Avon Products, Inc. Annual Report 2017

FY2017 Annual Report · Avon Products, Inc.

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Annual Report
2017

www.avcorp.com

Avcorp Industries Inc.

annual report 2017

ABOUT AVCORP INDUSTRIES INC. The Avcorp Group designs and builds major airframe structures for
some of the world’s leading aircraft companies, including BAE Systems, Boeing, Bombardier, Lockheed
Martin and Subaru Corporation. The Avcorp Group has more than 60 years of experience, over 700 skilled
employees and 636,000 square feet of facilities. Avcorp Structures & Integration located in Delta British
Columbia, Canada is dedicated to metallic and composite aerostructures assembly and integration; Avcorp
Engineered Composites located in Burlington Ontario, Canada is dedicated to design and manufacture of
composite aerostructures, and Avcorp Composite Fabrication located in Gardena California, USA has
advanced composite aerostructures fabrication capabilities for composite aerostructures. The Avcorp
Group offers integrated composite and metallic aircraft structures to aircraft manufacturers, a distinct
advantage in the pursuit of contracts for new aircraft designs, which require lower-cost, light-weight,
strong, reliable structures. Comtek Advanced Structures Ltd., at our Burlington, Ontario, Canada location
also provides aircraft operators with aircraft structural component repair services for commercial aircraft.

Avcorp Composite Fabrication Inc. is wholly owned by Avcorp US Holdings Inc. Both companies are
incorporated in the State of Delaware, USA, and are wholly owned subsidiaries of Avcorp Industries Inc.

Comtek Advanced Structures Ltd., incorporated in the Province of Ontario, Canada, is a wholly owned
subsidiary of Avcorp Industries Inc.

Avcorp Industries Inc. is a federally incorporated reporting company in Canada and traded on the Toronto
Stock Exchange (TSX:AVP).

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Avcorp Industries Inc.

annual report 2017

management discussion & analysis

This Management Discussion and Analysis has been prepared as of July 10, 2018, and should be read in conjunction with the
Company’s consolidated financial statements and notes thereto for the year ended December 31, 2017.

Description of Business

Avcorp Industries Inc. (the “Company”, “Avcorp” or the “Avcorp Group”) supplies major airframe structures to aircraft
manufacturers and to their suppliers. Our capabilities are product design, tool design, metal and composite parts fabrication,
assembly and repair, all of which are governed by strong program management.

The Company currently operates from two locations in Canada and one location in the United States. Located in Delta, British
Columbia, Avcorp Industries Inc., named as Avcorp Structures & Integration (“ASI”), is dedicated to metallic and composite
aerostructures assembly and integration. Within Comtek Advanced Structures Ltd., located in Burlington, Ontario, exists two named
divisions, one (“Comtek”) dedicated to aircraft structural component repair services, and the second Avcorp Engineered Composites
(“AEC”) dedicated to design and manufacture of composite aerostructures. Located in Gardena, California, Avcorp Composite
Fabrication Inc. (“ACF”) is dedicated to advanced composite aerostructures fabrication.

Avcorp Industries Inc. is a federally incorporated reporting company in Canada and traded on the Toronto Stock Exchange
(TSX:AVP).

Avcorp Composite Fabrication Inc. is wholly owned by Avcorp US Holdings Inc. Both companies are incorporated in The State of
Delaware and are subsidiaries of Avcorp Industries Inc.

Comtek Advanced Structures Ltd., incorporated in the Province of Ontario is a wholly owned subsidiary of Avcorp Industries Inc.

Avcorp is in compliance with industry standard quality certifications.

2017 Highlights

Key financial results include:



On April 3, 2017, the Company collected the final amount of consideration receivable from SGL Carbon SE (“SGL”) for the
acquisition of the US-based composite Aerostructures division of Hitco, a subsidiary of Frankfurt-listed SGL (“Hitco”), amounting
to USD$9.2 million.

On May 26, 2017, the Company signed a loan agreement to replace the current agreement with a Canadian Chartered Bank,
supported by a major customer, to access a USD$58 million operating line of credit (converted as approximately
CAD$72.8 million as at December 31, 2017). The Company has utilized $61,283,000 of the operating line of credit, with
$5,212,000 cash on hand, as at December 31, 2017.

Effective July 6, 2017 the Company and Panta Canada B.V. (“Panta”) amended a term loan held by Panta to provide for an
extended maturity date. Panta is Avcorp’s majority shareholder owning approximately 68.6% of the issued and outstanding
common shares on December 31, 2017. Panta is wholly owned by Panta Holdings B.V. Both companies are incorporated in The
Netherlands and Mr. Jaap Rosen Jacobson, a director of the Company, is the sole shareholder of Panta Holdings B.V.

On July 31, 2017 the Company repaid a principal amount of USD$2.5 million plus interest accrued in the amount of
USD$285,000 of the Panta term loan.

On August 3, 2017 Panta exercised 12,105,327 warrants expiring August 17, 2017 at $0.07 whose aggregate price of $847,000
was deemed to be made by way of set-off against the Panta loan obligation.

On August 25, 2017 Panta exercised 6,052,664 warrants expiring September 9, 2017 at $0.07 whose aggregate price of
$424,000 was deemed to be made by way of set-off against the Panta loan obligation.

On September 8, 2017 Panta exercised 12,105,327 warrants expiring September 23, 2017 at $0.07 whose aggregate price of
$847,000 was deemed to be made by way of set-off against the Panta loan obligation.

Customer order backlog increased by $249 million during 2017 due to increases in production rates, contract renewals for
various existing programs, and contract awards.

New program start-up revenues total $5.4 million in 2017 in commencement of 2016 order backlog growth for new and legacy
aircraft programs.

Six new customer production programs launched at ASI during 2017.

Highlights Subsequent to Year-End

Since December 31, 2017 key developments include:



Avcorp is a member of Canada’s Digital Technology Supercluster (“CDTS”) which was awarded funding under the Federal
Government’s Innovation Supercluster Initiative (“ISI”).

On March 28, 2018, signed a loan agreement to expand the current agreement with a Canadian Chartered Bank, supported by
a major and material customer, to access an additional USD$10 million operating line of credit.

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Avcorp Industries Inc.

annual report 2017



In Comtek’s continuing effort to reduce the operator’s key metric of turnaround time for repaired components, while still
providing premium quality, Comtek has embarked on deploying a forward base of operations located in the United Kingdom.
Doors open in the third quarter and will initially provide much needed support for the growing Q400 fleet in Europe.

On April 19, 2018 Avcorp’s Board appointed Amandeep Kaler, formerly the General Manager of Avcorp’s Delta operations, as
the new CEO of Avcorp Group.

Financial Overview

Three-Year Results

The following table provides selected financial information for the three years to December 31, 2017.

THREE-YEAR RESULTS

(prepared in accordance with IFRS, expressed in thousands of Canadian dollars except per share amounts)

FOR THE YEAR ENDED DECEMBER 31

2017

20162

2015

OPERATIONS

Revenue

EBITDA1

Operating loss

Net loss3

Basic and diluted loss per share

FINANCIAL POSITION

Capital expenditures

Total assets

Bank indebtedness and term debt

Shareholders’ (deficit) equity

Net book value per share4

Ratio: current assets/current liabilities

Shares outstanding at period end

$149,444

$183,707

(48,342)

(53,773)

(58,538)

(0.18)

3,054

113,276

64,453

(57,405)

(0.17)

0.53

(13,762)

(16,405)

(19,959)

(0.07)

6,836

133,076

25,040

(6,883)

(0.02)

0.94

$80,416

(8,093)

(11,623)

(12,154)

(0.04)

959

160,091

1,886

6,784

0.02

1.40

337,404,502

307,141,184

305,555,184

EBITDA = earnings before interest, taxes, depreciation and amortization. This is not a recognized term under International Financial
Reporting Standards (“IFRS”).
It should be noted that in 2016, the loss and EBITDA incorporated substantial costs incurred which have yet to be recovered from the
seller of Hitco. No recovery of these costs has been recorded, as an estimated amount cannot be reasonably determined at this time.

3. On the acquisition of Hitco on December 18, 2015, Avcorp assumed the unfavourable contract liability and customer advance arising
from specific customer contracts. In previously filed financial statements the Company recorded the foreign exchange gain on these
acquired liabilities through the statement of operations. Upon further analysis in 2017, it was determined that the foreign exchange
gains on these items should have been recorded through other comprehensive income in the statement of equity. As a result the
Company has reclassified $3,995,000 from foreign exchange gain to other comprehensive income in the year ended
December 31, 2016, as well as a reclassification of $861,000 from January 1, 2016 Deficit to Accumulated Other Comprehensive
Income.
Net book value per share is not a recognized term under IFRS.

Avcorp’s recurring contracted revenue base remains strong as customers continue to place orders within existing long-term
supply agreements. 2017 production revenues have decreased by $10,302,000 from 2016, exclusive of the 2016 $33,019,000
amortization and contract renegotiation of the unfavourable contract liability into revenue (December 31, 2017: $9,058,000).
Recent customer contract awards contributed $5,395,000 to 2017 revenues in comparison to $Nil for 2016.

The three primary factors underlying the year on year reduction in revenues are: 2016 revenues include amortization for the
unfavourable contract liability, which amounted to $33,019,000 in 2016 (2017: $9,058,000); wind-down of certain loss-making
contracts acquired in the Hitco acquisition; change in aircraft repairs cycles; and a significant transfer of defence program
deliveries from 2017 into 2018.

Growth in revenues from 2015 to 2016 was primarily attributable to the December 18, 2015 Hitco acquisition.

During 2017 the Company continued with its strategic approach for securing business growth in the composite aircraft
structures assembly market, to further diversify its aerostructures market position, leveraging its 2015 acquisition of Hitco.
The Hitco acquisition, which required significant turn-around expenditures and was severly burdened with operational
inefficiencies and extensive legacy product warranty obligations, reduced Earnings Before Interest, Taxes, Depreciation &
Amortization (“EBITDA”) for the Group. Although expenditures have now been reduced, the Company continues to consume
significant resources for the Hitco turn-around.

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Avcorp Industries Inc.

annual report 2017

The 2016 $16,405,000 operating loss contains a $38,937,000 amoritization of an unfavourable contract liability into income;
without which the operating loss for 2016 was $55,342,000. On a comparative basis, the 2017 $53,773,000 operating loss
contains a $9,058,000 amoritization of an unfavourable contracts liability into income; without which the operating loss was
$62,831,000. Additional provisions for onerous contracts amouting to $13,603,000 during 2017 have caused operating results
to deteriorate. Certain of those contracts are being wound down in 2018. The 2015 $11,623,000 operating loss contains a
$356,000 amoritization of an unfavourable contracts liability into income, as this amoritization only impacted the December 18,
2015 post-acquisition period to December 31, 2015.

Capital expenditures during the three year period presented have been limited to upgrading manufacturing equipment and
capabilities, in particular for new program introductions, as well as information technology assets; with $1,892,000 of capital
expenditures incurred at Avcorp’s Gardena facility in order to rectify equipment deficiencies and improve the effectiveness of
operational capabilities.

Bank indebtedness and term debt increased by $40,739,000 in 2017 over 2016. Cash flows from operating activities, before
consideration of changes in non-cash working capital, decreased by $42,257,000 during the year ended December 31, 2017 as
compared to a $59,091,000 decrease of cash during the year ended December 31, 2016. Cash flows from operating activities
were most significantly impacted as a result of operating losses incurred from the integration and production costs expended for
the acquired Hitco operations; losses arising from unfavourable customer contracts assumed; and operational, administrative,
and legal expenditures, incurred at Avcorp’s Gardena facility; as well as new program introduction and start-up costs at the
Delta facility. 2015 bank debt and 2016 bank debt were reduced by $32,826,000 and $22,429,000 respectively as a result of
cash consideration received from the December 18, 2015 Hitco acquisition (December 31, 2017: $12,378,000).

Quarterly Results

The following table provides selected unaudited quarterly consolidated financial information for the eight most recent fiscal
quarters to December 31, 2017 prepared in accordance with IAS 34 – Interim Financial Reporting (“IAS 34”) as issued by the
International Accounting Standards Board (“IASB”).

QUARTERLY RESULTS

(prepared in accordance with IFRS, expressed in thousands of Canadian dollars except per share amounts)

FOR THE THREE MONTHS ENDED

Dec 31

Sep 303

Jun 30

Mar 31

Dec 31

Sep 30

Jun 30

Mar 31

2017

20162

Revenue

$37,923

$36,267

$36,686

$38,568

$46,183

$47,349

$50,234

$39,941

Operating (loss) income

(27,342)

(6,644)

(11,170)

(8,617)

9,233

(12,060)

(6,010)

(7,568)

EBITDA1, 4

Net (loss) income4

EBITDA per share1

Basic

Diluted

Net (loss) income per share

Basic

Diluted

(24,493)

(6,253)

(10,003)

(7,593)

12,496

(8,413)

(5,412)

(12,433)

(27,469)

(8,444)

(12,512)

(10,113)

10,578

(9,963)

(6,738)

(13,836)

(0.07)

(0.02)

(0.03)

(0.02)

(0.07)

(0.02)

(0.03)

(0.02)

(0.08)

(0.03)

(0.04)

(0.03)

(0.08)

(0.03)

(0.04)

(0.03)

0.04

0.03

(0.03)

(0.02)

(0.04)

(0.03)

(0.02)

(0.04)

(0.03)

(0.02)

(0.05)

(0.03)

(0.02)

(0.05)

Long-term debt

2,973

1,919

1,588

1,617

1,646

1,674

1,650

1,649

1. EBITDA = earnings before interest, taxes, depreciation and amortization. This is not a recognized term under International Financial

Reporting Standards (“IFRS”), refer to page 10.

2. It should be noted that in 2016, the loss and EBITDA incorporated substantial costs incurred which have yet to be recovered from the
seller of Hitco. No recovery of these costs has been recorded, as an estimated amount cannot be reasonably determined at this time.
3. Restatement: Effective July 1, 2017, the Company changed its functional currency from Canadian dollars (“CAD”) to United States
(“US”) dollars (“USD”) for Avcorp Industries Inc. and Comtek Advanced Structures Limited. The Company applied the change in
functional currency on a prospective basis. After further subsequent evaluation of the entities’ revenue and cost cash flows as well as the
Company's financing agreements, the Company has determined that the functional currency of these two entities should not have been
changed. Consequently, the Q3 2017 financial results above have been restated to reflect the functional currency of Avcorp Industries
Inc. and Comtek Advanced Structures Limited as the CAD. The impact of this restatement was to increase Q3 2017 net income by
1,219,000, and increase assets by 1,454,000.

4. On the acquisition of Hitco on December 18, 2015, Avcorp assumed the unfavourable contract liability and customer advance arising
from specific customer contracts. In previously filed financial statements the Company recorded the foreign exchange gain on these
acquired liabilities through the statement of operations. Upon further analysis in 2017, it was determined that the foreign exchange
gains on these items should have been recorded through other comprehensive income in the statement of equity. As a result the
Company has reclassified $3,995,000 from foreign exchange gain to other comprehensive income in the year ended December 31, 2016,
as well as a reclassification of $861,000 from January 1, 2016 Deficit to Accumulated Other Comprehensive Income.

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Avcorp Industries Inc.

annual report 2017

During 2017 certain production contracts for commercial aircraft were wound down at Avcorp Composite Fabrication Inc., as
planned during the Hitco acquisition; however, additional operating inefficiencies contributed to quarterly operational losses.
The Company continues to focus on reducing the cost structure in Gardena by consolidating facility usage and staffing levels via
lean production techniques.

income benefited

2016
liability
(2017: $9,058,000); however, additional provisions for onerous contracts amounting to $13,603,000 during 2017 have caused
operating results to deteriorate. Such contracts are being wound down in 2018.

income of an unfavourable contracts

from $38,937,000 of amortization

into

2017 and 2016 Results Overview

During the year ended December 31, 2017 Avcorp Group revenues totalled $149,444,000 compared with $183,707,000 for the
previous year.

The Company operates within “general terms agreements” with its customers. These agreements are typically for five years or
longer. The contracts provide for long lead-time orders; the civil aerospace business is also slightly seasonal as some aircraft
manufacturers reduce or suspend production in December and for a period of time during the summer months.

2017 revenues arising from the assignment by customers of commercial aerospace contracts to Avcorp Industries Inc. in
conjunction with the December 18, 2015 Hitco acquisition have generated $50,946,000 in revenue (December 31, 2016:
$67,492,000). These contracts support customer production of commercial aircraft. Manufacturing of the composite parts
occurs in Avcorp Group’s Gardena facility. The Gardena facility was assigned defence aerospace contracts by Hitco’s
customers upon the finalization of the acquisition. These contracts generated $19,879,000 of revenue during the year ended
December 31, 2017 for ACF (December 31, 2016: $17,369,000). Issues with deliveries of products and services within the
Gardena production supply chain impacted this facility’s ability to have delivered to available customer demand; planned
wind-down of certain commercial contracts assigned from the Hitco acquisition further reduced revenues. However, the
March 31, 2017 and subsequent May 26, 2017 increases to the Company’s existing credit facility with a Canadian chartered
bank cumulatively to USD$58,000,000 alleviated supply chain constraints during the year. The majority of the loss making
production contracts for the Gardena facility, which were assumed with the Hitco acquisition, have been re-priced or will be
wound-down by the end of 2018.

The Burlington facility had an increase in the delivery of composite floor panels in supply to Bombardier Aerospace’s Global
5000/6000 and Global 7000/8000 programs during the current year, with a 71% increase in production for these contracts in
2017 versus 2016 (a $1,850,000 revenue increase 2017 over 2016). Full rate production for these programs establishes the
wholly owned subsidiary as a leading manufacturer of composite floor panels. Composite floor panel revenues arising from
aftermarket, spare, or other original equipment manufacturers (“OEM”) composite floor panel sales were reduced during 2017
relative to 2016; a 16% decrease ($1,210,000 revenue reduction in 2017 relative to 2016) This facility has had significant
success during 2017 in growing its sales base for other composite component deliveries to OEMs. Sales in this market segment
grew by 86% in 2017 relative to 2016 ($1,724,000 revenue increase). Composite aircraft repair revenues out of Comtek were
$3,779,000 lower in 2017 in comparison to 2016, as regional airline customers implemented cost reduction initiatives and fleet
aircraft mix changes; while it is anticipated that new market penetration and a backup of regional airline repairs will augment
the 2018 revenue base. Burlington cost structure related to overhead, administration and general expenses were reduced in
2017 relative to 2016 in efforts to reduce the impact of the current revenue reduction while providing a cost effective
organizational structure basis for 2018 revenue growth.

Delta facility revenues, for all programs generated by production contracts, have increased by $5,149,000 during the current
year relative to the previous year (an 11% increase for 2017 in comparison to 2016). On a delineated basis, Delta revenues
from the production and delivery for business jet programs has increased by approximately $2,698,000 as customer demand
for the products has increased in 2017 over 2016; commercial aircraft production supply increased by $2,170,000 in 2017 as
compared to 2016 primarily due to the 2017 start-up of production for a higher complexity assembled structure, offsetting
decreases in legacy programs; defence programs’ production has increased only slightly as customer delivery requirements
have been shifted from the first half of 2017 into 2018.

Avcorp’s Delta location continues to actively pursue production contracts on aerospace programs throughout North America,
Asia, and Europe both in the commercial and defence aerospace sectors. These production contracts consist of complex metal
bond and multi-material structural assemblies that complement Avcorp’s capability as a strategic integrated supplier within the
aerospace industry. Production and deliveries for recent contract awards commenced during the current year for the Delta
facility providing $5,395,000 revenues in 2017. Delta operating losses in 2017 were primarily as a result of a single fixed
quantity new commercial aircraft program introduction. Significant efforts have been made in 2017 to improve operational
efficiencies, including automation, which reduce this programs losses in 2018.

For the year ending December 31, 2017, the Avcorp Group recorded losses from operations totaling $53,773,000 from
$149,444,000 revenue, which include costs incurred on start-up of new programs, as compared to $16,405,000 operating
losses from $183,707,000 revenue for the previous year. Program introduction and start-up costs for new programs, deferred
defense production deliveries, continued production and delivery of onerous contracts, for which the Company provided an
additional $13,603,000 in onerous contracts provision in 2017, as well as a shift in customer requirements for aircraft repairs
have caused operating losses in 2017. Furthermore, issues with deliveries of products and services within the production supply
chain were a major cause for sales not to have filled available customer demand, causing a revenue shortfall; as well as an
adverse financial impact resulting from inconsistent supply chain deliveries which caused inefficient production ‘work-arounds’
within the facility. It should be noted that 2016 operating losses benefited by $38,937,000 income from amortization of an
unfavourable contract liability into income (2017: $9,058,000).

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Avcorp Industries Inc.

annual report 2017

An unfavourable contract liability accruing for certain customer contracts, for which unavoidable costs are expected to exceed
the corresponding revenue earned, amounted to $100,582,000 upon the December 18, 2015 Hitco acquisition; of which
$44,460,000 remains unamortized as at December 31, 2017 (December 31, 2016: $56,969,000). The unfavourable contract
liability is amortized into income on a units-of-production basis over the expected life of the contract and as costs are incurred.
The amount of unfavourable contract liability amortized into income during the year ended December 31, 2017 was $9,058,000
(December 31, 2016: $38,937,000). The unamortized unfavourable contract liability is accrued in US dollars and therefore the
unamortized balance will vary from quarter to quarter as the estimated provision is adjusted for foreign currency fluctuations.

Over the course of 2016 and through 2017, certain of the smaller loss making contracts at the Gardena facility are being wound
down eliminating the associated losses. The remaining significant loss making contract has been the focus of a comprehensive
Company initiative under which management is working with a customer to facilitate an orderly transition of this significant loss
making contract away from Avcorp’s Gardena facility.

Although recent customer contract awards will continue to increase facility utilization, there remains significant levels of
unutilized plant capacity within the Company’s Delta, British Columbia facility. The Company has expensed $4,309,000 of
overhead costs during the year as compared to $4,408,000 for December 31, 2016 in respect of unutilized plant capacity. The
amount of overhead costs expensed, as a result of unutilized capacity, will fluctuate from quarter to quarter as production in
support of deliveries varies. Although, revenue growth in this facility would benefit Company profitability via a contribution to
the recovery of fixed overhead expenditures, new program introduction expenditures and learning curve costs related to new
program start-ups at Delta have added $2,029,000 to current year operating losses. Avcorp is engaged with aerospace OEM’s
as well as industry tier 1 suppliers in North America, Asia and Europe in collaborative production initiatives that support the
Company’s recent transition to composite manufacturing capabilities, further leveraging existing production capacity and
investments.

During the year ended December 31, 2017, cash flows from operating activities, excluding the impact of changes in non-cash
working capital, utilized $42,257,000 of cash as compared with utilization of $59,091,000 of cash during the year ended
December 31, 2016. Cash flows from operating activities were most significantly impacted as a result of operating losses
incurred from the integration and production costs expended for the acquired Hitco operations; losses arising from unfavourable
customer contracts assumed; operational, administrative, and legal expenditures incurred in support of Avcorp’s Gardena
facility; as well as new program introduction and start-up costs at the Delta facility.

Changes in non-cash working capital during the current year utilized cash flows from operating activities in the amount of
$347,000 as compared to the previous year during which non-cash working capital provided $8,744,000; accounts receivable
provided cash and accounts payable used cash in 2017 compared to 2016 during which accounts receivable and payable
provided cash.

Pursuant to the Hitco acquisition, the Company assumed a customer advance for pre-funding of product deliveries. The
customer advance is re-paid as the Company delivers to its customer ordered products for a specific program. The customer
advance is subject to an access and security agreement along with a general security agreement entered into with the
Company’s bank and the customer. The remaining unamortized customer advance has been discounted to arrive at the
December 31, 2017 amount of $7,227,000 (December 31, 2016: $11,573,000) of which it is estimated $7,227,000 will be
amortized during the next twelve months. The Company re-paid and amortized into income $4,346,000 of the customer
advance during the year ended December 31, 2017 (December 31, 2016: $6,955,000).

As at December 31, 2017, the Company had $5,212,000 cash on hand (December 31, 2016: $3,960,000) and had utilized
$61,283,000 of its operating line of credit (December 31, 2016: $17,111,000). The Company has a working capital deficit of
$63,613,000 as at December 31, 2017 which has increased from the December 31, 2016 $5,439,000 deficit. Working capital
surplus/deficit is defined as the difference between current assets and current liabilities. The increase in bank utilization during
2017 has increased the working capital deficit in 2017 over 2016. However, the Company’s accounts receivable and inventories
net of accounts payable, amount to a $37,889,000 surplus as at December 31, 2017 (December 31, 2016: $38,436,000
surplus). The Company’s accumulated deficit as at December 31, 2017 is $157,185,000 (December 31, 2016: $98,647,000).

ACF Gardena

The ACF commercial operations in Gardena faced several significant unanticipated challenges during 2016, immediately
post-acquisition which continued to have an adverse financial impact into 2017 as the Company’s operational turn around
initiatives were significantly delayed. Operational losses, incurred at the Gardena facility amounted to $33,035,000 for the year
ended December 31, 2017 as compared to $4,078,000 operating losses for 2016. Gardena 2016 operating losses benefited by
$38,937,000 income from amortization of an unfavourable contract liability into income (2017: $9,058,000). Product quality
and warranty claims on product delivered by Hitco pre-acquisition, although indemnified under the asset purchase agreement
with Hitco and SGL, further adversely impacted operations and caused excessive personnel costs, and administrative and legal
expenditures at ACF’s Gardena facility during the periods. These costs have yet to be recovered and are included in all the costs
for 2016 and into 2017.

