elastomer’s (“Ace”) specialized products into its expanding range of solutions. ADG remained focused on its survivability solutions platform while targeting traditional defense contracts in line with its long term strategy of expanding its product portfolio. In addition, ADG continued to work with its key customers to leverage opportunities aligned with its growth initiatives, subject to timing as delays in the conversion of these opportunities continued through the fourth quarter of 2022. In particular, execution of the previously announced awards for Husky 2G vehicles has been delayed due to ongoing global challenges, and management now anticipates execution of those orders to commence by the end of the second quarter of 2023. Management continues to believe that the future sourcing of Personal Protective Equipment ("PPE") for first responders and healthcare professionals will remain a necessity and priority for front line workers, evidenced by the strong pipeline of PPE-related opportunities that ADG is currently pursuing. Within the Engineered Products segment, 2022 finished strong despite being a challenging year given the continued impact of raw material price increases, supply chain challenges and production volatility by the original equipment manufacturers (OEMs). Engineered Products was able to work with its key suppliers and customers to strengthen its financial situation and management expects this segment to deliver improved financial results in 2023. Management also continued to focus on operational improvements including managing variable costs and sustaining a stable hourly workforce, while dealing with volume volatility in the automotive sector and specifically on AirBoss' products for SUV, light truck and mini-van platforms. The segment also continued its focus and commitment to drive efficiencies and best-in-class automation, as well as diversification of its product lines into sectors adjacent to the automotive space. A N N U A L R E P O R T 13 2022 MD&A (cont’d) In December 2022, a statement of claim was filed in the Ontario Superior Court of Justice against AirBoss and several named officers. The applicants under the proceeding seek an order for leave to proceed under the Securities Act (Ontario), certifying the proceeding as a class proceeding and appointing them as representative plaintiffs. The applicants seek, among other relief, a declaration that the Company made misrepresentations contrary to the Securities Act (Ontario) during a period extending from November 9,2021 to September 6, 2022, as well as unspecified damages. No provision for contingent losses has been recognized in the Company’s annual consolidated financial statements. Despite the continued headwinds associated with economic and geopolitical issues, the Company’s longer-term priorities remain intact and include: 1. Growing the core Rubber Solutions segment by positioning it as a specialty supplier of choice in the consolidating North American market, with a focus on building defensible leadership positions in selected compounds; 2. Capitalizing on AirBoss Defense Group’s enhanced scale and capabilities to pursue an array of growth and value-creation opportunities in the broader survivability solutions segment serving both defense and first responder markets; 3. Driving improved performance from Engineered Products through a combination of disciplined cost containment, client relationship expansion, new product development and sector diversification; and 4. Targeting additional acquisition opportunities across the business with a focus on adding new compounds and products, technical capabilities, and geographic reach into selected North American and international markets. AirBoss continues to generate meaningful returns to shareholders with 16 years of dividend payments growing at an average annual rate of 15%, while driving improved profitability and simultaneously investing in core areas of the business to expand a solid foundation that will support long-term growth. RESULTS OF OPERATIONS – For year ended December 31, 2022 compared to 2021 NET SALES Consolidated net sales for the year ended December 31, 2022 decreased by 18.7% to $477,155, compared with 2021 primarily due to ADG's delivery of nitrile gloves to the U.S. Department for Health and Human Services ("HHS") in the prior year, partially offset by increased sales at Rubber Solutions across the majority of customer sectors and improved performance at the Engineered Products segment. In thousands of US dollars Net Sales Increase (decrease) $ Increase (decrease) % 2022 2021 AirBoss Defense Group 133,160 329,916 (196,756) (59.6) Rubber Solutions 236,149 171,553 64,596 37.7 Engineered Products 132,512 116,621 15,891 13.6 Inter-segment net sales (24,666) (31,232) 6,566 (21.0) Total 477,155 586,858 (109,703) (18.7) AirBoss Defense Group Net sales in the AirBoss Defense Group segment decreased by 59.6% to $133,160 in 2022, from $329,916 in 2021. The decrease was primarily due to ADG's delivery of filters and nitrile gloves to HHS in 2021. Rubber Solutions Net sales in the Rubber Solutions segment increased by 37.7%, to $236,149 in 2022, from $171,553 in 2021. This was a record year for Rubber Solutions. Volume was up 3.3% with increases across the majority of sectors despite residual softness due to economic headwinds. Tolling volumes for the year ended December 31, 2022 decreased by 11.9%, compared with 2021. Non-tolling volumes for the year ended December 31, 2022 increased by 6.6% compared with 2021. The overall increase in volume was across several sectors with strong increases in industrial, conveyor belt applications and specialty applications. Engineered Products Net sales in the Engineered Products segment increased by 13.6%, to $132,512 in 2022, from $116,621 in 2021. The increase was due to increased volume and improved arrangements with key suppliers and customers in the SUV, light truck and mini-van platforms compared to the same period in the prior year. 14 AirBoss of America Corp. MD&A (cont’d) GROSS PROFIT For the year ended December 31, 2022, consolidated gross profit was down by $112,167 to $24,131. Gross profit as a percentage of net sales decreased to 5.1% from 23.2% in 2021. The decrease was driven by a $57.0 million non-cash write- down at ADG related to nitrile glove inventory and the delivery of nitrile gloves to HHS in 2021, partially offset by significant improvements at the Rubber Solutions and Engineered Products segments. In thousands of US dollars Gross Profit Increase (decrease) $ % net of sales AirBoss Defense Group (10,970) 116,658 (127,628) (8.2) 35.4 2022 2021 2022 2021 Rubber Solutions 33,084 20,836 12,248 14.0 12.1 Engineered Products 2,017 (1,196) 3,213 1.5 (1.0) Total 24,131 136,298 (112,167) 5.1 23.2 AirBoss Defense Group Gross profit at AirBoss Defense Group for the year ended December 31, 2022 was $(10,970), down $127,628 compared with $116,658 in 2021. The decreases were primarily the result of the $57.0 million inventory write-down and deliveries to HHS in 2021, partially offset by favorable volume in ADG's industrial products line. Rubber Solutions For the year ended December 31, 2022, gross profit for Rubber Solutions was $33,084 (14.0% of net sales), up $12,248 compared to $20,836 (12.1% of net sales) in 2021. The increase was primarily as a result of increased non-tolling volumes compared to the same period in 2021 and managing controllable overhead costs, partially offset by labor and logistics costs and the elimination of government- directed subsidies in the first half of 2021. Engineered Products Gross profit for the year ended December 31, 2022 in the Engineered Products segment was $2,017, up $3,213 compared with $(1,196) in 2021. The increase was primarily a result of increased volume, improved arrangements with Engineered Products’ key suppliers and customers and a continued focus on controllable operational cost containment and managing overhead costs, partially offset by a government-directed wage subsidy in the first half of 2021 and challenges associated with global electronic chip shortages in the automotive sector combined with some residual raw material cost escalations, freight and logistics costs earlier in the year. OPERATING EXPENSES Consolidated operating expenses for the year ended December 31, 2022 decreased by $18,783 to $58,805 compared with 2021. The decrease was primarily due to lower stock-based compensation expenses and lower selling costs, partially offset by higher professional fees related in part to negotiations at AEP, the elimination of government-directed wage subsidies, inclusion of Blackbox Biometrics, Inc. (“B3”) and Ace for a full year, higher administrative costs, and a larger foreign exchange loss. As a percentage of net sales, operating expenses for the year ended December 31, 2022 decreased to 12.3% from 13.2% in 2021. In thousands of US dollars Operating Expenses Increase (decrease) $ % net of sales AirBoss Defense Group 29,051 41,660 (12,609) 21.8 12.6 2022 2021 2022 2021 Rubber Solutions 13,389 9,711 3,678 5.7 5.7 Engineered Products 13,289 10,033 3,256 10.0 8.6 Corporate 3,076 16,184 (13,108) N/A N/A Total 58,805 77,588 (18,783) 12.3 13.2 AirBoss Defense Group AirBoss Defense Group's operating expenses for the year ended December 31, 2022 decreased by 30.3% to $29,051. The decrease was primarily due to lower selling costs and administrative costs, partially offset by the inclusion of B3 for a full year and amortization of B3's intangible assets, the elimination of government-directed wage subsidies, and higher R&D costs. Rubber Solutions Rubber Solutions' operating expenses for the year ended December 31, 2022 increased by 37.9%, to $13,389, compared with $9,711 in 2021. The increase was primarily due to the inclusion of Ace for a full year and amortization of Ace's intangible assets, higher administration costs and the elimination of government-directed wage subsidies, partially offset by a larger foreign exchange gain. Engineered Products Engineered Products' operating expenses for the year ended December 31, 2022 increased by 32.5% to $13,289. The increase was due to higher professional fees, the elimination of government-directed wage subsidies, and higher administration costs. Unallocated Corporate Costs Unallocated corporate costs for the year ended December 31, 2022 decreased by $13,108 from 2021. The decrease was principally due to lower stock-based compensation expenses and lower administration costs, partially offset by higher professional fees, the elimination of government-directed wage subsidies, and a larger foreign exchange loss. A N N U A L R E P O R T 15 2022 MD&A (cont’d) FINANCE COST Finance costs in 2022 were $5,738 (2021: $4,178). The increase was primarily due to greater borrowings and increased borrowing costs along with higher banking fees, partially offset by gains on the interest rate swap. INCOME TAX EXPENSE For the year ended December 31, 2022, the Company recorded an income tax recovery of $8,520 (2021: expense of $7,829) or an effective income tax rate of 21.1% (14.4% in 2021). The effective tax rate increased due to the recognition of temporary differences recognized in 2021. Tax expense Rate In thousands of US dollars Expected statutory rate Foreign rate differential Effect of permanent differences Change in tax rates and new legislation Filing differences Deductible temporary differences not recognized Other Effective tax rate 2022 (10,709) 2,137 225 259 (309) (14) (109) (8,520) 2021 14,452 (1,377) (1,124) (199) (543) (3,464) 84 7,829 2022 2021 26.50% (5.29%) (0.56%) (0.64%) 0.76% 0.03% 0.27% 21.07% 26.50% (2.53%) (2.06%) (0.36%) (1.00%) (6.35%) 0.15% 14.35% PROFIT (LOSS) AND EARNINGS (LOSS) PER SHARE Net loss in 2022 amounted to $31,892, compared with a profit of $46,703 in 2021. The basic and fully diluted net loss per share were $1.18 (2021: earnings of $1.73 and $1.65, respectively). The decreases were primarily attributable to ADG's $57.0 million inventory write-down, and deliveries of filters and nitrile gloves to HHS in 2021. QUA RTERLY INFORMATION In thousands of US dollars Quarter Ended 2022 December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022 2021 December 31, 2021 September 30, 2021 June 30, 2021 March 31, 2021 Fourth Quarter 2022 Results Net Sales 117,453 104,682 110,547 144,473 249,053 112,027 118,449 107,329 Earnings (loss) per share Diluted Profit (loss) Basic 11,997 (55,957) 2,492 9,576 15,162 6,902 18,320 6,319 0.44 (2.07) 0.09 0.35 0.56 0.26 0.68 0.23 0.43 (2.07) 0.09 0.34 0.53 0.24 0.65 0.22 NET SALES Consolidated net sales for Q4 2022 decreased by 52.8% to $117,453, from $249,053 in Q4 2021, with a decrease from ADG partially offset by increases from Rubber Solutions and Engineered Products for the reasons outlined below. AirBoss Defense Group AirBoss Defense Group's net sales for Q4 2022 decreased by 88.7% to $19,806 compared with Q4 2021. The decrease was primarily the result of delivery under the nitrile patient examination gloves contract from HHS, as part of the U.S. government's response to the COVID-19 pandemic, in the prior year. Rubber Solutions Net sales for Q4 2022 in the Rubber Solutions segment increased by 9.8% to $57,778, from $52,616 in Q4 2021. The increase in net sales for Q4 2022 was primarily in the conveyor belt, OTR/retread, industrial and specialty products sectors. Tolling volume was down 46.0%, while non-tolling volume was down 4.5% driven by decreases in most sectors. In tolling applications, the Company only realizes net sales on the provision of compounding services for customer-supplied material, versus non-tolling where AirBoss also supplies the raw material inputs that are reflected in net sales. Engineered Products Engineered Products net sales for Q4 2022 increased by 64.8% to $46,655 compared with Q4 2021. The increase a result of improved volumes across several automotive product lines in particular the muffler hangers, bushings, and spring insulator product lines in addition to improved arrangements with Engineered Products’ key suppliers and customers recognized in the quarter. 16 AirBoss of America Corp. MD&A (cont’d) GROSS PROFIT Consolidated gross profit for Q4 2022 decreased to $24,767 (21.1% of net sales) from $51,444 (20.7% of net sales) in Q4 2021, with decreases in the AirBoss Defense Group segment partially offset by increases in the Rubber Solutions and Engineered Products segments. AirBoss Defense Group AirBoss Defense Group's gross profit for Q4 2022 decreased by $44,920 to $2,904 compared with Q4 2021.The decrease was primarily due to delivery of nitrile patient examination gloves to HHS in the prior year. Rubber Solutions Gross profit at Rubber Solutions for Q4 2022 was $6,915 (12.0% of net sales), compared with $5,869 (11.2% of net sales) in Q4 2021. The increase in gross profit was principally due to product mix partially offset by a modest reduction in volume. Engineered Products Gross profit at Engineered Products for Q4 2022 increased by $17,197 to $14,948 compared with a loss of $2,249 in Q4 2021. The increase was primarily a result of price, product mix, and volume in the automotive sector in addition to operational cost containment, and managing overhead costs. OPERATING EXPENSES Consolidated operating expenses for Q4 2022 decreased by $14,611, compared with Q4 2021. The decrease was primarily due to lower selling costs, lower stock-based compensation costs, lower administration costs, and a higher foreign exchange gain, partially offset by higher professional fees related in part to key challenges addressed in the Engineered Products segment. As a percentage of net sales, operating expenses in Q4 2022 were slightly higher than Q4 2021. INCOME TAX EXPENSE Tax expense for Q4 2022 decreased by $10,115 compared to Q4 2021. Income tax expense decreased due to lower pre-tax income and recognizing tax assets during the quarter. LIQUIDITY AND CAPITAL RESOURCES Overview The Company expects to fund its 2023 operating cash requirements, including required working capital investments, capital expenditures and scheduled debt repayments from cash on hand, cash flow from operations and committed borrowing capacity. The Company’s operating revolving loan facility provides financing up to $250,000 (2021: $250,000). As at December 31, 2022, $130,813 was drawn against the credit facility. For the period ended December 31, 2022, $30,775 of cash was consumed by operations (2021: $2,023 cash generated), $10,189 was used for investing activities (2021: $64,559) and $52,202 was provided by financing activities (2021: $17,526 cash consumed). Cash and cash equivalents increased by $11,421 from $7,131 to $18,552, adjusted for the effect of exchange rate fluctuations on cash held. Operating activities For the year ended December 31, 2022, cash used by operating activities increased by $32,798 compared to 2021. The increase was due to a $78,595 decrease in profit and higher interest payments of $2,014, partially offset by higher non-cash expenses of $33,997, a $7,056 decrease in cash consumed by net working capital and decreased tax payments of $6,758. Cash consumed by working capital for the year ended December 31, 2022 was $58,490 (2021: $65,546) as a result of the following factors: • Cash used for trade and other receivables was $12,252 due to increased sales at the Engineered Products and Rubber Solutions segments; • Cash used for inventories was $25,140, primarily related to AirBoss Defense Group's carryover inventory of nitrile gloves, and raw material safety stock at the Rubber Solutions segment; • Cash from prepaid expenses was $727 primarily from taking delivery of inventory paid by deposit; • Cash used for trade and other payables was $19,997 due to lower volumes at AirBoss Defense Group, partially offset by increased activity at the Rubber Solutions and Engineered Products segments. • Cash used for provisions of $1,828 related to the payout of preferred share units and payments to former owners of acquired businesses. A N N U A L R E P O R T 17 2022 MD&A (cont’d) Investing Activities Property, Plant and Equipment For the year ended December 31, 2022, the following investments were made in each segment: AirBoss Defense Group invested $1,292. $408 was invested in growth initiatives, and the balance was invested to replace or upgrade existing property, plant and equipment. Rubber Solutions invested $6,548. $1,267 was invested in growth initiatives, $1,310 in cost savings initiatives, and the balance was invested to replace or upgrade existing property, plant and equipment. Engineered Products invested $960. $206 was invested in growth initiatives, $352 was invested in cost savings initiatives, and the balance was invested to replace or upgrade existing property, plant and equipment. Intangible assets The Company invested $1,392 on productivity software and rolling out company-wide enterprise software. Financing activities In September 2021 the Company updated its credit facilities to increase revolving credit availability to $250 million from $150 million with an accordion of $75 million (from $50 million) upon the satisfaction of customary conditions for such features. The facility bears interest at LIBOR plus applicable margins from 145 to 250 basis points, depending on covenants, and matures on September 23, 2026. Proceeds from the new facility were used to repay the Company's term loan and fund upfront payments related to acquisition of finished goods and other inventories, related primarily to execution on existing contracts. The Company expects to modify the credit facilities in March 2023 to convert borrowing rates from LIBOR to SOFR in line with market-wide changes. This change is not expected to have a material impact on the consolidated financial statements. In September 2022, the Company's lenders agreed to exclude the $57 million charge related to the nitrile gloves from the calculation of financial covenants. In April 2021 the Company's previous credit facility was amended to increase the revolving facility from $60 million to $150 million. Deferred financing fees, less accumulated amortization have been deducted against borrowings for presentation purposes. The fees are being amortized over the term of the credit facilities and $376 (2021: $324) has been amortized and is included in finance costs. Interest expense under the credit facility was $4,441 (2021: $3,817). Commitments and contractual obligations The Company’s contractual obligations as at December 31, 2022 are summarized below: Revolving line of credit Lease liabilities Purchase obligations Total 2023 – 2,286 30,854 33,140 2024 – 2,155 – 2,155 Payments Due In 2026 2025 – 2,153 – 2,153 130,048 2,257 – 132,305 2027 Thereafter Total – 2,388 – 2,388 – 3,768 – 3,768 130,048 15,007 30,854 175,909 Government assistance Scientific research and investment tax credits of $839 were recognized in 2022 (2021: $813); research and development expenses were reduced accordingly. On May 1, 2020, the Company received a $6,422 loan pursuant to the Paycheck Protection Program under Division A, Title I of the CARES Act, to fund certain payroll and business expenses of the Company’s Michigan and North Carolina operations. This loan bore interest at 1.0% and was scheduled to mature on May 1, 2022. On June 30, 2021, the loan and accrued interest were forgiven and the Company recorded a reduction to cost of sales and operating expenses of $5,560 and $936, respectively, in the consolidated statement of profit. The Government of Canada provided the Canada Emergency Wage Subsidy (“CEWS”) and the Canada Emergency Rent Subsidy ("CERS") to support businesses affected by COVID-19 based on certain criteria, including demonstration of revenue declines as a result of COVID-19.The Company recorded the subsidy as a reduction to cost of sales and operating expenses in the consolidated statement of profit. Dividends A quarterly dividend of $0.10 CAD per share was declared on November 8, 2022 and paid on January 16, 2023. Total dividends declared during the year were $0.40 CAD per common share compared to $0.37 per common share in 2021. Outstanding shares As at December 31, 2022 the Company had 27,092,041 common shares outstanding. 