Avon Products, Inc. Annual Report 2019

FY2019 Annual Report · Avon Products, Inc.

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Annual Report
2019

www.avcorp.com

Avcorp Industries Inc.

annual report 2019

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).

Page 1

Avcorp Industries Inc.

annual report 2019

management discussion & analysis

This Management Discussion and Analysis has been prepared as of March 30, 2020 and should be read in conjunction with the
Company’s consolidated financial statements and notes thereto for the year ended December 31, 2019.

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. Comtek Advanced Structures Ltd., located in Burlington, Ontario, (“Comtek”) is dedicated to aircraft
structural component repair services, and 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.

2019 Highlights

Key financial results include:

•

2019 revenue was $164,770,000 compared to $170,710,000 in 2018. 2019 revenue decreased by $1,323,000, in comparison to
2018, after the benefit of amortization of the unfavourable contract liability is removed.

2019 operating loss was $1,124,000 compared to operating income of $26,917,000 in 2018. Operating loss improved by
$2,101,000 in comparison to 2018, after the benefit of amortization of unfavourable contracts liability and onerous contract
provisions, net contract modification, and the net claims impact have been removed. This was mainly due to improvement in
operational performance and consolidation of costs. 2019 operating results were negatively impacted by the lower deliveries
caused by 737 MAX grounding and labour disruptions at the Delta facility.

2019 cash flows from operating activities was $10,911,000 compared to utilization of $16,029,000 in 2018. 2019 cash flows from
operating activities improved by $12,508,000, relative to 2018, after the net cash settlement of $14,431,000 (USD$10,810,000)
from the agreement with Hitco Carbon Composites Inc., SGL Carbon, SGL, and SGL Carbon SE (the “SGL Parties”) and a customer
has been removed.

On January 25, 2019, the Company entered into a net claim settlement agreement with HITCO Carbon Composites, Inc., SGL
Carbon, LLC, and SGL Carbon SE (the “SGL parties”) and a customer, which provided the Company a settlement in satisfaction
of existing and potential claims, causes of action, disputes and other business matters related to the acquisition from the SGL
parties. The net claim settlement resulted in a gain of $19,759,000.

During the second quarter of 2019, the Company received all required customer approvals for the 737 MAX spoiler program;
subsequently, on July 5, 2019 the Company successfully shipped the first shipset.

On September 25, 2019 the Company reached a new labour agreement with the International Association of Machinists and
Aerospace Workers (Lodge 250) (the “Union”) at its Delta, British Columbia facility. The six year labour agreement was ratified
by the Union and will expire on March 31, 2025 bringing the company long term stability.

On November 15, 2019 the Company amended its loan agreement with a Canadian Chartered Bank to extend the maturity date
of the existing operating credit facility to June 30, 2021, which is supported by a major and material customer of the Company
by way of a guarantee.

On November 15, 2019, the Company entered into a standby credit facility agreement (“2019 Panta Loan”) with Panta Canada
B.V which amended and restated the existing non-revolving term long agreement (“2018 Panta Loan”), as well as securing an
additional $4,546,000 (USD$3,500,000).

Highlights Subsequent to Year-End

•

On March 2, 2020, the Company entered into an amendment to the standby credit facility (“2019 Panta Loan”) with Panta Canada
B.V. (“Panta”) securing an additional $2,598,000 (USD$2,000,000)

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Avcorp Industries Inc.

annual report 2019

Financial Overview

Three-Year Results

The following table provides selected financial information for the three years to December 31, 2019.

THREE-YEAR RESULTS

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

FOR THE YEAR ENDED DECEMBER 31

20193,4

20183

2017

OPERATIONS

Revenue

EBITDA1

Operating (loss) income

Net (loss) income

Basic and diluted (loss) income per share

FINANCIAL POSITION

Capital expenditures

Total assets

Bank indebtedness and term debt

Shareholders’ (deficit)

Net book value per share2

Ratio: current assets/current liabilities

Shares outstanding at period end

$164,770

$170,710

$149,444

10,813

(1,124)

(9,316)

(0.03)

904

128,140

115,086

(43,475)

(0.12)

0.47

35,338

26,917

20,373

0.06

1,809

116,068

94,150

(36,144)

(0.10)

0.50

(48,342)

(53,773)

(58,538)

(0.18)

3,054

113,276

64,453

(57,405)

(0.17)

0.53

368,118,620

337,404,502

2.
3.