As a result of legacy quality issues raised by customers on Hitco products delivered prior to the acquisition, a substantial and
large number of items were identified that required corrective action. These items accounted for substantial expenditures,
including extra contract personnel beyond normal production levels, for which losses ACF has yet to be indemnified by Hitco or
SGL.

The complexity and challenge of executing the production start-up and improvement plans for the Gardena operations
increased from pre-acquisition estimates. Avcorp continues to work successfully with its commercial and defence aerospace
customers to update plans and commitments to ensure support for their programs and maintain purchase order schedules.

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Avcorp Industries Inc.

annual report 2017

Over the course of 2016 and through 2017 certain of the smaller loss making contracts at the Gardena facility were being
wound down eliminating the associated losses; and the period of performance for the most significant loss making contract was
reduced by four years. What will be the remaining significant loss making contract continues to be the focus of a comprehensive
Company initiative under which management is working with a major customer for an orderly and protected transition of this
significant loss making contract from Avcorp’s Gardena facility. Contract revisions are in place which are expected to improve
Avcorp’s financial performance.

Revenue

For the year ended December 31, 2017 revenues totalled $149,444,000, a $34,263,000 reduction in revenues relative to 2016
(December 31, 2016; $183,707,000).

The four primary factors underlying the year on year reduction in revenues are: 2016 revenues include amortization into
revenue for the unfavourable contract liability which amounted to $33,019,000 in 2016 (2017: $9,058,000); wind-down of
certain loss-making contracts acquired in the Hitco acquisition; change in aircraft repairs cycles; and a significant transfer of
defence program deliveries from 2017 into 2018.

New program start-up revenues contributed $5,395,000 to 2017 revenue in commencement of the $523 million increase in
order backlog which occurred in 2016 for new and legacy aircraft programs.

Operating segment revenues are as follows:

REVENUE DISTRIBUTION

(prepared in accordance with IFRS, expressed in thousands of Canadian dollars)

FOR THE YEAR ENDED DECEMBER 31

2017

2016

Avcorp Industries Inc. (ASI)

Comtek Advanced Structures Ltd. (AEC)

Avcorp Composite Fabrication Inc.1 (ACF)

Total

Revenue % of Total

$51,485

18,076

79,883

34.4

12.1

53.5

$46,483

19,491

117,733

25.3

10.6

64.1

149,444

100.0

183,707

100.0

1. ACF revenue includes amortization of a portion of the unfavourable contract liability of $9,058,000 in 2017 (December 31, 2016:

$33,019,000).

Delta facility new commercial aircraft program revenues have contributed $5,395,000 of revenue growth in 2017 over 2016.
Revenue from the production and delivery for business jet programs has increased by approximately $2,698,000 as customer
demand for the products has increased in 2017 over 2016. Production for defence programs remained flat in 2017 relative to
2016; however, customer delivery requirements for these products has increased but moved into 2018.

Effective December 18, 2015, Avcorp completed the acquisition of the US-based composite Aerostructures division of Hitco, a
subsidiary of Frankfurt-listed SGL. The Acquisition was completed pursuant to the terms of an asset purchase agreement that
was entered into on July 20, 2015, and subsequent amendments to December 18, 2015. Pursuant to the Agreement Avcorp’s
subsidiary, Avcorp Composite Fabrication Inc., (the Group’s Gardena facility) purchased the assets of the division of Hitco
which produces composite structural parts for commercial and military aerostructures.

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Avcorp Industries Inc.

annual report 2017

Despite the challenges encountered, the acquisition of Hitco’s Aerostructures composite division has provided Avcorp the unique
opportunity to transform the Avcorp Group’s existing metal fabrication and integrated assembly business by broadening the
product range and strengthening Avcorp’s composite capabilities. Advanced composite fabrication capabilities, provided by this
acquisition, will enhance Avcorp Group’s ability to participate in large aerospace assembly programs which combine mixed
material components.

2017 revenues arising from the assignment by customers of commercial aerospace contracts to Avcorp Industries Inc. in
conjunction with the December 18, 2015 Hitco acquisition have generated $50,946,000 in revenue (December 31, 2016:
$67,345,000). These contracts support customer production of commercial aircraft. Manufacturing of the composite parts
occurs in Avcorp Group’s Gardena facility. The Gardena facility was assigned defence aerospace contracts by Hitco’s customers
upon the finalization of the acquisition. These contracts generated $19,879,000 of revenue during the year ended
December 31, 2017 for ACF (December 31, 2016: $17,369,000). Issues with deliveries of products and services within the
Gardena production supply chain were the primary cause for this facility not to have delivered to available customer demand.
The May 26, 2017 increase of the Company’s existing credit facility with a Canadian chartered bank to USD$58,000,000
alleviated supply chain constraints during the second half of 2017 and provided the necessary liquidity to commence normal
operating conditions.

Deliveries and quality performance as at December 31, 2017 for Canadian manufacturing operations were at customer required
levels. The manufacturing operations have achieved, and continue to maintain, top quality and delivery ratings for the majority
of their programs.

In conjunction with the Hitco acquisition, Hitco and its ultimate parent SGL Carbon SE have the contractual responsibility and
liability for certain losses incurred by Avcorp in connection with quality and warranty claims pertaining to finished goods
delivered by Hitco before the closing date and certain finished goods manufactured by Hitco before the closing date that were
designated as conforming inventory. Immediately after the Hitco acquisition, a thorough quality and delivery review and audit
was conducted of Hitco’s Gardena manufacturing operations by ACF, which has produced improvement plans together with its
customers. ACF continues to work collaboratively with customers to ensure any quality and delivery issues are fully resolved at
the earliest date.

Revenues from Avcorp Group customers are as follows:

REVENUE DISTRIBUTION

(prepared in accordance with IFRS, expressed in thousands of Canadian dollars)

FOR THE YEAR ENDED DECEMBER 31

2017

2016

Revenue % of Total

BAE Systems

Boeing1

Bombardier

Lockheed Martin

Subaru Corporation (formerly Fuji Heavy Industries)

Other

$5,413

59,089

19,134

15,735

24,566

16,449

Amortization and contract renegotiation of the unfavourable contract liability

9,058

3.6

39.5

12.8

10.5

16.4

11.0

6.2

$5,352

80,735

16,047

12,659

15,789

20,106

33,019

2.9

43.9

8.7

6.9

8.6

11.0

18.0

Total

149,444

100.0

183,707

100.0

1. Includes Boeing program partner revenue

The Avcorp Delta BC facility is the single source supplier for the F-35 CV-OBW assembly under contract with BAE Systems
(“BAES”), and delivers directly to Lockheed Martin. The Outboard Wing is the foldable portion of the wing on the carrier
version of the F-35 aircraft which allows for handling and storage of the aircraft on the aircraft-carrier’s deck and hangers, while
keeping its long-range and low-landing-speed flight characteristics. The CV-OBW is regarded as one of the more complex
assemblies that the Canadian aerospace industry contributes to the F-35 program. Production demand for the F-35 CV-OBW
has increased in 2017 relative to 2016, with more significant increase in deliveries to occur in 2018. Production contracts have
been secured through to end of 2019, with discussions underway with the customer to secure constant production through to
mid-2022. The Company announced that further to the contract award from Lockheed Martin announced on October 15, 2015
for the expanded scope on the F-35 CV-OBW, Avcorp has received a firm order for the remaining units in the next two
production phases, referred to as Low Rate Initial Production (“LRIP”) Nine and LRIP Ten. Avcorp’s established New Product
Introduction (“NPI”) process will ensure the successful knowledge and skills transfer from Lockheed Martin, required for the
intricate work of paint preparation and complex installation of control surfaces and systems such as the outboard leading edge
flaps, ailerons, fairings and sub-systems. The delivery of the first shipset to Lockheed Martin’s Final Assembly and Check Out
facility in Fort Worth, Texas, USA was in August 2016, with subsequent confirmed orders extending out to 2019, and
discussions underway with the customer to secure constant production through to mid-2022.

Page 8

Avcorp Industries Inc.

annual report 2017

Avcorp’s Gardena California facility provides substantial content for all three models of the F-35 fighter aircraft. Fabricated
components include: wing skins, upper and lower, nacelles, access panels, and a strap component that serves as a structural
backbone to the aircraft. Avcorp fabricates these complex structures through a combination of both automated robotic fiber
placement and hand laid graphic fabric methods. Avcorp is under a multi-year contract with Lockheed Martin Corporation, who
release order quantity and schedule requirements that coincide with their fiscal year. The current period of performance
extends through 2019. Follow on contract value is anticipated, assuming acceptable quality and delivery performance.
Revenues for this long-term defence program totalled $15,735,000 for the year ended December 31, 2017 (December 31,
2016: $12,659,000).

Shipments of large metallic assemblies to Boeing Commercial Airplane Group (“Boeing”), primarily for the 737 commercial
jet program, increased by 33% during 2017 relative to 2016, primarily as a result of a newly awarded program start-up.
Concurrently, deliveries of fabricated parts and components to Boeing decreased 5% as customer demand for discrete and
lower complexity assembled structures has been reduced. However, commencement of production in 2017 for certain 2016
awarded parts and components will achieve full rates of production in 2018. During 2016, Avcorp delivered its first significant
quantity of shipsets of composite fabricated aerostructures parts for Boeing programs from its acquired Gardena production
facility. 2017 revenues for these composite parts totalled $21,625,000 (December 31, 2016: $39,780,000), a reduction from
2016 as the planned wind-down of certain Hitco acquired customer contracts takes place. Total revenues generated for the
Company from various Boeing Commercial aircraft programs amounted to $51,058,000 (December 31, 2016: $64,869,000).
The Company also delivers components to Boeing Defense, Space & Security (“Boeing DSS”) for the Chinook CH47
helicopter. During the year ended December 31, 2017 the Company generated $3,697,000 of revenues in supply to Boeing
DSS, a decrease in revenues recorded for the same period in 2016 (December 31, 2016: $4,261,000) reflecting variances in
timing of customer demand. The Avcorp Delta BC facility announced on October 26, 2015 that it has been awarded the
production contract for the supply of Boeing 767-2C Panoramic Camera Fairings. Furthermore, the Delta facility was able to
secure the production contract for the Boeing 767 Flap Track Fairings. Both new programs were in the production set-up phase
during 2016 and have commenced to generate revenues in 2017. The Company continues to work towards obtaining additional
new contracts supporting Boeing commercial jet programs as well as other Boeing DSS defense programs.

Revenues from Bombardier Aerospace (“Bombardier”) programs increased during the current year relative to the year
ended December 31, 2016. Shipments of large assemblies for the CL605 business jet program increased by $2,698,000 during
the current year as demand for these products has increased relative to 2016; while the Company experienced a $1,850,000
increase in its deliveries of composite floor panels to Bombardier primarily as a result in the growth of Global 5000/6000 and
Global 7000/8000 program deliveries. Avcorp Group’s primary source of revenues from Bombardier in 2017 will continue to be
from components for the CL605 and CL850 business jets, composite floor panels for the CRJ and Q400 aircraft programs, as
well as a sustained rate of production of composite floor panels for Bombardier’s Global 5000/6000 and Global 7000/8000
programs.

Avcorp’s deliveries to Subaru Corporation (“Subaru”) of large complex composite structural components which are
integrated into the centre wing box in support of the Boeing 787 commercial jet program totalled $24,566,000 for the current
year (December 31, 2016: $15,789,000). This is a significant commercial production contract being manufactured in the
Gardena facility. This long term agreement represents an important relationship with a long-standing industry tier one supplier.

Composite aircraft structure repair revenues out of Comtek were reduced as regional airline customers implement cost
reduction initiatives and fleet aircraft mix changes, causing 2017 revenues to decrease by $3,779,000 relative to revenues in
the previous year. The Group also supplies Canadian aircraft retro-fit programs out of its Delta facility, and large composite
structures in support of various US defense programs out of its Gardena facility. These revenues were reduced relative to 2016
as certain of these programs were wound down. These Other revenues are of significant importance to the Group’s operations
as they generated $16,449,000 in revenue during the year ended December 31, 2017 (December 31, 2016: $20,106,000).

Defence program revenues for Avcorp during 2017 totalled $29,772,000 (December 31, 2016: $26,982,000); 21% of total
revenues (December 31, 2016: 18%). Commercial program revenues continue to provide the majority of the Company’s
revenue (December 31, 2017: 79%; December 31, 2016: 82%) amounting to $110,613,000 for 2017 and $123,707,000 for
2016. The Group continues to move forward with its revenue diversification between commercial and defence aerospace
programs. Included in total revenues for the Company is the amortization and contract renegotiation of the unfavourable
contract liability of $9,058,000 in 2017 (2016: $33,019,000).

Gross Profit

Gross profit (revenue less cost of sales) for the year ended December 31, 2017 was negative 21.3% of revenue compared to
positive 4.6% of revenue for the year ended December 31, 2016. Included in the calculation of gross profit is the amortization
of the unfavourable contract liability of $9,058,000 into revenue and cost of sales in 2017 (2016: $36,936,000). Exclusive of
the unfavourable contract liability amortization into revenue and cost of sales, the negative gross profit for 2017 would be
$40,910,000 (December 31, 2016: $28,562,000 negative gross margin). Additional provisions for onerous contracts amounting
to $13,603,000 during 2017 have caused operating results to deteriorate.

The start-up, post-acquisition of the operations in Gardena, faced several unanticipated challenges during the first half of 2016.
As a result of legacy quality issues raised by customers, a number of items were identified that required corrective action.
These items accounted for substantial expenditures beyond normal production costs. Staffing levels during the third and fourth
quarters 2016 for the Gardena facility continued to remain very high relative to production deliveries as the operations utilized
production resources to implement customer supported corrective actions. Consequently, key turn around initiatives were
delayed into 2017 significantly delaying gross margin improvements on production contracts manufactured out of the Gardena
facility. The Gardena facility gross margin for the current year was negative $27,588,000 (December 31, 2016: $4,440,000
positive gross margin). 2017 Gardena facility gross margin, exclusive of the $9,058,000 amortization of the unfavourable
contract liability into revenue is negative $36,646,000. On a comparative basis exclusive of the 2016 $36,936,000 amortization
of the unfavourable contract liability into revenue and cost of sales, the 2016 Gardena facility gross margin was negative
$32,496,000.

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Avcorp Industries Inc.

annual report 2017

Many corrective actions have been implemented. As legacy operational deficiencies are rectified, additional operational
improvements were made in the second half of 2016 and into 2017, thereby allowing the Gardena operations to achieve fully
contracted output levels, however at a continuing high cost structure during the first half of 2017. Avcorp’s key commercial
customers have worked collaboratively with Avcorp to mitigate production schedule risks and support the earliest resolution of
the outstanding process and product issues. Furthermore, certain of the smaller loss making contracts at the Gardena facility
are being wound down eliminating the associated losses. The remaining significant loss making contract has been the focus of
a comprehensive Company initiative under which management is working with a customer to facilitate an orderly transition of
this significant loss making contract away from Avcorp’s Gardena facility.

Delta and Burlington production contracts produced a combined negative gross margin for the year ended December 31, 2017
of $4,264,000 as compared with a gross margin of $3,934,000 for 2016; primarily caused by a shifting into 2018 customer
demand for defence aircraft, as well as start-up costs incurred with Delta’s new programs’ introduction into production.
Furthermore, the recent shift in regional airline repairs schemes have caused Burlington gross margins to decrease in this
market segment.

There remain within operations significant levels of unutilized plant capacity. The Company has expensed $4,309,000 of
overhead costs during the year (December 31, 2016: $4,408,000) in respect of unutilized plant capacity.

Administration and General Expenses

As a percentage of revenue, administration and general expenses increased slightly to 14.4% for the year ended December
31, 2017 from 13.3% for the year ended December 31, 2016. In absolute terms, administration and general costs decreased by
$2,849,000 during the current year relative to the prior year. Legal and professional services incurred during the prior year
were substantial and continue as the Company administers various contracts and agreements assigned from and ancillary to its
asset purchase agreement with Hitco and Frankfurt-listed SGL, which became effective on December 18, 2015.

Foreign Exchange Gain or Loss

Avcorp Group recorded a $1,944,000 foreign exchange gain during the year ended December 31, 2017 (December 31, 2016:
$3,278,000 gain) as a result of holding US dollar-denominated cash, receivables, payables and debt.

Earnings Before Interest, Taxes, Depreciation & Amortization

Avcorp Group presents earnings before interest, taxes, depreciation and amortization (“EBITDA”) to assist the Company’s
stakeholders with their assessment of its financial performance. EBITDA is a financial measure not recognized as a term under
IFRS. However, the Company’s management believes that the Company’s stakeholders consider this metric to be useful
information to assist them in evaluating profitability.

EBITDA was negative $48,342,000 for the year ended December 31, 2017 compared to EBITDA of negative $13,762,000 for
the year ended December 31, 2016. Included in the calculation of EBITDA is the amortization of the unfavourable contract
liability of $9,058,000 into income in 2017 (December 31, 2016: $38,937,000). Additional provisions for onerous contracts
amounting to $13,603,000 during 2017 have caused operating results to deteriorate. Such contracts are being wound down in
2018; or completed in 2019.

Significant pre-existing operational deficiencies and excessive cost structure within the acquired Hitco operations resulted in
poor production contract performance and adversely affected Group earnings for 2016 and have continued through into 2017 as
turnaround initiatives for the Gardena facility were significantly deferred. As legacy operational deficiencies were identified,
operational improvements were made, thereby allowing the Gardena operations to achieve fully contracted output levels.
Avcorp’s key commercial customers have worked collaboratively with Avcorp to mitigate production schedule risks and support
the earliest resolution of the outstanding process and product issues.

Delta and Burlington EBITDA was adversely affected for the current year primarily due to a shifting into customer demand for
defence aircraft, as well as start-up costs incurred with Delta’s new programs’ introduction into production. Furthermore, the
recent shift in regional airline repairs schemes have caused Burlington earnings to decrease in this market segment; while it is
anticipated that new market penetration and a backup of regional airline repairs will augment the 2018 revenue base.

The financial results presented for the year ended December 31, 2017 do not take into account any recovery provision for the
operational expenditures for which the Company believes it is indemnified for under its asset purchase agreement with Hitco
and SGL. These expenditure recovery amounts are not finalized and cannot be practicably quantified at this time and there is
uncertainty as to the amount that will be recovered.

The start-up, post-acquisition, of the new operations in Gardena faced several unanticipated challenges during the first quarter
2016. As a result of legacy quality issues raised by customers, a number of items were identified that required corrective
action. These items accounted for substantial expenditures beyond normal production costs.

The complexity and challenge of executing the production start-up and improvement plans for the Gardena operations
increased from the pre-acquisition estimates.

Over the course of 2016 and 2017 certain of the smaller loss making contracts produced out of the Gardena facility were being
wound down eliminating the associated losses. What will be the remaining significant loss making contract has been the focus
of a comprehensive Company initiative under which management has commenced planning with a major customer for an
orderly and protected transition of this significant loss making contract from Avcorp’s Gardena facility. Contract revisions are
completed for the significant loss making contract, which have significantly reduced the required period of delivery.

Page 10

Avcorp Industries Inc.

annual report 2017

EBITDA1

(expressed in thousands of Canadian dollars)

FOR THE YEAR ENDED DECEMBER 31

2017

2016

2015

Income loss for the year

Interest expense and financing charges

Income tax expense

Depreciation

Amortization of development costs and intangibles

$(58,538)

$(19,959)

$(12,154)

2,820

4,153

3,223

353

3,915

1,929

860

1,680

1,521

(48,342)

(13,762)

(8,093)

1. This is not a recognized term under International Financial Reporting Standards

Finance Costs

Total interest and financing charges on both short- and long-term debt for the year ended December 31, 2017 were
$2,806,000, which is net of $14,000 interest income as compared with to $339,000 expense, net of $14,000 interest income
for the year ended December 31, 2016. Interest expenditures have increased during the current year relative the previous year
as bank indebtedness has increased substantially.

Income Taxes

Avcorp Group has not incurred a tax expense during the year ended December 31, 2017 (December 31, 2016: $Nil) nor
recorded a tax benefit as it is not more likely than not that the benefit would be recognized.

Income or Loss

Loss for the year ended December 31, 2017 was $58,538,000 compared to a loss of $19,959,000 for the year ended
December 31, 2016. Significant pre-existing operational deficiencies and excessive cost structure within the acquired Hitco
operations have resulted in poor production contract performance and significantly adversely affected Group earnings,
Operational turn around initiatives, although delayed, have commenced. Income was also adversely affected during the current
year due to a shifting into 2018 of customer demand for defence aircraft, as well as start-up costs incurred with Delta’s new
programs’ introduction into production. Furthermore, the shift in regional airline repairs schemes have caused Burlington
earnings to decrease in this market segment; while it is anticipated that new market penetration and a backup of regional
airline repairs will augment the 2018 revenue base. The 2016 $16,405,000 operating loss contains a $38,937,000 amoritization
of an unfavourable contract liability into income; without which the operating loss for 2016 was $55,342,000. On a comparative
basis, the 2017 $53,773,000 operating loss contains a $9,058,000 amoritization of an unfavourable contracts liability into
income; without which the operating loss was $62,831,000. Additional provisions for onerous contracts amounting to
$13,603,000 during 2017 have caused operating results to deteriorate. Such contracts are being wound down in 2018; or
completed in 2019.

Liquidity and Capital Resources

On May 26, 2017, the Company entered into a loan agreement to expand its operating credit facility with a Canadian Chartered
bank. This loan agreement amends, restates and replaces the loan agreement entered into on September 27, 2012. This loan
amendment provides an additional borrowing capacity of up to USD$35,000,000 increasing its existing, as at March 31, 2017,
USD$23,000,000 revolving loan in total up to USD$58,000,000. The loan matures on June 30, 2020.

Interest rate for advances made up to the maximum of the allowable borrowing base on the existing USD$23,000,000 revolving
loan:



RBP plus 0.75% per annum

RBUSBR plus 0.75% per annum

BA Equivalent Rate plus 2.25% per annum

LIBOR Rate plus 2.25% per annum

Interest rate for advances made on the additional USD$35,000,000 borrowing capacity up to USD$58,000,000.



RBP plus 0.00% per annum

RBUSBR plus 0.00% per annum

BA Equivalent Rate plus 0.875% per annum

LIBOR Rate plus 0.875% per annum

Drawdown under the USD$35,000,000 additional borrowing capacity is supported by a major and material customer of the
Company by way of a guarantee.

Page 11

Avcorp Industries Inc.

annual report 2017

The Company will provide the guarantor, as consideration for the guarantee, a fee equal to 5.375% of the weighted average
outstanding balance of the guaranteed portion over each full twelve (12) month period commencing on the funding date plus,
for the partial year thereafter, 5.375% of the weighted average outstanding balance of the guaranteed portion multiplied by the
number of days in the partial year divided by three hundred sixty (360). The fee will be payable on the maturity date.

The revolving loan is subject to security agreements with a Canadian Chartered bank and with its guarantor. This debt facility is
secured by a charge and specific registration over all of the assets of the Company.

At year end Avcorp Group’s operating line of credit provides for a total utilization of USD$58,000,000 (providing approximately
CAD$72,761,000 million of liquidity). Avcorp Group ended 2017 with bank operating line utilization of $61,283,000 offset by
$5,212,000 cash compared to utilization of $17,111,000 and $3,960,000 cash on hand at December 31, 2016. Based on net
collateral provided to its bank, Avcorp Group is able to draw up to an additional USD$9,149,000 on its operating line of credit
as at December 31, 2017 (December 31, 2016: $4,901,000).

On April 7, 2017, a term loan entered into with Panta become due and payable for the principal amount of USD$5,000,000 and
USD$187,000 of accrued and unpaid interest. As at that date the Company and Panta amended the term loan to provide for a
maturity date which is the earlier of the date on which credit is available to be drawn by the Company under the revolving loan
with a Canadian Chartered bank, and July 6, 2017, with interest continuing at 8% per year. The Company incurred a
USD$100,000 amendment fee in this regard. Effective July 6, 2017 the Company and Panta further amended the term loan to
provide for a maturity date which is the earlier of (i) the date upon which, for any reason, the outstanding principal balance of
the operating credit facility with a Canadian Chartered bank becomes due and owing and (ii) the date on which all or
substantially all the assets of Comtek are sold by the Borrower or a controlling interest in the shares of Comtek is sold by the
Borrower, in each case by a transaction or series of transactions, and (iii) July 6, 2021.

As at July 7, 2017 the Panta term loan bears interest at the aggregate rate of interest, expressed as an annual rate, of the U.S.
Base Rate of Royal Bank of Canada (RBUSBR) plus a margin of 5.375% per annum which shall accrue and not be compounded
until the maturity date.

On July 31, 2017 the Company repaid a principal amount of USD$2,500,000 plus interest accrued in the amount of
USD$285,000 of the Panta term loan.

On August 3, 2017 Panta exercised 12,105,327 warrants expiring August 17, 2017 at $0.07 whose aggregate price of $847,000
was deemed to be made by way of set-off against the Panta loan obligation.