18 AirBoss of America Corp. MD&A (cont’d) TRANSACTIONS WITH RELATED PARTIES During the year, the Company paid $168 (2021: $176) to companies controlled by the Chairman & CEO of the Company for use of office facilities. TRANSACTIONS WITH KEY MANAGEMENT PERSONNEL Key management includes directors, Chairman & CEO, President & COO, CFO, and senior management. The compensation expense to key management for employee services is shown below: December 31 Salaries and other short-term benefits Share-based payment expense (recovery) 2022 4,175 (5,313) (1,138) 2021 6,297 8,332 14,629 The amounts disclosed in this table are the amounts recognized as operating expenses for accounting purposes during the period and do not necessarily represent amounts receivable or received in cash. Key management own 21.0% of the outstanding common shares as at December 31, 2022 (2021: 21.0%). In March 2018, the Company provided a share purchase loan of CAD $500 to the President & COO that bears interest at 1%, maturing March 2023. In June 2019, the Company provided share purchase loans of CAD $300 to the Executive Vice President, General Counsel; and CAD $92 to the President & COO that bear interest at 2%, maturing June 2024. The loan to the Executive Vice President, General Counsel was repaid in May 2022. In April 2022 the Company loaned $1,750 to the Chief Executive Officer of ADG, secured by shares of the Company, bearing interest at 1%, maturing April 2023. All loans are due upon the earlier of the disposition date of all or proportionate to any part of the pledged securities, and maturity. All share purchase loans are full recourse and interest is due and payable semi-annually. In total, 141,178 shares of the Company having a fair value of $776 were pledged as collateral on these loans. At December 31, 2022, the loan receivable of $2,203, including accrued interest, were included in Other Assets on the consolidated statement of financial position. During the year, interest revenue of $8 (2021: $7) was received. NEW STANDARDS ADOPTED Amendments to IAS 37 , Provisions, Contingent Liabilities and Contingent Assets The amendment specifies that the ‘cost of fulfilling’ a contract comprises the ‘costs that relate directly to the contract’. Costs that relate directly to the contract can either be incremental costs of fulfilling that contract or an allocation of other costs that relate directly to fulfilling that contract. This amendment did not have a material impact on the consolidated financial statements. A N N U A L R E P O R T 19 2022 MD&A (cont’d) FUTURE ACCOUNTING STANDARDS Certain new accounting standards and interpretations have been published that are not mandatory for the current period and have not been early adopted. Of those standards applicable to the Company none are expected to have a material impact on its consolidated financial statements. CRITICAL ACCOUNTING ESTIMATES The Company’s preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, net sales and expenses. The Company’s estimates are based upon historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The results of the Company’s ongoing evaluation of these estimates form the basis for making judgments about the carrying value of assets and liabilities and the reported amounts for net sales and expenses. Actual results may differ from these estimates under different assumptions. These estimates and assumptions are affected by management’s application of accounting policies. The Company’s critical accounting policies are those that affect our consolidated financial statements materially and involve a significant level of judgment by the Company. A summary of the significant accounting policies, including critical accounting policies, is set forth in note 3 to the consolidated financial statements. The Company’s critical accounting estimates include valuation of trade and other receivables and inventories, valuation of goodwill and other long-lived assets, accounting for income taxes, and government assistance. Valuation of Accounts receivable As at December 31, 2022, AirBoss Defense Group recorded a $482 (2021: $252) allowance for impairment and the Rubber Solutions segment recorded a $243 (2021: $349) allowance for impairment. Valuation of inventory The majority of the Company’s products are manufactured against orders and inventory on hand is primarily raw materials or finished goods awaiting shipment or customer release. A provision for obsolete inventory is established based on materials on hand that can no longer be used for customer orders based on a review of historical and forecast sales, as well as a technical review to see if such materials can be reworked. Management reviews the carrying cost of its inventory to ensure it is measured at the lower of cost and net realizable value by examining current replacement cost and the quoted pricing to customers over the estimated time frame to consume the inventory on hand and irrevocable commitments. The Company’s provision for obsolete inventory and the write-down of inventory to net realizable value may require an adjustment should any of the above factors change. At December 31, 2022, a reserve for impaired inventory in the Rubber Solutions segment represents $732 (2021: $832). AirBoss Defense Group maintains a provision of $60,817 (2021: $7,101) and the Engineered Products segment maintains a provision of $1,515 (2021: $498). Valuation of Goodwill The Company reviews and evaluates goodwill for impairment when an indicator of impairment exists in the associated cash- generating units, but at least on an annual basis. In determining whether impairment has occurred in one of the Company’s cash- generating units, management compares the cash-generating unit’s carrying value to its recoverable amount based on value in use. Value in use was determined by the future cash flows generated from the continuing use of the unit. The calculations are most sensitive to the discount rate and growth rate. Determination of growth rate is based on a number of assumptions arising from the most current financial performance of each cash generating unit, the upcoming annual budget for each reporting unit and the historical variability of earnings. Other factors, such as any foreign exchange volatility and volatility in world markets for rubber and carbon black can also materially alter our expectations. Accordingly, management’s judgment is required to determine whether these factors at any one point in time and in light of business initiatives, suggest a major change, positive or negative, to the prospects of the business and, therefore, to the valuation of goodwill. No impairment charge was required in 2022 or 2021. 20 AirBoss of America Corp. MD&A (cont’d) Other Long-lived Assets The Company reviews and evaluates long-lived assets for impairment when events or changes in economic and other circumstances indicate that the carrying value of such assets may not be fully recoverable. The net recoverable value of an asset, or cash-generating unit, is calculated as the higher of an asset’s or cash-generating unit’s fair value less costs to sell and its value in use. Future net cash flows are developed using assumptions that reflect the planned course of action for an asset given management’s best estimate of the most probable set of economic conditions. Inherent in these assumptions are significant risks and uncertainties. In 2022, there are no indicators of impairment based on assumptions which they believe to be reasonable and no impairment charge was recorded. Accounting for Income Taxes The provision for income taxes is calculated based on the expected tax treatment of transactions recorded in the consolidated financial statements. The objectives of accounting for income taxes are to recognize the amounts of taxes payable or refundable for the current year and future tax liabilities and assets for the future tax consequences of events that have been recognized in the consolidated financial statements or tax returns. In determining both the current and deferred components of income taxes, the Company interprets tax legislation in a variety of jurisdictions, as well as makes assumptions about the expected timing of the reversal of deferred tax assets and liabilities and recognition of deferred tax assets is based on a probable criteria. If its interpretations differ from those of tax authorities or if the timing of reversals is not as anticipated, the provision or relief for income taxes could increase or decrease in future periods. Additional information regarding our accounting for income taxes is contained in note 17 to the consolidated financial statements. Deferred tax assets have been recorded relating to loss carry-forward amounts when management believes it is more likely than not that these will be used before expiration. FINANCIAL INSTRUMENTS Foreign exchange hedge At December 31, 2022, the Company had contracts to sell $24,662 from January 2023 to September 2023 for Canadian dollars ("CAD") $33,000. The fair value of these contracts, representing an unrealized loss of $258, are included in trade and other payables, including derivatives on the consolidated statement of financial position. The unrealized changes in fair value, representing a loss of $205 (2021: $673), are recorded on the statement of profit as other expenses. Interest rate swap In December 2020, the Company entered into an interest rate swap agreement for a notional amount of $28,125 ($24,375 as at December 31, 2022) amortizing down to $24,375 at maturity on January 1, 2023. Swap interest is calculated and settled on a monthly basis based on the difference between the floating rate of USD LIBOR and the fixed rate of 0.265%. In February 2023, the Company entered into an interest rate swap agreement for a notional amount of $25,000, maturing in February 2025. The swap agreement calculates interest based on the difference between the floating rate of SOFR and a fixed rate of 4.31%. During 2022, interest recovery on the swap agreement was $310 (2021: expense of $44). At December 31, 2022, the fair value of this agreement, representing a gain of $52 (2021: $48), is included in loans and borrowings on the consolidated statement of financial position. The change in the fair value, representing a gain of $4 (2021: $105), is recorded on the consolidated statement of profit as finance costs. The Company entered into the interest rate swap agreements to fix the interest rate on a portion of its borrowings and does not hold them for trading or speculative purposes. Share price hedge In November 2022, the Company entered into hedging arrangements to reduce its exposure to the change in share price related to its share-based compensation. At December 31, 2022, the fair value of these agreements, representing a gain of $223 is included in trade and other receivables, including derivatives on the consolidated statement of financial position. The change in the fair value, representing a gain of $223, is recorded on the consolidated statement of profit (loss) as other expenses. RISK FACTORS Impact of Economic Cycle The demand for the Company’s products can vary in accordance with general economic cycles and the economic conditions of the industry sectors that are served by the Company. In addition, a number of such industry sectors are cyclical in nature. The Company is particularly sensitive to trends in the defense, automotive, tire, energy generation, construction, mining and transportation industries because these industries are significant markets for the Company’s business and are highly cyclical. In a severe economic slowdown, prices for coal, copper and other mined materials may fall, affecting demand for conveyor belting, off-road retread tires and other rubber products manufactured by our customers from rubber compounds manufactured by the Rubber Solutions segment. At AirBoss Defense Group, the timing and size of orders from government defense departments worldwide is highly dependent on the political climate in the applicable jurisdiction, the broader geopolitical climate and their impact on defense budgeting and spending and a significant decline in defense budget and spending from current levels could have a material adverse effect on the profitability of AirBoss Defense Group. The global automotive industry is also cyclical, with the potential for regional differences in timing of expansion and contraction. A significant decline in automobile production volumes for the North American market from current levels could have a material adverse effect on the profitability of our Engineered Products segment. A N N U A L R E P O R T 21 2022 MD&A (cont’d) Political Uncertainty and Policy Change Certain of the business sectors in which we and our customers operate, particularly in the AirBoss Defense Group and Engineered Products segments, are highly globalized industries. Election of protectionist governments or implementation of protectionist trade policies could negatively impact the movement of goods, services and people across borders, including within North America. Uncertainty created by rapidly changing political circumstances may impact our ability to plan effectively for our businesses over the short- and medium-terms, until such time as policy changes or new laws, if any, are implemented. For example, such uncertainty may affect plans relating to establishing operations in new locations (directly or through joint ventures) or potential acquisitions. A material variation between our planning assumptions and actual outcomes could have a material adverse effect on our profitability and financial condition. Raw Materials and Inventory The Company depends on various outside sources of supply for raw materials used in the production of its products, the price and availability of which are subject to market conditions. As a result, any shortage of such raw materials could potentially delay delivery of our products or supplies, increase our costs and decrease our profitability. The Company maintains multiple supply sources in different areas of the world to mitigate the risk of shortages or price increases experienced in certain, but not all, markets. However, there can be no assurance that such multiple supply sources can be maintained in the future and multiple sources cannot overcome a global shortage in a particular raw material, should one occur. Historically, raw material markets have been extremely volatile with key materials doubling or halving in price within a relatively short period, and the Company does not expect such volatility to cease. Excess inventory or shortages of raw material could prove costly to the Company in these markets. The Company does not have long-term supply contracts with the majority of its suppliers and purchases most raw materials on a purchase order basis. The price of many raw materials, such as carbon black, synthetic and natural rubber, chemicals for rubber mixing, steel and silicone is directly or indirectly affected by factors such as exchange rates and the price of oil and, in the case of natural rubber, weather conditions that impact harvest seasons. Although the Company attempts to pass price changes in raw materials on to its customers, it may not always be able to adjust its prices, especially in the short term, to recover the costs of increased raw material prices. Conversely, if raw material prices decrease significantly and rapidly, the Company may be at risk to recover the cost of any inventory purchased based on demand at higher prices. The following table approximates the financial impact (assuming changes are not passed along to its customers) on the Company of a 10% increase in the cost of its most critical raw materials based upon purchases made in the respective years: in millions of US dollars Natural and synthetic rubber Chemicals (Rubber mixing) Steel Carbon black Silicone Earnings before tax 2022 (8.19) (4.42) (2.82) (3.60) (0.83) (19.86) 2021 (7.27) (3.64) (2.55) (2.45) (0.75) (16.66) Competition and Price Pressure The Company competes directly against major North American and international companies. Some of these companies have strong established competitive positions in these markets, including having a direct local presence in international markets where the Company does not, and may be sheltered by domestic tariffs. In the case of rubber compounding, the industry leader may have greater resources, both financial and technical, than the Company and has long-standing relationships with some of the Company’s prospective customers using well-established marketing and distribution networks. Furthermore, the customers of several industry sectors are price sensitive and thus, certain of the more commodity-like products in our businesses can be affected by severe price pressure, which in turn could adversely impact our profitability in those areas. Litigation In December 2022, a statement of claim was filed in the Ontario Superior Court of Justice against AirBoss and several named officers. The applicants under the proceeding seek an order for leave to proceed under the Securities Act (Ontario), certifying the proceeding as a class proceeding and appointing them as representative plaintiffs. The applicants seek, among other relief, a declaration that the Company made misrepresentations contrary to the Securities Act (Ontario) during a period extending from November 9, 2021 to September 6, 2022, as well as unspecified damages. No provision for contingent losses has been recognized in the Company’s annual consolidated financial statements. In addition to ongoing litigation, the Company may become party to litigation from time to time in the ordinary course of business which could adversely affect our business. Should any litigation in which the Company becomes involved be determined against the Company, such a decision could adversely affect the Company’s ability to continue operating and the market price for our shares, and could require the use of significant resources. Even if the Company is involved in litigation and wins, litigation can redirect significant Company resources. Contract-related Risks Contracts from many of our customers, particularly in the Rubber Solutions and Engineered Products segments, consist of individual purchase orders or blanket orders under umbrella supply agreements. In these cases, there is no obligation on any customer to continue to issue individual purchase orders and most umbrella supply agreements do not impose minimum purchase requirements and also permit the customer to terminate blanket orders at any time. The termination of blanket orders could result in the Company incurring various pre-production, engineering and other costs that we may not recover from our customer and which could have an adverse impact on our profitability. In addition, it is difficult to predict accurately when opportunities to win contract awards for defense products and personal protective equipment from the United States, Canadian or other foreign governments or agencies will arise and how long the contract tender to award and subsequent commencement of production process will take. A prolonged tender process without a corresponding award could also result in the Company incurring various pre-production, engineering and other costs that we may not recover and which could have an adverse impact on our profitability. 