EBITDA = earnings before interest, taxes, depreciation and amortization. This is not a recognized term under International Financial
Reporting Standards (“IFRS”), refer to page 9.
Net book value per share is not a recognized term under IFRS, refer to page 14.
Includes revenues recognized as a result of a change in revenue recognition policy under IFRS 15. IFRS 15 was adopted on a modified
retrospective basis, and therefore comparative figures have not been restated.
Excludes operating lease expense, recognizes right of use asset and lease liability as a result of change to lease accounting policy under
IFRS 16. IFRS 16 was adopted on a modified retrospective basis, and therefore comparative figures have not been restated

Avcorp’s recurring contracted revenue base remains strong as customers continue to place orders within existing long-term supply
agreements. 2019 production revenues have decreased by $1,323,000 from 2018, exclusive of the $4,617,000 amortization of
the unfavourable contract liability into revenue in 2018.

The primary factors underlying the year on year change in revenues was the wind-down of certain loss-making contracts acquired
in the Hitco acquisition in 2017 and 2018; offset by revenues arising from contract awards, primarily in the Delta facility, and
2019 was impacted by the 737 MAX grounding and labour disruptions.

The Hitco acquisition, which required significant turn-around expenditures and was severely burdened with operational
inefficiencies and extensive legacy product warranty obligations, reduced Earnings Before Interest, Taxes, Depreciation &
Amortization (“EBITDA”) for the Group which continued into 2017 & 2018. In 2019 the company agreed a net claim settlement
of $19,759,000 resolving legacy product warranty issues arising out of the Hitco acquisition.

The 2017 $53,773,000 operating loss contains a $9,058,000 amortization 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 caused operating results to deteriorate in 2017; certain of those contracts were wound down in 2018. On a comparative
basis the 2018 $26,917,000 operating income contains a $4,617,000 amortization of an unfavourable contracts liability, a
$9,115,000 amortization of onerous contracts provision, a $41,470,000 net contract modification gain and a $5,421,000 net claim
position; without which the operating loss was $22,864,000. The 2019 $1,124,000 Operating Loss contains $1,665,000
amortization of onerous contract and $17,974,000 net claim settlement gain; without which the operating loss was $20,763,000.

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.

Bank indebtedness and term debt increased by $20,936,000 in 2019 over 2018 largely due to the transition to IFRS 16 and
recognition of lease liabilities included in term debt. Cash flows from operating activities, before consideration of changes in non-
cash working capital, generated $2,631,000 cash during the year ended December 31, 2019 as compared to a $11,632,000
decrease of cash during the year ended December 31, 2018. Cash flows from operating activities were most significantly impacted
as a result of the SGL settlement providing USD$10,810,000 of cash and continued consolidation of costs and improvements in
operational effectiveness.

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Avcorp Industries Inc.

annual report 2019

Quarterly Results

The following table provides selected quarterly consolidated financial information for the eight most recent fiscal quarters to
December 31, 2019 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 amount)

20192

2018

Dec 31

Sep 30

Jun 30

Mar 31

Dec 31

Sep 30

Jun 30

Mar 31

Revenue

$38,309

$37,437

$46,799

$42,225

$39,280

$44,862

$43,292

$43,276

Operating (loss) income

(8,114)

(5,164)

(2,903)

15,057

(9,833)

41,070

286

(4,606)

EBITDA1

Net (loss) income
EBITDA per share1

Basic

Diluted

Net (loss) income per share

Basic

Diluted

(4,455)

(2,901)

172

17,997

(8,575)

(10,846)

(7,511)

(4,568)

13,609

(13,299)

43,682

40,234

2,139

(1,908)

(961)

(5,601)

(0.01)

0.00

(0.03)

(0.02)

(0.01)

0.05

0.04

(0.02)

(0.04)

2,800

0.13

0.12

7,651

0.00

(0.00)

2,180

(0.01)

(0.02)

2,187

Long-term debt

26,848

22,018

22,496

22,229

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

Reporting Standards (“IFRS”), refer to page 9.

2. Excludes operating lease expense, recognizes right of use asset and lease liability as a result of change to lease accounting policy under

IFRS 16. IFRS 16 was adopted on a modified retrospective basis, and therefore comparative figures have not been restated.