On August 25, 2017 Panta exercised 6,052,664 warrants expiring September 9, 2017 at $0.07 whose aggregate price of
$424,000 was deemed to be made by way of set-off against the Panta loan obligation.

On December 18, 2015, in conjunction with the acquisition of Hitco, the Company assumed a customer advance for pre-funded
product deliveries. The customer advance is re-paid as the Company delivers to the customer. In the event that cancellation,
termination, or assignment of the statement of work occurs earlier than December 31, 2018 the customer shall have the right
to recover from the Company within 120 days of such an event the unamortized portion of the cash advance. The customer
advance is subject to an access and security agreement along with a general security agreement entered into with the
Company’s bank and customer.

The customer advance was recorded at its fair value on December 18, 2015 in the amount of $18,953,000. The remaining
unamortized customer advance has been discounted to arrive at the December 31, 2017 amount of $7,227,000 (December 31,
2016: $11,573,000) of which it is estimated $7,227,000 (December 31, 2016: $8,034,000) will be amortized during the next
twelve months. The Company amortized into revenue $3,702,000 of the customer advance during the year ended December
31, 2017 (December 31, 2016: $6,287,000).

During the year ended December 31, 2017, the Company incurred a net loss of $58,538,000 (December 31, 2016:
$19,959,000) and had negative operating cash flows of $42,604,000 (December 31, 2016: negative $50,347,000); as at
December 31, 2017, the Company had a shareholders’ deficiency of $57,405,000 (December 31, 2016: $6,883,000 deficiency)
and an accumulated deficit of $157,185,000 (December 31, 2016: $98,647,000). Management assesses the Company’s ability
to continue as a going concern at each reporting date, using all quantitative and qualitative information available. Material
uncertainties have been identified which may cast significant doubt upon the Company’s ability to continue as a going concern.
This assessment, by its nature, relies on estimates of future cash flows and other future events, whose subsequent changes
would materially impact the validity of such an assessment.

The Company’s ability to continue as a going concern is dependent upon its ability to continue to raise adequate financing and
achieve significant improvements in operating results in the future. In assessing whether the going concern assumption was
appropriate, management took into account all relevant information available about the future, which was at least, but not
limited to, the 12 month period from December 31, 2017. The Company, in conjunction with its Board of Directors, is currently
implementing various financing strategies which include:



On May 26, 2017, the Company entered into a loan agreement to expand its loan facility with a Canadian Chartered bank.
This loan agreement amends, restates and replaces the loan agreement entered into on September 27, 2012. This
Revolving Loan provides an additional borrowing capacity of up to USD$35,000,000 increasing its existing, as at June 30,
2017, USD$23,000,000 revolving loan in total up to USD$58,000,000. The loan agreement matures on June 30, 2020.

Page 12

Avcorp Industries Inc.

annual report 2017



On March 28, 2018, the Company entered into an amendment to its existing credit facility with a Canadian chartered bank
whereby the following amendments were made:



Availability under the Revolving Loan is increased by USD$10,000,000 (“Expanded Loan”) subject to existing
drawdown provisions, interest rates and bonus fees;

Drawdowns under the Expanded Loan are supported by a major and material customer of the Company by way of a
guarantee; and

The Expanded Loan matures on March 31, 2019.



On May 25, 2018, the Company entered into an amendment to its existing credit facility with a Canadian chartered bank
whereby the following amendment was made:

 Maximum availability under the Revolving Loan cannot exceed USD$68,000,000 less USD$4,300,000, until August 31,

2018, at which time the agreement reverts back to existing terms.

The Company ended the year with bank operating line utilization of $61,283,000 offset by $5,212,000 cash compared to
utilization of $17,111,000 with $3,960,000 cash on hand as at December 31, 2016. Based on net collateral provided to its
bank, the Company was able to draw up to an additional USD$9,149,000 on its operating line of credit as at December 31,
2017 (December 31, 2016: $4,901,000).

Pursuant to the terms of the loan agreement, the Company is required to meet certain covenants. The Company is in breach of
certain covenants pursuant to the terms of the loan agreement and accordingly an event of default had occurred that requires
remediation.

The Company, in conjunction with is Board of Directors continue to carry out various operational strategies which include:



Operating and warranty issues at ACF were the largest cause of the Company’s 2016 losses. Technical quality issues which
were discovered by the Company soon after the Hitco acquisition created additional compliance costs during 2016.
Management has resolved these technical quality issues such that they did not re-occur in 2017 and going forward.
Furthermore, the Company has received notification from its customers that these quality issues have been appropriately
resolved. All personnel resources and support service provider costs incurred during 2016 as a result of these issues have
been terminated. The significant product scrap and re-work costs have been processed and expensed and one-time
expenditures for equipment upgrades have been completed.

Numerous process improvements initiatives, restructuring activities and supplier contract renegotiations have significantly
reduced production costs on a go forward basis. These cost reduction initiatives have included significant headcount
reductions, relative high points in 2016, the latest of which were announced in April 2017 and continue through the second
half of 2017 and into 2018.

Contract renegotiations with customers and new customer contracts have provided an improved basis for operations in the
future.

Close collaboration with customers has resulted in both financial and operational support for continued operations.

The assessment of the Company’s ability to execute its strategy of reducing operating costs and funding future working capital
requirements involves significant judgement. Estimates and assumptions regarding future operating costs, revenue and
profitability levels and general business and customer conditions are continually evaluated and are based on historical
experience and other factors, including expectations of future events that are believed to be reasonable under the
circumstances.

The Company cannot provide assurance that, if it needs to raise additional funds, such funds will be available on favourable
terms, or at all. If the Company cannot raise adequate funds on acceptable terms, its business could be materially harmed.

Cash Flows from Operating Activities

Cash flows from operating activities, before consideration of changes in non-cash working capital, decreased by
$42,257,000 during the year ended December 31, 2017 as compared to a $59,091,000 decrease of cash during the year
ended December 31, 2016. Cash flows from operating activities were most significantly impacted as a result of operating
losses incurred from the integration and production costs expended for the acquired Hitco operations, losses arising from
unfavourable customer contracts assumed, and operational, administrative, and legal expenditures, incurred at Avcorp’s
Gardena facility as well as new program introduction and start-up costs at the Delta facility. Additional provisions for
onerous contracts amounting to $13,366,000 during 2017 have caused operating results to deteriorate. Such contracts are
being wound down in 2018; or completed in 2019.

Non-cash operating assets and liabilities utilized $347,000 of cash during the current year, compared to providing
$8,744,000; accounts receivable provided cash and accounts payable used cash in 2017 compared to 2016 during which
accounts receivable and payable provided cash.

Avcorp Group continues to closely monitor accounts receivable and work with its customers in order to ensure cash is
collected on a timely basis.

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Avcorp Industries Inc.

annual report 2017

Cash Flows from Investing Activities

During the year ended December 31, 2017, Avcorp Group collected $12,378,000 in consideration receivable from the Hitco
acquisition; while cash consideration received from this source in 2016 totalled $22,429,000.

During the year ended December 31, 2017, the Avcorp Group purchased capital assets totalling $2,869,000 compared with
$5,129,000 during the year ended December 31, 2016. Avcorp Group continues to minimize its capital expenditures in
order to conserve cash, with only operation critical expenditures being made.

In order to improve operational reporting, measurements, and business management in Gardena, Avcorp Group is
expending funds on integrating the Gardena facility business systems with those in Delta. Such costs of integration during
2017 amounted to $571,000.

During 2016 and 2017, the Company commenced the new program introduction process in support of the newly awarded
production contracts. The start-up of new production contracts requires significant investments in hard and soft tooling.
Such tooling investments amounted to $5,347,000 in 2017 (December 31, 2016: $2,617,000).

Cash Flows from Financing Activities

Avcorp Group finances working capital through a combination of bank debt and equity financings.

Cash flows from financing activities provided $40,739,000 of cash during the current year compared with providing
$23,527,000 of cash in 2016. The Company’s operating line was $61,283,000 drawn as at December 31, 2017
(December 31, 2016: $17,111,000) providing $46,872,000 in cash during the year.

On March 17, 2017, Avcorp entered into a loan agreement with Panta to fund the Company to a maximum aggregate
principal amount of USD$907,000 maturing on May 15, 2017. The Loan was drawn down in two tranches dated March 21,
2017 and March 27, 2017. The loan was repaid on April 3, 2017 from the proceeds of the consideration receivable.

On September 19, 2016, Avcorp entered into a non-revolving term loan agreement with Panta to fund the Company to a
maximum aggregate principal amount of USD$5,000,000. On July 21, 2017, the Company repaid a principal amount of
USD$2,500,000 plus interest accrued in the amount of USD$285,000 of the Panta term loan.

Panta Canada B.V. is Avcorp’s majority shareholder owning approximately 68.6% of the issued and outstanding common
shares on December 31, 2017. Panta Canada B.V. is wholly owned by Panta Holdings B.V. Both companies are
incorporated in The Netherlands and Mr. Jaap Rosen Jacobson, a director of the Company, is the sole shareholder of Panta
Holdings B.V.

Under the SADI program from the Government of Canada, the Company was able to secure $260,000 in project financing
(December 31, 2016: $111,000).

On December 31, 2017, the ratio of the Company's current assets to current liabilities was 0.53:1 (December 31, 2016:
0.94:1).

Contractual Obligations

PAYMENTS DUE BY PERIOD

(expressed in thousands of Canadian dollars)

Finance lease obligations

Term loan

Other long-term obligations1

Purchase obligations2

Total contractual obligations

Total

2018

2019 – 2021

2022 – 2023

Post 2023

$218

1,237

1,715

66,233

69,403

$79

118

43,227

43,424

$139

104

7,147

7,420

1,089

197

4,707

5,993

1,414

11,152

12,566

1. This amount represents obligations the Company has with Industrial Technologies Office.
2. Purchase obligations include payments for the Company’s operating and property leases, as well as committed contractual

operational purchase order obligations outstanding.

The Company expects that payment of contractual obligations will come from funds generated by operations, utilization of
the bank operating line of credit, cash on hand and proceeds from debt and equity financings.

The Company does not have any off-balance sheet liabilities or transactions that are not recorded or disclosed in the
consolidated financial statements.

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Avcorp Industries Inc.

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Capital Stock

As at December 31, 2017, there were 337,404,502 common shares, 30,714,118 common share purchase warrants, and
49,532,500 stock options issued and outstanding. No subsequent issuance of common shares has occurred to the date of this
report.

Common Shares

During the third quarter 2017 holders of the Company’s warrants exercised 30,263,318 warrants at a price of $0.07
resulting in the issuance of 30,263,318 common shares with a value of $2,118,000.

Panta Canada B.V., is 100% owned by Panta Holdings B.V. and is Avcorp’s majority shareholder owning approximately
68.6% of issued and outstanding common shares as of December 31, 2017.

The Company is authorized to issue an unlimited number of common shares as well as an unlimited number of first
preferred and second preferred shares, issuable in series, the terms of which will be determined by the Company’s
directors at the time of creation of each series. There were 337,404,502 common shares issued at December 31, 2017.
The book value of common shares issued and outstanding as at December 31, 2017 was $82,905,000 (December 31,
2016: $80,302,000).

Accounting standards issued but not yet effective

The following is a brief summary of the new standards issued but not yet effective:

IFRS 15 – Revenue from Contracts with Customers

IFRS 15 presents new requirements for the recognition of revenue, replacing IAS 18 “Revenue”, IAS 11 “Construction
Contracts”, and several revenue-related Interpretations. The new standard establishes a control-based revenue recognition
model and provides additional guidance in many areas not covered in detail under existing IFRSs, including how to account
for arrangements with multiple performance obligations, variable pricing, customer refund rights, supplier repurchase
options, and other common complexities.

The Company is in the process of evaluating the impact of adopting these standards on the Company’s consolidated
financial statements. IFRS 15 permits either a full or modified retrospective approach for the adoption and is effective for
annual periods beginning on or after January 1, 2018.

The Company has undertaken a project to assess the impact of IFRS 15 and ensure the Company’s compliance with
IFRS 15. The Company has collected an inventory of significant contracts with customers in scope for IFRS 15 assessment
and identified preliminary accounting topics that may impact the Company’s reported results based on the review of a
sample of contracts from each revenue stream. The Company is in the process of reviewing contracts with customers to
ensure revenue recognition practices are in accordance with IFRS 15 and evaluating potential changes to revenue
processes and systems. The Company has identified contracts in which performance obligations are satisfied over time as
control transfers during production. For these contracts, the revenue recognition pattern will change with revenue being
recognized earlier in the year of adoption as compared to under the previous accounting policy. Contracts that do not meet
the criteria for over time recognition will continue to be recognized at a point in time.

The Company continues to assess the impact of this standard on the consolidated financial statements and it is not yet in a
position to make a reliable estimate of its impact. The Company plans to disclose the estimated financial effects of the
adoption of IFRS 15 in its March 31, 2018 quarterly consolidated financial statements.

IFRS 9 – Financial Instruments

In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments (“IFRS 9”) which reflects all phases of the
financial instruments project and replaces IAS 39 Financial Instruments: Recognition and Measurement and all previous
versions of IFRS 9. The standard introduces new requirements for classification and measurement, impairment, and hedge
accounting. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, with early application permitted.
Retrospective application is required, but comparative information is not compulsory. The Company plans to adopt the new
standard on the required effective date and will not restate comparative information.

The Company is in the process of evaluating the impact of adopting these amendments on the Company’s consolidated
financial statements. Overall, the Company expects no significant impact on its statement of financial position and equity
except for the effect of applying the impairment requirements of IFRS 9.

IFRS 16 - Leases

In January 2016, the IASB issued IFRS 16 – Leases (“IFRS 16”) which replaces IAS 17 – Leases and its associated
interpretative guidance. IFRS 16 applies a control model to the identification of leases, distinguishing between a lease and
a service contract on the basis of whether the customer controls the asset being leased. For those assets determined to
meet the definition of a lease, IFRS 16 introduces significant changes to the accounting by lessees, introducing a single,
on-balance sheet accounting model that is similar to current finance lease accounting, with limited exceptions for
short-term leases or leases of low value assets. Lessor accounting remains similar to current accounting practice. The
standard is effective for annual periods beginning on or after January 1, 2019, with early application permitted for entities
that apply IFRS 15. The Company plans to adopt the new standard on the required effective date. The Company has not
yet assessed the impact the final standard is expected to have on its consolidated financial statements.

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Avcorp Industries Inc.

annual report 2017

IFRS 2 – Share Based Payments

In 2016, the IASB issued the final amendments to IFRS 2, Share-based Payments (“IFRS 2”) that clarify the classification
and measurement of share-based transactions, consisting of: accounting for cash-settled share-based payment
transactions that include a performance condition; classification of share-based payment transactions with net settlement
features; accounting for modifications of share-based payment transactions from cash-settled to equity-settled. The
amendments are effective for annual periods beginning on or after January 1, 2018, with earlier adoption permitted. The
amendments are to be applied prospectively. However, retrospective application is allowed if this is possible without the
use of hindsight. The Company plans to adopt the new standard on the required effective date and will apply the
amendments prospectively. The Company is in the process of evaluating the impact of adopting these amendments on the
Company’s consolidated financial statements.

IFRIC Interpretation 22 – Foreign Currency Transactions and Advance Consideration

In 2016, the IASB issued IFRIC Interpretation 22, Foreign Currency Transactions and Advance Consideration (“IFRIC 22”),
which provides requirements about which exchange rate to use in reporting foreign currency transactions (such as revenue
transactions) when payment is made or received in advance. IFRIC 22 is effective for annual periods beginning on or after
January 1, 2018, with earlier adoption permitted. On initial application, entities have the option to apply either
retrospectively or prospectively. The Company plans to adopt the new standard on the required effective date and will
apply the amendments prospectively. The Company is in the process of evaluating the impact of adopting these
amendments on the Company’s consolidated financial statements.

Operations Overview

Delivery and Quality Performance

In conjunction with the Hitco acquisition, Hitco and its ultimate parent, SGL Carbon SE, have the contractual responsibility and
liability for certain losses incurred by Avcorp in connection with quality and warranty claims pertaining to finished goods
delivered by Hitco before the closing date and certain finished goods manufactured by Hitco before the closing date that were
designated as conforming inventory. Immediately after the Hitco acquisition, a thorough quality and delivery review and audit
was conducted of Hitco’s Gardena manufacturing operations by ACF, which has produced improvement plans together with its
customers. ACF continues to work collaboratively with customers to ensure any quality and delivery issues are resolved at the
earliest date, as it continues to achieve quality and delivery requirements.

Order Backlog

Avcorp Group operates within “general terms agreements” with its customers. These agreements are typically for five years or
longer.

The Company’s agreements with Boeing Commercial Airplane Group extend from January 2018 to December 2022; additional
production contracts entered into during 2015 and 2016 extend to 2028 and 2025 respectively. Production contracts underlying
Boeing’s general term agreements, which were assigned to Avcorp with the Hitco acquisition, extend to 2019.

Agreements with Boeing Defense, Space and Security extend into 2020 with established minimum base delivery quantity
requirements.

The Bombardier and Subaru agreements extend for the life of the individual aircraft programs.

Agreements with Lockheed Martin extend into 2019, with negotiations occurring for follow-on orders to existing statements of
work through to 2020.

Agreements with BAE Systems (Operations) Limited extend into 2019 and continue to generate additional sales order backlog.

The Company defines order backlog as the value of purchase orders it expects to receive from these agreements based on
manufacturers’ projections and current degrees of exclusivity. Order backlog is a financial measure not recognized as a term
under IFRS. However, the Avcorp’s management believes that the Company’s stakeholders consider this metric to be useful
information to assist them in evaluating profitability. The order backlog, as at December 31, 2017, is $879 million in
consideration of attaining full award values, compared to $826 million as at December 31, 2016. The changes in order backlog
are as follows:



$149 million decrease in order backlog resulting from revenues recorded during the year ended December 31, 2017;

$249 million increase in order backlog due to increases in the production rates, contract renewals for various existing
programs, and contract awards; and

$47 million decrease in order backlog resulting from change in the value of the Canadian dollar relative to the US dollar for
the Company’s US dollar denominated sales. Refer to comments on currency risk.

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Avcorp Industries Inc.

annual report 2017

Supply Chain

Supplier quality and delivery performance continued to meet targeted levels during the year; the Company continues to
monitor supplier performance in all aspects of quality, delivery and price. The Company works closely with its supply chain to
ensure a stable, uninterrupted delivery of compliant products and is making changes in product sourcing processes where
necessary. The capacity and delivery performance of a limited number of critical vendors continues to be closely monitored to
mitigate risks to assembly start dates. Risk mitigation plans have been implemented.

The securing of additional long term contracts with key suppliers continues. Critical supplier cost reduction initiatives are
continuing through 2017 and into the future.

Working Capital Utilization

Total current assets less total current liabilities were in a deficit position of $63,613,000 at December 31, 2017 and a
$5,439,000 deficit position at December 31, 2016. Working capital decreased during 2017 as consideration receivable was
collected, and bank indebtedness increased due to repayment of suppliers and operating losses. However, the Company’s
accounts receivable and inventories net of accounts payable, amount to a $37,889,000 surplus as at December 31, 2017
(December 31, 2016: $38,436,000 surplus).

Financial Resources

Avcorp Group has invested in its chosen strategies of organic growth, capabilities acquisition, lean manufacturing and strategic
outsourcing. Management believes that significant investments necessary to better position Avcorp Group in the aerospace
industry have and continue to be made, and that those investments along with the expected continued financial support of
shareholders and lenders position the Company to be able to face and mitigate risks associated with the business.

Non-Financial Resources

The Company’s non-financial resources relate to the Company’s human resources, operating equipment, business systems,
technologies, processes and qualifications. The Company does not have any extended enterprise relationships such as special
purpose entities or joint ventures.

Human Resources

The number of employees at December 31, 2017 was 728 (December 31, 2016: 722).

Equipment, Systems, Technologies and Processes

Manufacturing equipment and information technology assets have been consistently upgraded and further deployed,
increasing reliability and utility.

Risk Assessment

The principal risks that Avcorp Group faces are summarized as follows:



additional financing is required to maintain and grow its business;

no agreement on extension of customer contracts, or terminated customer programs are not replaced;

increases in material costs, primarily aluminum plate, composite materials, titanium, sandwich panels and assembly
hardware, and subcontractor costs, without equivalent price protection in customer contracts;

reduction in production rates of aircraft manufacturers and delays in program introduction;

consolidation and globalization by competitors;

potential failure to achieve cost-reduction objectives relative to changes in revenue levels; and

increase in the value of the Canadian dollar, relative to the US dollar, has an adverse effect on the US dollar equivalent
value of those Company procured goods and services which are denominated in Canadian dollars.

The Company’s view is that with its strategic plan in place and the continued integration of composite design and manufacturing
capabilities, the Company should be in a position to face and mitigate these risks. However, there can be no assurance that the
Company will be successful with all initiatives.

Additional Financing

Avcorp Group’s growth strategy requires continued access to capital. From time to time, the Company may require
additional financing to enable it to:



finance unanticipated working capital requirements;

finance transitional operating losses incurred upon integration of acquired entities;

finance new program development and introduction;

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Avcorp Industries Inc.

annual report 2017



develop or enhance existing services and capabilities;

respond to competitive pressures; or

finance business acquisitions.

On May 26, 2017, the Company entered into a loan agreement to expand its existing credit facility by an additional
borrowing capacity of up to USD$35,000,000; providing a total borrowing capacity of USD$58,000,000 until June 30,
2020.

On March 28, 2018, the Company entered into an amendment to its existing credit facility, which provides an additional
borrowing capacity of up to USD$10,000,000 and is due on March 31, 2019.

On May 25, 2018, the Company entered into an amendment to its existing credit facility with a Canadian chartered bank
whereby the maximum availability under the Revolving Loan cannot exceed USD$68,000,000 less USD$4,300,000, until
August 31, 2018, at which time the agreement reverts back to existing terms.

Pursuant to the terms of the loan agreement, the Company is required to meet certain covenants. The Company is in
breach of certain covenants pursuant to the terms of the loan agreement and accordingly an event of default had occurred
that requires remediation.

The Company cannot provide assurance that, if it needs to raise additional funds, such funds will be available on
favourable terms, or at all. If the Company cannot raise adequate funds on acceptable terms, its business could be
materially harmed.

Customer Contracts

The Company is exposed to the risk that existing customer fixed-term contracts are not renewed at expiration date. Avcorp
Group operates within “general terms agreements” with its customers. These agreements are typically for five years or
longer. The Company’s agreements with Boeing CA extend from current date, with various expiry timelines, through to the
end of 2028. Agreements with Boeing DSS have been renewed and established which extend into 2020 with minimum base
quantity requirements. It is the Company’s objective to successfully renew Boeing production contracts in advance of
expiry dates.

The Bombardier and Subaru agreements extend for the life of the individual aircraft programs.

BAE and Lockheed Martin customer contracts extend into 2019. The Company is currently negotiating the extension of
follow-on contracts.

The Company continues to face the financial risk that the wind-down in previous years of certain program contracts have
not been replaced on a timely basis thereby causing the Company to continue to bear significant levels of expenses related
to under-utilized operational capacity. The Company has restructured its business development strategy in order to best
mitigate this risk and is now commencing to be awarded new customer production contracts.

Procured Materials and Parts

The Company is engaging suppliers and customers to properly align production requirements and pricing, ensuring
uninterrupted delivery of compliant products with a cost structure closely matching product pricing. Changes in forecasts
are closely monitored in order to promptly adjust procured materials and parts quantities with the objective of limiting
unwanted inventory build-up.

Aircraft Production Rates

The following industry and program trends impact the Company:



Company research indicates that the aerostructures markets for commercial aircraft and larger business jets would
continue to grow beyond 2017. The lighter business jets’ market is expected to show modest growth.

Growth in air travel rates has and will further increase production rates on the Boeing 737 and Airbus A320 platforms
in the coming years. The regional aircraft market remains soft around current rates.

Bombardier Challenger CL650 aircraft production requirements increased in 2017 relative to 2016, and are
forecasted to remain substantially flat through 2020.

The growth in the global market for defence aircraft although slowed, continued through 2017 with continued growth
expected in 2018.

The F-35 remains, on a global scale, one of the largest Defence Airplane programs for the foreseeable future.

Offset opportunities created by Canadian Government procurement within military aerospace programs such as the
Boeing F-18 and Airbus C295 FWSAR could lead to additional revenue opportunities from this aerospace sector.

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Avcorp Industries Inc.

annual report 2017

Competitors

The long-term trend continues towards more intense competition from larger entities having operations in Asia, Mexico and
Europe, while original equipment manufacturers continue to increase the size and amount of outsourced components. It
can be expected that consolidation on Tier 1 and Tier 2 levels will continue to take place. The Company continues to
examine opportunities for mergers or acquisitions, on a global basis, that would improve competitiveness and acquire
vertical strengths or additional strategic capabilities.

Cost Reductions

Approximately 60% of Avcorp Group’s cost of sales is related to labour and overhead and 40% related to procurement of
raw materials and finished parts. The Company’s wage rates are generally lower than its western European and north
western United States competitors and higher than those in the south eastern United States, Asia, Eastern Europe and
Mexico. On July 30, 2013 the labour force, at the Delta facility ratified a six-year collective agreement. The agreement
was ratified by a two-thirds majority, with the agreement expiring on March 31, 2019. Subsequent to the Hitco acquisition
the Company and the labour force, in Gardena, agreed to a four month extension of the current collective agreement,
which was to expire February 29, 2016. On June 29, 2016 the labour force at the Gardena facility ratified a six-year
collective agreement, adding language that allows for High Performance Work Teams and incentive bonus payments for
accomplishing annual targets regarding operational and quality performance.