22 AirBoss of America Corp. MD&A (cont’d) Currency Exposure The Company has net sales and expenses denominated in both CAD and USD dollars. In addition, the cost to the Company of certain key raw materials and other expense items and the competitiveness of prices charged by the Company for its products will be indirectly affected by currency fluctuations. Changes in the value of the Canadian dollar relative to the US dollar could have a material positive or adverse effect on the Company’s results of operations. The Company reviews its currency exposure positions from time to time and reacts accordingly by increasing or decreasing the proportion of borrowings denominated in CAD funds as a natural balance sheet hedge or establishing forward contracts to purchase CAD funds to manage its foreign exchange risk related to cash flows. However, there is no assurance that such strategies will be successful or cost effective and the profitability of the Company’s business could be adversely affected by currency fluctuations. The following table approximates the impact on the Company of a $0.10 decrease in the value of one CAD dollar in the Company’s USD functional currency (million): in millions of US dollars Sales (1) Purchases (2) Earnings before tax 2022 (1.9) 6.1 2021 (1.8) 6.5 (1) Based upon Canadian dollar-denominated sales (2) Based upon Canadian dollar-denominated debt repayments, purchases and expenses Health, Safety and the Environmental The Company’s operations are subject to extensive health, safety and environmental (HSE) regulations by federal, provincial, state and local authorities. The Company employs individuals who undertake manufacturing activity and handle various substances in its manufacturing process, the nature of which may expose the Company to risks of causing or being deemed liable for injury or environmental or other damages. The Company regularly assesses its policies and procedures relating to workplace safety in its production facilities. While its use of potentially hazardous materials is limited, the Company ensures that its operations are conducted in a manner that minimizes such risks and maintains insurance coverage considered reasonable by management. To date, no regulatory authority has required the Company to pay any material fines or remediation expenses in connection with any alleged violation of HSE regulations. However, there can be no assurance that future personal injury or environmental damage will not occur or that personal injury or environmental damage due to prior or present practices will not result in future liabilities. While management believes that the Company is in substantial compliance with all material HSE government requirements relating to its operations, changes in government laws and regulations are ongoing and may make HSE compliance increasingly expensive. It is not possible to predict future costs, which may be incurred to meet such obligations. Impacts of Global Health Situations Global health situations can have an impact on the Company’s operations and we continue to monitor the impact of COVID-19 (Coronavirus). The duration and scope of the continued outbreaks is not known with any certainty and the Company is unable to accurately project the ultimate impact on the business. However, if outbreaks continue for an extended period of time, AirBoss may continue to experience supply chain and logistics challenges, in particular given production delays throughout the world, a decline in sales activities, and reductions in operations and workforce. Dependence on Key Customers and Contracts From time to time, a significant portion of the Company’s sales for a given period may be represented by a relatively small number of customers. Net sales from one customer represent approximately 9% (2021: 40%) of consolidated net sales in 2022. Five customers represented 33% (2021: 56%) of consolidated net sales in 2022. While the Company continues to work on diversification of its customer base in all segments, there is no assurance of continued success and shifts in market share away from these top customers could adversely impact our profitability. Product Liability and Warranty Claims As a manufacturer of rubber-based and other products, products which are used in vehicles and products which are worn by individuals in the defense and first responder communities, the Company faces a risk of product liability and warranty claims from its direct customers and, in some cases, from end-users of its products. Although the Company carries commercial general liability insurance of the types, and in the amounts it believes to be reasonable by industry standards, any claim which is successful and is not covered by insurance or which exceeds the policy limit could have a material adverse effect on the Company and its results. Capacity and Equipment Our rubber compounding facilities have an annual capacity to process over 500 million turn pounds. The Company remains committed to continuous maintenance and upgrading of its equipment. Critical equipment remains not only in a high state of repair, but is also technologically up to date so that the Company is able to ensure the reliability of supply to its customers at competitive prices and at a high quality standard. The Company has made regular investments in capacity and efficiency across its operations and should additional equipment be required to fulfill any substantial increases in sales, the Company expects that it can be readily sourced in the market; however, any material failure of our equipment or inability to purchase additional required equipment could have a material adverse effect on the Company. A N N U A L R E P O R T 23 2022 MD&A (cont’d) Production Disruptions Our production facilities, and those of our subcontractors and suppliers, are subject to risk of shut-down caused by fire, natural disaster or other catastrophic event, pandemic, labour conflicts or other forces or events beyond our control, or could result from a disruption of supply of source materials from suppliers and sub-suppliers. Any prolonged shut-down of one or more of our production facilities or that of our subcontractors could result in a materially negative impact on our profitability. Climate Change Risks Extreme weather events such as floods and windstorms and other natural disasters such as earthquakes caused by climate could cause catastrophic destruction to some of our or our sub-suppliers’ facilities, which could in turn disrupt our production and/or prevent us from supplying products to our customers. While we conduct risk assessments of our facilities and have implemented mitigation strategies to address, where practical, physical risks related to extreme weather events or natural disasters, the frequency and severity of any such event can vary by region and cannot be predicted. A catastrophic destruction of our or our sub- supplier facilities could have a material adverse effect on our operations and profitability. IT/Cybersecurity Risks Although we have established and continue to enhance security controls intended to protect our IT systems and infrastructure, there is no guarantee that such security measures will be effective in preventing unauthorized physical access or cyber-attacks. A significant breach of our IT systems could: result in theft of funds; cause disruptions in our manufacturing operations; lead to the loss, destruction or inappropriate use of sensitive data; or result in theft of our, our customers’ or our suppliers’ intellectual property or confidential information. The occurrence of any of the foregoing could adversely affect our operations and/or reputation, and could lead to claims against us that could have a material adverse effect on our profitability. Acquisitions and Integration As part of our growth strategy, we will continue to pursue acquisitions in areas we have identified as consistent with such strategy. However, there can be no assurance that we will identify suitable targets for acquisition or be able to acquire suitable targets successfully. In addition, there is also a risk that the Company may not be able to successfully integrate any acquisition or achieve all or any of the anticipated synergies of such acquisitions or to do so within the anticipated timelines, any of which could adversely impact our profitability and financial condition. Key Personnel The Company’s future success largely depends on its ability to recruit, retain and develop qualified managers and other key personnel. If key persons leave the Company and successors cannot be recruited or if the Company is unable to attract qualified personnel, this could have a negative impact on our profitability and financial condition. DISCLOSURE CONTROLS AND PROCEDURES As of the end of the fiscal year of the Company, an evaluation was carried out under the supervision of and with the participation of the Company’s management, including our Chairman & CEO, and CFO, of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our Chairman & CEO, and CFO concluded that the design and operation of our disclosure controls and procedures were effective as of December 31, 2022, the end of the period covered by management’s discussion and analysis, to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by officers within those entities. The Company’s Chairman & CEO, and CFO are responsible for establishing and maintaining the Company’s disclosure controls and procedures. The Disclosure Committee, composed of senior managers of the Company, assists the Chairman & CEO, and CFO in evaluating the information and appropriateness of material subject to public disclosure. CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING During the most recent period, there have been no changes in the Company’s existing policies and procedures and other processes that comprise its internal control over financial reporting, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. INTERNAL CONTROLS OVER FINANCIAL REPORTING Management has designed internal controls over financial reporting to provide reasonable assurance regarding the reliability of the Company’s financial reporting and its compliance with IFRS in its consolidated financial statements. The Chairman & CEO, and CFO have supervised management in the evaluation of the design and effectiveness of the Company’s internal controls over financial reporting as at December 31, 2022 and believe the design and effectiveness of the internal controls to be effective. 24 AirBoss of America Corp. Management’s Responsibility for Financial Reporting The accompanying consolidated financial statements of AirBoss of America Corp. and all the information in the annual report are the responsibility of management and have been approved by the Board of Directors. The consolidated financial statements have been prepared by management, in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. When alternate accounting methods exist, management has chosen those it deems most appropriate in the circumstances. Financial statements are not precise since they include certain amounts based on estimates and judgments. Management has determined such amounts on a reasonable basis in order to ensure that the financial statements are presented fairly, in all material respects. Management has prepared the financial information presented in this annual report and has ensured that it is consistent with that presented in the consolidated financial statements. AirBoss of America Corp. maintains systems of internal accounting and administrative controls consistent with reasonable cost. Such systems are designed to provide reasonable assurance that the financial information is relevant, reliable and accurate and the Company’s assets are appropriately accounted for and adequately safeguarded. The Board of Directors is responsible for ensuring that management fulfills its responsibilities for reviewing and approving the financial statements. The Board carries out this responsibility principally through its Audit Committee. The Audit Committee is appointed by the Board and all members are outside directors. The Committee meets periodically with management, as well as the external auditors, to discuss internal controls over the financial reporting process, auditing matters and financial reporting issues, to satisfy itself that each party is properly discharging its responsibilities and to review the annual report, the financial statements and the external auditors’ report. The Committee reports its findings to the Board for consideration when approving the financial statements for issuance to the shareholders. The Committee also considers the engagement or re-appointment of the external auditors for review by the Board and approval by the shareholders. KPMG LLP, the Company’s external auditors, who are appointed by the shareholders, audited the consolidated financial statements as of and for the years ended December 31, 2022 and December 31, 2021 in accordance with Canadian generally accepted auditing standards to enable them to express to the shareholders their opinion on the consolidated financial statements. KPMG LLP has full and free access to the Audit Committee. March 13, 2023 P. Gren Schoch Chairman and Chief Executive Officer Frank Ientile Chief Financial Officer A N N U A L R E P O R T 25 2022 Independent Auditor's Report the consolidated statements of financial position as at December 31, 2022 and December 31, 2021 the consolidated statements of profit (loss) and comprehensive income (loss) for the years then ended the consolidated statements of changes in equity for the years then ended the consolidated statements of cash flows for the years then ended To the Shareholders of AirBoss of America Corp. Opinion We have audited the consolidated financial statements of AirBoss of America Corp. (the Entity), which comprise: • • • • • and notes to the consolidated financial statements, including a summary of significant accounting policies (Hereinafter referred to as the “financial statements”). In our opinion, the accompanying financial statements present fairly, in all material respects, the consolidated financial position of the Entity as at December 31, 2022 and December 31, 2021, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). Basis for Opinion We conducted our audit 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 Financial Statements” section of our auditor’s report. We are independent of the Entity 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. Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements for the year ended December 31, 2022. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. We have determined the matters described below to be the key audit matters to be communicated in our auditor’s report. Evaluation of impairment of goodwill Description of the matter We draw attention to Notes 2(d), 3(e)(i) and 10 to the financial statements. The goodwill balance included in intangible assets is $51,577 thousand. The Entity performs goodwill impairment testing at least annually and whenever events or changes in circumstances indicate that the carrying amount of the cash-generating unit likely exceeds its recoverable amount. The allocation of goodwill is made to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose, identified according to operating segment. The recoverable amount of the cash-generating unit is based on value in use, which is determined by discounting the future cash flows generated from the continuing use of the cash-generating unit. In determining the estimated recoverable amount of the cash-generating unit, the Entity’s key assumptions include projected sales and margins, discount rates and the terminal multiple. Why the matter is a key audit matter We identified the evaluation of the impairment of goodwill as a key audit matter. This matter represented significant auditor judgement due to the high degree of estimation uncertainty in determining the recoverable amount. In addition, the involvement of those with specialized skills and knowledge was required in performing and evaluating the results of our audit procedures due to the sensitivity of the recoverable amount to changes in key assumptions. How the matter was addressed in the audit The primary procedures we performed to address this key audit matter included the following: We assessed the Entity’s ability to accurately forecast by comparing the Entity’s projected sales and margins used in the prior year impairment test to actual results. We compared the Entity’s projected sales and margins to actual results. We took into account changes in conditions and events, affecting each cash-generating unit or cash-generating group to assess the adjustments made in arriving at the projected assumptions. We involved valuation professionals with specialized skills and knowledge, who assisted in evaluating the appropriateness of (1) the discount rates and (2) the terminal multiple. The discount rates for the cash-generating units were compared against ranges that were independently developed using publicly available market data for comparable entities. The terminal multiple was compared against independently developed multiples using publicly available market data for comparable entities and overall macro-economic conditions. 