For the quarter ended December 31, 2019, the Avcorp Group recorded losses from operations totalling $8,114,000 (December
31, 2018: $9,833,000 loss). Current quarter operating loss benefited from the amortization into income of the onerous
contracts provision in the amount of $155,000, offset by the write-off of fair value of investment in AVS-SYS of $649,000
(December 31, 2018: $2,161,000 amortization of unfavourable liability and onerous contract liability). Fourth quarter 2019
operating loss improved by $4,374,000, in comparison to the same quarter in 2018, after the exclusion of the above mentioned
items due to the consolidation of costs and improved operating effectiveness.

2019 and 2018 Results Overview

During the year ended December 31, 2019 Avcorp Group revenues totalled $164,770,000 compared with $170,710,000 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.

Manufacturing of composite parts occurs in Avcorp Group’s Gardena facility. 2019 revenues arising from the assignment by
customers of commercial aerospace contracts to Avcorp Industries Inc. have generated $31,256,000 in revenue (December 31,
2018: $35,947,000). These contracts, whose production occurs in the Gardena facility, support customer production of
commercial aircraft. The planned wind-down of certain loss making production commercial contracts assigned from the Hitco
acquisition have reduced revenues for the current year relative to 2018. The Gardena facility defence aerospace contracts
generated $34,960,000 of revenue during the year ended December 31, 2019 for ACF (December 31, 2018: $26,643,000).
Further manufacturing focus on meeting defence contract demand has increased this market segment revenue in the current
year relative to 2018.

The Burlington facility increased delivery of composite panels in 2019 in supply to original equipment manufacturer (OEM)
production demand, and spares and after market demand; a $479,000 revenue increase in 2019 over 2018. Composite aircraft
repair revenues out of Comtek were $182,000 lower in the current year in comparison to 2018; it is anticipated that new market
penetration and a backup of regional airline repairs will augment the 2020 revenue base. Non-panel OEM composite components
generated revenue during the 2019 were $242,000 greater than the previous year. Higher administrative costs during 2019
though have decreased the Burlington facilities operating income in 2019 by $132,000.

Delta facility revenues, for all programs generated by production contracts, have decreased by $5,490,000 during the current
year relative to the year ended December 31, 2018. On a market segment basis, Delta revenues from the production and delivery
of business and commercial jet programs has decreased by approximately $8,206,000 in 2019 relative to 2018 primarily due to
737 MAX grounding, labour disruptions and customer scheduling delays; while defence programs’ production has increased by
$2,716,000 from both existing and new defence production programs.

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Avcorp Industries Inc.

annual report 2019

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.

For the year ended December 31, 2019, the Avcorp Group recorded losses from operations totaling $1,124,000 from
$164,770,000 revenue, as compared to $26,917,000 operating income from $170,710,000 revenue for the previous year. It
should be noted that 2019 operating loss benefited by $1,665,000 income from amortization of onerous contracts provision
(December 31, 2018: $13,732,000 amortization of unfavourable contract liability and onerous contract liability). In addition, 2019
benefitted from the net settlement gain of $17,974,000 in comparison to 2018 which benefitted from the net contract modification
for an unfavourable contract in the amount of $41,470,000 and a net claim settlement loss of $5,421,000. Continued consolidation
of operating costs have resulted in reduced current year operating losses of $2,101,000 in comparison to 2018 after these benefits
have been removed.

An unfavourable contract liability accruing for certain customer contracts, for which unavoidable costs were expected to exceed
the corresponding revenue earned, amounted to $100,582,000 upon the December 18, 2015 Hitco acquisition; of which $Nil
remains unamortized due to a contract modification to production of a certain customer contract in 2018. The unfavourable
contract liability was amortized into income on a units-of-production basis over the expected life of the contract and as costs
were incurred. The amount of unfavourable contract liability amortized into income during the year ended December 31, 2019 on
a units-of-production basis was $Nil (December 31, 2018: $4,617,000). The unamortized unfavourable contract liability was
accrued in US dollars and therefore the unamortized balance varied as the estimated provision was adjusted for foreign currency
fluctuations.

Operational loss at the Gardena facility amounted to $10,274,000 for the year ended December 31, 2019 as compared to
$4,948,000 operating loss for the year ended December 31, 2018. Gardena 2019 operating loss benefited by $Nil income from
amortization of an unfavourable contract liability into income (2018: $4,617,000). In addition, Gardena’s 2019 loss included a
net claim settlement loss of $1,785,000. Removing these items, this is an improvement of $1,076,000.