The Company continues to focus on cost reductions for direct labour, material and overhead costs. These cost reductions
will be achieved through continuous improvements in the internal and external parts supply chain using lean
manufacturing technology, through continued negotiation of long-term agreements with the majority of key suppliers,
through increased efficiency of plant capacity augmented by technological improvements, and through continued focus on
cost targets at all levels of the organization. All discretionary spending is reviewed and controlled by senior management,
with expenditures focused on expediting new commercial program business growth and launching of long-term defence
programs. However, fixed overhead costs continue to have an adverse impact on the Company’s cost structure during this
period of reduced revenues. This will be mitigated by increased revenue and facility utilization.

US Dollar Revenues

Avcorp Group sells a significant proportion of its products in US dollars, partially from its Canadian operations and entirely within its
United States operations, at prices which are often established well in advance of manufacture and shipment dates. As the value of
the Canadian dollar decreases, the equivalent value of US dollar denominated revenues increases; conversely, the cost of US dollar
denominated purchases will increase. The Company is continuing to structure new agreements with customers which mitigate the
risk associated with currency fluctuations. It should be noted that a significant portion of the Company’s purchases of raw materials,
supplier fabricated parts, as well as equipment purchases, are denominated in US dollars.

Outlook

Variability of the Canadian dollar relative to the US dollar continues to cause the value of the Company’s current order backlog to
fluctuate. Also, the Company continues to work towards securing additional defence program production contracts in order to
augment and diversify its backlog. The Company began delivering products under its defence contracts in 2009 and continues to
negotiate long-term supply agreements. Both defence and commercial production contracts are being renewed, with select new
customer agreements extending into 2028. The Company expects to finance investment in the start-up of new production programs
primarily by milestone payments from customers, though this cannot be assured. Avcorp Group may require financing for capital
expenditures and start-up costs required for new programs.

Boeing is the Company’s largest customer in 2017, followed by Subaru, Bombardier, Lockheed Martin and BAE Systems. The
Company forecasts its 2018 revenues to increase due to orders received for defence related program deliveries, and Delta
production ramp-up for recently awarded contracts (exclusive of the amortization into revenue of the unfavourable contract liability).

The Company forecasts its working capital financing requirements for 2017 to be met by the operating line of credit, and working
capital surplus (exclusive of Bank indebtedness). Working capital financing has been supplemented, as well, by shareholder loans
and consideration received as a result of the Hitco acquisition. However, further debt and equity financing may be required.

On March 28, 2018, the Company entered into an amendment to its existing credit facility (“Revolving Loan”) with a Canadian
chartered bank whereby the following amendments were made:



Availability under the Revolving Loan is increased by USD$10,000,000 (“Expanded Loan”) subject to existing drawdown
provisions, interest rates and bonus fees;

Drawdowns under the Expanded Loan are supported by a major and material customer of the Company by way of a guarantee;
and

The Expanded Loan matures on March 31, 2019.

On May 25, 2018, the Company entered into an amendment to its existing credit facility with a Canadian chartered bank whereby
the following amendment was made:

 Maximum availability under the Revolving Loan cannot exceed USD$68,000,000 less USD$4,300,000, until August 31, 2018, at

which time the agreement reverts back to existing terms.



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Avcorp Industries Inc.

annual report 2017

The Company cannot provide assurance that, if it needs to raise additional funds, such funds will be available on favourable terms,
or at all. If the Company cannot raise adequate funds on acceptable terms, its business could be materially harmed.

Transactions with Related Parties

During the year ended December 31, 2017, consulting services were provided by certain directors. Fees paid to certain directors, or
companies with which they have beneficial ownership, during the year ended December 31, 2017 amounted to $437,000
(December 31, 2016: $337,000). Fees payable to certain directors or Companies with which they have beneficial ownership, as at
December 31, 2017 are $Nil (December 31, 2016: $376,000). These fees are included in the Consolidated Statements of Loss and
Comprehensive Loss as administrative and general expenses and amount to $61,000 for the year ended December 31, 2017
(December 31, 2016: $701,000).

Key management includes Executive Officers for all operating facilities. The compensation paid or payable to key management for
employee services is shown below.

KEY MANAGEMENT COMPENSATION

(expressed in thousands of Canadian dollars)

FOR THE YEAR ENDED DECEMBER 31

Salaries and other short-term employee benefits

Contributions to defined contribution plan

Option-based awards

2017

2016

$2,285

659

3,019

$2,186

1,332

3,587

The balance of loans receivable from key management as at December 31, 2017 is $15,000 (December 31, 2016: $15,000). These
loans are unsecured and payable on demand.

Effective July 6, 2017 the Company and Panta amended the term loan to provide for a maturity date which is the earlier of (i) the
date upon which, for any reason, the outstanding principal balance of the revolving loan with a Canadian Chartered bank becomes
due and owing and (ii) the date on which all or substantially all the assets of Comtek are sold by the Borrower or a controlling
interest in the shares of Comtek is sold by the Borrower in each case by a transaction or series of transactions, and (iii) July 6,
2021.

As at July 7, 2017 the loan bears interest at the aggregate rate of interest, expressed as an annual rate, of the U.S. Base Rate of
Royal Bank of Canada (RBUSBR) plus a margin of 5.375% per annum which shall accrue and not be compounded until the maturity
date.

On July 31, 2017 the Company repaid a principal amount of USD$2,500,000 plus interest accrued in the amount of USD$285, 000 of
the Panta term loan.

On August 3, 2017 Panta exercised 12,105,327 warrants expiring August 17, 2017 at $0.07 whose aggregate price of $847,000 was
deemed to be made by way of set-off against the Panta loan obligation.

On August 25, 2017 Panta exercised 6,052,664 warrants expiring September 9, 2017 at $0.07 whose aggregate price of $424,000
was deemed to be made by way of set-off against the Panta loan obligation.

These transactions were conducted in the normal course of business and were accounted for at the exchange amount.

Business Acquisition

Effective December 18, 2015, Avcorp completed the acquisition of the US-based composite Aerostructures division of Hitco Carbon
Composites Inc. (“Hitco”), a subsidiary of Frankfurt-listed SGL Carbon SE (“SGL”) (the “Acquisition”). The Acquisition was completed
pursuant to the terms of an asset purchase agreement (the “Agreement”) that was entered into on July 20, 2015, with subsequent
amendments to December 18, 2015. Pursuant to the Agreement Avcorp’s subsidiary, Avcorp Composite Fabrication Inc., purchased
the assets of the division of Hitco which produces composite structural parts for commercial and military aerostructures (the
“Business”).

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Avcorp Industries Inc.

annual report 2017

Pursuant to the Agreement, Hitco and SGL are subject to a non-competition clause within the United States and a non-solicitation
clause for a period of five years. As part of the Acquisition, Avcorp also leased certain real property owned by Hitco, which Avcorp
will use to conduct the Business.

As a result of potential product quality and warranty claims, in addition to the liabilities assumed in the transaction, the Company
may be involved in, or subject to, other disputes, claims and proceedings that arise in connection with the business acquired,
including some that Avcorp asserts against others. The ultimate resolution of, and liability and costs related to these matters, at this
time is undeterminable.

Pursuant to the asset purchase agreement, Hitco’s direct and indirect parent companies have guaranteed certain of Hitco’s
obligations to Avcorp under the Agreement, including Hitco’s indemnity obligations to Avcorp for Avcorp’s losses stemming from
product quality and warranty claims pertaining to finished goods delivered by Hitco before the closing date and certain finished
goods manufactured by Hitco before the closing date that were designated as conforming inventory.

Consideration provided by Avcorp for the Acquisition of the assets was principally the assumption of liabilities by Avcorp, including
the current trade payables and ongoing contractual obligations of the Business.

As at the date of this report, no agreements to merge with or acquire another entity have been entered into.

Fourth Quarter

The following summarizes unaudited financial results for the fourth quarter 2017.

Operating loss for the fourth quarter of 2017 was $27,342,000 from $37,923,000 in revenues, as compared to operating income of
$9,233,000 from $46,183,000 in revenues for the quarter ended December 31, 2016. The Company expensed $1,013,000 of
overhead costs during the fourth quarter 2017 (2016: $1,317,000) in respect of unutilized plant capacity. Included in the calculation
of operating income for the fourth quarter 2017 is the amortization and contract renegotiation of the unfavourable contract liability
of $2,139,000 into income (fourth quarter 2016: $13,658,000). Provisions for onerous contracts accrued during the fourth quarter
2017 totalled $13,603,000.

Critical Accounting Estimates and Judgment

The preparation of consolidated financial statements in conformity with IFRS requires management to make estimates and
judgments that affect the amounts which are reported in the consolidated financial statements during the reporting period.
Estimates and other judgments are evaluated at each reporting date and are based on management’s experience and other factors,
including expectations about future events that are believed to be reasonable under the circumstances. The critical estimates and
judgements utilized in preparing the Company’s consolidated financial statements affect the assessment of net recoverable
amounts, net realizable values and fair values, and the determination of functional currency of the Canadian operations of the
group. Any changes in estimates and assumptions could have a material impact on the assets and liabilities at the date of the
statement of financial position. The Company reviews its estimates and assumptions on an ongoing basis and uses the most current
information available and exercises careful judgement in making these estimates and assumptions.



Functional currency: The functional currency for the Company and its subsidiaries is the currency of the primary economic
environment in which each operates. The Company has determined that the functional currency for the Company and all its
subsidiaries except for Avcorp US Holdings Inc. and Avcorp Composite Fabrication Inc. is the Canadian dollar. The functional
currency for Avcorp US Holdings Inc. and Avcorp Composite Fabrication Inc. is the US dollar. The determination of functional
currency may require certain judgements to determine the primary economic environment. The Company reconsiders the
functional currency used when there is a change in events and conditions which determined the primary economic environment.

Impairments: The recoverable amount of intangible assets, development costs and property, plant and equipment is based on
estimates and assumptions regarding the expected market outlook and cash flows from each CGU or group of CGUs. In order to
estimate the fair value of indefinite-lived intangible assets and goodwill resulting from business combinations, the Company
typically estimates future revenue, considers market factors and estimates future cash flows. Based on these key assumptions,
judgments and estimates, the Company determines whether to record an impairment charge to reduce the value of the asset
carried on the consolidated statement of financial position to its estimated fair value. Assumptions, judgments and estimates
about future values are complex and often subjective. They can be affected by a variety of factors, including external factors
such as industry and economic trends, and internal factors such as changes in the Company’s business strategy or internal
forecasts. Although the Company believes the assumptions, judgments and estimates made in the past have been reasonable
and appropriate, different assumptions, judgments and estimates could materially affect the Company’s reported financial
results.

Going Concern: Management assesses the Company’s ability to continue as a going concern at each reporting date, using all
quantitative and qualitative information available. This assessment, by its nature, relies on estimates of future cash flows and
other future events, whose subsequent changes would materially impact the validity of such an assessment.

Capitalization of development costs: When capitalizing development costs the Company must assess the technical and
commercial feasibility of the projects and estimate the useful lives of resulting products. Determining whether future economic
benefits will flow from the assets and therefore the estimates and assumptions associated with these calculations are
instrumental in (i) deciding whether project costs can be capitalized, and (ii) accurately calculating the useful life of the projects
for the Company.

Unfavourable contracts liability: At the acquisition date management valued the unfavourable contracts liability at fair value
using certain assumptions that would arise in a market participant view. The Company estimates the expected shipsets of
production when assessing the liability, together with the discounts rate and period of performance under the varying contracts
and service agreements. The cash flows are discounted over the period of performance using a discount rate commensurate
with the risk associated with the liability.

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Avcorp Industries Inc.

annual report 2017



Fair value of assets and liabilities acquired in a business combination: The Company accounted for the acquisition of ACF using
the acquisition method when control is transferred to the Company. The consideration received is generally measured at fair
value, as are the identifiable net liabilities assumed. The fair value of the liabilities assumed is determined using valuation
techniques that require estimation of the estimated cash flows, discount rates and estimated operating margins.

Inventories are valued at the lower of cost and net realizable value. The costs of inventory involve estimates in determining the
allocation of fixed and variable production overhead. The estimates involved include determination of normal production
capacity and nature of expenses to be allocated. Additionally inventory is reviewed monthly to ensure the carrying value does
not exceed net realizable value. If so, a write-down is recognized. The write-down may be reversed if the circumstances which
caused it no longer exist

On a periodic basis the Company reviews its plant capacity and estimates the portion of its under-utilized overhead
expenditures. The Company has expensed $4,309,000 of overhead costs during the current year (December 31, 2016:
$4,408,000) in respect of unutilized plant capacity. These amounts are included in the Consolidated Statements of Loss and
Comprehensive Loss as costs of sales.

The Company has entered into production contracts in the ordinary course of its business. The unavoidable cost of meeting the
obligations under certain of these contracts exceeds the associated expected future net benefits; consequently, an onerous
contract provision has been recognized. The calculation of this provision involves the use of estimates including, but not limited
to, program gross margin, and the effect of learning curves of production and the timing of achieving certain operational
efficiencies. These actual results can vary significantly from these estimates with consequent variability in the amounts of the
provision recorded. The onerous contract provision is calculated by taking the expected future costs that will be incurred under
the contract and deducting any estimated revenues. A portion of the onerous contract provision is for costs incurred that were
greater than the expected future costs used to determine the fair value of the unfavourable contract liability; this portion of the
onerous contract provision for the year ended December 31, 2017 is $3,479,000. The remaining portion of the onerous contract
provision is primarily due to a high cost structure and learning curves of production that cannot be recovered through current
pricing of the associated contracts. The current portion of the onerous contract provision for the year ended December 31, 2017
is $7,297,000. The onerous contract provision for the year ended December 31, 2017 is $13,366,000 (December 31, 2016:
$37,000).

Financial Instruments and Other Instruments

Market Risk

Market risk is the risk that changes in the market prices, such as foreign exchange rates and interest rates, will affect the
Company’s income or the value of its holdings of financial instruments. The Company’s policy is not to utilize derivative financial
instruments for trading or speculative purposes. The Company may utilize derivative instruments in the management of its
foreign currency and interest rate exposures.

Currency Risk

Currency risk arises because the amount of the local currency receivable or payable for transactions denominated in foreign
currencies may vary due to changes in exchange rate (“transaction exposures”) and because the non-Canadian dollar
denominated financial statements of the Company’s subsidiaries may vary on consolidation into the reporting currency of
Canadian dollars (“translation exposures”).

The Company sells a significant proportion of its products in US dollars at prices which are often established well in advance of
manufacture and shipment dates. In addition, the Company purchases a significant proportion of its raw materials and
components in US dollars at prices that are usually established at the order date. The Company’s operations are based in
Canada and in the US. As a result of this, the Company is exposed to currency risk to the extent that fluctuations in exchange
rates are experienced. The amount of foreign exchange loss recorded for the year ended December 31, 2017 is $1,944,000
(December 31, 2016: $3,278,000 loss).

The Company had the following US dollar denominated balances as at December 31, 2017 and as at December 31, 2016:

CURRENCY RISK

(expressed in thousands of dollars)

FOR THE YEAR ENDED DECEMBER 31

2017 (expressed in USD)

2016 (expressed in USD)

Bank cash position

Accounts receivable

Consideration receivable

Accounts payable net of prepayments

Bank indebtedness

Term debt

$2,929

9,749

2,111

48,851

868

$1,205

15,278

9,124

1,574

4,250

4,560

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Avcorp Industries Inc.

annual report 2017

With other variables unchanged, each $0.10 strengthening (weakening) of the CAD against the USD would result in an increase
(decrease) of approximately $3,915,000 in net income for the year ended December 31, 2017 as a result of holding a net
liability position in USD as at December 31, 2017.

As at December 31, 2016, a $0.10 strengthening (weakening) of the CAD against the USD would result in a (decrease) increase
of approximately $1,522,000 in net income for the year ended December 31, 2016 as a result of holding a net USD asset
position in USD as at December 31, 2016.

Credit Risk

Credit risk is the risk of a financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its
contractual obligation. The Company manages credit risk for trade and other receivables through a financial review of the credit
worthiness of the prospective customer along with credit monitoring activities. The majority of the Company’s trade receivables
reside with Boeing Commercial Airplane Group (“Boeing”), Boeing Defense, Space & Security (“BDS”), Bombardier Aerospace
(“Bombardier”), BAE Systems (Operations) Limited (“BAE”), Lockheed Martin (“LM”), and Subaru Corporation (“Subaru”). The
maximum exposure to credit risk is represented by the amount of cash, accounts receivable in the consolidated statements of
financial position.

As at the consolidated statements of financial position date 86.6% (December 31, 2016: 69.8%) of the Company’s trade
accounts receivable are attributable to these customers.

The Company is exposed to credit risk if counterparties to its trade receivables are unable to meet their obligations. The
concentration of credit risk from its customers is minimized because the Company has an original equipment manufacturer and
tier one aerospace customer base as at December 31, 2017. The customers are predominately large, well-capitalized, and long
established entities with a low risk of non-payment. The Company regularly monitors its credit risk and credit exposure.

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 seeks
to manage liquidity risk through the management of its capital structure and financial leverage.

Accounts payable and accrued liabilities are all due within the next twelve months.

The Company’s operating line of credit is due on demand.



On March 28, 2018, the Company entered into an amendment to its existing credit facility with a Canadian chartered bank
whereby the following amendments were made:



Availability under the Revolving Loan is increased by USD$10,000,000 (“Expanded Loan”) subject to existing
drawdown provisions, interest rates and bonus fees;

Drawdowns under the Expanded Loan are supported by a major and material customer of the Company by way of a
guarantee; and

The Expanded Loan matures on March 31, 2019.



On May 25, 2018, the Company entered into an amendment to its existing credit facility with a Canadian chartered bank
whereby the following amendment was made:

 Maximum availability under the Revolving Loan cannot exceed USD$68,000,000 less USD$4,300,000, until August 31,

2018, at which time the agreement reverts back to existing terms.

Page 23

Avcorp Industries Inc.

annual report 2017

The Company, in conjunction with is Board of Directors continue to carry out various operational strategies which include:



Numerous process improvements initiatives, restructuring activities and supplier contract renegotiations are expected to
significantly reduce production costs on a go forward basis. These cost reduction initiatives include significant headcount
reductions, relative to high points I 2016, the latest of which were announced in April 2017 and continue through the
second half of 2017 and into 2018.

Contract renegotiations with customers and new customer contracts have provided an improved basis for operations in the
future.

Close collaboration with customers has resulted in both financial and operational support for continued operations.

Interest Rate Risk

The Company is exposed to interest rate risk on the utilized portion of its operating line of credit.

Interest rate for advances made up to the maximum of the allowable borrowing base on the existing USD$23,000,000 revolving
loan:



RBP plus 0.75% per annum

RBUSBR plus 0.75% per annum

BA Equivalent Rate plus 2.25% per annum

LIBOR Rate plus 2.25% per annum

Interest rate for advances made on the additional borrowing capacity up to USD$58,000,000.



RBP plus 0.00% per annum

RBUSBR plus 0.00% per annum

BA Equivalent Rate plus 0.875% per annum

LIBOR Rate plus 0.875% per annum

Drawdown under the USD$35,000,000 additional borrowing capacity is supported by a major and material customer of the
Company by way of a guarantee.

Page 24

Avcorp Industries Inc.

annual report 2017

The maximum operating line of credit availability is $72,761,000 (USD$58,000,000) of which $61,283,000 is utilized as at
December 31, 2017 (December 31, 2016: $17,111,000). The Company lowers interest rate costs by managing utilization of the
operating lines of credit to the lowest amount practical. For the year ended December 31, 2017, with other variables
unchanged, a 1% change in the base borrowing rate would have a $613,000 (December 31, 2016: $171,000) impact on net
earnings and cash flow.

The Company primarily finances the purchase of long-lived assets at fixed interest rates.

Capital Risk

The Company’s objectives when managing capital are to safeguard its ability to continue as a going concern and to provide an
adequate return to shareholders, while satisfying other stakeholders.

The Company includes long-term debt, preferred shares and capital stock in its definition of capital, as shown in the Company’s
consolidated statements of financial position.

The Company’s primary objective in its management of capital is to ensure that it has sufficient financial resources to fund
ongoing operations and new program investment. In order to secure this capital the Company may attempt to raise funds via
issuance of debt and equity, or by securing strategic partners.

Other Items

Disclosure Controls and Procedures, and Internal Controls over Financial Reporting

In accordance with the Canadian Securities Administrators Multilateral Instrument 52-109, the Company has filed certificates
signed by the Chief Executive Officer and the Chief Financial Officer that, among other things, report on the design of disclosure
controls and procedures and the design of internal control over financial reporting. These certificates can be found on
www.sedar.com.

The Company has continued to undertake to engage additional, qualified financial reporting expertise to assist with complex
accounting matters, as well as develop the expertise of in-house staff ensuring that the Company’s tax accounting resources,
processes and controls are designed and operating effectively. Furthermore, the Company is aligning its business systems
within its two largest facilities in order to simplify and increase consistency of internal controls over financial reporting.

Internal Controls over Financial Reporting

The Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”) have designed, or caused to be designed under their
supervision, the Company’s internal controls over financial reporting (“ICFR”) in order to provide reasonable assurance
regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in
accordance with International Financial Reporting Standards (“IFRS”). The CEO and CFO have evaluated the effectiveness of the
Company’s ICFR as at December 31, 2016 based on Internal Control—Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission (“COSO”). During the course of this review, the CEO and CFO
determined that there were material weaknesses in the Company’s ICFR related to the accounting for the complex accounting
transaction arising from the 2015 Hitco acquisition, which resulted in the reclassification of foreign exchange gains and losses in
prior years filed financial statements, as well as integrating the related accounting systems, particularly inventory systems that
may result in inaccuracies in financial reporting. Management mitigated these weaknesses by utilizing outside consultants for
assistance, by developing in-house expertise and/or by recruiting personnel with the necessary expertise; however, such
mitigating procedures did not constitute a compensating control for the purposes of National Instrument 52-109 Certification of
Disclosure in Issuers’ Annual and Interim Filings. Based on the review of the Company’s ICFR, the CEO and CFO determined
that there was a reasonable possibility that the above deficiencies could have resulted in misstatements not being prevented or
detected on a timely basis and therefore concluded they were material weaknesses. To remediate the foregoing specific issues
for future reporting periods, the Company continues to undertake to engage additional, qualified financial reporting expertise to
assist with any complex accounting matters, and has converted the ERP business system of the Gardena operations to Avcorp’s
existing business systems platform, as well as developed the expertise of in-house staff ensuring that the Company’s inventory
accounting resources, processes and controls are designed and operating effectively.

Disclosure Controls and Procedures (“DCP”)

For the year ended December 31, 2016, the CEO and the CFO have designed, or caused to be designed under their supervision,
the Company’s DCP to provide reasonable assurance that material information relating to the Company and its consolidated
subsidiaries has been recorded, processed, summarized and disclosed in a timely manner in accordance with regulatory
requirements and good business practices and that the Company’s DCP will enable the Company to meet its ongoing disclosure
requirements. As described above, the Company has determined that there were material weaknesses in the design of its ICFR.
As a result, the CEO and CFO have determined that, as a result, for the same reasons, the Company’s DCP were also ineffective
for this specific issue as at December 31, 2017. This issue will be remediated as described above.

Page 25

Avcorp Industries Inc.

annual report 2017

Limitation of Controls and Procedures

The Company’s CEO and CFO, believe that any DCP and ICFR, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system
must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.
Because of the inherent limitations in all control systems, they cannot provide absolute assurance that all control issues and
instances of fraud, if any, within the Company have been prevented or detected. These inherent limitations include the realities
that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by
unauthorized override to the control. The design of any control system also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any control system will succeed in achieving its stated goals
under all potential future conditions. Accordingly, because of the inherent limitations in a cost effective, control system,
misstatements due to error or fraud may occur and not be detected.

Changes to DCP and ICFR The Company is required to disclose herein any change in the Company’s internal control over
financial reporting that occurred during the period beginning January 1, 2017 and ended on December 31, 2017 that has
materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting. No
material changes in the Corporation's internal control over financial reporting were identified during such period that have
materially affected, or are reasonably likely to materially affect, the Corporation's internal control over financial reporting.

Forward Looking Statements

This management discussion and analysis should be read in conjunction with the Company’s audited consolidated financial
statements. Certain statements in this report and other oral and written statements made by the Company from time to time are
forward-looking statements, including those that discuss strategies, goals, outlook or other non-historical matters; or projected
revenues, income, returns or other financial measures. These forward-looking statements are subject to risks and uncertainties that
may cause actual results to differ materially from those contained in the statements, including the following: (a) the ability of the
Company to renegotiate its debt agreements under which it is in default; (b) the extent to which the Company is able to achieve
savings from its restructuring plans; (c) uncertainty in estimating the amount and timing of restructuring charges and related costs;
(d) changes in worldwide economic and political conditions that impact interest and foreign exchange rates; (e) the occurrence of
work stoppages and strikes at key facilities of the Company or the Company’s customers or suppliers; (f) government funding and
program approvals affecting products being developed or sold under government programs; (g) cost and delivery performance
under various program and development contracts; (h) the adequacy of cost estimates for various customer care programs
including servicing warranties; (i) the ability to control costs and successful implementation of various cost reduction programs; (j)
the timing of certifications of new aircraft products; (k) the occurrence of further downturns in customer markets to which the
Company products are sold or supplied; (l) changes in aircraft delivery schedules, cancellation of orders or changes in production
scheduling; (m) the Company’s ability to offset, through cost reductions, raw material price increases and pricing pressure brought
by original equipment manufacturer customers; (n) the availability and cost of insurance; (o) the Company’s ability to maintain
portfolio credit quality; (p) the Company’s access to debt financing at competitive rates; and (q) uncertainty in estimating
contingent liabilities and establishing reserves tailored to address such contingencies.