26 AirBoss of America Corp. Assessment of nitrile gloves inventory Description of the matter We draw attention to Notes 3 (f) and 7 to the financial statements. Inventories are measured at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs to sell. Impairment charges are recorded against cost of sales when it is determined that the net realizable value is less than cost. The Entity had finished goods inventory of $92,745 thousand, a portion of which related to nitrile gloves inventory. The Entity recorded inventory provisions for the write-down of inventories of $63,064 thousand, which included a specific provision of $54,500 related to nitrile gloves inventory. Why the matter is a key audit matter We identified the assessment of nitrile gloves inventory as a key audit matter. This matter was a key audit matter because it required significant auditor attention in performing the audit. An increased extent of audit effort was needed to address this matter. How the matter was addressed in the audit The primary procedures we performed to address this key audit matter included the following: As it relates to the write-down of the nitrile gloves inventory, we evaluated the condition of the inventory to assess the appropriateness of the write-down. For the remaining nitrile gloves inventory, we: • Counted a sample of inventory to verify quantities on hand. • Examined a sample of shipping documents for inventory in-transit. • Assessed the net realizable value by evaluating the physical condition of the inventory and comparing the net realizable value to recent sales invoices Other Information Management is responsible for the other information. Other information comprises: • • the information included in Management’s Discussion and Analysis filed with the relevant Canadian Securities Commissions. the information, other than the financial statements and the auditor’s report thereon, included in a document likely to be entitled “2022 Annual Report”. Our opinion on the financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon. In connection with our audit of the 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 financial statements or our knowledge obtained in the audit and remain alert for indications that the other information appears to be materially misstated. We obtained the information included in Management’s Discussion and Analysis filed with the relevant Canadian Securities Commissions as at 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 the auditor’s report. We have nothing to report in this regard. The information, other than the financial statements and the auditor’s report thereon, included in a document likely to be entitled “2022 Annual Report” is expected to be made available to us after the date of this auditor’s report. If, based on the work we will perform on this other information, we conclude that there is a material misstatement of this other information, we are required to report that fact to those charged with governance. Responsibilities of Management and Those Charged with Governance for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with IFRS as issued by the IASB, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, management is responsible for assessing the Entity’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 Entity or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Entity’s financial reporting process. A N N U A L R E P O R T 27 2022 Auditors’ Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the 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 the 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 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 Entity’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 Entity'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 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 Entity to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. • 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. • Provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the group Entity to express an opinion on the financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. • Determine, from the matters communicated with those charged with governance, those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our auditor’s report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Chartered Professional Accountants, Licensed Public Accountants The engagement partner on the audit resulting in this auditor's report is David Brendan Power. Vaughan, Canada March 13, 2023 28 AirBoss of America Corp. Consolidated Statement of Financial Position In thousands of US dollars Note December 31, 2022 December 31, 2021 ASSETS Current assets Cash and cash equivalents Trade and other receivables, including derivatives Prepaid expenses Inventories Current income taxes receivable Total current assets Non-current assets Property, plant and equipment Intangible assets Deferred Income tax assets Other assets Total non-current assets Total assets LIABILITIES Current liabilities Loans and borrowings Trade and other payables, including derivatives Provisions Current taxes payable Total current liabilities Non-current liabilities Loans and borrowings Employee benefits Provisions Deferred income tax liabilities Total non-current liabilities Total liabilities EQUITY Share capital Contributed surplus Retained earnings Total equity Total liabilities and equity 6, 12 7 17 8, 9 10 17 11 9, 13 12 14 17 9, 13 20 14 17 15 15 18,552 94,628 9,310 92,833 8,466 223,789 89,292 113,237 11,799 2,649 216,977 440,766 2,286 85,239 2,108 609 90,242 141,356 408 8,548 3,215 153,527 7,131 82,440 10,032 122,147 6,136 227,886 93,148 121,075 – 1,155 215,378 443,264 2,356 103,026 2,840 – 108,222 78,207 579 17,511 3,597 99,894 243,769 208,116 87,811 4,598 104,588 196,997 440,766 87,937 2,531 144,680 235,148 443,264 The notes on pages 33 to 63 are an integral part of these consolidated financial statements. Commitments (note 19), Subsequent events (notes 12 and 23). On behalf of the Board P.G. Schoch Director Robert L. McLeish Director A N N U A L R E P O R T 29 2022 Consolidated Statement of Profit (loss) and Comprehensive income (loss) For the year ended December 31 In thousands of US dollars Note 2022 2021 Net Sales Cost of sales Gross profit General and administrative expenses Selling and marketing expenses Research and development expenses Other expenses Operating expenses Results from operating activities Finance costs Profit (loss) before income tax Income tax recovery (expense) Profit (loss) and comprehensive income (loss) Earnings (loss) per share Basic Diluted 7 3 18 13, 20 17 16 16 477,155 (453,024) 24,131 (46,478) (8,223) (3,390) (714) (58,805) (34,674) (5,738) (40,412) 8,520 (31,892) (1.18) (1.18) 586,858 (450,560) 136,298 (52,918) (20,729) (3,652) (289) (77,588) 58,710 (4,178) 54,532 (7,829) 46,703 1.73 1.65 The notes on pages 33 to 63 are an integral part of these consolidated financial statements. 30 AirBoss of America Corp. Consolidated Statement of Changes in Equity In thousands of US dollars Attributable to equity holders of the Company Share Capital Contributed Surplus Retained Earnings Total equity Balance at January 1, 2021 Profit and comprehensive income for the year 87,060 – 1,578 – 105,950 46,703 194,588 46,703 Contributions by and distributions to owners Stock options expensed Share options exercised Share options forfeited Dividends to equity holders Total contributions by and distributions to owners – 877 – – 877 1,196 (220) (23) – 953 – – – (7,973) (7,973) 1,196 657 (23) (7,973) (6,143) Balance at December 31, 2021 87,937 2,531 144,680 235,148 In thousands of US dollars Attributable to equity holders of the Company Share Capital Contributed Surplus Retained Earnings Total equity Balance at January 1, 2022 Loss and comprehensive loss for the year 87,937 – 2,531 – 144,680 (31,892) 235,148 (31,892) Contributions by and distributions to owners Stock options expensed Share options exercised Share options forfeited Shares issued Deferred share unit reclassified as equity (notes 14, 15) Dividends to equity holders Total contributions by and distributions to owners – (622) – 496 – – (126) 1,600 (71) (53 – 591 – 2,067 – – – – – (8,200) (8,200) 1,600 (693) (53) 496 591 (8,200) (6,259) Balance at December 31, 2022 87,811 4,598 104,588 196,997 The notes on pages 33 to 63 are an integral part of these consolidated financial statements. A N N U A L R E P O R T 31 2022 Consolidated Statement of Cash Flows For the year ended December 31 In thousands of US dollars Cash flows from operating activities Profit (loss) for the year Adjustments for: Depreciation Amortization of intangible assets Write-down of inventory Finance costs Unrealized foreign exchange gains Share-based payment expense (recovery) SRED tax credits Income tax (recovery) expense Government assistance loan forgiveness Other Change in inventories Change in trade and other receivables Change in prepaid assets Change in trade and other payables Change in provisions Net change in non-cash working capital balances Interest paid Income tax paid Net cash provided by (used in) operating activities Cash flows from investing activities Cash acquired on acquisition of subsidiary Cash paid to acquire subsidiary Proceeds from sale of property, plant and equipment Acquisition of property, plant and equipment Expenditures on intangible assets Net cash used in investing activities Cash flows from financing activities Repayment of borrowings Proceeds from operating line of credit Principal payments for lease liabilities Payment of debt refinancing fees Exercise of stock options (net of withholding tax) Repayment of share purchase loans Issuance of share purchase loans Interest received on share purchase loan Dividends paid Net cash provided by (used in) financing activities Net (decrease) / increase in cash and cash equivalents Cash and cash equivalents at January 1 Effect of exchange rate fluctuations on cash held Cash and cash equivalents at December 31 Note 2022 2021 (31,892) 46,703 8, 9 10 7 13, 20 14, 15 18 17 18 4, 5 4, 5 8 10 11 11 15 12,609 9,296 57,001 5,738 135 (5,394) (839) (8,520) – (158) 37,976 (25,140) (12,252) 727 (19,997) (1,828) (58,490) (5,556) (4,705) (30,775) – – 3 (8,800) (1,392) (10,189) – 65,100 (2,364) – (693) 239 (1,750) 8 (8,338) 52,202 11,238 7,131 183 18,552 13,135 7,746 – 4,178 1,012 9,448 (813) 7,829 (6,496) (168) 82,574 (74,376) (12,074) (3,065) 25,038 (1,069) (65,546) (3,542) (11,463) 2,023 1,946 (48,521) 9 (16,912) (1,081) (64,559) (71,883) 65,000 (2,354) (1,593) 656 – – 7 (7,359) (17,526) (80,062) 86,970 223 7,131 The notes on pages 33 to 63 are an integral part of these consolidated financial statements. 32 AirBoss of America Corp. Notes to Consolidated Financial Statements ("CFS") For the years ended December 31, 2022 and 2021 (Amounts in thousands of US dollars, except per share amounts, unless otherwise specified) NOTE 1 REPORTING ENTITY AirBoss of America Corp. is a public company listed on the Toronto Stock Exchange and cross-traded on the OTCQX® Best Market in the United States, incorporated and domiciled in Ontario. Its registered office is located at 16441 Yonge Street, Newmarket, Ontario, Canada. AirBoss of America Corp. and its subsidiaries are together referred to, in these consolidated financial statements, as the "Company” or "AirBoss". The Company has operations in Canada and the US and is involved primarily in the manufacture of high-quality rubber-based products to resource, military, health care, government, automotive and industrial markets (see note 21). Subsidiaries are consolidated based on control which is assessed on whether the Company has power over an investee, exposure or rights to variable returns from its involvement with the investee and ability to use its power to affect those returns. List of Subsidiaries Set out below is a list of operating subsidiaries of the Company. Operating Subsidiaries Jurisdiction Ownership % 2022 (2021) AirBoss Rubber Compounding (NC) LLC ("ANC") North Carolina SunBoss Chemicals Corp. AirBoss Flexible Products, LLC ("AFP") AirBoss Defense Group Ltd. ("ADG Canada") AirBoss Defense Group, LLC ("ADG USA") Critical Solutions International, LLC ("CSI") Blackbox Biometrics, Inc. ("B3") Ace Elastomer, LLC ("Ace") Ontario Michigan Quebec Delaware Texas New York South Carolina 100% 100% 100% 100% 100% 100% 100% 100% The Company’s operating segments are organized into the following reportable segments: • Rubber Solutions - Includes manufacturing and distribution of rubber compounds and distribution of rubber compounding related chemicals. • Engineered Products - Includes the manufacture and distribution of anti-noise, vibration and harshness dampening parts. • AirBoss Defense Group - Includes the manufacture and distribution of personal protection and safety products, primarily for CBRN-E threats, and the manufacture of semi-finished rubber related products. • Unallocated Corporate Costs - Includes corporate activities and certain unallocated costs. COVID-19 In March 2020, the World Health Organization declared COVID-19 a global pandemic. The impact of COVID-19 has been felt throughout the world, with significant disruptions to business operations, supply chains and customer demand; the imposition of quarantines; as well as considerable general concern and uncertainty. A majority of the Company’s operations fall within essential businesses classifications and have continued to operate throughout the pandemic. In 2021, the Company continued to experience significant supply challenges and record raw material price increases. The Engineered Products segment was further challenged as electronic chip shortages caused original equipment manufacturers to shutter production. The effect of COVID-19 continued into 2022 but with a smaller impact on operations. The ultimate business and economic impacts of COVID- 19 will depend on a variety of factors, including the possibility of shutdowns, impacts on customers and suppliers, the rate at which economic conditions return to pre-COVID-19 levels, any continued or future governmental orders or lock-downs due to any future wave of COVID-19, the potential for a recession in key markets due to the effect of the pandemic, and on the demand for the respective products that the Company and its customers produce. A N N U A L R E P O R T 33 2022 Notes to CFS (cont’d) NOTE 2 BASIS OF PREPARATION (a) Statement of compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board. The Consolidated financial statements were authorized for issue by the Board of Directors on March 13, 2023. (b) Basis of measurement The consolidated financial statements have been prepared on the historical cost basis except for the following material items in the statement of financial position: • certain property, plant and equipment was re-measured at fair value on the adoption of IFRS • • forward contracts are measured at fair value liabilities for cash settled share-based payment arrangements are initially and thereafter measured at fair value • equity settled share-based payment arrangements are measured at fair value at the grant date • • recognition of future income taxes on foreign exchange differences where the currency of the tax basis on non-monetary assets and liabilities differ from the functional currency the employee benefit liability is recognized as the net total of the plan assets, at fair value, less the present value of the defined benefit obligation. (c) Functional and presentation currency These consolidated financial statements are presented in US dollars (“USD”), which is the Company’s functional currency. All financial information presented in USD has been rounded to the nearest thousand, except where otherwise indicated. (d) Use of estimates and judgments The preparation of the consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Significant areas requiring the use of estimates include valuation of trade and other receivables, inventories, intangible assets, accounting for income taxes, share-based payments, measurement of post-retirement benefits and fair value of assets acquired through business combination. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. Information about critical judgments in applying accounting policies that have the most significant effect on the amounts recognized in the consolidated financial statements is included in the following notes: Note 4 and 5 – fair value of assets acquired in a business combination and fair value of contingent consideration Note 6 – trade and other receivables Note 7 – inventories Note 9 – leases Note 10 – intangible assets Note 17 – income taxes Note 18 – government assistance Information about assumptions and estimation uncertainties that have a significant risk resulting in a material adjustment within the next financial year are included in the following notes: Note 10 – intangible assets - key assumptions used in value-in-use calculations; Note 14 – provisions; Note 15 – capital and other components of equity; Note 17 – income taxes; Note 19 – commitments and contingencies; and Note 20 – post-retirement benefits. 34 AirBoss of America Corp. Notes to CFS (cont’d) NOTE 3 SIGNIFICANT ACCOUNTING POLICIES The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements. (a) Basis of consolidation (i) Business combinations The Company measures goodwill as the fair value of the consideration transferred including the recognized amount of any non-controlling interest in the acquiree, less the net recognized amount (generally fair value) of the identifiable assets acquired and liabilities assumed, all measured as of the acquisition date. When the excess is negative, a bargain purchase gain is recognized immediately in profit or loss. The Company elects to measure, on a transaction-by-transaction basis, non- controlling interest either at its fair value or at its proportionate share of the recognized amount of the identifiable net assets at the acquisition date. Transaction costs, other than those associated with the issue of debt or equity securities, that the Company incurs in connection with a business combination are expensed as incurred. Contingent consideration is remeasured at fair value at each reporting date and subsequent changes in the fair value are recognized in profit or loss. (ii) Subsidiaries Subsidiaries are entities controlled by the Company. Control exists when the Company is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The financial information of subsidiaries is included in the consolidated financial statements from the date that control commences until the date that control ceases. The accounting policies of subsidiaries have been changed, when necessary, to align them with the policies adopted by the Company. (iii) Transactions eliminated on consolidation Inter-company balances and transactions, and any unrealized income and expenses arising from inter-company transactions, are eliminated in preparing the consolidated financial statements. (b) Foreign currency (i) Functional and presentation currency Items included in the financial statements of each of the Company’s entities are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The consolidated financial statements are presented in USD, which is the Company's functional and presentation currency. (ii) Foreign currency transactions Transactions in foreign currencies are translated to functional currencies at exchange rates at the dates of the transactions, or valuation where items are re-measured. Monetary assets and liabilities denominated in a currency other than the functional currency are translated to the functional currency at the exchange rate at the reporting date. The foreign currency gain or loss on the settlement of such transactions and from the translation at period-end exchange rates of monetary assets and liabilities are recognized in profit or loss on the consolidated income statement. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Foreign exchange gains and losses are presented within other expenses in the consolidated statement of profit (loss). (c) Financial instruments (i) Financial assets and liabilities The Company recognizes financial assets and financial liabilities initially at fair value and subsequently measures these at either fair value or amortized cost based on the following classifications: Fair value through profit or loss ("FVTPL"): Financial assets and financial liabilities purchased or incurred, respectively, with the intention of generating earnings in the near term, and derivatives are classified as FVTPL. This category includes derivative assets and derivative liabilities that do not qualify for hedge accounting. For items classified as FVTPL, the Company initially recognizes such financial assets on the consolidated statement of financial position at fair value and recognizes subsequent changes in the consolidated statement of profit (loss). Transaction costs incurred are expensed in the consolidated statement of profit (loss). Fair value through other comprehensive income ("FVTOCI"): This category includes the Company’s investments in equity securities. Subsequent to initial recognition, they are measured at fair value on the consolidated statement of financial position and changes therein are recognized in other comprehensive income (loss). When an investment is derecognized, the accumulated gain or loss in other comprehensive income (loss) is transferred to the statement of profit. Amortized cost: The Company classifies financial assets held to collect contractual cash flows at amortized cost, including cash and cash equivalents, trade and other receivables, and share purchase loans. The Company initially recognizes the carrying amount of such assets on the consolidated statement of financial position at fair value plus directly attributable transaction costs, and subsequently measures these at amortized cost using the effective interest rate method, less any impairment losses. Financial liabilities that are not classified as FVTPL include trade and other payables and long-term debt. These financial liabilities are recorded at amortized cost on the consolidated statement of financial position. A N N U A L R E P O R T 35 2022 Notes to CFS (cont’d) (ii) Impairment of financial assets The Company uses the forward looking “expected credit loss” model to determine the allowance for impairment as it relates to trade and other receivables. The Company’s allowance is determined by historical experiences, and considers factors including the aging of the balances, the customer’s credit worthiness, and updates based on the current economic conditions, expectation of bankruptcies, and the political and economic volatility in the markets/location of customers. (iii) Derecognition The Company derecognizes a financial asset when the contractual rights to the cash flows and benefits from the asset expire or are settled. The difference between the carrying amount of the financial asset and the sum of consideration received and receivable is recognized in the consolidated statements of profit. Financial liabilities are derecognized when obligations under the contract expire, are discharged or cancelled. The difference between the carrying amount of the financial liability derecognized and the consideration paid and payable is recognized in the consolidated statements of profit. Financial assets and liabilities are offset and the net amount presented in the statement of financial position when and only when, the Company has a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. (iv)Derivative financial instruments The Company holds stand-alone derivative financial instruments to reduce its foreign currency risk exposures. Such derivatives are recognized initially at fair value; attributable transaction costs are recognized in profit or loss as incurred. Subsequent to initial recognition, derivatives are measured at fair value and changes therein are recognized immediately in the consolidated statements of profit. (d) Property, plant and equipment (i) Recognition and measurement Land and buildings comprise mainly manufacturing facilities and offices. Items of property, plant and equipment are measured at historical cost (net of government grants) less accumulated depreciation and accumulated impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the assets to a working condition for their intended use, the costs of dismantling and removing the items and restoring the site on which they are located and borrowing costs. Cost also includes transfers from equity of any gain or loss on qualifying cash flow hedges of foreign currency purchases of property, plant and equipment. Purchased software that is integral to the functionality of the related equipment is capitalized as part of that equipment. When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment. Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment and are recognized net within other expenses in the consolidated statement of profit (loss). (ii) Subsequent costs The cost of replacing a part of an item of property, plant and equipment is recognized in the carrying amount of the item or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognized. The costs of the day-to-day servicing of property, plant and equipment are recognized in profit or loss as incurred. (iii) Depreciation Land is not depreciated. For other property, plant and equipment, depreciation is calculated over the depreciable amount, which is the cost of an asset, revalued amount or other amount substituted for cost, less its residual value. Depreciation is recognized in profit or loss on a straight-line basis over the estimated useful lives of each component of property, plant and equipment, with certain manufacturing equipment being depreciated on a units of production basis since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. The estimated useful lives for the current and comparative periods are as follows: • • • • buildings plant and manufacturing equipment vehicles furniture, office, lab and computer equipment 15-40 years 5-15 years 3-5 years 3-5 years Depreciation methods, useful lives and residual values are reviewed at each financial year end and adjusted if appropriate. 36 AirBoss of America Corp. Notes to CFS (cont’d) (e) Intangible assets (i) Goodwill Goodwill that arises upon the acquisition of a business is included in intangible assets. At initial recognition, goodwill is measured as the excess of purchase price over the fair value of identifiable net assets. In respect of acquisitions prior to January 1, 2010, goodwill is included on the basis of its deemed cost, the amount recorded prior to the transition to IFRS. Subsequent measurement Goodwill is measured at cost less accumulated impairment losses. Goodwill is tested at least annually for impairment and whenever events or changes in circumstances indicate that the carrying amount of the cash-generating unit likely exceeds its recoverable amount. Impairment losses on goodwill are not reversed. Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose, identified according to operating segment. (ii) Customer Relationships Customer Relationships that arise upon the acquisition of a business are included in intangible assets. At initial recognition, customer relationships are measured at fair value based on total sales to customers, estimating an annual attrition rate and future growth based on current market conditions and historical data. (iii) Research and development Expenditure on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, is recognized in profit or loss as incurred. Investment tax credits and other related government assistance are recorded as a reduction of research and development costs. Investment tax credits related to capital assets reduce property, plant and equipment accordingly. Development activities involve a plan or design for the production of new or substantially improved products and processes. Development expenditure is capitalized only if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable and the Company intends to and has sufficient resources to complete development and to use or sell the asset. The expenditure capitalized includes the cost of materials, direct labour, overhead costs that are directly attributable to preparing the asset for its intended use and borrowing costs on qualifying assets. Other development expenditure is recognized in profit or loss as incurred. Capitalized development expenditure is measured at cost less accumulated amortization and accumulated impairment losses. (iv) Other intangible assets Other intangible assets that are acquired or developed by the Company and have finite useful lives are measured at cost less accumulated amortization and accumulated impairment losses. Costs associated with annual licenses and maintaining computer software programs are recognized as an expense as incurred. Development costs that are directly attributable to the design and testing of identifiable and unique software products controlled by the Company are recognized as intangible assets when there is an ability to use the software product and it can be demonstrated how the software product will generate probable future economic benefits. Directly attributable costs that are capitalized as part of the software product include the incremental software development or contracted employee costs. Other development expenditures that do not meet these criteria are recognized as an expense as incurred. (v) Subsequent expenditures Subsequent expenditures are capitalized only when they increase the future economic benefits embodied in the specific asset to which it relates. All other expenditures, including expenditures on internally generated goodwill and intellectual property, are recognized in profit or loss as incurred. (vi) Amortization Amortization is recognized in profit or loss on a straight-line basis over the estimated useful lives of intangible assets, other than goodwill, from the date that they are available for use, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. Amortization is calculated over the cost of the asset, or other amount substituted for cost, less its residual value. The estimated useful lives for the current and comparative periods are as follows: 5 years • 3-5 years • 10-17 years • 8-10 years • brands, patents and trademarks software capitalized development costs customer relationships A N N U A L R E P O R T 37 2022 Notes to CFS (cont’d) Inventories (f) Inventories are measured at the lower of cost and net realizable value. The cost of manufactured inventories is based on the weighted average cost principle and includes expenditures incurred in acquiring the inventories, production or conversion costs and other costs incurred in bringing them to their existing locations and conditions. Inventory that is not interchangeable is determined on an individual item basis and includes expenditures incurred in acquiring the inventories, shipping and logistics costs. In the case of manufactured inventories and work in progress, cost includes an appropriate share of production overheads based on normal operating capacity. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs to sell. Impairment charges are recorded against cost of sales, when it is determined the net realizable value is less than cost. (g) Employee benefits: (i) Other long-term employee benefits The Company provides certain employees with post-retirement life insurance benefits that are unfunded. The expected costs of these benefits are accrued over the period of employment using the same accounting methodology as used for defined benefit pension plans. These obligations are valued annually by independent qualified actuaries. The Company’s net obligation in respect of long-term employee benefits, other than pension plans, is the amount of future benefits that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value. The discount rate is the yield at the reporting date on high quality corporate bonds that have maturity dates approximating the terms of the Company’s obligations. Any actuarial gains and losses are recognized in other comprehensive income and retained earnings in the period in which they arise. (ii) Defined Contribution Plan US operating subsidiaries of AirBoss maintain 401(k) defined contribution plans for their respective employees. The Company and its Canadian operating subsidiaries maintain registered and unregistered defined contribution plans for their employees. Contributions to these plans are expensed as incurred. (iii) Multi-Employer Pension Plan The Company contributes to the Steel Workers Pension Trust, a defined benefit multi-employer pension plan (MEPP) under the terms of collective-bargaining agreements that cover its union-represented employees in the State of Michigan. Defined benefit MEPPs are accounted for as defined contribution plans as adequate information to account for the Company's participation in the plan is not available due to the size and number of contributing employees in the plan. The risks of participating in a MEPP are different from participation in a single-employer plan in the following aspects: (a) Assets contributed to the multi-employer plan by one employer may be used to provide benefits to employees of other participating employers. (b) If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers. (c) If the Company chooses to stop participating in the multi-employer plan, the Company may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability. (iv) Bonus Plan The Company recognizes a liability for unpaid bonuses and an expense for all bonuses, based on a formula that takes into consideration the profit attributable to the Company’s shareholders, after certain adjustments. The Company recognizes a provision where contractually obliged or where there is a past practice that has created a constructive obligation. (v) Defined Benefit plan The Company provided designated employees with defined post-employment benefits based upon their years of service. A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. These benefits are accrued by the Company and remain unfunded unless certain events occur. The Company’s net obligation, in respect of defined benefit pension plans, is calculated by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value. The fair value of plan assets (if any) are deducted. The discount rate is the yield at the reporting date on high-quality corporate bonds that have maturity dates approximating the terms of the Company’s obligations and that are denominated in the same currency in which the benefits are expected to be paid. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The Company recognizes all actuarial gains and losses arising from defined benefit plans immediately in other comprehensive income and reports them in retained earnings. Settlements are approved by the Board of Directors and any difference between the final cash settlement and the Company’s net obligation is recognized at that time as a gain or loss to the current Statement of Income. 38 AirBoss of America Corp. Notes to CFS (cont’d) (h) Provisions Provisions for environmental restoration and legal claims are recognized when: the Company has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognized as finance cost. (i) Net Sales: (i) Goods Sold Net sales from the sale of goods in the course of ordinary activities is measured at the fair value of the consideration received or receivable, net of returns, trade discounts and volume rebates. Net sales for production of finished goods is recognized at the point in time control of the goods is transferred to the customer. Control of finished goods production transfers upon shipment to, or receipt by, customers depending on the terms of the contract. Generally, the buyer has no right of return except if the product did not comply with the agreed upon specifications. (ii) Services Net sales for tolling services is recognized over time as value is added to the raw materials which are controlled and provided by the customer. Net sales for other services are recognized upon acceptance by the customer. (j) Government assistance Government assistance is recognized as a reduction of the related expense or cost of the asset acquired in the period the expenditure is recognized, unless the conditions for receiving the assistance are met after the related expenditure has been recognized. In this case, the assistance is recognized when it becomes receivable. (k) Lease payments The Company recognizes a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, and subsequently at cost less any accumulated depreciation and impairment losses, and adjusted for certain remeasurements of the lease liability. When a right-of-use asset meets the definition of investment property, it is presented in investment property. The right-of-use asset is initially measured at cost, and subsequently measured at fair value, in accordance with the Company’s accounting policies. The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company’s incremental borrowing rate. Generally, the Company uses its incremental borrowing rate as the discount rate. The Company applied judgment to determine the lease term for a lease contract running month-to-month, which significantly affects the amount of lease liability and right-of-use asset recognized. A N N U A L R E P O R T 39 2022 Notes to CFS (cont’d) (l) Finance income and finance costs Finance income comprises interest income on funds invested and changes in the fair value of financial assets at fair value through profit or loss. Interest income is recognized, as it accrues in profit or loss, using the effective interest method. Finance costs comprise interest expense on borrowings, unwinding of the discount on provisions, changes in the fair value of financial assets at fair value through profit or loss, impairment losses recognized on financial assets and the financing component of employee benefits. Borrowing costs that are not directly attributable to the acquisition, construction or production of a qualifying asset are recognized in profit or loss using the effective interest method. (m) Income tax Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in profit or loss except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income. Current tax is the expected tax payable or receivable on the taxable income or loss for the period, using tax rates enacted or substantively enacted at the reporting date and any adjustment to tax payable in respect of previous years. Current tax also includes any tax arising from dividends. Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized for the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss and differences relating to investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse in the foreseeable future. In addition, deferred tax is not recognized for taxable temporary differences arising on the initial recognition of goodwill. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis, or their tax assets and liabilities will be realized simultaneously. A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. In determining the amount of current and deferred tax, the Company takes into account the impact of uncertain tax positions and whether additional taxes and interest may be due. This assessment relies on estimates and assumptions and may involve a series of judgments about future events. New information may become available that causes the Company to change its judgment regarding the adequacy of existing tax liabilities; such changes to tax liabilities will impact tax expense in the period that such a determination is made. (n) Segment reporting Segment results that are reported to the Company’s the Chairman & CEO, and President & COO (the chief operating decision makers) include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Operating segments are aggregated if they are similar and demonstrate similar economic characteristics. Unallocated items comprise mainly corporate assets (primarily the Company’s headquarters), and head office expenses. 