Over the course of 2016 and through 2018 certain of the smaller loss-making contracts at the Gardena facility were wound down
eliminating the associated losses; as well, production for the most significant loss-making contract was wound down during the
third quarter 2018. Contract revisions are in place which will help improve Avcorp’s financial performance.

Although recent customer contract awards in Canadian operations will continue to increase facility utilization, there remains
unutilized plant capacity within the Company’s Delta, British Columbia facility, and also within the Gardena, California facility due
to the transition out of certain loss-making production contracts. The Company has expensed $7,004,000 of overhead costs
during the year as compared to $6,469,000 for December 31, 2018 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. Revenue growth in these facilities would benefit Company profitability via a contribution to the recovery of fixed overhead
expenditures. 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 composite manufacturing capabilities, further leveraging existing
production capacity and investments.

During the year ended December 31, 2019, cash flows from operating activities, excluding the impact of changes in non-cash
working capital, were $2,631,000 of cash as compared with utilization of $11,632,000 of cash during the year ended December
31, 2018. The company received a net cash settlement of USD$10,810,000 from the agreement with Hitco Carbon Composites
Inc., SGL Carbon, SGL, and SGL Carbon SE (the “SGL Parties”) and a customer.

Changes in non-cash working capital during the current year provided $8,280,000 as compared to the previous year during which
non-cash working capital utilized $4,397,000.

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, 2019, 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; such event occurred
during the third quarter 2018. 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.

The customer advance was recorded at its fair value on December 18, 2015 and amortized into revenue. The Company amortized
into revenue $Nil of the customer advance during the year ended December 31, 2019 (December 31, 2018: $2,660,000). The
remaining unamortized customer advance has been recorded at its face value to reflect the amount due. The face value of the
unamortized portion of the customer advance as at December 31, 2019 is USD$4,643,000 (December 31, 2018: USD$4,643,000).

As at December 31, 2019, the Company had $4,316,000 cash on hand (December 31, 2018: $2,051,000) and had utilized
$84,661,000 of its operating line of credit (December 31, 2018: $85,840,000). The Company has a working capital deficit of
$71,561,000 as at December 31, 2019 which has decreased from the December 31, 2018 $74,374,000 deficit. Working capital
surplus/deficit is defined as the difference between current assets and current liabilities. However, the Company’s accounts
receivable, contract assets, and inventories net of accounts payable, amount to a $18,542,000 surplus as at December 31, 2019
(December 31, 2018: $22,000,000 surplus). The Company’s accumulated deficit as at December 31, 2019 is $142,194,000
(December 31, 2018: $132,878,000).

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Avcorp Industries Inc.

annual report 2019

Revenue

For the year ended December 31, 2019 revenues totalled $164,770,000, a $5,940,000 decrease in revenues relative to 2018
(December 31, 2018; $170,710,000).

The amount of unfavourable contract liability amortized into revenue during the year ended December 31, 2019 on a units-of-
production basis was $Nil (December 31, 2018: $4,617,000).

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

2019

2018

Revenue

% of Total

Revenue

% of Total

Avcorp Industries Inc. (ASI)

Comtek Advanced Structures Ltd. (AEC)

Avcorp Composite Fabrication Inc.1 (ACF)

Total

$78,099

20,455

66,216

164,770

47.4

12.4

40.2

100.0

$83,589

19,916

67,205

170,710

49.0

11.6

39.4

100.0

1. ACF revenue includes amortization of a portion of the unfavourable contract liability of $Nil in 2019 (2018: $4,617,000).

Delta facility revenues 2019 totalled $78,099,000 (December 31, 2018: $83,589,000).

Delta facility commercial aircraft programs production revenues have decreased by $5,490,000 of which established commercial
aircraft production contract revenues have contributed $8,206,000 of this revenue decrease in 2019 relative to 2018. This was
partially offset with production for defence programs which increased by $2,716,000 in 2019 relative to 2018.

Burlington facility revenues for 2019 totalled $20,455,000 (December 31, 2018: $19,916,000).

The Burlington facility had an increase in the delivery of composite floor panels and racks in supply to OEM production lines during
the current year of 1% relative to 2018. Composite floor panel revenues arising from aftermarket or OEM spares composite floor
panel sales decreased by $69,000 relative to 2018. Sales for other composite component deliveries to OEMs increased by
$337,000 in 2019 relative to 2018. Composite aircraft repair revenues out of Comtek decreased by 4% in comparison to 2018.