Page 26

Avcorp Industries Inc.

annual report 2017

report of management

The accompanying consolidated financial statements of Avcorp Industries Inc. and all other information contained in the
Management Discussion and Analysis are the responsibility of management. The consolidated financial statements were prepared in
conformity with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board
(“IASB”) appropriate in the circumstances, in a manner consistent with the previous year, and include some amounts based on
management's best judgments and estimates. The financial information contained elsewhere in this Management Discussion and
Analysis is consistent with that in the consolidated financial statements.

Management is responsible for maintaining a system of internal accounting controls and procedures to provide reasonable
assurance. As at the end of the period covered by this report, management identified material weaknesses as described in the
Management Discussion and Analysis under the heading “Other Items”. During the period covered by this report, there has been no
change in internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the issuer’s
internal control over financial reporting

EDWARD MERLO

Chief Financial Officer
and Corporate Secretary

AMANDEEP KALER

Executive Officer and
Group Chief Executive
Officer

Page 27

Avcorp Industries Inc.

annual report 2017

independent auditor’s report

To the Shareholders of Avcorp Industries Inc.

We have audited the accompanying consolidated financial statements of Avcorp Industries Inc., which comprise the consolidated
statement of financial position as at December 31, 2017, and the consolidated statements of loss and comprehensive loss, changes
in equity and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory
information.

Management’s responsibility for the consolidated financial statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with
International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the
preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in
accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements
and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from
material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial
statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material
misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the
auditors consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements 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. An audit also includes evaluating the appropriateness of accounting policies used and
the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated
financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion..

Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Avcorp
Industries Inc. as at December 31, 2017, and its financial performance and its cash flows for the year then ended in accordance with
International Financial Reporting Standards.

Emphasis of matter

Without qualifying our opinion, we draw attention to note 1 to the consolidated financial statements, which indicates that as at
December 31, 2017, the Company had a shareholders’ deficiency of $57,405,000 and an accumulated deficit of $157,185,000 and
for the year ended December 31, 2017, the Company had a consolidated net loss of $58,538,000 and negative cash flows from
operations of $42,604,000. These conditions, along with other matters as set forth in note 1, indicate the existence of material
uncertainties that may cast significant doubt about the Company’s ability to continue as a going concern.

Other matter

The consolidated financial statements of Avcorp Industries Inc. as at and for the year ended December 31, 2016 were audited by
another auditor who expressed an unmodified opinion on those consolidated financial statements on June 29, 2017 [July 10, 2018
as to the effects of the restatement discussed in note 33].

Vancouver, Canada
July 10, 2018

Chartered Professional Accountants

Page 28

Avcorp Industries Inc.

annual report 2017

independent auditor’s report

To the Shareholders of Avcorp Industries Inc.

We have audited the accompanying consolidated financial statements of Avcorp Industries Inc., which comprise the consolidated
statement of financial position as at December 31, 2016, and the consolidated statements of loss and comprehensive loss,
consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and a summary of
significant accounting policies and other explanatory information.

Management's Responsibility for the Consolidated Financial Statements

Auditor's Responsibility

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial
statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material
misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor
considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements 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. An audit also includes evaluating the appropriateness of accounting policies used and
the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated
financial statements.

We believe that the audit evidence we have obtained in our audit is sufficient and appropriate to provide a basis for our audit
opinion.

Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Avcorp
Industries Inc. as at December 31, 2016, and its financial performance and its cash flows for the year then ended in accordance with
International Financial Reporting Standards.

Emphasis of Matter

Without qualifying our opinion, we draw attention to Note 1 to the consolidated financial statements, which indicates that as of
December 31, 2016, the Company had a shareholders’ deficiency of $6,883,000 and for the year ended December 31, 2016, the
Company had a consolidated net loss of $19,959,000 and negative cash flows from operations of $50,347,000. These conditions,
along with other matters as set forth in Note 1, indicate the existence of material uncertainties that may cast significant doubt about
the Company’s ability to continue as a going concern.

/s/ Deloitte LLP

Chartered Professional Accountants

June 29, 2017 (July 10, 2018 as to the effects of the restatement discussed in Note 33(i))
Vancouver, Canada

Page 29

Avcorp Industries Inc.

annual report 2017

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(expressed in thousands of Canadian dollars)

AS AT DECEMBER 31

ASSETS (note 16)

Current assets

Cash (note 16)

Accounts receivable (note 9)

Consideration receivable (note 10)

Inventories (note 11)

Prepayments and other assets (note 12)

Non-current assets

Prepaid rent

Development costs (note 13)

Property, plant and equipment (note 14)

Intangibles (note 15)

Total assets

LIABILITIES AND EQUITY

Current liabilities (note 23)

Bank indebtedness (note 16)

Accounts payable and accrued liabilities (note 18)

Current portion of term debt (note 22)

Customer advance (note 17)

Deferred program revenues (note 19)

Unfavourable contracts liability (note 20)

Onerous contract provision (note 4)

Non-current liabilities

Deferred gain and lease inducement (note 21)

Term debt (note 22)

Customer advance (note 17)

Deferred program revenues (note 19)

Unfavourable contracts liability (note 20)

Onerous contract provision (note 4)

(Deficiency) Equity

Capital stock (note 24)

Contributed surplus (note 24)

Accumulated other comprehensive income (note 33)

Accumulated deficit (note 33)

Total liabilities and (deficiency) equity

Nature of operations and going concern (note 1)
Subsequent events (note 34)

2017

2016

$5,212

18,942

42,781

4,390

71,325

146

8,623

29,318

3,864

$3,960

26,262

12,251

44,296

4,144

90,913

146

5,200

31,930

4,887

113,276

133,076

61,283

23,834

1,285

7,227

17,131

16,881

7,297

134,938

100

1,885

110

27,579

6,069

17,111

32,122

6,283

8,034

13,861

18,904

96,352

246

1,646

3,539

111

38,065

170,681

139,959

82,905

6,979

9,896

(157,185)

(57,405)

80,302

6,744

4,718

(98,647)

(6,883)

113,276

133,076

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

Approved by the Board of Directors on July 10, 2018

David Levi
Chairman

Ken Robertson
Committee Chair, Audit & Corporate Governance Committee

Page 30

Avcorp Industries Inc.

annual report 2017

CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS

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

AS AT DECEMBER 31

Revenues (notes 17, 20 and 32)

Cost of sales (note 32)

Gross (loss) profit

Administrative and general expenses

Office equipment depreciation

Operating Loss

Finance costs – net (note 27)

Foreign exchange loss (note 33)

Net loss (gain) on sale of equipment

Loss before income tax

Income tax expense (note 29)

Net loss for the period

Other comprehensive income (note 33)

2017

2016

$149,444

$183,707

181,296

175,333

(31,852)

21,580

341

8,374

24,429

350

(53,773)

(16,405)

2,806

1,944

339

3,278

(63)

(58,538)

(19,959)

(58,538)

(19,959)

5,178

3,857

Comprehensive loss for the period

(53,360)

(16,102)

Loss per share:

Basic and diluted loss per common share (notes 31 and 33)

(0.18)

(0.07)

Basic and diluted weighted average number of shares outstanding (000’s) (note 31)

318,019

306,611

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

Page 31

Avcorp Industries Inc.

annual report 2017

CONSOLIDATED STATEMENTS OF CASH FLOWS

(expressed in thousands of Canadian dollars)

AS AT DECEMBER 31

2017

2016

Cash flows (used in) from operating activities

Net loss for the year

Adjustment for items not affecting cash:

Interest expense

Depreciation

Development cost amortization

Intangible assets amortization

Non-cash financing cost accretion

Loss (Gain) on disposal of equipment

Provision for unfavourable contracts

Provision for onerous contracts

Provision for doubtful accounts

Provision for obsolete inventory

Stock based compensation

Unrealized foreign exchange

Other items

$(58,538)

$(19,959)

2,216

4,153

1,924

1,299

589

(9,058)

13,603

921

(678)

720

712

(135)

322

3,915

604

1,325

(15)

(38,937)

(77)

189

(8,653)

1,158

1,135

(129)

Cash flows (used in) operating activities before changes in non-cash working capital

(42,257)

(59,091)

Changes in non-cash working capital

Accounts receivable

Inventories

Prepayments and other assets

Accounts payable and accrued liabilities

Customer advance payable

Deferred program revenues

6,546

869

(693)

(6,636)

(3,702)

3,269

7,129

(614)

(3,994)

6,705

(6,955)

6,473

Net cash (used in) operating activities

(42,604)

(50,347)

Cash flows from (used in) investing activities

Proceeds from consideration receivable

Proceeds from sale of equipment

Purchase of equipment

Addition of developed software

Payments relating to development costs and tooling

Net cash from (used in) investing activities

Cash flows from (used in) financing activities

Increase in bank indebtedness

Payment of interest

Proceeds from term debt

Proceeds from issuance of common shares

Repayment of term debt

Net cash from financing activities

Net increase (decrease) in cash

Net foreign exchange difference

Cash - Beginning of the period

Cash - End of the period

Supplementary Cash Flow Information (note 28)

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

Page 32

12,378

(2,744)

(571)

(5,347)

3,736

46,872

(1,331)

1,473

(6,275)

40,739

1,871

(619)

3,960

5,212

22,429

(5,129)

(2,617)

14,743

17,111

(184)

6,727

113

(240)

23,527

(12,077)

1,553

14,484

3,960

Avcorp Industries Inc.

annual report 2017

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(expressed in thousands of Canadian dollars, except number of shares)

Capital Stock

Number of
Shares

Amount

Contributed
Surplus

Deficit

Accumulated
Other
Comprehensive
Income

Total
Deficiency

Balance at January 1, 2016 (note 33)

305,555,184

80,158

4,453

(78,688)

861

6,784

Issue of Common Shares (note 24)

1,586,000

113

Stock-based compensation expense (note 25)

Forfeiture of issued stock options (note 25)

Transfer to share capital on exercise of stock
options

Fair value of warrants issued (note 24)

Unrealized currency gain on translation for
the year (note 33)

Net loss for the year (note 33)

1,578

(420)

(31)

1,164

113

1,578

(420)

1,164

3,857

(19,959)

Balance December 31, 2016 (note 33)

307,141,184

80,302

6,744

(98,647)

4,718

(6,883)

Issue of common shares (note 24)

30,263,318

2,118

Transfer to share capital on exercise of warrants

Stock-based compensation expense (note 25)

Cancellation of issued stock options

Unrealized currency gain on translation for the
year

Net loss for the year

485

(485)

718

2,118

718

5,178

(58,538)

Balance December 31, 2017

337,404,502

82,905

6,979

(157,185)

9,896

(57,405)

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

Page 33

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2017
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2017

1. Nature of Operations and Going Concern

Avcorp Industries Inc. (the “Company” or “Avcorp”) is a Canadian-based manufacturer within the aerospace industry, and a
single source supplier for engineering design, manufacture and assembly of subassemblies and complete major structures for
aircraft manufacturers.

The Company currently operates from two locations in Canada and one location in the United States. Located in Delta, British
Columbia, Avcorp Industries Inc., named as Avcorp Structures & Integration (“ASI”), is dedicated to metallic and composite
aerostructures assembly and integration. Within Comtek Advanced Structures Ltd. (“Comtek”) located in Burlington, Ontario,
exists two named divisions: Comtek, dedicated to aircraft structural component repair services, and Avcorp Engineered
Composites (“AEC”) dedicated to design and manufacture of composite aerostructures. Located in Gardena, California, Avcorp
Composite Fabrication Inc. (“ACF”) is dedicated to advanced composite aerostructures fabrication.

Avcorp Composite Fabrication Inc. is wholly owned by Avcorp US Holdings Inc. Both companies are incorporated in the State of
Delaware and are wholly owned subsidiaries of Avcorp Industries Inc.

Comtek Advanced Structures Ltd., incorporated in the Province of Ontario is a wholly owned subsidiary of Avcorp Industries Inc.

The Company’s governing corporate statute is the Canada Business Corporations Act (the “CBCA”).

The consolidated financial statements of the Company for the year ended December 31, 2017 were authorized for issue in
accordance with a resolution of its Board of Directors on July 10, 2018.



On March 28, 2018, the Company entered into an amendment to its existing credit facility with a Canadian chartered bank
whereby the following amendments were made:



Availability under the Revolving Loan is increased by USD$10,000,000 (“Expanded Loan”) subject to existing
drawdown provisions, interest rates and bonus fees (note 16);

Drawdowns under the Expanded Loan are supported by a major and material customer of the Company by way of a
guarantee (note 16); and

The Expanded Loan matures on March 31, 2019.

On May 25, 2018, the Company entered into an amendment to its existing credit facility with a Canadian chartered bank
whereby the following amendment was made:

 Maximum availability under the Revolving Loan cannot exceed USD$68,000,000 less USD$4,300,000, until August 31,

2018, at which time the agreement reverts back to existing terms.

The Company ended the year with bank operating line utilization of $61,283,000 offset by $5,212,000 cash compared to
utilization of $17,111,000 with $3,960,000 cash on hand as at December 31, 2016. Based on net collateral provided to its
bank, the Company is able to draw up to an additional USD$9,149,000 on its operating line of credit as at December 31,
2017 (December 31, 2016: $4,901,000).

Pursuant to the terms of the loan agreement, the Company is required to meet certain covenants. The Company is in
breach of certain covenants pursuant to the terms of the loan agreement and accordingly an event of default had occurred
that requires remediation.

On December 18, 2015, in conjunction with the acquisition of Hitco, the Company assumed a customer advance for
pre-funded product deliveries. The customer advance is re-paid as the Company delivers to the customer. In the event
that cancellation, termination, or assignment of the statement of work occurs earlier than December 31, 2018 the
customer shall have the right to recover from the Company within 120 days of such an event the unamortized portion of
the cash advance. The customer advance is subject to an access and security agreement along with a general security
agreement entered into with the Company’s bank and customer.

Page 34

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2017
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2017



The customer advance was recorded at its fair value on December 18, 2015 in the amount of $18,953,000. The remaining
unamortized customer advance has been discounted to arrive at the December 31, 2017 amount of $7,227,000 (December
31, 2016: $11,573,000) of which it is estimated $7,227,000 (December 31, 2016: $8,034,000) will be amortized during
the next twelve months. The Company amortized into revenue $3,702,000 of the customer advance during the year ended
December 31, 2017 (December 31, 2016: $6,287,000).

The Company, in conjunction with is Board of Directors continue to carry out various operational strategies which include:



Contract renegotiations with customers and new customer contracts have provided an improved basis for operations in the
future.

Close collaboration with customers has resulted in both financial and operational support for continued operations.

Management is actively working to secure additional production orders, extension to its banking agreements, will continue to
work with existing common shareholders, and will seek additional financing as necessary. The Company cannot provide
assurance that, if it needs to raise additional funds, such funds will be available on favourable terms, or at all. If the Company
cannot raise adequate funds on acceptable terms, its business could be materially harmed.

2. Basis of Preparation and Measurement

The consolidated financial statements of the Company have been prepared in accordance with International Financial Reporting
Standards (“IFRS”).

The consolidated financial statements have been prepared on a historical cost basis. The consolidated financial statements are
presented in Canadian dollars and all values are rounded to the nearest thousand (000), except where otherwise indicated.

3. Summary of Significant Accounting Policies

The significant accounting policies used in the preparation of these consolidated financial statements are described below.
These policies have been consistently applied to all periods presented, unless otherwise stated.

Basis of consolidation

The financial statements of the Company consolidate the accounts of Avcorp Industries Inc. and its subsidiaries Comtek
Advanced Structures Ltd., Avcorp US Holdings Inc., and Avcorp Composite Fabrication Inc. (the “Group”). All material
intercompany transactions, balances and unrealized gains and losses from intercompany transactions are eliminated on
consolidation.

The consolidated financial statements comprise the financial statements of the Group and its subsidiaries as at December 31,
2017. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee
and has the ability to affect those returns through its power over the investee. Specifically, the Group controls an investee if,
and only if, the Group has:



Power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee);

Exposure, or rights, to variable returns from its involvement with the investee; and

The ability to use its power over the investee to affect its returns.

Generally, there is a presumption that a majority of voting rights result in control. Consolidation of a subsidiary begins when
the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Assets, liabilities,
income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated financial
statements from the date the Group gains control until the date the Group ceases to control the subsidiary.

When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line
with the Group’s accounting policies. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to
transactions between members of the Group are eliminated in full on consolidation.

Business combinations

Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate
of the consideration transferred, which is measured at acquisition date fair value. Acquisition-related costs are expensed as
incurred and included in administrative expenses.

Page 35

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2017
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2017

Foreign currency translation



Functional and presentation currency: Foreign currency items included in the consolidated financial statements of each
consolidated entity in the Avcorp Industries Inc. group 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 Canadian dollars, which is the Company’s functional currency. The functional currency of the Company’s subsidiary,
Comtek, is also determined to be Canadian dollars. The functional currency of the Company’s subsidiary, Avcorp US
Holdings Inc., and ACF is determined to be US dollars.

On consolidation, the assets and liabilities of foreign operations are translated into Canadian dollars at the rate of
exchange prevailing at the reporting date and their statement of income are translated at average exchange rates
prevailing during the period. The exchange differences arising on translation for consolidation are recognized in other
comprehensive income (“OCI”). On disposal of a foreign operation, the component of OCI relating to that particular foreign
operation is reclassified to consolidated income.

Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of
assets and liabilities arising on the acquisition are treated as assets and liabilities of the foreign operation and translated at
the spot rate of exchange at the reporting date.

Transactions and balances: Foreign currency transactions are translated into the functional currency using the exchange
rates prevailing at the dates of the transactions. Generally, foreign exchange gains and losses resulting from the
settlement of foreign currency transactions and from the translation at period-end exchange rates of monetary assets and
liabilities denominated in currencies other than an operation’s functional currency are recognized in the consolidated
statement of income.

Fair value measurement

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or
most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement
date. When determining fair value measurements for assets and liabilities required to be recorded at fair value, the Company
considers the principal or most advantageous market in which it would transact and also considers assumptions that market
participants would use when pricing an asset or liability. The fair value hierarchy has three levels of inputs that may be used to
measure fair value: Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities; Level 2—Unadjusted
quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or
liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability; and
Level 3—Unobservable inputs for the asset or liability. The Company has not applied fair value measurements to any of its
financial instruments.

Financial instruments

a) Financial assets

Financial assets include, in particular, cash, accounts receivables, other assets and consideration receivable.

Financial assets are recognized at the contract date and initially measured in accordance with IAS 39, Financial
Instruments: Recognition and Measurement. The measurement of financial assets subsequent to initial recognition
depends on whether the financial instrument is held for trading, held-to-maturity, available-for-sale, or whether it falls in
the loans and receivables category. The assignment of an asset to a measurement category is performed at the time of
acquisition and is primarily determined by the purpose for which the financial asset is held.

Held for trading instruments are held at fair value. Changes in fair value are included in the consolidated statement of loss
unless the instrument is included in a cash flow hedge. If the instruments are included in a cash flow hedging relationships,
which are effective, changes in value are taken to equity. When the hedged forecast transaction occurs, amounts
previously recorded in equity are recognized in the statement of loss. The Company has no such financial instruments.

Held-to-maturity instruments are measured at amortized cost using the effective interest method. The Company has no
such financial instruments.

Available-for-sale assets are held at fair value. Changes in fair value arising from changes in exchange rates are included
in the consolidated statement of loss. All other changes in fair value are taken to equity. On disposal, the accumulated
changes in value recorded in equity are included in the gain or loss recorded in the statement of loss. The Company has no
such financial instruments.

Loans and receivables are held at amortized cost and not revalued (except for changes in exchange rates which are
included in the consolidated statement of loss). The Company’s financial assets in this category are: cash, accounts
receivables, consideration receivable and other assets.

At each statement of financial position date, the carrying amounts of financial assets that are not measured at fair value
through profit or loss are assessed to determine whether there is any substantial objective indication of impairment. The
amount of impairment loss is recognized in the statement of loss. If impairment is indicated for available-for-sale financial
assets, the amounts previously recognized in equity are eliminated from other comprehensive income up to the amount of
the assessed impairment loss and recognized in the consolidated statement of loss.

Page 36

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2017
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2017

b) Financial liabilities

Financial liabilities often entitle the holder to return the instrument to the issuer in return for cash or another financial
asset. These include, in particular, bank indebtedness, accounts payables, finance lease liabilities and term debt.

Financial liabilities are measured at their fair value at the time of acquisition, which is normally equivalent to the net loan
proceeds. Transaction costs directly attributable to the acquisition are deducted from the amount of all financial liabilities
that are not measured at fair value through profit or loss subsequent to initial recognition. If a financial liability is interest
free or bears interest at below the market rate, it is recognized at an amount below the settlement price or nominal value.
The financial liability initially recognized at fair value is amortized subsequent to initial recognition using the effective
interest method.

Inventories

Inventories are stated at the lower of cost and net realizable value. Cost is determined using the first-in, first-out (“FIFO”)
method. The cost of finished goods and work-in-progress comprises raw materials, direct labour, other direct costs and related
production overheads (based on normal operating capacity) including applicable depreciation on property, plant and equipment
and amortization of intangible assets. Net realizable value is the estimated selling price less applicable selling expenses.

Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. Cost
includes expenditures that are directly attributable to the acquisition of the asset. Subsequent costs are included in the asset’s
carrying amount 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 can be measured reliably. The carrying amount of a replaced
asset is derecognized when replaced. Repairs and maintenance costs are charged to the consolidated statement of loss during
the period in which they are incurred.

An estimation is made of the useful life of property, plant and equipment. The useful life is measured in terms of years of
production, and depreciated on a straight line basis.

Computer hardware and software
Machinery and equipment
Leasehold improvements

2 - 10 years
5 - 15 years
end of leases up to 2028

The Company allocates the amount initially recognized in respect of an item of property, plant and equipment to its significant
parts and depreciates separately each such part. The useful lives of the assets are reviewed annually and adjusted if
appropriate. The amortization expense in property, plant and equipment is recognized in the consolidated statement of loss in
the expense category that is consistent with the function of the property, plant and equipment.

Intangible Assets

Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a
business combination is their fair value at the date of acquisition. Following initial recognition, intangible assets are carried at
cost less any accumulated amortization and accumulated impairment losses. Internally generated intangibles, excluding
capitalized development costs, are not capitalized and the related expenditure is reflected in profit or loss in the period in which
the expenditure is incurred.

Intangible assets with finite lives are amortized over the useful economic life and assessed for impairment whenever there is an
indication that the intangible asset may be impaired. The amortization period and the amortization method for an intangible
asset with a finite useful life are reviewed at least at the end of each reporting period. Changes in the expected useful life or the
expected pattern of consumption of future economic benefits embodied in the asset are considered to modify the amortization
period or method, as appropriate, and are treated as changes in accounting estimates. The amortization expense on intangible
assets with finite lives is recognized in the profit or loss in the expense category that is consistent with the function of the
intangible assets.

Research and development costs

Research costs are expensed as incurred. Development costs, which are currently all tooling and new program introduction
costs incurred on long-term programs that meet the criteria for deferral, are capitalized and amortized straight-line over the
number of shipsets management believes is a reasonable estimate of units to be sold for the program.

Segment Reporting

Management has determined the operating segments based on information regularly reviewed for the purposes of decision
making, allocating resources and assessing performance by the Company’s chief operating decision maker; the Chief Executive
Officer (CEO). The Company evaluates the financial performance of its operating segments primarily based on operating income
or loss.

Page 37

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2017
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2017

Impairment of non-financial assets

The Company assesses, at each reporting date, whether there is an indication that an asset may be impaired. If any indication
exists, or when annual impairment testing for an asset is required, the Company estimates the asset’s recoverable amount. An
asset’s recoverable amount is the higher of an asset’s or cash generating units (“CGU”) fair value less costs of disposal and its
value in use. The Company’s CGUs are ASI, Comtek, and ACF. The recoverable amount is determined for an individual asset,
unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets.
When the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written
down to its recoverable amount.

In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate
that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair
value less costs of disposal, recent market transactions are taken into account. If no such transactions can be identified, an
appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly
traded companies or other available fair value indicators.

The Company bases its impairment calculation on detailed budgets and forecast calculations, which are prepared separately for
each of the Company’s CGUs to which the individual assets are allocated. These budgets and forecast calculations generally
cover a period of five years. A long-term growth rate is calculated and applied to project future cash flows after the fifth year.