40 AirBoss of America Corp. Notes to CFS (cont’d) (o) Share-based payments In 2015, the shareholders approved the Company’s 2015 Omnibus Incentive Plan (“Omnibus Plan”). The Omnibus Plan is a share- based compensation plan under which the entity receives services from directors, employees and certain advisors as consideration for equity instruments of the Company. The fair value of the services received in exchange for the grant of the equity awards is recognized as an expense. The total amount to be expensed is determined by reference to the fair value of the awards granted. Under the Omnibus Plan, the Company can issue restricted stock units, performance share units, deferred share units and stock options pursuant to the terms and conditions of the Omnibus Plan and the related award agreements entered into thereunder. Non-market vesting conditions are included in assumptions about the number of equity awards that are expected to vest. The total expense is recognized over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. At the end of each reporting period, the entity revises its estimates of the number of equity awards that are expected to vest based on the non-market vesting conditions. It recognizes the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to equity. Unless net settled, when options are exercised the Company issues new shares. The proceeds received, together with the amount recorded in contributed surplus, are credited to share capital when the options are exercised. The beneficiary can elect to convert the fair value of the vested options to the market value of shares on a cash-less basis on the exercise date. Liabilities related to performance share units are settled through cash payment. The dilutive effect of outstanding equity awards is reflected as additional share dilution in the computation of diluted earnings per share. (p) New Standards adopted Amendments to IAS 37, Provisions, Contingent Liabilities and Contingent Assets The amendment specifies that the ‘cost of fulfilling’ a contract comprises the ‘costs that relate directly to the contract’. Costs that relate directly to the contract can either be incremental costs of fulfilling that contract or an allocation of other costs that relate directly to fulfilling that contract. This amendment did not have a material impact on the consolidated financial statements. (q) Future Accounting Standards Certain new accounting standards and interpretations have been published that are not mandatory for the current period and have not been early adopted. Of those standards applicable to the Company none are expected to have a material impact on its consolidated financial statements. A N N U A L R E P O R T 41 2022 Notes to CFS (cont’d) NOTE 4 ACQUISITION OF ACE ELASTOMER, INC. On August 31, 2021, the Company acquired 100% ownership of Ace for $42.5 million in cash, adjusted for working capital. Acquisition-related costs The Company incurred acquisition-related costs of $275 on professional fees and due diligence costs that were included in general and administrative expenses in 2021. Consideration transferred The following table summarizes acquisition date fair value of consideration transferred. Cash paid on closing Cash held back and to be settled in accordance with purchase agreement Holdback not paid Cash for excess working capital Total consideration transferred 39,958 2,542 (214) 42,286 371 42,657 Identifiable assets acquired and liabilities assumed The following table summarizes the recognized amounts of identifiable assets acquired and liabilities assumed at the acquisition date on the basis of management’s estimates of fair values as follows: Fair value of assets acquired: Cash and cash equivalents Restricted cash to settle Ace's outstanding debt Trade and other receivables Prepaid expenses Inventories Property, plant, and equipment Trade name Customer relationships Unpatented know-how Non-compete agreements with employees Total assets Value of liabilities assumed: Trade and other payables Debt Total liabilities assumed Net assets acquired 540 638 2,522 429 2,169 1,691 3,300 17,060 5,540 90 33,979 1,852 633 2,485 31,494 The fair value of Ace's intangible assets have been measured through an independent valuation based on the following key assumptions: financial forecasts, customer attrition rates, estimated technical obsolescence rates, discount rates and royalty rates. The following methodologies were used: Relief From Royalty, Multi Period Excess Earnings, and With and Without Income approach. Goodwill Goodwill arising from the acquisition has been recognized as follows. Consideration transferred Fair value of identifiable net assets Goodwill 42,657 (31,494) 11,163 The valuation of goodwill is attributable mainly to the skills and technical talent of Ace’s work force, and the synergies expected to be achieved from integrating Ace into AirBoss Rubber Solutions. 42 AirBoss of America Corp. Notes to CFS (cont’d) NOTE 5 ACQUISITION OF BLACKBOX BIOMETRICS, INC. On May 17, 2021, the Company acquired B3. $7.6 million in cash was paid on closing and up to an additional $20.0 million will be paid in royalties over eight years, based on revenues earned from B3 products. Acquisition-related costs The Company incurred acquisition-related costs of $170 on professional fees and due diligence costs that were included in general and administrative expenses in 2021. Consideration transferred The following table summarizes acquisition date fair value of consideration transferred: Cash Contingent consideration Total consideration transferred 7,615 9,008 16,623 Identifiable assets acquired and liabilities assumed The following table summarizes the recognized amounts of identifiable assets acquired and liabilities assumed at the acquisition date on the basis of management’s estimates of fair values as follows: Fair value of assets acquired: Cash and cash equivalents Trade and other receivables Prepaid expenses Inventories Property, plant, and equipment Computer software Patents and trademarks Total assets Value of liabilities assumed: Trade and other payables Deferred taxes Total liabilities assumed Net assets acquired 768 121 357 77 102 42 13,410 14,877 320 2,878 3,198 11,679 The fair value of B3's intangible assets (patents and trademarks) have been measured through an independent valuation based on the following key assumptions: financial forecasts, estimated technical obsolescence rates, discount rates and royalty rates using the following methodologies: Relief From Royalty and Multi Period Excess Earnings. Contingent consideration was measured on a discounted cash flow basis, reflecting the present value of undiscounted expected future payments of $20.0 million which is the expected payout based on forecast revenues at that date, discounted using a risk adjusted discount rate of 25%. Goodwill Goodwill arising from the acquisition has been recognized as follows. Consideration transferred Fair value of pre-existing interest in B3 Fair value of identifiable net assets Goodwill 16,623 417 (11,679) 5,361 The remeasurement to fair value of the Company’s pre-existing 2.5% interest in B3 resulted in a loss of $76 ($417 less the $493 carrying amount of the investment). This amount has been included in finance costs. The goodwill is attributable mainly to the skills and technical talent of B3’s work force, and the synergies expected to be achieved from integrating B3 into AirBoss Defense Group. A N N U A L R E P O R T 43 2022 Notes to CFS (cont’d) NOTE 6 TRADE AND OTHER RECEIVABLES December 31 Trade receivables Less: expected credit loss Other receivables Impairment losses The aging of trade receivables at the reporting date was: 2022 93,367 (725) 92,642 1,986 94,628 2021 80,861 (601) 80,260 2,180 82,440 December 31 Within terms Past due 0-30 days Past due 31-120 days 2022 2021 Gross Impairment Gross Impairment 70,382 14,117 8,868 93,367 – – (725) (725) 64,776 10,520 5,565 80,861 – – (601) (601) 2021 (750) (188) 292 45 (601) The continuity of the allowance for impairment was: For the year ended December 31 Balance at January 1 Impairment loss recognized Collected Revised estimate Balance at December 31 2022 (601) (251) 74 53 (725) 44 AirBoss of America Corp. Notes to CFS (cont’d) NOTE 7 INVENTORIES December 31 Raw materials and consumables Work in progress Finished goods Inventory in transit Provisions 2022 53,305 8,205 92,745 1,642 155,897 (63,064) 92,833 2021 49,338 3,734 76,848 658 130,578 (8,431) 122,147 An inventory charge of $54,633 (2021: charge of $1,974) was included in cost of sales. During the quarter ended September 30, 2022, AirBoss Defense Group recorded a $57,001 provision related to its inventory of nitrile gloves due to significant downward shifts in pricing and some gloves no longer meeting ADG’s safety standards. Of the total provision, $54,500 was recorded in inventory and $2,501 was recorded in trade and other payables, including derivatives. A N N U A L R E P O R T 45 2022 Notes to CFS (cont’d) NOTE 8 PROPERTY, PLANT AND EQUIPMENT Land and buildings1 Plant and equipment1 Furniture and equipment1 Under construction Cost Balance at January 1, 2021 Acquisition of subsidiary Additions Disposals Transfers Balance at December 31, 2021 Additions Disposals Transfers 40,807 1,811 5,030 (846) 5,586 52,388 412 – 1,151 Balance at December 31, 2022 53,951 Accumulated Depreciation Balance at January 1, 2021 Acquisition of subsidiary Depreciation for the period Disposals Transfers Balance at December 31, 2021 Depreciation for the period Disposals Transfers 14,477 – 3,390 (937) 959 17,889 3,751 – – Balance at December 31, 2022 21,640 102,830 1,939 2,165 (66) 856 107,724 1,554 (1,024) 12,537 120,791 55,410 498 9,113 (37) (438) 64,546 8,612 (1,024) 180 72,314 3,819 184 408 – (1,365) 3,046 176 – (217) 3,005 2,176 – 632 – (521) 2,287 246 – (355) 2,178 5,861 27 13,901 – (5,077) 14,712 6,678 – (13,713) 7,677 – – – – – – – – – – Total 153,317 3,961 21,504 (912) – 177,870 8,820 (1,024) (242) 185,424 72,063 498 13,135 (974) – 84,722 12,609 (1,024) (175) 96,132 (1) includes right of use assets. See note 9 for additional details. Carrying amounts In thousands of US dollars Balance at December 31, 2021 Balance at December 31, 2022 Land and buildings 34,499 32,311 Plant and equipment Furniture and equipment Under construction 43,178 48,477 759 827 14,712 7,677 Total 93,148 89,292 Depreciation expense of $11,913 (2021: $12,442) was charged to cost of sales, $630 (2021: $673) was charged to general and administrative expense and $66 (2021: $21) was charged to research and development expenses. 46 AirBoss of America Corp. Notes to CFS (cont’d) NOTE 9 LEASES The Company leases some of its plants, offices, and equipment. The majority of the Company's leases are for buildings, which have remaining terms between 1 and 6 years. Right-of-Use Assets Cost Balance at January 1, 2021 Acquisition of subsidiary Lease additions Disposals Balance at December 31, 2021 Lease additions Balance at December 31, 2022 Accumulated depreciation Balance at January 1, 2021 Depreciation Disposals Balance at December 31, 2021 Depreciation Balance at December 31, 2022 Carrying amount at December 31, 2021 Carrying amount at December 31, 2022 Land and buildings Equipment Total 13,525 1,593 4,517 (846) 18,789 – 18,789 2,775 1,999 (846) 3,928 2,069 5,997 14,861 12,792 1,852 78 75 (5) 2,000 20 2,020 465 385 (5) 845 436 1,281 1,155 739 15,377 1,671 4,592 (851) 20,789 20 20,809 3,240 2,384 (851) 4,773 2,505 7,278 16,016 13,531 Lease Liabilities Interest expense on lease liabilities of $708 (2021: $764) is included in Finance Costs. Cash outflow related to leases was $3,072 (2021: $3,118). The future undiscounted contractual lease payments are as follows: In thousands of US dollars Total 2023 2024 2025 2026 2027 Thereafter Lease payments 17,181 2,772 2,656 2,570 2,538 2,592 4,053 A N N U A L R E P O R T 47 2022 Notes to CFS (cont’d) NOTE 10 INTANGIBLE ASSETS Cost Balance at January 1, 2021 Acquisition of subsidiary Additions Balance at December 31, 2021 Additions Transfers Balance at December 31, 2022 Accumulated Amortization Balance at January 1, 2021 Amortization for the year Balance at December 31, 2021 Amortization for the year Disposals Balance at December 31, 2022 Carrying amounts Balance at December 31, 2021 Balance at December 31, 2022 Goodwill Customer Relationships Patents and Development costs Trademarks Total Brands, Software and 35,053 16,524 – 51,577 – – 51,577 – – – – – – 51,577 51,577 46,150 17,060 – 63,210 – – 63,210 20,139 4,863 25,002 5,618 – 30,620 38,208 32,590 8,687 22,341 – 31,028 196 – 31,224 819 2,268 3,087 2,913 – 6,000 27,941 25,224 6,961 41 1,081 8,083 1,196 241 9,520 4,119 615 4,734 765 175 5,674 3,349 3,846 96,851 55,966 1,081 153,898 1,392 241 155,531 25,077 7,746 32,823 9,296 175 42,294 121,075 113,237 Amortization expense of $9,296 (2021: $7,746) was charged to general and administrative expense. Remaining amortization for customer relationships acquired is 1 to 16 years and patents and trademarks is 2 to 7 years. Goodwill December 31 AirBoss Defense Group Rubber Solutions Engineered Products 2022 30,349 11,163 10,065 51,577 2021 30,349 11,163 10,065 51,577 Goodwill Goodwill is allocated to those cash-generating units that are expected to benefit from synergies of the related business combination and represent the lowest level within the Company at which management monitors goodwill. As at December 31, 2022 and December 31, 2021, there was no goodwill impairment. Recoverable amount Recoverable amount was based on value-in-use. Value-in-use was determined by discounting the future cash flows generated from the continuing use of the cash-generating unit. Key assumptions used in value-in-use calculations The calculations of value-in-use for the cash-generating units are most sensitive to the following assumptions: • Discount rate of 12.3% to 14.4% determined using risk-adjusted returns from comparable companies adjusted for the Company's capital structure. • Terminal multiple based on market capitalization • Projected sales and margins used to extrapolate cash flows beyond the budget date Cash flows were projected based on past experience, actual operating results and the business plan for a one-year period. Cash flows for a further four-year period were extrapolated using projected sales and a growth rate for operating expenses based on past experiences and future growth trends. Net sales and margins in the business plan were budgeted based on discussions with customers, contracts on-hand and industry information, past experience and trends, as well as continuous improvement initiatives. The anticipated annual net sales have been based on expected growth levels (net of the inflationary effect of rising raw material prices). The values assigned to the key assumptions represent management’s assessment of future trends in the rubber, defense and engineered products industries, which are based on both external sources and internal sources (historical data). Material changes to these assumptions could cause the carrying amounts of goodwill exceed their net recoverable amounts. 48 AirBoss of America Corp. Notes to CFS (cont’d) NOTE 11 OTHER ASSETS Balance at January 1, 2021 Accrued interest Interest paid Effect of movements in exchange rates Investment eliminated upon acquiring control of B3 (note 5) Balance at December 31, 2021 Accrued interest Interest paid Repayment of loan New loan issuances Effect of movements in exchange rates Balance at December 31, 2022 (1) see note 22 for additional details. Share purchase loans1 Other Total 704 10 (7) 2 – 709 20 (8) (239) 1,750 (29) 2,203 939 – – – (493) 446 – – – – – 446 1,643 10 (7) 2 (493) 1,155 20 (8) (239) 1,750 (29) 2,649 NOTE 12 DERIVATIVES NOT DESIGNATED IN A FORMAL HEDGING RELATIONSHIP Foreign exchange hedge At December 31, 2022, the Company had contracts to sell $24,662 from January 2023 to September 2023 for Canadian dollars ("CAD") $33,000. The fair value of these contracts, representing an unrealized loss of $258, are included in trade and other payables, including derivatives on the consolidated statement of financial position. The unrealized changes in fair value, representing a loss of $205 (2021: $673), are recorded on the statement of profit as other expenses. At December 31, 2021, the Company had contracts to sell $16,617 from January 2022 to September 2022 for CAD $21,000. The fair value of these contracts, representing an unrealized loss of $53 are included in trade and other payables including derivatives on the consolidated statement of financial position. Interest rate swap In December 2020, the Company entered into an interest rate swap agreement for a notional amount of $28,125 ($24,375 as at December 31, 2022) amortizing down to $24,375 at maturity on January 1, 2023. Swap interest is calculated and settled on a monthly basis based on the difference between the floating rate of USD LIBOR and the fixed rate of 0.265%. In February 2023, the Company entered into an interest rate swap agreement for a notional amount of $25,000, maturing in February 2025. The swap agreement calculates interest based on the difference between the floating rate of SOFR and a fixed rate of 4.31%. During 2022, interest recovery on the swap agreement was $310 (2021: expense of $44). At December 31, 2022, the fair value of this agreement, representing a gain of $52 (2021: $48), is included in loans and borrowings on the consolidated statement of financial position. The change in the fair value, representing a gain of $4 (2021: $105), is recorded on the consolidated statement of profit as finance costs. The Company entered into the interest rate swap agreements to fix the interest rate on a portion of its borrowings and does not hold them for trading or speculative purposes. Share price hedge In November 2022, the Company entered into hedging arrangements to reduce its exposure to the change in share price related to its share-based compensation. At December 31, 2022, the fair value of these agreements, representing a gain of $223 is included in trade and other receivables, including derivatives on the consolidated statement of financial position. The change in the fair value, representing a gain of $223, is recorded on the consolidated statement of profit (loss) as other expenses. NOTE 13 LOANS AND BORROWINGS December 31 2022 2021 Non-current Revolving line of credit Interest rate swap Lease liabilities Less: deferred financing Current Lease liabilities December 31 Revolving line of credit Interest rate swap Lease liabilities Subtotal Less principal due within one year Less deferred financing A N N U A L R E P O R T 130,100 (52) 12,721 (1,413) 141,356 2,286 2,286 2022 130,100 (52) 15,007 145,055 (2,286) 142,769 (1,413) 141,356 65,000 (48) 15,043 (1,788) 78,207 2,356 2,356 2021 65,000 (48) 17,399 82,351 (2,356) 79,995 (1,788) 78,207 49 2022 Notes to CFS (cont’d) In September 2021 the Company updated its credit facilities to increase revolving credit availability to $250 million from $150 million with an accordion of $75 million (from $50 million) upon the satisfaction of customary conditions for such features. The facility bears interest at LIBOR plus applicable margins from 145 to 250 basis points, depending on covenants, and matures on September 23, 2026. Proceeds from the new facility were used to repay the Company's term loan and fund upfront payments related to acquisition of finished goods and other inventories, related primarily to execution on existing contracts. The Company expects to modify the credit facilities in March 2023 to convert borrowing rates from LIBOR to SOFR in line with market-wide changes. This change is not expected to have a material impact on the consolidated financial statements. In September 2022, the Company's lenders agreed to exclude the $57 million charge related to the nitrile gloves from the calculation of financial covenants. In April 2021 the Company's previous credit facility was amended to increase the revolving facility from $60 million to $150 million. Deferred financing fees, less accumulated amortization have been deducted against borrowings for presentation purposes. The fees are being amortized over the term of the credit facilities and $376 (2021: $324) has been amortized and is included in finance costs. Interest expense under the credit facility was $4,441 (2021: $3,817). Principal repayments on the loans and borrowings are as follows: Revolving line of credit Lease liabilities Total 130,048 15,007 145,055 2023 – 2,286 2,286 2024 – 2,155 2,155 2025 – 2,153 2,153 2026 2027 Thereafter 130,048 2,257 132,305 – 2,388 2,388 – 3,768 3,768 As at December 31, 2022, $130,813 was drawn against the credit facility (2021: $65,713). All obligations under the current credit facility and related loan documentation are secured by a first charge against all of the Company’s present and after acquired property in favor of the lenders. At December 31, 2022 the Company is not in default, nor has it breached any terms of the credit agreement relating to the credit facilities. The carrying amount and fair value of the borrowings are as follows: Revolving line of credit and interest rate swap Lease liabilities Carrying amount Fair value 2022 128,635 15,007 2021 63,164 17,399 2022 130,156 13,726 2021 65,022 18,739 The fair value of current borrowings approximate the carrying amount, as the impact of discounting at current market rates will not have a material impact. The fair values are based on cash-flows discounted using a rate based on the borrowing rate of 6.3% (2021: 2.1%) for the credit facility and lease liabilities. NOTE 14 PROVISIONS