Gardena facility revenues for 2019 totalled $66,216,000 (December 31, 2018: $67,205,000).

The Gardena facility provides a unique aerostructures composite composite capability to the Avcorp Group’s existing metal
fabrication and integrated assembly business through broadening the product range and strengthening Avcorp’s composite
capabilities. Advanced composite fabrication capabilities enhance Avcorp Group’s ability to participate in large aerospace assembly
programs which combine mixed material components.

Year ended December 31, 2019 revenues arising from the assignment by customers of commercial aerospace contracts to Avcorp
Industries Inc. have generated $31,256,000 in production revenue (December 31, 2018: $35,947,000). Wind-down of certain
loss-making contracts totalling $9,053,000 was partially offset by an increase in deliveries for an ongoing customer program
amounting to $5,336,000 from this facility in 2019 relative to 2018. These contracts support customer production of commercial
aircraft with manufacturing of the composite parts occurring in Avcorp Group’s Gardena facility. The Gardena facility defence
aerospace contracts generated $34,960,000 of production revenue during the year ended December 31, 2019 for ACF (December
31, 2018: $26,643,000) as facility resources are further operationalized to meet customer delivery requirements.

Deliveries and quality performance as at December 31, 2019 for Avcorp 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.

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Avcorp Industries Inc.

annual report 2019

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

BAE Systems

Boeing1

Bombardier

Lockheed Martin

Subaru Corporation

Other
Amortization of the unfavourable contract
liability

Total

2019

2018

Revenue

% of Total

Revenue

% of Total

$18,181

50,351

18,535

35,812

28,306

13,585

164,770

11.0

30.6

11.2

21.8

17.2

8.2

100.0

$15,789

67,606

20,860

24,527

22,970

14,341

4,617

170,710

9.3

39.6

12.2

14.4

13.5

8.3

2.7

100.0

1. Includes Boeing program partner revenue consisting of industry tier-one suppliers to Boeing.

The Avcorp Delta BC facility is the single source supplier for the F-35 CV-OBW assembly under contract with BAE Systems 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 increased by $2,392,000
in 2019 relative to 2018. Production contracts have been secured through to end of 2022, with discussions underway with the
customer to secure constant production through to the first quarter of 2025. 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 production phase, referred to as Low Rate Initial Production (“LRIP”) eleven; and are in discussions with the
customer for production under LRIP twelve through fourteen. 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 2022,
and discussions underway with the customer to secure constant production through to the first quarter of 2025.

Avcorp’s Gardena California facility provides 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 mid-
2020. Follow on contract value is anticipated, assuming acceptable quality and delivery performance. Total revenues for this long-
term defence program totalled $33,469,000 for the year ended December 31, 2019 (December 31, 2018: $22,466,000).

Shipments of large complex metal assemblies out of the Delta facility to Boeing Commercial Airplane Group (“Boeing”),
primarily for the 737 commercial jet program, decreased by 17% in 2019 relative to 2018, primarily as a result of Boeing 737
MAX grounding and decreased customer demand. Concurrently, deliveries of fabricated parts and components to Boeing
decreased by $168,000 as customer demand for discrete and lower complexity assembled structures has decreased slightly.
These products were manufactured at Avcorp’s Delta facility. During 2016, Avcorp delivered its first significant quantity of shipsets
of composite fabricated aerostructures parts for Boeing programs from its acquired Gardena production facility. 2019 revenues
for these composite parts totalled $Nil (December 31, 2018: $8,783,000), a reduction from 2018 as the planned wind-down of
certain Hitco acquired customer contracts occurred. Total production deliveries generated for the Company from various Boeing
Commercial aircraft programs amounted to $41,930,000 for the year ended December 31, 2019 (December 31, 2018:
$57,066,000). The Company also delivers components to Boeing Defence, Space & Security (“Boeing DSS”) for the Chinook
CH47 helicopter and KC135 aircraft. During the year ended December 31, 2019 the Company generated $6,849,000 of revenues
in supply to Boeing DSS, a slight increase in revenues recorded for the same period in 2018 (December 31, 2018: $6,804,000).

Production deliveries for Bombardier Aerospace (“Bombardier”) programs decreased by 11% during the current year relative
to the year ended December 31, 2018. Shipments of large assemblies for the CL605 business jet program decreased by
$1,693,000 during the current year as demand for these products decreased relative to 2018; while the Company experienced a
$182,000 decrease in its deliveries of composite panels and related products to Bombardier. Avcorp Group’s primary source of
revenues from Bombardier in 2020 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.