An assessment is made at each reporting date to determine whether there is an indication that previously recognized
impairment losses no longer exist or have decreased. If such indication exists, the Company estimates the asset’s or CGU’s
recoverable amount. A previously recognized impairment loss is reversed only if there has been a change in the assumptions
used to determine the asset’s recoverable amount since the last impairment loss was recognized. The reversal is limited so that
the carrying amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have
been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such reversal is
recognized in the statement of profit or loss unless the asset is carried at a revalued amount, in which case, the reversal is
treated as a revaluation increase.

Employee benefits



Post-employment benefit obligations: Employees of companies included in these consolidated financial statements have
entitlements under Company pension plans which are defined contribution pension plans.

The cost of defined contribution pension plans is charged to expense as the contributions become payable.

Stock based compensation: The Company grants stock options to certain employees. Stock options vest over three to ten
years and all expire over five to ten years after grant date. Each tranche in an award is considered a separate award with
its own vesting period and grant date fair value. Fair value of each tranche is measured at the date of grant using the
Black-Scholes option pricing model.

Compensation expense is recognized over the tranche’s vesting period based on the number of awards expected to vest,
by increasing contributed surplus. The number of awards expected to vest is reviewed at least quarterly, with any impact
being recognized immediately.

Termination benefits: The Company recognizes termination benefits when it is demonstrably committed to either
terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal, or
providing benefits as a result of an offer made to encourage voluntary termination. Benefits falling due more than twelve
months after the end of the reporting period are discounted to their present value where the effect is material.

Provisions and unfavourable contracts liability

In connection with the acquisition of the US-based composite Aerostructures division of Hitco Carbon Composites Inc. (“Hitco”),
a subsidiary of Frankfurt-listed SGL Carbon SE (“SGL”) (note 33) the Company assumed existing long-term and short-term
customer contracts. Based on our review of these contracts, the Company concluded that the terms of the contracts to be
unfavourable, compared to what could be realized in market transactions, as of the date of the acquisition. As a result, the
Company recognized contract liabilities, assumed, based on the present value of the difference between the contractual cash
flows of the unfavorable contracts and the estimated cash flows to fulfil the obligation under the terms of the existing contracts
from the acquisition date. The liabilities principally relate to long-term life of program contracts that were initially executed in
the years prior to the acquisition (note 20).

The Company measured these liabilities under the measurement provisions of IFRS 13, Fair Value Measurements, which is
based on the price to transfer the obligation to a market participant at the measurement date, assuming that the liabilities will
remain outstanding in the marketplace. Fair value estimates are based on a complex series of judgments about future events
and uncertainties and rely heavily on estimates and assumptions. The judgments used to determine the estimated fair value
assigned to each long-term contracts can materially impact our results of operations.

Included in income is the non-cash amortization of acquired contract liabilities recognized as fair value adjustments through
purchase accounting from the acquisition of ACF. For the year ended December 31, 2017, the Company recognized net
amortization of unfavourable contract liabilities of $9,058,000 (December 31, 2016: $38,937,000). The balance of the liability
as of December 31, 2017 is $44,460,000 and, is based on a units of production basis over the expected life of the contracts.
The unfavorable contract liability is amortized on a units-of-production basis over the expected lives of the contracts, the
longest of which at the acquisition date was expected to be December 31, 2023, however in 2016, the Company successfully
renegotiated one of the major contracts attributing to the unfavorable contracts liability such that the term of the contract was
reduced from December 31, 2023 to December 31, 2019.

Page 38

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2017
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2017

Revenue

Revenue is recognized when it is probable that the economic benefits will flow to the Company and delivery has occurred, the
sales price is fixed or determinable, and collectability is reasonably assured. These criteria are generally met at the time the
product is shipped and delivered to the customer and, depending on the delivery conditions, title and risk of the product have
passed to the customer.

The term ‘bill and hold’ sale is used to describe a transaction where delivery is delayed at the customer’s request, but the
customer takes title and accepts billing. Revenue is recognized when the customer takes title, provided it is probable that
delivery will be made, the item is on hand, identified and ready for delivery to the customer at the time the sale is recognized,
the customer specifically acknowledges the deferred delivery instructions, and the usual payment terms apply.

Revenue is measured based on the price specified in the sales contract, net of discounts.

The Company’s major revenue streams arise from the production and supply of major airframe structures and aircraft parts to
aircraft manufacturers, the repair of aircraft components, aircraft product design and production tooling design and
manufacture.

The nature of the Company’s operating cycle for the manufacture and delivery of highly engineered aerospace parts and
components is one in which significant order and production lead-times exist. There exists a high degree of variability within the
length of operating cycles for the various manufactured components, aircraft programs, and customers. The Company’s
operating cycle commences with receipt, from its customers, of a purchase order for production of a component and culminates
when the Company has received full payment from the customer for the product it has delivered. The individual product
component operating cycles can range from twelve weeks to greater than sixty weeks. Costs incurred for proto-type design, as
well as hard and soft tooling expenditures for new program introduction can occur over a two year period. Given this variability,
since no single operating cycle is clearly identifiable, the Company has concluded that the operating cycle is twelve months.

Certain program inventories have been funded by a customer, whereby the associated deferred program revenues will be
recorded as revenue upon delivery of units of production.

Additionally, customers have funded non-recurring costs incurred during the introduction of new production programs. These
costs are deferred as development costs and will be amortized to the consolidated statement of loss straight-line on a units-of-
production basis over the expected life of the programs, in conjunction with the associated deferred revenue upon
commencement of production.

Deferred program revenues are classified as current or non-current based on the estimated timing of when the related
revenues are realized. This period of deferred revenue realization can extend, dependent on the amortization of the related
costs, over one or more fiscal years.

Cost of sales

Cost of sales includes the cost of production, including materials, direct labour, overhead expenses as well as applicable
depreciation and amortization.

Income tax

a) Current income tax

Current income tax assets and liabilities for the current year are measured at the amount expected to be recovered from
or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or
substantively enacted, at the reporting date in the countries where the Company operates and generates taxable income.

Current income tax relating to items recognized directly in equity is recognized in equity and not in the consolidated
statement of loss. Management periodically evaluates positions taken in the tax returns with respect to situations in which
applicable tax regulations are subject to interpretation and establishes provisions where appropriate.

b) Deferred income tax

Deferred income tax is provided using the liability method on deductible temporary differences between the tax bases of
assets and liabilities and their carrying amounts for financial reporting purposes at the reporting date.

Deferred income tax liabilities are recognized for all taxable temporary differences, except:



taxable temporary differences associated with investments in subsidiaries, when the timing of the reversal of the
temporary differences can be controlled and it is probable that the temporary differences will not reverse in the
foreseeable future.

Deferred income tax assets are recognized for all deductible temporary differences, the carry forward of unused tax credits
and any unused tax losses to the extent that it is probable that taxable profit will be available against which the deductible
temporary differences and the carry forward of unused tax credits and unused tax losses can be utilized.

The carrying amount of deferred income tax assets is reviewed at each reporting date and reduced to the extent that it is
no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be
utilized. Unrecognized deferred income tax assets are reassessed at each reporting date and are recognized to the extent
that it has become probable that future taxable profits will allow the deferred income tax asset to be recovered.

Page 39

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2017
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2017

Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the
asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively
enacted at the reporting date.

Deferred income tax relating to items recognized outside profit or loss is recognized outside profit or loss. Deferred income
tax items are recognized in correlation to the underlying transaction either in other comprehensive income or directly in
equity.

Deferred income tax assets and deferred income tax liabilities are offset if a legally enforceable right exists to set off
current tax assets against current income tax liabilities and the deferred income taxes relate to the same taxable entity
and the same taxation authority.

Capital Stock

Common shares are classified as equity. Incremental costs directly attributable to the issuance of shares are recognized as a
deduction from equity.

Earnings per share

Basic earnings per share (“EPS”) is calculated by dividing the net loss for the year by the weighted average number of common
shares outstanding during the year.

Diluted EPS is calculated by adjusting the weighted average number of common shares outstanding for dilutive instruments.
The number of shares included with respect to options, warrants and similar instruments is computed using the treasury stock
method. The Company’s potentially dilutive common shares comprise stock options granted to employees and warrants.

Leases

Leases are classified as finance or operating leases. A lease that transfers substantially all the benefits and risks incidental to
the ownership of property is classified as a finance lease. All other leases are accounted for as operating leases whereby lease
payments are expensed on a straight-line basis over the term of the lease. Gains and losses arising on sale and leaseback
transactions, when the leaseback is classified as a finance lease, are deferred and amortized in proportion to the amortization of
the leased asset when material. Lease inducements received are recorded as a deferred credit and amortized as a reduction of
lease expense over the term of the lease.

Accounting standards issued but not yet effective

The following is a brief summary of the new standards issued but not yet effective:

IFRS 15 – Revenue from Contracts with Customers

IFRS 15 presents new requirements for the recognition of revenue, replacing IAS 18 “Revenue”, IAS 11 “Construction
Contracts”, and several revenue-related Interpretations. The new standard establishes a control-based revenue recognition
model and provides additional guidance in many areas not covered in detail under existing IFRSs, including how to account for
arrangements with multiple performance obligations, variable pricing, customer refund rights, supplier repurchase options, and
other common complexities.

The Company is in the process of evaluating the impact of adopting these standards on the Company’s consolidated financial
statements. IFRS 15 permits either a full or modified retrospective approach for the adoption and is effective for annual periods
beginning on or after January 1, 2018.

The Company has undertaken a project to assess the impact of IFRS 15 and ensure the Company’s compliance with IFRS 15.
The Company has collected an inventory of significant contracts with customers in scope for IFRS 15 assessment and identified
preliminary accounting topics that may impact the Company’s reported results based on the review of a sample of contracts
from each revenue stream. The Company is in the process of reviewing contracts with customers to ensure revenue recognition
practices are in accordance with IFRS 15 and evaluating potential changes to revenue processes and systems. The Company
has identified contracts in which performance obligations are satisfied over time as control transfers during production. For
these contracts, the revenue recognition pattern may change with revenue being recognized earlier in the year of adoption as
compared to under the previous accounting policy. Contracts that do not meet the criteria for over time recognition will
continue to be recognized at a point in time.

The Company continues to assess the impact of this standard on the consolidated financial statements. The Company plans to
disclose the estimated financial effects of the adoption of IFRS 15 in its March 31, 2018 quarterly consolidated financial
statements.

Page 40

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2017
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2017

IFRS 9 – Financial Instruments

The Company is in the process of evaluating the impact of adopting these amendments on the Company’s consolidated financial
statements. Overall, the Company expects no significant impact on its statement of financial position and equity except for the
effect of applying the impairment requirements of IFRS 9.

IFRS 16 - Leases

In January 2016, the IASB issued IFRS 16 – Leases (“IFRS 16”) which replaces IAS 17 – Leases and its associated
interpretative guidance. IFRS 16 applies a control model to the identification of leases, distinguishing between a lease and a
service contract on the basis of whether the customer controls the asset being leased. For those assets determined to meet the
definition of a lease, IFRS 16 introduces significant changes to the accounting by lessees, introducing a single, on-balance sheet
accounting model that is similar to current finance lease accounting, with limited exceptions for short-term leases or leases of
low value assets. Lessor accounting remains similar to current accounting practice. The standard is effective for annual periods
beginning on or after January 1, 2019, with early application permitted for entities that apply IFRS 15. The Company plans to
adopt the new standard on the required effective date. The Company has not yet assessed the impact the final standard is
expected to have on its consolidated financial statements.

IFRS 2 – Share Based Payments

In 2016, the IASB issued the final amendments to IFRS 2, Share-based Payments (“IFRS 2”) that clarify the classification and
measurement of share-based transactions, consisting of: accounting for cash-settled share-based payment transactions that
include a performance condition; classification of share-based payment transactions with net settlement features; accounting
for modifications of share-based payment transactions from cash-settled to equity-settled. The amendments are effective for
annual periods beginning on or after January 1, 2018, with earlier adoption permitted. The amendments are to be applied
prospectively. However, retrospective application is allowed if this is possible without the use of hindsight. The Company plans
to adopt the new standard on the required effective date and will apply the amendments prospectively. The Company is in the
process of evaluating the impact of adopting these amendments on the Company’s consolidated financial statements.

IFRIC Interpretation 22 – Foreign Currency Transactions and Advance Consideration

In 2016, the IASB issued IFRIC Interpretation 22, Foreign Currency Transactions and Advance Consideration (“IFRIC 22”),
which provides requirements about which exchange rate to use in reporting foreign currency transactions (such as revenue
transactions) when payment is made or received in advance. IFRIC 22 is effective for annual periods beginning on or after
January 1, 2018, with earlier adoption permitted. On initial application, entities have the option to apply either retrospectively
or prospectively. The Company plans to adopt the new standard on the required effective date and will apply the amendments
prospectively. The Company is in the process of evaluating the impact of adopting these amendments on the Company’s
consolidated financial statements.

4. Critical Accounting Estimates and Judgements

The preparation of consolidated financial statements in conformity with IFRS requires management to make estimates and
judgments that affect the amounts which are reported in the consolidated financial statements during the reporting period.
Estimates and other judgments are evaluated at each reporting date and are based on management’s experience and other
factors, including expectations about future events that are believed to be reasonable under the circumstances. The critical
estimates and judgements utilized in preparing the Company’s consolidated financial statements affect the assessment of net
recoverable amounts, net realizable values and fair values, and the determination of functional currency of the Canadian
operations of the group. Any changes in estimates and assumptions could have a material impact on the assets and liabilities at
the date of the statement of financial position. The Company reviews its estimates and assumptions on an ongoing basis and
uses the most current information available and exercises careful judgement in making these estimates and assumptions.



Functional currency: The functional currency for the Company and its subsidiaries is the currency of the primary economic
environment in which each operates. The Company has determined that the functional currency for the Company and all
its subsidiaries except for Avcorp US Holdings Inc. and ACF is the Canadian dollar. The functional currency for Avcorp US
Holdings Inc. and ACF is the US dollar. The determination of functional currency may require certain judgements to
determine the primary economic environment. The Company reconsiders the functional currency used when there is a
change in events and conditions which determined the primary economic environment.

Page 41

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2017
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2017



Impairments: The recoverable amount of intangible assets, development costs and property, plant and equipment is based
on estimates and assumptions regarding the expected market outlook and cash flows from each CGU or group of CGUs. In
order to estimate the fair value of indefinite-lived intangible assets and goodwill resulting from business combinations, the
Company typically estimates future revenue, considers market factors and estimates future cash flows. Based on these key
assumptions, judgments and estimates, the Company determines whether to record an impairment charge to reduce the
value of the asset carried on the consolidated statement of financial position to its estimated fair value. Assumptions,
judgments and estimates about future values are complex and often subjective. They can be affected by a variety of
factors, including external factors such as industry and economic trends, and internal factors such as changes in the
Company’s business strategy or internal forecasts. Although the Company believes the assumptions, judgments and
estimates made in the past have been reasonable and appropriate, different assumptions, judgments and estimates could
materially affect the Company’s reported financial results.

Going concern: Management assesses the Company’s ability to continue as a going concern at each reporting date, using
all quantitative and qualitative information available. This assessment, by its nature, relies on estimates of future cash
flows and other future events, whose subsequent changes would materially impact the validity of such an assessment.

Capitalization of development costs: When capitalizing development costs the Company must assess the technical and
commercial feasibility of the projects and estimate the useful lives of resulting products. Determining whether future
economic benefits will flow from the assets and therefore the estimates and assumptions associated with these calculations
are instrumental in (i) deciding whether project costs can be capitalized, and (ii) accurately calculating the useful life of the
projects for the Company.

Unfavorable contracts liability: At the acquisition date valued the unfavorable contracts liability at fair value using certain
assumptions that would arise in a market participant view. The Company estimates the expected shipsets or production
when assessing the liability, together with the discounts rate and period of performance under the varying contracts and
service agreements. The cash flows are discounted over the period of performance using a discount rate commensurate
with the risk associated with the liability.

Fair value of assets and liabilities acquired in a business combination: The Company accounted for the acquisition of ACF
using the acquisition method when control is transferred to the Company. The consideration received is generally
measured at fair value, as are the identifiable net liabilities assumed. The fair value of the liabilities assumed is determined
using valuation techniques that require estimation of the estimated cash flows, discount rates and estimated operating
margins.

Inventories are valued at the lower of cost and net realizable value. The costs of inventory involve estimates in
determining the allocation of fixed and variable production overhead. These estimates involved include determination of
normal production capacity and nature of expenses to be allocated. Additionally inventory is reviewed monthly to ensure
the carrying value does not exceed net realizable value. If so, a write-down is recognized. The write-down may be
reversed if the circumstances which caused it no longer exist.

The Company has entered into production contracts in the ordinary course of its business. The unavoidable cost of meeting
the obligations under certain of these contracts exceeds the associated expected future net benefits; consequently, an
onerous contract provision has been recognized. The calculation of this provision involves the use of estimates including,
but not limited to, program gross margin, and the effect of learning curves of production and the timing of achieving
certain operational efficiencies. These actual results can vary significantly from these estimates with consequent variability
in the amounts of the provision recorded. The onerous contract provision is calculated by taking the expected future costs
that will be incurred under the contract and deducting any estimated revenues. A portion of the onerous contract provision
is for costs incurred that were greater than the expected future costs used to determine the fair value of the unfavourable
contract liability; this portion of the onerous contract provision for the year ended December 31, 2017 is $3,479,000. The
remaining portion of the onerous contract provision is primarily due to a high cost structure and learning curves of
production that cannot be recovered through current pricing of the associated contracts. The current portion of the onerous
contract provision for the year ended December 31, 2017 is $7,297,000. The onerous contract provision for the year ended
December 31, 2017 is $13,366,000 (December 31, 2016: $37,000).

Page 42

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2017
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2017

5. Expenses by Nature

The Consolidated Statements of Loss and Comprehensive Loss presents expenses by function. Accordingly, amortization and
depreciation is not presented as a separate line on the statement, but is included within cost of sales to the extent that it
relates to manufacturing machinery and equipment, as well as leasehold improvements associated with manufacturing facility.

Expenses by nature:

FOR THE YEAR ENDED DECEMBER 31

Raw materials, purchased parts and consumables

Salary, wages and benefits

Change in onerous contracts provision

Contracted services and consulting

Other expenses and conversion of costs into inventory

Plant equipment rental and maintenance

Depreciation

Rent

Utilities

Legal and audit fees

Transportation

Amortization of development costs

Travel costs

Amortization of intangible assets

Office equipment rental/maintenance

Bad debt expense

Insurance

Office supplies

Royalties

6. Capital Risk Management

2017

$78,961

70,891

13,603

6,266

4,909

4,333

4,153

3,695

3,143

2,981

2,240

1,924

1,488

1,299

1,071

1,030

623

384

223

2016

$68,084

77,010

19,431

2,768

5,950

3,915

4,332

5,848

1,484

2,992

604

1,728

1,325

2,130

1,328

659

278

246

203,217

200,112

The Company’s objectives when managing capital are to safeguard its ability to continue as a going concern and to provide an
adequate return to shareholders, while satisfying other stakeholders.

The Company includes long-term debt, preferred shares and capital stock in its definition of capital, as shown in the Company’s
consolidated statements of financial position.

The Company’s loan agreement with a Canadian chartered bank restricts the declaration or payment of any dividend.

7. Financial Risk Management

The Company is exposed to certain financial risks including market risk, currency risk, credit risk, liquidity risk, interest rate risk
and price risk. The note presents information about the Company’s risk to each of these risks; its objectives, policies and
processes for measuring and managing risk.

a) Market Risk

Market risk is the risk that changes in the market prices, such as foreign exchange rates and interest rates, will affect the
Company’s income or the value of its holdings of financial instruments. The Company’s policy is not to utilize derivative
financial instruments for trading or speculative purposes. The Company may utilize derivative instruments in the
management of its foreign currency and interest rate exposures.

b) Currency Risk

Currency risk arises because the amount of the local currency receivable or payable for transactions denominated in
foreign currencies may vary due to changes in exchange rate (“transaction exposures”) and because the non-Canadian
dollar denominated financial statements of the Company’s subsidiaries may vary on consolidation into the reporting
currency of Canadian dollars (“translation exposures”).

Page 43

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2017
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2017

The Company sells a significant proportion of its products in US dollars at prices which are often established well in
advance of manufacture and shipment dates. In addition, the Company purchases a significant proportion of its raw
materials and components in US dollars at prices that are usually established at the order date. The Company’s operations
are based in Canada and in the US. As a result of this, the Company is exposed to currency risk to the extent that
fluctuations in exchange rates are experienced. The amount of foreign exchange loss recorded for the year ended
December 31, 2017 is $1,944,000 (December 31, 2016: $3,278,000 loss).

The Company had the following US dollar denominated balances:

FOR THE YEAR ENDED DECEMBER 31

Bank cash position

Accounts receivable

Consideration receivable

Accounts payable net of prepayments

Bank indebtedness

Term debt

2017

US$2,929

9,749

2,111

48,851

868

2016

US$1,205

15,278

9,124

1,574

4,250

4,560

With other variables unchanged, each $0.10 strengthening (weakening) of the CAD against the USD would result in an
increase (decrease) of approximately $3,915,000 in net income for the year ended December 31, 2017 as a result of
holding a net liability position in USD as at December 31, 2017.

As at December 31, 2016, a $0.10 strengthening (weakening) of the CAD against the USD would result in a (decrease)
increase of approximately $1,522,000 in net income for the year ended December 31, 2016 as a result of holding a net
USD asset position in as at December 31, 2016.

c) Credit Risk

Credit risk is the risk of a financial loss to the Company if a customer or counterparty to a financial instrument fails to meet
its contractual obligation. The Company manages credit risk for trade and other receivables through a financial review of
the credit worthiness of the prospective customer along with credit monitoring activities. The majority of the Company’s
trade receivables reside with Boeing Commercial Airplane Group (“Boeing”), Boeing Defense, Space & Security (“BDS”),
Bombardier Aerospace (“Bombardier”), BAE Systems (Operations) Limited (“BAE”), Lockheed Martin (“LM”), and Subaru
Corporation (“Subaru”). The maximum exposure to credit risk is represented by the amount of accounts receivable in the
consolidated statements of financial position.

As at the consolidated statements of financial position date 86.6% (December 31, 2016: 69.8%) of the Company’s trade
accounts receivable are attributable to these customers.

The Company is exposed to credit risk if counterparties to its trade receivables are unable to meet their obligations. The
concentration of credit risk from its customers is minimized because the Company has an original equipment manufacturer
and tier one aerospace customer base as at December 31, 2017. The customers are predominately large, well-capitalized,
and long established entities with a low risk of non-payment. The Company regularly monitors its credit risk and credit
exposure.

The following table provides the change in allowance for doubtful accounts for trade receivables:

FOR THE YEAR ENDED DECEMBER 31

Balance as at January 1

Additions

Use

Collection

Balance as at December 31

The following table provides aged trade receivables:

FOR THE YEAR ENDED DECEMBER 31

Current

31 – 60 days

61 – 90 days

Over 90 days

Total

2017

$326

1,168

(129)

(128)

1,237

2017

$8,587

5,895

1,841

379

16,702

2016

$137

1,517

(1,328)

326

2016

$13,954

2,953

3,077

4,221

24,205

Consideration receivable arising from a 2015 business acquisition (notes 33) is guaranteed by the seller and a Canadian
chartered bank.

Page 44

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2017
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2017

d) 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
seeks to manage liquidity risk through the management of its capital structure and financial leverage.

Accounts payable and accrued liabilities are all due within the next twelve months.

The Company’s operating line of credit is due on demand (note 16). Term debt repayments are as outlined in note 22.

The table below categorizes the Company’s non-derivative financial liabilities into relevant maturity periods based on the
remaining period from the consolidated statements of financial position date to the contractual maturity date. The amounts
disclosed in the table are the contractual undiscounted cash flows.

Subsequent to year end, the Company entered into agreements to expand its loan facilities (note 34).

Bank indebtedness (note 16)

Term debt (note 22)

Trade payables (note 18)

Payroll related liabilities (note 18)

Accrued interest (note 18)

Restoration provision (note 18)

Restructuring provision (note 18)

Other accruals (note 18)

Bank indebtedness (note 16)

Term debt (note 22)

Trade payables (note 18)

Payroll related liabilities (note 18)

Accrued interest (note 18)

Restoration provision (note 18)

Restructuring provision (note 18)

Other accruals (note 18)

Interest Rate Risk

Less than 3
months

3 months to 1
year

2 – 5 years

Over 5 years

December 31, 2017

$61,283

1,136

17,263

5,150

149

103

1,883

839

446

Less than 3
months

3 months to 1
year

2 – 5 years

Over 5 years

December 31, 2016

$17,111

24,835

5,793

6,942

371

841

454

1,192

247

The Company is exposed to interest rate risk on the utilized portion of its operating line of credit.

Interest rate for advances made up to the maximum of the allowable borrowing base on the existing USD$23,000,000
revolving loan:



RBP plus 0.75% per annum

RBUSBR plus 0.75% per annum

BA Equivalent Rate plus 2.25% per annum

LIBOR Rate plus 2.25% per annum

Interest rate for advances made on the additional borrowing capacity up to USD$58,000,000.



RBP plus 0.00% per annum

RBUSBR plus 0.00% per annum

BA Equivalent Rate plus 0.875% per annum

LIBOR Rate plus 0.875% per annum

Drawdown under the USD$35,000,000 additional borrowing capacity is supported by a major and material customer of the
Company by way of a guarantee.