Balance at January 1, 2021 Funds withheld on acquisition on ACE (note 4) Settlement of funds withheld Issued to acquire B3 (note 5) Change in fair value of B3 provision Provisions accrued Payments Forfeitures Foreign exchange Balance at December 31, 2021 Less: amount due within one year Change in accounting estimate Change in fair value of B3 provision Provisions accrued (recovered) Payments Forfeitures Foreign exchange Balance at December 31, 2022 Less: amount due within one year Site restoration Legal PSUs and DSUs Payable to former owners of acquired businesses 74 – – – – – – – 5 79 – 79 – – – – – – 79 – 79 – – – – – – – – – – – – – – 11,550 (11,550) – – – – – 2,557 – – – – 8,403 (1,069) (129) 41 9,803 (829) 8,974 (591) – (6,720) (694) (221) (298) 1,279 (1,072) 207 – 2,542 (792) 9,008 (289) – – – – 10,469 (2,011) 8,458 – (37) – (1,134) – – 9,298 (1,036) 8,262 Total 2,631 2,542 (792) 9,008 (289) 8,403 (1,069) (129) 46 20,351 (2,840) 17,511 (591) (37) 4,830 (13,378) (221) (298) 10,656 (2,108) 8,548 50 AirBoss of America Corp. Notes to CFS (cont’d) In the second quarter of 2022, the Company was named as a defendant in legal proceedings related to shipping and demurrage costs owed to a vendor by a subcontractor of the Company. The Company agreed to settlements totaling $11.6 million (inclusive of legal fees) in respect of the shipping and demurrage costs, which were fully settled before the end of the year. Performance Awards The Company has issued 274,841 performance awards to certain executives pursuant to the terms and conditions of the Omnibus Plan. Each performance award entitles the holder to receive on vesting a cash payment equal to the product of (a) the fair market value of a common share as of the vesting date and (b) a performance factor between 0.5 and 1.5, based on the level of achievement of predetermined performance objectives over the vesting period generally. The performance awards vest three years following the grant date. Performance stock units January 1 New issuances Forfeitures Settlements December 31 2022 224,470 79,367 (11,520) (17,476) 274,841 2021 201,210 54,350 (5,847) (25,243) 224,470 During 2022, the Company recognized cost recoveries of $3,691 (2021: costs of $5,577) related to the plan. Deferred Stock Units The Company has issued deferred stock units (“DSUs”) to non-executive directors pursuant to the terms and conditions of the Omnibus Plan. Each vested DSU entitles the holder to receive, on redemption, either: (a) one common share; (b) a cash payment equal to the fair market value of a common share as of the redemption date; or (c) a combination of both cash and common shares, at the sole discretion of the Company. The redemption of a DSU occurs only following the termination of a holder’s service as director and will occur on either: (a) a date selected by a recipient following the termination of their services as a director (which can be no earlier than 10 days, and no later than one year, after the service termination date); or (b) a date selected by the Company following the death of the recipient while still serving as director (which can be no later than 90 days following the death of the recipient). Under the terms of compensation for independent directors of the Company approved by the Compensation Committee and Board in 2016, commencing with the second quarter of 2016 and for each subsequent quarter while he or she remains a director, each independent director is to be granted a number of DSUs having a fair market value equal to CAD $6.25. The fair market value of each DSU is equal to the volume-weighted average trading price of a Common Share on the TSX for the 5 trading days preceding the relevant grant date. In addition to this fixed amount of DSUs, independent directors are able to elect to be paid all or a portion of all other director’s fees in DSUs in lieu of cash, using the same calculation of fair market value as for the fixed amount of DSUs, to be granted on a quarterly basis. All DSUs issued to independent directors vest three months following the relevant grant date. The compensation expense is accrued over the vesting period with a corresponding increase in liabilities in the amount which represents the fair value of the amount payable to the independent director in respect of the DSUs. Deferred stock units January 1 New issuances December 31 2022 112,335 22,553 134,888 2021 97,060 15,275 112,335 During 2022, the Company recognized cost recoveries of $3,220 (2021: expense of $2,698) related to DSUs issued under the Omnibus Plan, including costs of $30 following the change in how DSUs are redeemed. In November 2022, the Company notified its directors that the redemption of all existing and future DSUs will only be satisfied in common shares. As a result of this change the Company will no longer record the DSUs at fair value with a corresponding adjustment for the change in fair value recorded in the Statement of Profit and Loss. Instead, the Company will record fair value of the cost of DSUs over their vesting periods based on their fair values at the grant dates. A N N U A L R E P O R T 51 2022 Notes to CFS (cont’d) NOTE 15 CAPITAL AND OTHER COMPONENTS OF EQUITY Share Capital and Contributed Surplus Share Capital: Authorized - Unlimited number of Class A shares without par value designated as common shares. Unlimited number of Class B preference shares without par value and issuable in series subject to the filing or articles of amendment. The directors may fix, from time to time before such issue, the number of shares that is to comprise each series and the designations, rights, privileges, restrictions and conditions attaching to each series. Under the Omnibus plan, a maximum of 10% of issued and outstanding shares are available for issuance under any type of share-based compensation plan. As at December 31, 2022, 903,907 shares are available (2021: 936,191). Issued share capital is as follows: In thousands of shares January 1 Issued to employee Exercise of share options December 31 2021 26,993 20 79 27,092 2021 26,909 – 84 26,993 Issuance of common shares During 2022, 122,040 options were exercised resulting in the issuance of 79,079 common shares (2021: 98,764 options exercised). In December 2022, the Company renewed its normal course issuer bid ("NCIB") to purchase up to 500,000 of its common shares, representing approximately 2.9% of the Company's public float. The Company purchased nil shares (2021: nil) under its NCIB in 2022. Capital and other components of equity Contributed surplus Contributed surplus is comprised of the difference between the book value per share and the purchase price paid for shares acquired for cancellation by the Company and stock-based compensation of employees and non-employees. Stock Options The term of an option shall not exceed 10 years from the date of grant. Options granted to directors and officers of the Company, which were outstanding at December 31, 2022, are as follows: Range of exercise price ($CAD) 5.14 9.49 11.56 16.30 17.53 32.45 36.01 Options outstanding Quantity Weighted average contract life Options exercisable Quantity 1,121,477 138,644 1,244 25,000 8,372 208,732 166,940 1,670,409 2.23 1.41 0.22 2.42 2.87 4.21 3.23 511,018 99,979 1,244 12,500 4,186 – 41,735 670,662 Options granted and outstanding: A summary of the status of the Company’s stock option plan as of December 31, 2022 and 2021 and changes during the years then ended, is presented below: 2022 2021 Weighted average exercise price ($CAD) 9.11 32.45 5.36 12.25 12.23 Quantity 1,650,792 213,800 (122,040) (72,143) 1,670,409 Quantity 1,605,426 175,279 (98,764) (31,149) 1,650,792 Weighted average exercise price ($CAD) 6.42 36.01 13.50 7.87 9.11 Outstanding beginning of year Granted Exercised Forfeited Outstanding end of year 52 AirBoss of America Corp. Notes to CFS (cont’d) Inputs for measurement of grant date fair values The grant date fair value of all options were measured based on the Black-Scholes model. Expected volatility is estimated by considering historic average share price volatility. The inputs used in the measurement of the fair values at grant date of the share-based payment plans are the following: Fair value of share options and assumptions In Canadian dollars Fair value at grant date Share price at grant date Exercise price Expected volatility (weighted average volatility) Option life (expected weighted average life) Expected annual dividend rate Risk-free interest rate (based on government bonds) The stock options issued vest as follows: Vested at December 31, 2022 2023 2024 2025 2026 Stock option and DSU expense March 2022 March 2021 $ $ $ 11.76 32.84 32.45 42.4% 5 years 1.2% 2.0% $ $ $ 15.18 39.77 36.01 41.8% 5 years 0.7% 1.0% Quantity 670,662 446,156 407,491 93,918 52,182 1,670,409 During 2022, the Company recognized employee costs of $1,517 (2021: $1,173) relating to option grants in general and administrative expenses in the consolidated statement of profit (loss), and employee costs of $30 relating to DSUs in general and administrative expenses following the change in how DSUs are redeemed (see note 14). Dividends Dividends on common shares were paid to shareholders of record quarterly in 2022 and in 2021 as follows: 2022 2021 Shareholder of record at: $CAD/share Date Paid $CAD/share Date Paid March 31 June 30 September 30 December 31 0.10 April 15, 2022 July 15, 2022 0.10 0.10 October 15, 2022 January 15, 2023 0.10 0.40 0.07 0.10 0.10 0.10 0.37 April 15, 2021 July 15, 2021 October 15, 2021 January 15, 2022 The dividend payable at December 31, 2022 was $2,000 (2021: $2,133). A N N U A L R E P O R T 53 2022 Notes to CFS (cont’d) NOTE 16 EARNINGS PER SHARE The following table sets forth the calculation of basic and diluted earnings per share: For the year ended December 31 In thousands of US dollars except per share amounts Numerator for basic and diluted earnings per share: Net income (loss) Denominator for basic and diluted earnings per share: Basic weighted average number of shares outstanding Dilution effect of stock options Dilution of effect of deferred stock units Diluted weighted average number of shares outstanding Profit (loss) per share: Basic Diluted 2022 (31,892) 27,071 – – 27,071 (1.18) (1.18) 2021 46,703 26,970 1,224 104 28,298 1.73 1.65 As of December 31, 2022, 1,670,409 options (2021: nil options) were excluded from the diluted weighted average number of common shares calculation as their effect would have been anti-dilutive. The average market value of the Company’s shares for the purpose of calculating the dilutive effect of share options was based on quoted market prices for the period during which the options were outstanding. NOTE 17 INCOME TAXES The provision for income taxes differs from the amount computed by applying the Canadian statutory income tax rate to income before income taxes for the following reasons: For the year ended December 31 Combined federal and provincial statutory income tax Foreign tax differential Effect of permanent differences Change in tax rates and new legislation Difference arising on filing and assessments Deductible temporary differences not recognized Other Total expense (recovery) The components of the provision for income taxes are as follows: Current Deferred Total expense (recovery) 2022 (10,709) 2,137 225 259 (309) (14) (109) (8,520) 3,661 (12,181) (8,520) 2021 14,452 (1,377) (1,124) (199) (543) (3,464) 84 7,829 6,847 982 7,829 The income tax effects of temporary differences that give rise to significant portions of deferred income tax assets and liabilities are as follows: December 31 Deferred income tax assets: Non-capital income tax loss carry-forwards Deferred income tax deductions relating to long-term liabilities Equity Compensation Financing fees Capital assets Reserve Other Deferred income tax liabilities: Reserve Capital assets Other Net deferred income tax liabilities Recorded on the consolidated statement of financial position: Deferred income tax assets Deferred income tax liabilities Net 54 2022 18,283 – 536 – 286 5,520 231 24,856 (73) (16,096) (103) (16,272) 8,584 11,799 (3,215) 8,584 2021 4,353 169 2,479 55 113 4,187 429 11,785 (133) (14,821) (428) (15,382) (3,597) – (3,597) (3,597) AirBoss of America Corp. Notes to CFS (cont’d) In assessing the recognition of deferred income tax assets, management considers whether it is more likely than not that some portion or all of the deferred income tax assets will be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the period in which the temporary differences are deductible. Management considers the scheduled reversals of deferred income tax liabilities, the character of the income tax asset and the tax planning strategies in making this assessment. Management would not recognize deferred income tax assets if the more likely than not realization criterion is not met. The Company has $102,981 of unused tax losses (2021: $42,087) available to offset future income taxes in the US. $41,811 of these losses were incurred prior to 2018 and are set to expire starting 2037. Losses incurred after 2017 can be carried forward indefinitely. The aggregate amount of taxable temporary differences associated with investments in subsidiaries for which no deferred income tax liabilities have been recognized is $11,614 (2021: deductible temporary differences of $55,734). Deferred tax assets have not been recognized in respect of the following items because it is not probable that future taxable profit will be available against which the Company can use the benefits therefrom. December 31 Gross amount Tax effect Gross amount Tax effect 2022 2021 Capital losses Operating losses Deductible temporary differences 575 29,289 4,716 34,580 72 6,764 1,089 7,925 575 24,608 10,523 35,706 72 5,168 2,507 7,747 NOTE 18 GOVERNMENT ASSISTANCE Scientific research and investment tax credits of $839 were recognized in 2022 (2021: $813); research and development expenses were reduced accordingly. On May 1, 2020, the Company received a $6,422 loan pursuant to the Paycheck Protection Program under Division A, Title I of the CARES Act, to fund certain payroll and business expenses of the Company’s Michigan and North Carolina operations. This loan bore interest at 1.0% and was scheduled to mature on May 1, 2022. On June 30, 2021, the loan and accrued interest were forgiven and the Company recorded a reduction to cost of sales and operating expenses of $5,560 and $936, respectively, in the consolidated statement of profit. The Government of Canada provided the Canada Emergency Wage Subsidy (“CEWS”) and the Canada Emergency Rent Subsidy ("CERS") to support businesses affected by COVID-19 based on certain criteria, including demonstration of revenue declines as a result of COVID-19. In 2022 the Company did not apply for CEWS. In 2021 the Company applied for CEWS and recorded the subsidy as a reduction to cost of sales and operating expenses of $2,380 and $569, respectively, in the consolidated statement of profit. NOTE 19 COMMITMENTS AND CONTINGENCIES Commitments The Company has purchase commitments of $30,854 (2021: $32,015) for raw materials. Delivery on these commitments is expected in 2023. Litigation In December 2022, a statement of claim was filed in the Ontario Superior Court of Justice against AirBoss and several named officers. The applicants under the proceeding seek an order for leave to proceed under the Securities Act (Ontario), certifying the proceeding as a class proceeding and appointing them as representative plaintiffs. The applicants seek, among other relief, a declaration that the Company made misrepresentations contrary to the Securities Act (Ontario) during a period extending from November 9, 2021 to September 6, 2022, as well as unspecified damages. No legal provisions are recognized at December 31, 2022 and 2021. The Company is occasionally named as a party in various claims and legal proceedings, which arise during the normal course of its business. The Company reviews each of these claims, including the nature of the claim, the amount in dispute or claimed and the availability of insurance coverage. Although there can be no assurance that any particular claim will be resolved in the Company’s favour, management does not believe that the outcome of any claim or potential claims of which it is currently aware will have a material adverse effect on the Company. A N N U A L R E P O R T 55 2022 Notes to CFS (cont’d) NOTE 20 POST RETIREMENT BENEFITS The Company provides post-retirement life insurance benefits to eligible retirees (the “Benefit Plan”). The post-retirement life insurance benefits under the other benefit plan are for non-unionized and unionized employees of ADG Canada, which are unfunded defined benefit plans covering life insurance. The methods of accounting, assumptions and frequency of valuations for the Benefit Plan are similar to those used for defined benefit pension schemes. This plan is funded through proceeds from an insurance policy. Total estimated contribution to this plan for the next fiscal year is $22. This plan is unfunded, as such there is no plan asset to be disclosed. At December 31, 2022, the weighted average duration of the defined benefit obligation was 8 years (2021: 10 years). The Benefit Plan exposes the Company to actuarial risks, such as interest rate risk and longevity risk. December 31 Present value of unfunded obligation and liability in the Consolidated Statement of Financial Position Movement in the defined benefit obligation is as follows: At January 1 Current service cost Interest cost Benefit payment Actuarial gain Foreign currency translation At December 31 Amounts recognized in the Consolidated Statement of Profit (loss): Post-retirement benefits (recovery)/expense Interest cost Foreign currency translation Recovery 2022 408 579 4 15 (55) (99) (36) 408 (142) 15 (36) (163) 2021 579 664 3 15 (30) (76) 3 579 (94) 15 3 (76) The current service charge was included in general and administrative expense and the interest cost is included in finance costs in the consolidated statement of profit (loss). December 31 The principal actuarial valuation assumptions used were as follows: Discount rate Mortality 2022 2021 5.15% 2.85% CPM mortality table projected with scale MI- 2017 for the private sector CPM mortality table projected with scale MI- 2017 for the private sector 56 AirBoss of America Corp. Notes to CFS (cont’d) The sensitivity of the Benefit Plan to changes in assumptions is set out below. The sensitivity analysis was performed by changing each assumption individually. If actual changes occur, some of these assumptions are likely to be correlated and result in a combined impact. Fiscal Year ending December 31 Effect of an increase of 1% Post-employment benefit obligation Effect of a decrease in 1% Post-employment benefit obligation Mortality Sensitivity Analysis Effect of an increase of 10% on mortality rates Post-employment benefit obligation Effect of a decrease of 10% on mortality rates Post-employment benefit obligation Defined Contribution Plan 2022 (32) 38 1 (2) 2021 (54) 66 2 (3) AirBoss of America Corp. maintains a registered retirement savings defined contribution plan for all of their employees. Total contribution and expense to this plan for 2022 were $531 (2021: $450). ANC maintains a 401(k) plan for its employees. Total contributions and expense to this plan during 2022 were $130 (2021: $98). Ace maintains a 401(k) plan for its employees. Total contributions and expense to this plan during 2022 were $104 (2021: $5). AFP maintains a 401(k) defined contribution plan for its employees. Total contributions and expense to this plan during 2022 were $538 (2021: $505). ADG USA maintains a 401(k) defined contribution plan for its employees. Total contributions and expense to this plan during 2022 were $123 (2021: $151). ADG Canada employees are covered under various registered and unregistered defined contribution plans. Total contribution and expense to these plans for 2022 were $217 (2021: $210). CSI maintains a 401(k) defined contribution plan for its employees. Total contribution and expense to these plans for 2022 