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Avcorp Industries Inc.

annual report 2019

Avcorp’s deliveries to Subaru Corporation (“Subaru”) of large complex composite structural components which are integrated
into the center wing box in support of the Boeing 787 commercial jet program totalled $28,306,000 for the current year (December
31, 2018: $22,970,000). 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 decreased by 4% relative to revenues in the previous year; it is
anticipated that new market penetration and a backup of regional airline repairs will augment the 2020 revenue base. The Group
also supplies Canadian aircraft retro-fit programs out of its Delta facility, and large composite structures in support of various US
defence programs out of its Gardena facility, whose revenues decreased relative to 2018. These Other revenues are of significant
importance to the Group’s operations as they generated $13,585,000 in revenue during the year ended December 31, 2019
(December 31, 2018: $14,341,000).

Defence program revenues for Avcorp 2019 totalled $62,333,000 (2018: $51,296,000); 37.8% of total production sales
(December 31, 2018: 30.0%). Commercial program sales continue to provide the greater portion of the Company’s sales
(December 31,2019: 62.2%; December 31,2018: 70.0%) amounting to $102,437,000 for 2019 and $119,414,000 for 2018. 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 of the unfavourable contract liability of $Nil in 2019 (2018: $4,617,000).

Gross Profit

Gross profit (revenue less cost of sales) for the year ended December 31, 2019 was positive 2.3% of revenue compared to
positive 8.8% of revenue for the year ended December 31, 2018.

Included in the calculation of gross profit is the amortization of the unfavourable contract liability of $Nil into revenue in 2019
(December 31, 2018: $4,617,000) as well as a $1,665,000 amortization into income of an onerous contracts provision (December
31, 2018: $9,115,000 provision). Excluding the amortization of the unfavourable contract liability and onerous contracts provision,
the gross margin increased by $898,000 in 2019 relative to 2018. This was due to consolidation of costs, increased utilization of
idle capacity in the Delta facility as new programs ramp up in production, as well as strong delivery performance of composite
floor panels from the Burlington facility.

Key turn around initiatives implemented in 2019 improved gross margin on production contracts manufactured out of the Gardena
facility. The Gardena facility gross margin for the current year was negative $1,650,000 (December 31, 2018: $3,156,000 positive
gross margin). The gross margin was negative $1,836,000 exclusive of $186,000 amortization of onerous contract provision. The
2018 Gardena gross margin was negative $10,139,000 exclusive of $4,617,000 amortization of the unfavourable contract liability
and $8,678,000 amortization of onerous contract provision. The Gardena facility gross margin improved by $8,303,000 in 2019
relative to 2018 exclusive of the positive impact of amortization of the unfavourable contract liability into revenue and amortization
of the onerous contract provision.

Many corrective actions have been implemented. Turnaround activities focused on cost reduction initiatives as well as operational
process flow improvements are contributing to the financial improvement in 2019 compared to 2018. Over the course of 2016
and through 2018 certain of the smaller loss-making contracts at the Gardena facility were wound down eliminating the associated
losses; as well, production for the most significant loss-making contract was wound down during the third quarter 2018. Contract
revisions are in place which will help improve Avcorp’s financial performance.

The Delta facility gross margin for the current year was positive $1,893,000 (December 31, 2018: $8,302,000 positive gross
margin). The 2019 Delta gross margin was $414,000 exclusive of $1,479,000 amortization of onerous contract provision. The
2018 Delta gross margin was $7,865,000 exclusive of $437,000 amortization of onerous contracts provision. 2019 Delta facility
gross margin decreased by $7,451,000 from the 2018 gross margin exclusive of the positive impact of amortization of the onerous
contracts provision into revenue in both years. The Delta facility continued to incur costs on the startup of new programs, delivery
delays due to the 737 MAX grounding, and incurred costs due to labour disruption during the year. In addition, certain new
program startups have been delayed due to continued customer engineering changes and delayed approval.

Burlington production contracts produced a positive gross margin for the year ended December 31, 2019 of $3,545,000 as
compared to a positive gross margin of $3,499,000 for 2018.