Page 45

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2017
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2017

The Company will provide the guarantor, as consideration for the guarantee, a fee equal to 5.375% of the weighted
average outstanding balance of the guaranteed portion over each full twelve (12) month period commencing on the
funding date plus, for the partial year thereafter, 5.375% of the weighted average outstanding balance of the guaranteed
portion multiplied by the number of days in the partial year divided by three hundred sixty (360). The fee will be payable
on the maturity date

The maximum operating line of credit availability is $72,761,000 (USD$58,000,000) of which $61,283,000 is utilized as at
December 31, 2017 (December 31, 2016: $17,111,000). The Company lowers interest rate costs by managing utilization
of the operating lines of credit to the lowest amount practical. For the year ended December 31, 2017, with other variables
unchanged, a 1% change in the base borrowing rate would have a $613,000 (December 31, 2016: $171,000) impact on
net earnings and cash flow. Based on net collateral provided to its bank, the Company is able to draw up to an additional
USD$9,149,000 on its operating line of credit as at December 31, 2017 (December 31, 2016: $4,901,000).

The Company primarily finances the purchase of long-lived assets at fixed interest rates.

Price Risk

Certain of the Company’s contracts contain derivative financial instruments to reduce exposure to price risk associated with
its revenues and costs of certain procured items.

Sales Contracts

A number of the Company’s sales contracts have a price adjustment clause where the final sales price is determined by
certain indices in a period prior to the date of sale. As a result, the final sales price will change as these underlying indices
change. This price adjustment clause is an embedded derivative that is recorded at fair value, with changes in fair value
recorded within administrative and general expenses, as amounts are not material, until the date of sale. As at
December 31, 2017, the Company has $8,992,000 (December 31, 2016: $4,303,000) of firmly committed orders that
include price adjustment clauses of this nature. $1,000 has been recorded as a derivative gain for the year ended
December 31, 2017 as compared to a $1,000 loss for the year ended December 31, 2016 as restated as a result of the
change in the fair value of the underlying embedded derivatives.

Included in prepayments and other assets is $1,000 of inflation derivatives assets arising from the Company’s sales
contracts having price adjustment clauses within their terms (December 31, 2016: $1,000).

g) Financial Assets and Liabilities by Category

Categories of financial instruments

Under IFRS, financial instruments are classified into one of the following categories: financial assets at fair value through
profit or loss, loans and receivables, available-for-sale financial assets, financial assets and liabilities held for trading,
financial liabilities at fair value through profit or loss, and other financial liabilities at amortized cost.

All financial instruments, including derivatives, are included on the consolidated statement of financial position, which are
measured at fair value except for loans and receivables and other financial liabilities, which are measured at amortized
costs. Held for trading investments are subsequently measured at fair value and all gains and losses are included in net
income in the period in which they arise. Available-for-sale financial instruments are subsequently measured at fair value
with revaluation gains and losses included in other comprehensive income until the instruments are derecognized or
impaired.

As at December 31, 2017 and 2016, the Company’s financial assets and liabilities are categorized as follows:

Financial Assets

Cash

Accounts receivable

Inflation derivative

Financial Liabilities

Bank indebtedness

Accounts payable

Term debt

December 31, 2017

Loans and
receivables

Total financial
assets

Other financial
liabilities (at
amortized costs)

$5,212

18,942

61,283

23,834

3,170

Total

$5,212

18,942

61,283

23,834

3,170

Page 46

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2017
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2017

Financial Assets

Cash

Accounts receivable

Consideration receivable

Inflation derivative

Financial Liabilities

Bank indebtedness

Accounts payable

Term debt

8. Fair Value Measurement

December 31, 2016

Loans and
receivables

Total financial
assets

Other financial
liabilities (at
amortized costs)

$3,960

26,262

12,251

17,111

32,122

7,929

Total

$3,960

26,262

12,251

17,111

32,122

7,929

At December 31, 2017 and December 31, 2016, the fair values of cash, accounts receivable, other assets, consideration
receivable, accounts payable, and bank indebtedness approximated their carrying values because of the short-term nature of
these instruments.

FOR THE YEAR ENDED DECEMBER 31

2017

2016

Financial liabilities

Term debt (level 2)

Fair value hierarchy

Carrying value

Fair value

Carrying value

Fair value

$3,170

$7,929

The Company’s financial assets and liabilities recorded at fair value on the consolidated statements of financial position have
been categorized into three categories based on a fair value hierarchy. Fair value of assets and liabilities included in Level 1 are
determined by reference to quoted prices in active markets for identical assets and liabilities. Assets and liabilities in Level 2
include valuations using inputs other than the quoted prices for which all significant inputs are based on observable market
data, either directly or indirectly. Level 3 valuations are based on inputs that are not based on observable market data.

The fair value hierarchy requires the use of observable market inputs whenever such inputs exist. A financial instrument is
classified to the lowest level of the hierarchy for which a significant input has been considered in measuring fair value. The
Company does not have any financial assets or financial liabilities carried at fair value as at December 31, 2017.

9. Accounts Receivable

FOR THE YEAR ENDED DECEMBER 31

Trade receivables

Input tax credits

Accrued receivables

2017

$16,702

2,176

18,942

2016

$24,205

1,887

170

26,262

The average trade receivables days outstanding is 54 days as at December 31, 2017 (December 31, 2016: 59 days).

The carrying amount of accounts receivable pledged as security under the Company’s operating line of credit (note 16) as at
December 31, 2017 is $16,702,000 (December 31, 2016: $23,325,000).

The carrying amounts of the Company’s trade and accrued receivables are denominated in the following currencies:

FOR THE YEAR ENDED DECEMBER 31

US dollar

Canadian dollar

2017

2016

US$10,649

US$16,592

5,600

3,986

Page 47

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2017
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2017

10. Consideration Receivable

On December 18, 2015, in conjunction with the acquisition of the US-based composite Aerostructures division of Hitco Carbon
Composites Inc., a subsidiary of Frankfurt-listed SGL Carbon SE (“Hitco”) (note 33), Avcorp received $32,826,000
(USD$23,540,000) in cash consideration with $12,251,000 (USD$9,220,000 undiscounted) consideration receivable remaining
as at December 31, 2016. On April 3, 2017, Avcorp received the USD$9,220,000 remaining consideration receivable;
USD$6,511,000 of the consideration payment was utilized to repay a portion of the debt facility with a Canadian Chartered
bank (note 16). A further amount of USD$907,000 was utilized to repay a loan with Panta (note 22).

FOR THE YEAR ENDED DECEMBER 31

2017

2016

Opening balance

Receipts

Accretion

Foreign exchange

11. Inventories

FOR THE YEAR ENDED DECEMBER 31

Raw materials

Work-in-progress

Finished products

Inventory obsolescence

$12,251

(12,378)

127

$38,720

(26,296)

510

(683)

12,251

2017

2016

$24,762

$21,121

22,156

2,238

(6,375)

42,781

25,733

4,495

(7,053)

44,296

The amount of inventory expensed in cost of sales during the year ended December 31, 2017 amounted to $162,200,000
(December 31, 2016: $168,062,000). The carrying value of inventory pledged as security under the Company’s operating line
of credit (note 16) as at December 31, 2017 is $42,781,000 (December 31, 2016: $20,828,000).

Certain program inventories have been funded by a customer, whereby the associated deferred program revenues will be
recorded as revenue upon delivery of units of production.

12. Prepayments and Other Assets

FOR THE YEAR ENDED DECEMBER 31

Deposits on material purchases

Prepaid insurance

Prepaid IT security maintenance and licenses

Prepaid property tax

Prepaid other

2017

$1,126

1,763

625

425

451

4,390

2016

$461

1,608

1,029

405

641

4,144

Page 48

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2017
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2017

13. Development Costs

Development costs represent hard and soft tooling, and prototype design costs incurred for various customer programs.

FOR THE YEAR ENDED DECEMBER 31

Opening balance

Additions

Amortization

2017

$5,200

5,347

(1,924)

8,623

2016

$3,187

2,617

(604)

5,200

FOR THE YEAR ENDED DECEMBER 31

2017

2016

Cost

Accumulated amortization

Net book amount

$16,528

(7,905)

8,623

$11,180

(5,980)

5,200

Customers have funded non-recurring costs incurred during the introduction of new production programs. These costs are
deferred as development costs and are amortized to income in conjunction with the associated production activities, upon
commencement of production, on a units-of-production basis over the expected life of the programs.

14. Property, Plant and Equipment

Machinery and
equipment

Computer
hardware and
software

Leasehold
improvements

Year ended December 31, 2016

Opening net book amount

Additions

Disposals – cost

Disposals – accumulated depreciation

Depreciation charge

Currency translation adjustment

Closing net book amount

At December 31, 2016

Cost

Accumulated depreciation

Net book amount

Year ended December 31, 2017

Opening net book amount

Additions

Disposals – cost

Disposals – accumulated depreciation

Depreciation charge

Currency translation adjustment

Closing net book amount

At December 31, 2017

Cost

Accumulated depreciation

Net book amount

1,066

386

(43)

(460)

(4)

953

8,065

(7,112)

953

1,315

(183)

(57)

2,028

9,314

(7,286)

2,028

28,048

5,827

(86)

(3,259)

(582)

30,024

57,180

(27,156)

30,024

967

(39)

(3,611)

(1,380)

25,965

56,395

(30,430)

25,965

Page 49

Total

29,640

6,836

(129)

(3,915)

(586)

31,930

526

623

(196)

953

1,975

(1,022)

67,220

(35,290)

953

31,930

953

772

(359)

(41)

1,325

2,690

(1,365)

1,325

31,930

3,054

(39)

(4,153)

(1,478)

29,318

68,399

(39,081)

29,318

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2017
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2017

The Company has $1,012,000 in commitments at December 31, 2017 (December 31, 2016: $67,000) to purchase property,
plant and equipment in 2018.

Included in computer hardware and software are assets held under finance leases at a cost of $24,000 (December 31, 2016:
$24,000) having accumulated depreciation of $14,000 (December 31, 2016: $10,000).

Included in machinery and equipment are assets held under finance leases at a cost of $416,000 (December 31, 2016:
$237,000) having accumulated depreciation of $66,000 (December 31, 2016: $38,000).

The Lessor of the Industrial Centre at Gardena California, where Avcorp Composite Fabrication Inc. has its manufacturing
facilities, received an Offer from a third party to purchase the Industrial Centre. On March 28, 2017 Avcorp exercised its right of
first refusal under the lease agreement by providing notice to the Lessor that it proposes to purchase the property on the same
terms and conditions as presented in the Offer. Avcorp has up to 270 days from the date of providing such notice to present
and close a sale transaction with the Lessor. In addition, Avcorp entered into a Memorandum of Understanding and a Letter
Agreement with Stockdale Acquisitions LLC to negotiate a joint venture agreement for the ultimate acquisition and development
of the property in exchange for a long term lease by Avcorp of a portion of the property on favourable economic terms. The
negotiation of that joint venture agreement is ongoing as due diligence on the property proceeds. On June 26, 2017, Avcorp
provided notice to the Lessor of the Industrial Centre at Gardena California that it has elected not to proceed with the
acquisition of the property.

15. Intangibles

Year ended December 31, 2016

Opening net book amount

Amortization charge

Currency translation adjustment

Closing net book amount

At December 31, 2016

Cost

Accumulated depreciation

Net book amount

Year ended December 31, 2017

Opening net book amount

Additions

Amortization charge

Currency translation adjustment

Closing net book amount

At December 31, 2017

Cost

Accumulated amortization

Net book amount

Lease

Customer
contract –
re-compete

Developed
Software

Total

$748

(239)

(26)

483

725

(242)

483

(234)

(24)

225

677

(452)

225

$5,674

(1,086)

(184)

4,404

5,505

(1,101)

4,404

(1,065)

(253)

3,086

5,143

(2,057)

3,086

571

(18)

553

$6,422

(1,325)

(210)

4,887

6,230

(1,343)

4,887

571

(1,299)

(295)

3,864

6,373

(2,509)

3,864

Page 50

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2017
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2017

16. Bank Indebtedness

On September 27, 2012 the Company entered into a loan agreement with a Canadian chartered bank for a
$12,000,000 principal amount secured debt facility. On May 26, 2017, the Company entered into a loan agreement to expand
its loan facility with a Canadian Chartered bank. This loan agreement amends, restates and replaces the loan agreement
entered into on September 27, 2012. This revolving loan provides an additional borrowing capacity of up to USD$35,000,000
increasing its existing, as at June 30, 2017, USD$23,000,000 revolving loan in total up to USD$58,000,000. The loan
agreement matures on June 30, 2020 (note 34).

Interest rate for advances made up to the maximum of the allowable borrowing base on the existing USD$23,000,000 revolving
loan:



RBP plus 0.75% per annum

RBUSBR plus 0.75% per annum

BA Equivalent Rate plus 2.25% per annum

LIBOR Rate plus 2.25% per annum

Interest rate for advances made on the additional borrowing capacity up to USD$58,000,000.



RBP plus 0.00% per annum

RBUSBR plus 0.00% per annum

BA Equivalent Rate plus 0.875% per annum

LIBOR Rate plus 0.875% per annum

Drawdown under the USD$35,000,000 additional borrowing capacity is supported by a major and material customer of the
Company by way of a guarantee.

The loan agreement is subject to the existing security agreements with a Canadian Chartered bank and with its guarantor. This
debt facility is secured by a charge and specific registration over all of the assets of the Company.

The Company ended the year with bank operating line utilization of $61,283,000 offset by $5,212,000 cash compared to
utilization of $17,111,000 with $3,960,000 cash on hand as at December 31, 2016. Based on net collateral provided to its
bank, the Company is able to draw up to an additional USD$9,149,000 on its operating line of credit as at December 31, 2017
(December 31, 2016: $4,901,000).

FOR THE YEAR ENDED DECEMBER 31

Opening balance

Add: Drawdowns on bank indebtedness

Less: Repayment of loans

Less: Foreign exchange gain

Ending balance

17. Customer advance

2017

$17,111

102,045

(55,173)

(2,700)

61,283

On December 18, 2015, in conjunction with the acquisition of Hitco, the Company assumed a customer advance for pre-funded
product deliveries. The customer advance is re-paid as the Company delivers to the customer. In the event that cancellation,
termination, or assignment of the statement of work occurs earlier than December 31, 2018 the Customer shall have the right
to recover from the Company within 120 days of such an event the unamortized portion of the cash advance. The customer
advance is subject to an access and security agreement along with a general security agreement entered into with the
Company’s bank and a customer.

Page 51

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2017
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2017

The Customer advance was recorded at its fair value on December 18, 2015 in the amount of $18,953,000. The remaining
unamortized customer advance has been discounted to arrive at the December 31, 2017 amount of $7,227,000 (December 31,
2016: $11,573,000) of which it is estimated $7,227,000 (December 31, 2016: $8,034,000) will be amortized during the next
twelve months. The Company amortized into revenue $3,702,000 of the customer advance during the year ended
December 31, 2017 (December 31, 2016: $6,287,000).

FOR THE YEAR ENDED DECEMBER 31

2017

2016

Opening balance

Amortization

Foreign exchange

Less: Current portion

Non-current portion

18. Accounts Payable and Accrued Liabilities

FOR THE YEAR ENDED DECEMBER 31

Trade payables

Payroll-related liabilities

Accrued interest

Restoration provision

Restructuring provision

Other

19. Deferred Program Revenues

FOR THE YEAR ENDED DECEMBER 31

Opening balance

Additions

Realized

Less: Current portion

Non-current portion

$11,573

(3,702)

(644)

7,227

2017

$17,263

5,150

839

446

103

$18,528

(6,287)

(668)

11,573

8,034

3,539

2016

$24,835

5,793

247

371

841

23,834

32,122

2017

$13,972

10,502

(7,233)

17,241

17,131

110

2016

$4,924

15,043

(5,995)

13,972

13,861

111

Certain program inventories have been funded by a customer, whereby the associated deferred program revenues will be
recognized as revenue upon delivery of units of production.

Additionally, customers have funded non-recurring costs incurred during the introduction of new production programs. These
costs are deferred as development costs and will be amortized to income, on a units-of-production basis over the expected life
of the programs, in conjunction with the associated deferred revenue upon commencement of production.

20. Unfavourable Contracts Liability

On December 18, 2015, in conjunction with the acquisition of Hitco, the Company assumed an unfavourable contract liability on
certain long term revenue contracts for which unavoidable costs are expected to exceed the corresponding revenues earned.
The unfavourable contracts liability is amortized into income on a units-of-production basis over the expected life of the
contracts which are contracted up to December 31, 2019.

Page 52

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2017
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2017

As at December 31, 2017, the remaining unamortized unfavourable contracts liability amounted to $44,460,000 (December 31,
2016: $56,969,000).

FOR THE YEAR ENDED DECEMBER 31

Opening net book amount

Amortization and contract renegotiation

Foreign exchange

Closing net book amount

Less: Current portion

Non-current portion

2017

2016

$56,969

(9,058)

(3,451)

44,460

16,881

27,579

$99,471

(38,937)

(3,565)

56,969

18,904

38,065

The result of the renegotiation of certain contract delivery requirements in 2016 resulted in a reduction of future delivery
commitments. Management performed a cumulative catch-up revenue adjustment of $7,249,000 in 2016 further reducing the
provision as at December 31, 2016. The remaining provision is to be amortized over the reduced contractual life of the
contract. The effect of this adjustment is to adjust the per unit amortization charge of finished goods already shipped to reflect
the updated amortization charge per unit had the amended agreement existed as at the commencement date of the contract.

21. Deferred Gain and Lease Inducement

On July 17, 2003, the Company sold its land and building in Delta for gross proceeds of $16,000,000, representing
$14,500,000 received in cash for the property and $1,500,000 as a lease inducement credit. Concurrently, the Company
entered into a 15-year leaseback agreement with the purchaser of the property. A $712,000 gain arising on disposal of
property in 2003 was recorded as a deferred gain and is being amortized to income over the life of the lease. The unamortized
balance of the gain is $26,000 as at December 31, 2017 (December 31, 2016: $73,000).

Concurrent with the sale and leaseback transaction recorded in 2003, the Company recorded a lease inducement credit of
$1,500,000. The lease inducement credit is being amortized against rental expense over the term of the lease. It has an
unamortized balance of $74,000 as at December 31, 2017 (December 31, 2016: $173,000).

22. Term Debt

FOR THE YEAR ENDED DECEMBER 31

Finance leases (a)

Term loans (b) (c) (d)

SADI (e)

Less: Current portion

Non-current portion

a) Finance Leases

2017

$218

1,237

1,715

3,170

1,285

1,885

2016

$147

6,384

1,398

7,929

6,283

1,646

There are various equipment leases that have a weighted average interest rate of 8.01% per annum (2016: 7.60%). The
leases are secured by way of a charge against specific assets. The leases are repayable in equal installments over periods
up to 60 months.

b) Term Loan

On September 19, 2016, Avcorp entered into a non-revolving term loan agreement (“loan”) with Panta Canada B.V.
(“Panta”) to fund the Company to a maximum aggregate principal amount of USD$5,000,000 due on April 7, 2017. The
Company received its first advance on September 23, 2016 of USD$2,000,000 ($2,612,000). On October 25, 2016, Panta
provided a second advance in the amount of USD$1,500,000 ($1,983,000) and a third advance on November 15, 2016 in
the amount of USD$1,500,000 ($2,020,000).

The Company’s acceptance of this loan was subject to a 3% commitment fee (USD$150,000) paid by the Company to
Panta Canada B.V. from proceeds of the first advance.

In conjunction with receiving advances under the term loan, the Company issued Panta 30,714,118 common share
purchase warrants (“warrants”) on a pro-rata basis, each warrant is exercisable for a period of 24 months following the
date of issuance with respect to one common share at an exercise price of $0.07 per common share. The Company issued
12,285,647 such warrants on September 19, 2016, 9,214,235 such warrants on October 24, 2016, and 9,214,236 such
warrants on November 10, 2016. The warrants were valued at fair value on date of issue using the Black Scholes option
pricing model.

Page 53

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2017
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2017

FOR THE YEAR ENDED DECEMBER 31

Opening balance

Accrued interest

Less: Fair value of warrants issued

Less: Repayment

Less: Exercise of warrants

Add: Foreign exchange gain

Accretion

2017

$6,123

348

(3,478)

(2,118)

(500)

715

1,088

2016

$6,617

(1,164)

541

6,123

The loan bears interest at 8% per year, is subordinated to existing security agreements and could be prepaid without
interest and penalties. The interest rate will increase to 15% per year, and all outstanding indebtedness including unpaid
interest, will continue to accrue such interest, after the loan maturity date until paid in full. The loan and all accrued
interest was due and payable on April 7, 2017.

As at that date the Company and Panta amended the term loan to provide for a maturity date which is the earlier of the
date on which credit is available to be drawn by the Company under the revolving loan with a Canadian Chartered bank,
and July 6, 2017, with interest continuing at 8% per year. The Company incurred a USD$100,000 amendment fee in this
regard.

Effective July 6, 2017 the Company and Panta amended the term loan to provide for a maturity date which is the earlier of
(i) the date upon which, for any reason, the outstanding principal balance of the revolving loan with a Canadian Chartered
bank becomes due and owing and (ii) the date on which all or substantially all the assets of Comtek are sold by the
Borrower or a controlling interest in the shares of Comtek is sold by the Borrower in each case by a transaction or series of
transactions, and (iii) July 6, 2021.

As at July 7, 2017 the loan bears interest at the aggregate rate of interest, expressed as an annual rate, of the U.S. Base
Rate of Royal Bank of Canada (RBUSBR) plus a margin of 5.375% per annum which shall accrue and not be compounded
until the maturity date.

On July 31, 2017 the Company repaid a principal amount of USD$2,500,000 plus interest accrued in the amount of
USD$285, 000 of the Panta term loan.

On August 3, 2017 Panta exercised 12,105,327 warrants expiring August 17, 2017 at $0.07 whose aggregate price of
$847,000 was deemed to be made by way of set-off against the Panta loan obligation (note 24).

On August 25, 2017 Panta exercised 6,052,664 warrants expiring September 9, 2017 at $0.07 whose aggregate price of
$424,000 was deemed to be made by way of set-off against the Panta loan obligation (note 24).

On September 8, 2017 Panta exercised 12,105,327 warrants expiring September 23, 2017 at $0.07 whose aggregate price
of $847,000 was deemed to be made by way of set-off against the Panta loan obligation (note 24).

Pursuant to the terms of the loan agreement, the Company is required to meet certain covenants. The Company is in
breach of certain covenants pursuant to the terms of the loan agreement and accordingly an event of default had occurred
that requires remediation. The entire loan balance has been classified as current portion of term debt.

c) Term Loan

On March 17, 2017, Avcorp entered into a loan agreement (“Loan”) with Panta Canada B.V. (“Panta”) bearing interest of
8% per annum to fund the Company to a maximum aggregate principal amount of USD$907,000 maturing on May 15,
2017. The Loan was drawn down in two tranches dated March 21, 2017 and March 27, 2017. The Loan was repaid on April
3, 2017 from the proceeds of the consideration receivable. Panta Canada B.V. is Avcorp’s majority shareholder owning
approximately 68.6% of the issued and outstanding common shares on December 31, 2016. Panta Canada B.V. is wholly
owned by Panta Holdings B.V. Both companies are incorporated in The Netherlands and Mr. Jaap Rosen Jacobson, a
director of the Company, is the sole shareholder of Panta Holdings B.V.

d) Term Loan

On March 13, 2015, the Company completed a secured term loan with a principal amount of $450,000. The Company
received full funding from the loan on March 26, 2015. The purpose of the loan was to finance machinery and equipment
required for new production programs at its Burlington ON facility.

The term loan has been provided by a Canadian chartered bank. The loan has a four year term; it is secured by a general
security agreement constituting a first ranking security interest in all personal property of the Company and a first ranking
and specific interest in the equipment financed. Export Development Canada (“EDC”) has guaranteed 50% of the
aggregate borrowings outstanding under the loan. The fee associated to the guarantee provided by EDC is equal to 3% of
50% of the outstanding loan amount. Interest is calculated and paid monthly at a rate of bank prime plus 1%. The loan
will be repaid over 48 months by way of blended principal and interest payments. The balance outstanding for this term
loan as at December 31, 2017 is $149,000 (December 31, 2016: $261,000).

Page 54

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2017
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2017

e) SADI

On April 23, 2014, the Company secured funding for certain non-recurring expenditures and manufacturing equipment.
The Government of Canada under the Strategic Aerospace and Defence Initiative (“SADI”) program has committed up to
$4.4 million for funding of program eligible costs. The contribution amount represents 40% funding for eligible costs.

The contribution agreement has the following terms:



The maximum amount to be repaid by the Company is 1.5 times the amount contributed by the Government of
Canada;

Repayments are to occur over a 15 year term, commencing two years following the fiscal year end, in which the
contributions are completed; and

Amounts repayable are unsecured.

$1,715,000 was drawn on this facility as at December 31, 2017 (December 31, 2016: $1,398,000). The amounts owing,
when due, are repayable to the Industrial Technologies Office.