were $87 (2021: $133). B3 maintains a 401(k) defined contribution plan for its employees. Total contribution and expense to these plans for 2022 were $37 (2021: $45). Multi-Employer Pension Plan During 2022, the Company made contributions of $299 (2021: $281) to a multi-employer pension plan. At December 31, 2022, multi-employer pension plan had assets of $6,871 (2021: $5,998) and liabilities of $6,602 (2021: $6,383). The collective bargaining agreement requires that the Company contributes $0.40 for each hour worked by eligible employees during the preceding wage month. A N N U A L R E P O R T 57 2022 Notes to CFS (cont’d) NOTE 21 SEGMENTED INFORMATION Performance of each reportable segment is measured based on profit before finance costs and income tax, as included in the internal management reports that are reviewed by the Company’s Chief Operating Decision Makers: the Chairman & CEO, and President & COO. Segment profit is used to measure performance as management believes that such information is the most relevant in evaluating the results of certain segments relative to other entities that operate within these industries. Transfer pricing is based on third-party rates. Information regarding the results of each reportable segment is included below. Inter-company amounts, which represent items purchased and sold between different segments, have been presented within the segment disclosure and are eliminated to arrive at the consolidated amounts. For the year ended December 31 AirBoss Defense Group Rubber Solutions Engineered Products Unallocated Corporate Costs Total 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 Segment net sales 133,160 329,916 236,149 171,553 132,512 116,621 Inter-segment net sales (2,588) (4,565) (20,937) (18,492) (1,141) (8,175) External net sales 130,572 325,351 215,212 153,061 131,371 108,446 – – – – 501,821 618,090 – (24,666) (31,232) – 477,155 586,858 Depreciation and amortization Segment measure of profit (loss) Finance costs Income tax expense Profit (loss) Segment assets Segment liabilities Capital additions 9,767 10,405 6,622 4,903 5,265 5,330 251 243 21,905 20,881 (40,021) 74,998 19,695 11,125 (11,272) (11,229) (3,076) (16,184) (34,674) 58,710 (5,738) (4,178) 8,520) (7,829) (31,892) 46,703 177,976 205,240 160,154 146,237 97,998 83,292 4,638 8,495 440,766 443,264 108,076 69,571 39,755 32,115 20,619 23,565 75,319 82,865 243,769 208,116 1,515 8,613 6,247 6,113 960 6,722 1,490 1,137 10,212 22,585 58 AirBoss of America Corp. Notes to CFS (cont’d) Geographical segments The Company operates manufacturing facilities and sales offices in the US and Canada, selling primarily in North American markets. In presenting information on the basis of geographical segments, segment net sales is based on the geographical location of customers. Segment assets are based on the geographical location of the assets. Non-current assets include property, plant and equipment, software, goodwill, future income taxes and other assets. For the year ended December 31 2022 2021 Net sales Non-current assets Net sales Non-current assets Canada United States Other countries 70,248 363,994 42,913 477,155 59,340 157,637 – 216,977 47,295 497,875 41,688 586,858 62,278 153,100 – 215,378 Major customers Net sales from one customer represent approximately 9% (2021: 40%) of consolidated net sales in 2022. Five customers represented 33% (2021: 56%) of consolidated net sales in 2022. Major Products AirBoss Defense Group Defense Industrial Rubber Solutions Tolling Mixing Engineered Products 2022 2021 85,931 44,641 130,572 10,009 205,203 215,212 131,371 477,155 291,621 33,730 325,351 8,643 144,418 153,061 108,446 586,858 A N N U A L R E P O R T 59 2022 Notes to CFS (cont’d) NOTE 22 RELATED PARTIES Related Party Transactions During the year, the Company paid $168 (2021: $176) to companies controlled by the Chairman & CEO of the Company for use of office facilities. Transactions with key management personnel Key management includes directors, Chairman & CEO, President & COO, CFO, and senior management. The compensation expense to key management for employee services is shown below: December 31 Salaries and other short-term benefits Share-based payment expense (recovery) 2022 4,175 (5,313) (1,138) 2021 6,297 8,332 14,629 The amounts disclosed in this table are the amounts recognized as operating expenses for accounting purposes during the period and do not necessarily represent amounts receivable or received in cash. Key management own 21.0% of the outstanding common shares as at December 31, 2022 (2021: 21.0%). In March 2018, the Company provided a share purchase loan of CAD $500 to the President & COO that bears interest at 1%, maturing March 2023. In June 2019, the Company provided share purchase loans of CAD $300 to the Executive Vice President, General Counsel; and CAD $92 to the President & COO that bear interest at 2%, maturing June 2024. The loan to the Executive Vice President, General Counsel was repaid in May 2022. In April 2022 the Company loaned $1,750 to the Chief Executive Officer of ADG, secured by shares of the Company, bearing interest at 1%, maturing April 2023. All loans are due upon the earlier of the disposition date of all or proportionate to any part of the pledged securities, and maturity. All share purchase loans are full recourse and interest is due and payable semi-annually. In total, 141,178 shares of the Company having a fair value of $776 were pledged as collateral on these loans. At December 31, 2022, the loan receivable of $2,203, including accrued interest, were included in Other Assets on the consolidated statement of financial position. During the year, interest revenue of $8 (2021: $7) was received. NOTE 23 FINANCIAL INSTRUMENTS Financial risk management The Company's activities result in exposure to a variety of financial risks, including risks related to commodity prices, currency fluctuation, interest rates, credit and liquidity. Market Risk Commodity prices and supplies The Company’s financial performance depends on certain outside sources for raw materials, including carbon black, synthetic and natural rubber, chemicals for rubber mixing, steel and silicone used in the production of its products. The price and availability of these raw materials are subject to fluctuations from such factors as weather, exchange rates, the price of oil, changes in industry production capacity, changes in world inventory levels and other factors beyond the Company's control. The Company manages its commodity price and supply risk by matching purchase commitments to its customers’ requirements during term of the price quote, generally ranging from 1 to 3 months and maintains supply sources in different areas of the world. The Company does not enter into commodity contracts other than to meet the Company’s expected usage and sale requirements; such contracts are not settled net. The following table approximates the financial impact (assuming changes are not passed along to its customers) on the Company of a 10% increase in the cost of its most critical raw materials based upon purchases made in the respective years: Earnings before tax 2022 2021 (8.19) (4.42) (2.82) (3.60) (0.83) (19.86) (7.27) (3.64) (2.55) (2.45) (0.75) (16.66) in millions of US dollars Natural and synthetic rubber Chemicals (Rubber mixing) Steel Carbon black Silicone 60 AirBoss of America Corp. Notes to CFS (cont’d) A portion of the Company's products are sold at prices denominated in CAD or based on prevailing CAD; most of the raw material purchases are denominated in USD and a significant portion of its operational costs and expenses are incurred in CAD. Therefore, an increase in the value of the USD to CAD decreases the net sales in USD terms realized by the Company from sales made in CAD, partially offset by lower CAD operational costs/expenses, which decreases operating margin and the cash flow available to fund operations. The net CAD monetary assets of its Canadian operations represent a currency risk as the balances are re-measured at the month end spot rate creating an unrealized exchange gain or loss. The Company manages its currency risk relating to monetary assets and liabilities denominated in CAD by increasing or decreasing the proportion of borrowings denominated in CAD or forward currency contracts. The Rubber Solution segment’s profit and loss is somewhat naturally hedged in that sales denominated in USD offset USD expenses and debt service costs. The following table approximates the following impact on the Company of a $0.10 decrease in the value of one Canadian dollar in US currency: in millions of dollars Sales (1) Purchases (2) Earnings before tax 2022 2021 (1.9) 6.1 (1.8) 6.5 (1) Based upon Canadian dollar-denominated sales (2) Based upon Canadian dollar-denominated purchases and expenses Interest Rate Risk The Company’s interest rate risk mainly arises from the interest rate impact on cash and floating rate debt. CAD and USD borrowings are on a variable rate basis. The Company has no formal policy to manage a certain proportion of borrowings on a fixed rate basis. In December 2020, the Company entered into an interest rate swap agreement for a notional amount of $28,125 ($24,375 as at December 31, 2022) amortizing down to $24,375 at maturity on January 1, 2023. Swap interest is calculated and settled on a monthly basis based on the difference between the floating rate of USD LIBOR and the fixed rate of 0.265%. In February 2023, the Company entered into an interest rate swap agreement for a notional amount of $25,000, maturing in February 2025. The swap agreement calculates interest based on the difference between the floating rate of SOFR and a fixed rate of 4.31%. During 2022, interest recovery on the swap agreement was $310 (2021: expense of $44). At December 31, 2022, the fair value of this agreement, representing a gain of $52 (2021: $48), is included in loans and borrowings on the consolidated statement of financial position. The change in the fair value, representing a gain of $4 (2021: $105), is recorded on the consolidated statement of profit as finance costs. The Company entered into the interest rate swap agreements to fix the interest rate on a portion of its borrowings and does not hold them for trading or speculative purposes. At the reporting date, the interest profile of the Company’s interest-bearing financial instruments was: December 31 Fixed rate instruments Financial assets Financial liabilities Variable rate instruments Financial liabilities Total 2022 2021 2,203 (14,955) (128,687) (141,439) 709 (13,649) (63,164) (76,104) Fair value sensitivity analysis for variable rate instruments A change of 100 basis points in interest rates for the year would have increased or decreased profit (loss) and equity by: 2022 Variable rate instruments 2021 Variable rate instruments Net income and equity 100bp increase 100bp decrease (760) (374) 760 374 This analysis assumes that all other variables, in particular foreign exchange rates, remain constant. A N N U A L R E P O R T 61 2022 Notes to CFS (cont’d) Credit Risk The Company held cash and cash equivalents of $18,552 at December 31, 2022 (2021: $7,131), which represents its maximum credit exposure on these assets. The cash and cash equivalents are held with bank and financial institution counterparties, which are rated A- to AA-, based on Standard and Poor’s ratings. The Company sells its products to a variety of customers under various payment terms in the normal course of its operations and therefore is exposed to credit risks. The Company’s exposure to credit risk is influenced by general economic conditions, the default risk of the industry and the relative concentration of business. A majority of the Company’s trade receivables are derived from sales to distributors and manufacturers who have been transacting with the Company for over five years. In monitoring credit risk, the Company considers industry, volume and aging trends (see note 6), maturity and other relevant factors. The Company performs ongoing credit evaluations of its customers’ financial condition and limits the amount of credit extended when deemed necessary. Purchase limits established for certain accounts represent the maximum open balance permitted without approval from the CEO. The Company maintains reserves for potential credit losses relating to specific exposures, and any such losses to date have been within management’s expectations. Net sales from one customer represent approximately 9% (2021: 40%) of consolidated net sales in 2022. Five customers represented 33% (2021: 56%) of consolidated net sales in 2022.The loss of any such customers or the delay or cancellation of any orders under certain high-volume contracts could have a significant impact on the Company. The Company believes that its five significant customers are credit worthy and has not recorded a provision for credit risk relating to these accounts. Liquidity Risk Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under normal and stressed conditions. The Company manages liquidity by maintaining adequate cash balances, having appropriate lines of credit available and monitoring cash requirements to meet expected operational expenses, including debt service and capital requirements. In addition, the Company maintains a facility permitting the Company an accordion feature of up to an additional $75,000 availability, upon the satisfaction of customary conditions for such features. At year end, the Company had cash of $18,552 and had drawn $130,813 against its $250,000 revolving credit facilities (2021: cash of $7,131 and had drawn $65,713). Fair value of financial instruments The Company’s financial instruments consist of cash and cash equivalents, trade and other receivables, share purchase loans, trade and other payables, interest rate swap, revolving line of credit, other debt, and foreign exchange hedges. The fair values of cash and cash equivalents, trade and other receivables, share purchase loans, trade and other payables, contingent consideration, interest rate swap and foreign exchange hedges, as recorded in the consolidated statement of financial position approximate their carrying amounts due to the short-term maturities of these instruments. The fair value of the revolving line of credit and leases have been discounted using current market interest rates. The carrying value and fair value are as follows: December 31, 2022 Cash and cash equivalents Trade and other accounts receivable Interest rate swap Share price hedge Share purchase loans Total financial assets Trade and other payables Foreign exchange hedge Loans and borrowings Contingent consideration Total financial liabilities Amortized cost Fair value through profit and loss 18,552 94,628 – – 2,203 115,383 84,981 – 143,694 – 228,675 – – 52 223 – 275 – 258 – 8,422 8,680 Total carrying amount 18,552 94,628 52 223 2,203 115,658 84,981 258 143,694 8,422 237,355 Total fair value 18,552 94,628 52 223 2,203 115,658 84,981 258 143,882 8,422 237,543 62 AirBoss of America Corp. Notes to CFS (cont’d) December 31, 2021 Cash and cash equivalents Trade and other accounts receivable Interest rate swap Share purchase loans Total financial assets Trade and other payables Foreign exchange hedge Loans and borrowings Contingent consideration Total financial liabilities Amortized cost Fair value through profit and loss 7,131 82,440 – 709 90,280 102,973 – 80,611 – 183,584 – – 48 – 48 – 53 – 8,719 8,772 Total carrying amount 7,131 82,440 48 709 90,328 102,973 53 80,611 8,719 192,356 Total fair value 7,131 82,440 48 709 90,328 102,973 53 83,761 8,719 195,506 The fair values of the share purchase loans and revolving line of credit have been based on market interest rate (level 2) in 2022 and 2021. The Company has not disclosed the fair values for financial instruments (trade and other receivables and other liabilities) as their carrying amounts approximate their fair values (level 3). There were no reclassifications between classes of financial assets and financial liabilities in 2022 and 2021. There were no transfers between levels of the fair value hierarchy in 2022 and 2021. Capital Management The Company has defined its capital as follows: December 31 Loans and borrowings less: leases included in loans and borrowings less: cash and cash equivalents Net debt Shareholders’ equity 2022 143,642 (15,007) (18,552) 110,083 196,997 307,080 2021 80,563 (17,399) (7,131) 56,033 235,148 291,181 Net Debt measures the financial indebtedness of the Company assuming that all cash on hand is used to repay a portion of the outstanding debt. The Company's business is cyclical and it experiences significant changes in cash flow over the business cycle. In addition, the Company's financial performance can be materially influenced by changes in the relative value of the CAD and USD. The Company's fundamental objective in managing capital is to ensure adequate liquidity and financial flexibility at all times, but particularly at the bottom of the business cycle and in a strong Canadian dollar environment. The Company constantly monitors and assesses its financial performance in order to ensure that its net debt levels are prudent, taking into account the anticipated direction of the business cycle. When reviewing financing decisions, the Company considers the impact of debt and equity financing on its existing and future shareholders. The Company has established a $250,000 committed revolving line of credit that provides liquidity and flexibility when capital markets are restricted. Key management currently own 21.0% of the outstanding shares of the Company. Each Director is required to hold common shares and/or DSUs valued, at the time(s) of purchase or issuance, as applicable, at three times the annual base cash retainer entitlement. Directors have a period of five years from the date of their election to the Board to achieve the minimum shareholding requirement. There is no plan to extend availability of options beyond key management and senior employees. The Company has a dividend policy to provide an additional return to shareholders; the decision to pay dividends is reviewed quarterly. In December 2022, the Company renewed its normal course issuer bid ("NCIB") to purchase up to 500,000 of its common shares, representing approximately 2.9% of the Company's public float. The Company purchased nil shares (2021: nil) under its NCIB in 2022. Neither the Company nor any of its subsidiaries are subject to externally imposed capital requirements. A N N U A L R E P O R T 63 2022 Corporate Information Board of Directors P. Grenville Schoch Chairman and CEO, AirBoss of America Corp. Aurora, Ontario Mary Matthews, CPA, CA, ICD.D. (1) (2) (3) Toronto, Ontario Stephen Ryan (2) Lead Director Washington, D.C. Robert L. McLeish (1) (2) (3) Port Carling, Ontario Anita Antenucci Upperville, Virginia Alan J. D. Watson (1) (2) (3) Sydney, Australia (1) Member of the Audit Committee (2) Member of the Compensation Committee (3) Member of Corporate Governance Committee David Camilleri (1) Waterloo, Ontario 64 AirBoss of America Corp. Corporate Information Solicitors CORPORATE OFFICE Davies Ward Phillips & Vineberg LLP Toronto, Ontario Auditors KPMG LLP Vaughan, Ontario Transfer Agent And Registrar Computershare Investor Services, Inc. Toronto, Ontario Stock Symbol - Toronto Stock Exchange: BOS Stock Symbol - OTCQX: ABSSF Website Address: www.airboss.com Email Address: info@airboss.com Our Annual Meeting is Wednesday, May 10, 2023 at 9:00am at: AirBoss Rubber Solutions 101 Glasgow Street, Kitchener, Ontario AirBoss of America Corp. 16441 Yonge Street Newmarket, Ontario, Canada L3X 2G8 Telephone: 905-751-1188 Facsimile: 905-751-1101 Chairman and CEO: P. G. (Gren) Schoch President and Chief Operating Officer: Chris Bitsakakis Chief Financial Officer: Frank Ientile . a d a n a C n i d e t n i r P i . n g s e D k s u D y b d e c u d o r P d n a d e n g s e D i A N N U A L R E P O R T Paper is FSC® Certified, Rainforest Alliance Certified™ and 10% Post-Consumer recycled content & fibre. 65 

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