FOR THE YEAR ENDED DECEMBER 31

Opening balance

Add: Accrued interest

Add: Contributions

Ending balance

2017

$1,398

260

1,715

23. Obligations and Commitments Under Finance and Operating Leases, and Contingent Liabilities

The Company has committed to payments under certain capital and operating leases relating to manufacturing machinery and
equipment, and building lease costs. Future minimum lease payments required in each of the next five fiscal years and
thereafter are:

FOR THE YEAR ENDED DECEMBER 31

2017

2016

2017

2018

2019

2020

2021

2022

Thereafter

Total future minimum lease payments

Less: Imputed interest

Balance of obligation under finance leases included in term debt (note 22)

Operating

Finance

Operating

Finance

4,416

2,500

2,301

2,164

2,287

13,571

27,239

n/a

246

(28)

218

$2,892

3,246

479

255

130

7,002

n/a

$56

165

(18)

147

For the year ended December 31, 2017, an amount of $2,865,000 representing payments under operating leases was expensed
(December 31, 2016: $2,897,000).

As at December 31, 2017 the Company had $38,811,000 of committed contractual operational purchase order obligations
outstanding (December 31, 2016: $38,963,000).

Two of the Company’s customers have made certain claims against the Company; one in the amount of €2,864,000 which
represents a claim against the Company for untimely delivery of product to that customer; the second claim in the amount of
$700,000USD which represents a claim for certain services performed by the second customer on behalf of the Company. The
Company has a claim, in excess of the amounts claimed, against one of the customers. The Company and its two customers are
currently negotiating a three-way settlement and the outcome of those negotiations are currently undeterminable.

Page 55

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2017
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2017

24. Capital Stock

The Company is authorized to issue an unlimited number of common shares as well as an unlimited number of first preferred
and second preferred shares, issuable in series, the terms of which will be determined by the Company’s directors at the time
of creation of each series. There were 337,404,502 common shares issued at December 31, 2017. The book value of common
shares issued and outstanding as at December 31, 2017 was $82,905,000 (December 31, 2016: $80,302,000).

Common shares issued or reserved:

December 31, 2015

Share issue

Cash (b)

Transfer from contributed surplus on exercise of stock options (b)

December 31, 2016

Share issue

Non-cash (a)

Transfer from contributed surplus on exercise of stock warrants (a)

December 31, 2017

Number of shares

305,555,184

Amount

80,158

1,586,000

307,141,184

30,263,318

337,404,502

113

80,302

2,118

485

82,905

a) During the third quarter 2017 holders of the Company’s warrants exercised 30,263,318 warrants at a price of $0.07

resulting in the issuance of 30,263,318 common shares with a value of $2,118,000.

b) During the second quarter 2016 holders of the Company’s stock options exercised 960,500 stock options at a price of
$0.085 and 625,500 stock options at a price of $0.05 resulting in the issuance of 1,586,000 common shares with a value
of $113,000.

c) The Company’s incentive stock option plan is administered by the Board of Directors. It is a rolling share option plan
wherein 10% of the issued and outstanding common shares at the time an option is granted are reserved for issuance.

A summary of the Company’s stock options issued as of December 31, 2017 and December 31, 2016, and changes during
the periods ending on those dates, are presented below.

FOR THE YEAR ENDED DECEMBER 31

2017

Weighted
average exercise
price

Options

2016

Options

Weighted average
exercise price

Outstanding – Beginning of year

52,225,500

0.092

34,653,500

Granted

Expired

Exercised

Forfeited

29,370,500

(1,250,000)

(1,586,000)

(2,693,000)

0.095

(8,962,500)

Outstanding – End of year

49,532,500

0.092

52,225,500

$0.09

0.089

0.05

0.071

0.158

0.092

The following table summarizes stock options which are exercisable as at December 31, 2017:

$0.085 - $0.100

Number

29,847,250

Weighted average
remaining contractual
life (years)

Weighted average
exercise price

6.08

$0.093

Page 56

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2017
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

d) The Company’s contributed surplus is comprised as follows:

FOR THE YEAR ENDED DECEMBER 31

Beginning of year

Stock-based compensation expense

Fair value of warrants issued

Cancellation of issued stock options

Transfer to share capital on exercise of stock options

Transfer to share capital on exercise of warrants

End of year

annual report 2017

2017

$6,744

718

(485)

6,979

2016

$4,453

1,158

1,164

(31)

6,744

The stock-based compensation expense is included in the Consolidated Statements of Loss and Comprehensive Loss as
administrative and general expenses and amounts to $718,000 (December 31, 2016: $1,158,000).

In conjunction with receiving advances under a term loan (note 22), the Company issued Panta 30,714,118 common share
purchase warrants (“warrants”) on a pro-rata basis, each warrant is exercisable for a period of 24 months following the
date of issuance with respect to one common share at an exercise price of $0.07 per common share. The Company issued
12,285,647 such warrants on September 19, 2016, 9,214,235 such warrants on October 24, 2016, and 9,214,236 such
warrants on November 10, 2016.

e) A summary of the Company’s warrants issued as of December 31, 2017 and December 31, 2016, and changes during the

periods ending on those dates, are presented below.

FOR THE YEAR ENDED DECEMBER 31

Outstanding – Beginning of year

Granted (i)

Expired

Exercised

2017

2016

60,977,436

(30,263,318)

30,263,318

30,714,118

Outstanding – End of year

30,714,118

60,977,436

September 19, 2016: Grant of 12,285,647 Warrants expiring September 19, 2018 at $0.07 to Panta.

October 24, 2016: Grant of 9,214,235 Warrants expiring October 24, 2018 at $0.07 to Panta.

November 10, 2016: Grant of 9,214,236 Warrants expiring November 10, 2018 at $0.07 to Panta.

ii.

August 3, 2017: Exercise of 12,105,327 Warrants expiring August 17, 2017 at $0.07 to Panta.

August 25, 2017: Exercise of 6,052,664 Warrants expiring September 9, 2017 at $0.07 to Panta.

September 8, 2017: Exercise of 12,105,327 Warrants expiring September 27, 2017 at $0.07 to Panta.

25. Stock Based Compensation

The Company records compensation expense for the fair value of the stock options granted under its incentive stock option plan
using the Black-Scholes option-pricing model. This model determines the fair value of stock options granted and amortizes it to
earnings over the vesting period.

No stock options were granted in the year ended December 31, 2017.

The assumptions used in the valuation of stock options were as follows:

Number of options

Risk-free rate (%)

Dividend yield (%)

Expected Lives (years)

Volatility (%)

2016

29,370,500 Options

1.35

57.70

Page 57

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2017
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2017

The amount of stock-based compensation expense, for options granted in current and prior periods, amortized to earnings
during the year ended December 31, 2017 was $718,000 (2016: $1,158,000). Stock-based compensation expense has been
included in the Consolidated Statements of Loss and Comprehensive Loss as administrative and general expenses.

During the year ended, 2,693,000 stock options were forfeited.

The Black-Scholes option-pricing model used by the Company to calculate option values was developed to estimate the fair
value of freely tradeable, fully transferable options without vesting restrictions, which significantly differ from the Company’s
stock option awards. Changes in the subjective input assumptions can materially affect the fair value estimate, and therefore,
the existing models do not necessarily provide a reliable, single measure of the fair value of options granted by the Company.

26. Defined Contribution Plan

The total cost recognized and paid for the Company’s defined contribution plan is as follows.

FOR THE YEAR ENDED DECEMBER 31

Defined contribution plan

2017

$1,341

2016

$1,280

The Company’s contribution to the plan is calculated on a percentage of employee wages. The range of percentages is 1.5% to
9.5%. The plan is available to all employees. Defined contribution plan expenses have been included in the Consolidated
Statements of Loss and Comprehensive Loss as administrative and general expenses and cost of sales.

27. Finance Costs

FOR THE YEAR ENDED DECEMBER 31

Interest on finance leases

Interest on other term debt

Interest on bank indebtedness

Interest on related party debt

Non-cash financing cost accretion

Interest expense

Interest income

Net interest expense

28. Supplementary Cash Flow Information

Non-cash financing and investing activities:

FOR THE YEAR ENDED DECEMBER 31

Equipment acquired under capital lease

Equipment acquired through accounts payable

Accounts payable settled with consideration receivable

Panta loan settled with exercise of warrants

Restoration provision revaluation

Transfer to share capital on exercise of warrants

29. Income Tax

2017

$12

173

1,711

335

589

2,820

(14)

2,806

2017

$125

2,118

185

485

2016

$14

158

353

(14)

339

2016

1,707

3,867

The provision for income tax (recovery) expense is based on the combined Canadian federal and provincial annual income tax
rate expected for the full financial year of 26%.

On December 22, 2017, the U.S. enacted the Tax Cuts and Job Act (TCJA). Substantially all the provisions of the TCJA are
effective for taxable years beginning after December 31, 2017. The most significant provisions of Tax Reform that impact the
Company is the reduction in the federal corporate tax rate from 35% to 21%.

IAS 12, Income Taxes, states that the tax effects of changes in tax laws must be recognized in the period in which the law is
enacted or substantively enacted. IAS 12 further requires deferred income tax assets and liabilities to be measured at the
enacted or substantively enacted tax rate expected to apply when temporary differences are to be realized or settled. Thus, at
the date of enactment, the Company’s deferred income taxes were re-measured based upon the new tax rate. The change in
deferred income taxes is generally recorded as a non-cash re-measurement adjustment to earnings.

Page 58

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2017
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2017

The Company has made a reasonable estimate for the measurement of certain effects of the TCJA. However, the Company is
taking a full valuation allowance. Therefore, considered in net, no deferred tax assets/liabilities were booked. As the Company
has not recognized any deferred amounts, historically or currently, the TCJA has no tax impact on the Company as of December
31, 2017.

Deferred income tax assets are recognized for deductible temporary differences, unused tax losses, and unused tax credits to
the extent that the realization of the related tax benefit through future taxable profits is probable. The Company did not
recognize deferred income tax assets of $35,727,000 (2016: $26,399,000) in respect of losses amounting to $107,532,000
(2016: $74,783,000) which include foreign losses of $29,260,000 (2016: $10,675,000) that will expire beginning in 2026
through 2036, unclaimed research and development costs of $10,830,000 (2016: $10,830,000) with no expiry, investment tax
credits of $1,726,000 (2016: $1,726,000) which expire beginning in 2017 through 2032, and deductible temporary differences
of $35,058,000 (2016: $23,133,000).

The company has recognized $Nil (2016: $Nil) in deferred income tax liabilities in relation to the fair value of the intangible
lease.

FOR THE YEAR ENDED DECEMBER 31

Statutory tax rate

Recovery at statutory rate

Change in unrecognized deferred income tax assets

Benefit of losses not previously recognized

Tax rate differences

Other permanent differences

Tax expense

30. Related Party Transactions

2017

26.00%

$(15,205)

15,964

(959)

200

2016

26.00%

$(5,189)

6,044

(477)

(807)

429

a) During the year ended December 31, 2017, consulting services were provided by certain directors. Fees paid to certain
directors, or companies with which they have beneficial ownership, during the year ended December 31, 2017 amounted
to $437,000 (December 31, 2016: $337,000). Fees payable to certain directors or Companies with which they have
beneficial ownership, as at December 31, 2017 are $Nil (December 31, 2016: $376,000). These fees are included in the
Consolidated Statements of Loss and Comprehensive Loss as administrative and general expenses and amount to $61,000
for the year ended December 31, 2017 (December 31, 2016: $701,000).

b) Key management compensation

Key management includes Executive Officers for all operating facilities. The compensation paid or payable to key
management for employee services is shown below.

FOR THE YEAR ENDED DECEMBER 31

Salaries and other short-term employee benefits

Contributions to defined contribution plan

Option-based awards

Loans to related parties

2017

$2,285

659

3,019

2016

$2,186

1,332

3,587

The balance of loans receivable from key management as at December 31, 2017 is $15,000 (December 31, 2016:
$15,000). These loans are unsecured and payable on demand.

Other related party transactions are disclosed elsewhere in these consolidated financial statements (notes 22 and 24).

These transactions were conducted in the normal course of business and were accounted for at the exchange amount.

Page 59

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2017
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2017

31. Earnings per share

Basic earnings per share amounts are calculated by dividing the net income for the year attributable to common equity holders
of the parent by the weighted average number of common shares outstanding during the year.

Diluted earnings per share amounts are calculated by dividing the net profit attributable to common equity holders of the
parent by the weighted average number of common shares outstanding during the year plus the weighted average number of
common shares that would be issued on conversion of all the dilutive potential common shares into common shares.

The following reflects the share data used in the basic and diluted earnings per share computations:

FOR THE YEAR ENDED DECEMBER 31

2017

2016

Weighted average number of common shares for basic earnings per share

318,019,396

306,611,069

Effect of dilution:

Warrants

Share options

Weighted average number of ordinary shares adjusted for the effect of dilution

318,019,396

306,611,069

There have been no other transactions involving common shares or potential common shares between the reporting date and
the date of authorization of these consolidated financial statements.

32. Economic Dependence and Segmented Information

The Company reports financial performance based on three reportable segments as detailed below. The Company's Chief
Operating Decision Maker (“CODM”) utilizes Operating Income Loss as a primary measure of profitability to evaluate
performance of its segments and allocate resources:



The Avcorp Structures & Integration (“ASI”) segment, which is dedicated to metallic and composite aerostructures
assembly and integration.

The Comtek Advanced Structures Ltd. (“Comtek”) segment, within which exists two divisions dedicated to aircraft
structural component repair services, and Avcorp Engineered Composites (“AEC”) dedicated to design and manufacture of
composite aerostructures.



The Avcorp Composite Fabrication Inc. (“ACF”) segment is dedicated to advanced composite aerostructures fabrication.

No operating segments have been aggregated to form the above reportable operating segments. Corporate includes general
corporate administrative costs and any other costs not identifiable with one of the Company’s segments.

The Company’s Board of Directors monitors the operating results of its business units separately for the purpose of making
decisions about resource allocation and performance assessment. Segment performance is evaluated based on operating profit
or loss and is measured consistently with operating profit or loss in the Consolidated Statements of Loss and Comprehensive
Loss.

a) Sales to five major customers for the year ended December 31, 2017, which comprise several programs and contracts,

accounted for approximately 82.8 % (December 31, 2016: 70.7%) of sales.

FOR THE YEAR ENDED DECEMBER 31

2017

2016

BAE Systems

Boeing1

Bombardier

Lockheed Martin

Subaru Corporation

Other
Amortization and contract renegotiation of the unfavourable contract
liability

Revenue

% of Total

Revenue

% of Total

$5,413

59,089

19,134

15,735

24,566

16,449

9,058

3.6

39.5

12.8

10.5

16.4

11.0

6.2

$5,352

80,735

15,332

12,659

15,789

20,821

33,019

2.9

43.9

8.4

6.9

8.6

11.3

18.0

Total

149,444

100.0

183,707

100.0

Includes Boeing program partner revenue

Page 60

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2017
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2017

b) The Company’s sales are distributed amongst the following geographical locations:

FOR THE YEAR ENDED DECEMBER 31

2017

2016

Revenue

% of Total

Revenue

% of Total

Canada

USA

Europe

Asia

Australia

Other
Amortization and contract renegotiation of the unfavourable contract
liability

$26,498

80,976

6,375

26,016

358

163

9,058

17.7

54.2

4.3

17.3

0.2

0.1

6.2

$21,616

96,767

14,184

17,438

515

168

33,019

Total

149,444

100.0

183,707

11.8

52.6

7.7

9.5

0.3

0.1

18.0

100.0

c) The Company operates in one industry that involves the manufacture and sale of aerospace products. All of the Company’s

operations and assets are in Canada and in the United States.

FOR THE YEAR ENDED DECEMBER 31

Canada

USA

Total

2017

$62,365

50,886

113,251

2016

$61,701

71,375

133,076

The Company operates from two locations in Canada and one in the United States. Located in Delta, British Columbia,
Avcorp Industries Inc., named as Avcorp Structures & Integration (“ASI”), is dedicated to metallic and composite
aerostructures assembly and integration. Within Comtek Advanced Structures Ltd. (“Comtek”), located in Burlington,
Ontario, exists two divisions dedicated to aircraft structural component repair services, and Avcorp Engineered Composites
(“AEC”) dedicated to design and manufacture of composite aerostructures. Located in Gardena, California, Avcorp
Composite Fabrication Inc. (“ACF”) is dedicated to advanced composite aerostructures fabrication.

Revenues, income loss and total assets are distributed by operating segment as noted in the tables below. Intercompany
revenues and cost of sales are eliminated from the operating results presented.

FOR THE YEAR ENDED DECEMBER 31, 2017

Total

ASI

Comtek

ACF1

Corporate

Revenue

Cost of sales

Gross (loss) profit

Selling, general, and admin expense

Depreciation and amortization

Operating (loss) gain

$149,444

$51,485

$18,076

$79,883

181,296

58,353

15,472

107,471

(31,852)

(6,868)

21,580

341

5,124

213

(53,773)

(12,205)

2,604

2,472

(27,588)

5,379

8,605

(33,035)

(8,605)

ACF revenue includes $9,058,000 amortization of the unfavourable contract liability.

FOR THE YEAR ENDED DECEMBER 31, 2016

Total

ASI

Comtek

ACF1

Corporate

Revenue

Cost of sales

Gross (loss) profit

Selling, general, and admin expense

Depreciation and amortization

$183,707

$46,483

$19,491

$117,733

175,333

46,729

15,311

113,294

8,374

24,429

350

(246)

6,849

281

4,180

2,795

4,440

8,506

6,279

Operating (loss) gain

(16,405)

(7,376)

1,328

(4,078)

(6,279)

ACF operating (loss) includes $38,937,000 amortization and contract recognition of the unfavourable contract liability; $33,019,000 in
revenue, $3,917,000 in cost of sales, and $2,001,000 in selling, general, and administration expense.

Page 61

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2017
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2017

FOR THE YEAR ENDED DECEMBER 31

2017

2016

Avcorp Industries Inc.

Comtek Advanced Structures Ltd.

Avcorp Composite Fabrication Inc.

Corporate

Total

Total Assets % of Total

Total Assets

% of Total

$50,814

10,197

52,122

143

44.9

9.0

46.0

0.1

$38,737

10,632

71,375

12,332

29.1

8.0

53.6

9.3

113,251

100.0

133,076

100.0

FOR THE YEAR ENDED DECEMBER 31

2017

2016

Development
Cost
Additions

Property,
Plant and
Equipment

Intangible
Asset
Additions

Development
Cost
Additions

Property,
Plant and
Equipment

Avcorp Industries Inc.

$4,929

$1,325

Comtek Advanced Structures Ltd.

Avcorp Composite Fabrication Inc.

Total

418

5,347

408

1,321

3,054

571

$2,550

2,617

$463

325

6,048

6,836

FOR THE YEAR ENDED DECEMBER 31

Avcorp Industries Inc.

Comtek Advanced Structures Ltd.

Avcorp Composite Fabrication Inc.

Corporate

Total

33. Business Acquisition

2017

Total

Liabilities % of Total

$31,946

3,545

71,116

64,074

18.7

2.1

41.7

37.5

2016

Total
Liabilities

$21,345

3,537

90,749

24,328

% of Total

15.3

2.5

64.8

17.4

170,681

100.0

139,959

100.0

Effective December 18, 2015, Avcorp completed the acquisition of Hitco (the “Acquisition”). The Acquisition was completed
pursuant to the terms of an asset purchase agreement (the “Agreement”) that was entered into on July 20, 2015, with
subsequent amendments to December 18, 2015. Pursuant to the Agreement Avcorp’s subsidiary ACF, purchased the assets of
the division of Hitco which produces composite structural parts for commercial and military aerostructures (the “Business”).

As a result of potential product quality and warranty claims, in addition to the liabilities assumed in the transaction, the
Company may be involved in, or subject to, other disputes, claims and proceedings that arise in connection with the business
acquired, including some that Avcorp asserts against others. The ultimate resolution of, and liability and costs related to these
matters, at this time is undeterminable.

Included in the finalized unfavourable contract liability balance of $100,582,000 is an amount related to extraordinary
inspection costs incurred by the Company in order to address certain product quality and warranty claims associated with
non-conforming finished goods discovered subsequent to the closing of the Acquisition. The extraordinary inspection costs have
been recognized based on management’s best estimate and there exists significant measurement uncertainty relating to
potential future product quality and warranty claims. Although the ultimate result and timing of potential additional claims and
the amounts at which they may be settled cannot be determined, management believes that there is a possibility that the costs
that may be incurred to settle these claims are material. Management intends to pursue recovery of the direct and
consequential damages incurred in relation to this matter.

Included in the finalized unfavourable contract liability balance is a provision for management’s best estimate of the expected
costs for the foregoing product quality and warranty claims however the Company has not disclosed the information usually
required by IAS 37 Provisions, Contingent Liabilities and Contingent Assets on the grounds that it can be expected to prejudice
seriously the outcome of possible litigation related to this matter.

Page 62

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2017
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2017

The Acquisition was accounted for as a business combination, using the acquisition method. The purchase consideration
provided was allocated to the fair values of the identifiable assets acquired and liabilities assumed as follows:

Cash

Consideration receivable

Consideration

Assets purchased

Accounts receivable

Inventories and prepayments

Current Assets

Equipment

Intangible – lease

Intangible – customer contract re-compete

Intangible – customer order backlog

Goodwill

Total assets purchased

Liabilities assumed

Accounts payable and accrued liabilities

Customer advance

Unfavourable contracts liability

Deferred income tax liability

As Previously Reported

Adjustment

$32,826

39,013

71,839

18,799

19,763

38,562

22,112

3,109

10,040

3,068

(748)

(242)

(2,356)

(4,323)

(3,068)

December 18, 2015

Final

$32,826

39,013

71,839

18,799

19,015

37,814

21,870

753

5,717

76,891

(10,737)

66,154

17,431

23,428

90,654

1,244

1,027

(4,475)

9,928

(1,244)

18,458

18,953

100,582

Total liabilities assumed

132,757

5,236

137,993

Net liabilities

Gain on acquisition

(55,866)

(15,973)

(71,839)

15,973

(15,973)

On the acquisition of Hitco on December 18, 2015, Avcorp assumed the unfavourable contract liability and customer advance
arising from specific customer contracts.

Adjustments of comparative amounts:

In previously filed financial statements the Company recorded the foreign exchange gain on these acquired liabilities
through the statement of operations. Upon further analysis in 2017, it was determined that the foreign exchange
gains on these items should have been recorded through other comprehensive income in the statement of equity. As a
result the Company has corrected the classification of $3,995,000 from foreign exchange gain to other comprehensive
income in the year ended December 31, 2016 (January 1, 2016: $861,000).

(Deficiency) Equity

Deficit

Accumulated Other Comprehensive Income

(Deficiency) Equity

Deficit

Accumulated Other Comprehensive Income

As Previously Reported

Adjustment

Final

January 1, 2016

$(77,827)

(861)

861

$(78,688)

861

As Previously Reported Cumulative Adjustment

Final

December 31, 2016

$(93,791)

(138)

$(4,856)

4,856

$(98,647)

4,718

Page 63

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2017
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2017

Consolidated statement of loss and comprehensive loss

Foreign exchange (gain) loss

Net loss for the year

Other comprehensive (loss) income

Loss per share

As Previously Reported

Adjustment

Final

December 31, 2016

$(717)

(15,964)

(138)

$3,995

(3,995)

3,995

$3,278

(19,959)

3,857

Basic and diluted loss per common share

(0.05)

(0.02)

(0.07)

Consolidated statement of cash flow

Net loss for the year

Unrealised foreign exchange

34. Subsequent Events

As Previously Reported

Adjustment

Final

December 31, 2016

$(15,964)

(2,860)

$(3,995)

3,995

$(19,959)

1,135

a) On March 28, 2018, the Company entered into an amendment to its existing credit facility (“Revolving Loan”) with a

Canadian chartered bank whereby the following amendments were made:



Availability under the Revolving Loan is increased by USD$10,000,000 (“Expanded Loan”) subject to existing
drawdown provisions, interest rates and bonus fees (note 16);

Drawdowns under the Expanded Loan are supported by a major and material customer of the Company by way of a
guarantee; and

The Expanded Loan matures on March 31, 2019.

b) On May 25, 2018, the Company entered into an amendment to its existing credit facility with a Canadian chartered bank

whereby the following amendment was made:

 Maximum availability under the Revolving Loan cannot exceed USD$68,000,000 less USD$4,300,000, until August 31,

2018, at which time the agreement reverts back to existing terms.

Page 64

notes

AVCORP INDUSTRIES INC.

BOARD OF DIRECTORS AND OFFICERS

David Levi (1)(2)
CHAIRMAN OF THE BOARD
Executive Chairman
GrowthWorks Capital Ltd.
Vancouver, British Columbia

Peter George
DIRECTOR
Lake Tapps, Washington

Elizabeth Otis (1)(2*)
DIRECTOR
Palm Springs, California

Ken Robertson (1*)
DIRECTOR
Vancouver, British Columbia

Jaap Rosen Jacobson (2)
DIRECTOR
President
Panta Holdings B.V.
Mijdrecht, The Netherlands

MANAGEMENT

Amandeep Kaler
Avcorp Group Chief Executive Officer
Surrey, British Columbia

Edward Merlo
CORPORATE SECRETARY
Avcorp Group Chief Financial Officer
Richmond, British Columbia

Brent Collver
President
Comtek Advanced Structures Ltd.
Oakville, Ontario

Jim Renaud
General Manager
Avcorp Composite Fabrication Inc.
Huntington Beach, California

(1) Member of the Audit and Corporate Governance Committee
(2) Member of the Compensation and Nominating Committee

* Designates the Committee Chair