Administration and General Expenses

As a percentage of revenue, administration and general expenses decreased to 13.0% for the year ended December 31, 2019
from 13.7% for the year ended December 31, 2018. In absolute terms, administration and general costs decreased by $1,999,000
during the current year relative to the previous year, mainly due to collection of amounts written off in previous years and savings
in various expenses during the year.

Foreign Exchange Gain or Loss

Avcorp Group recorded a $843,000 foreign exchange gain during the year ended December 31, 2019 (December 31, 2018:
$770,000 loss) as a result of holding US dollar-denominated cash, receivables, payables and debt.

Page 8

Avcorp Industries Inc.

annual report 2019

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 positive $10,813,000 for the year ended December 31, 2019 compared to EBITDA of positive $35,338,000 for the
year ended December 31, 2018. The company recorded a net settlement gain of $17,974,000 in 2019 (2018 $5,421,000 loss).
In addition, the calculation of EBITDA includes the amortization of the unfavorable contract liability of $Nil in 2019 (December
31, 2018: $4,617,000) and amortization of an onerous contracts provision of $1,665,000 in 2019 (December 31, 2018:
$9,115,000). On January 1, 2019, the Company adopted IFRS 16 using the modified retrospective method which has improved
2019 EBITDA by $3,995,000. Operating lease expense and payments, on transition, have been capitalised as right of use assets
and recorded with a corresponding lease liability which incur depreciation and interest expense are removed in the calculation of
EBITDA. Lastly, 2018 had a $41,470,000 contract modification gain. EBITDA was negative $12,821,000 for the year ended
December 31, 2019, after adjusting for the above mentioned items (2018: $14,443,000 loss). Turnaround activities focused on
cost reduction initiatives as well as operational process flow improvements contributed to the financial improvement.

The Delta facility continued to see delays in start-up of new product introductions due to engineering changes, labour disruptions
upon negotiations of the union agreement, and customer driven delivery schedule changes due to the 737 MAX grounding.

At the Gardena facility, as legacy operational deficiencies were identified, operational improvements were made, thereby allowing
the Gardena operations to achieve customer required output levels.

Over the course of 2017 and through 2018 certain of the smaller loss-making contracts at the Gardena facility were wound down
eliminating the associated losses; as well, production for the most significant loss-making contract was wound down during the
third quarter 2018. Contract revisions are in place which will help improve Avcorp’s financial performance.

EBITDA1

(expressed in thousands of Canadian dollars)

FOR THE YEAR ENDED DECEMBER 31

Income (loss) for the year

Interest expense and financing charges

Income tax expense

Depreciation

Amortization of development costs and intangibles

2019

$(9,316)

8,941

8,218

2,970

10,813

2018

$20,373

5,813

4,482

4,670

35,338

2017

$(58,538)

2,820

4,153

3,223

(48,342)

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, 2019 were $8,924,000,
which is net of $17,000 interest income as compared to $5,774,000 expense, net of $39,000 interest income for the year ended
December 31, 2018. Interest expenditures have increased during the current year relative to the previous year due to interest
on lease liabilities identified on transition to IFRS16.

Income Taxes

Avcorp Group has not incurred a tax expense during the year ended December 31, 2019 (December 31, 2018: $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, 2019 was $9,316,000 compared to an income of $20,373,000 for the year ended December
31, 2018. The December 31, 2019 net loss contains a $1,665,000 amortization of the onerous contracts provision, as well as a
$17,974,000 net claim settlement; without which the net loss for 2019 was $28,955,000.

On a comparative basis, the 2018 $20,373,000 net income contains a $13,732,000 amoritization of the unfavourable contracts
liability and onerous contracts provision, as well as $41,470,000 contract modification and $5,421,000 net claim position; without
which the net loss for 2018 was $29,408,000.

The reduction in net loss for 2019 relative to 2018 after excluding the impact of the amortization of the unfavourable contracts
liability and onerous contract provisions, net contract modification, and net claim settlement and positions was due to the
continued consolidation of costs, improvements in internal processes over inventory management, strong delivery performance
to Lockheed Martin from the Gardena facility and composite floor panels from the Burlington facility. This was offset by the costs
incurred on ramp up of new programs with continued delays in engineering changes and customer approvals at the Delta facility.

Page 9

Avcorp Industries Inc.

annual report 2019

Administration and general costs decreased by $1,999,000 during the current year relative to the previous year. Turnaround
activities focused on cost reduction initiatives as well as operational process flow improvements are contributing to the financial
improvement in comparison to 2018.

Liquidity and Capital Resources

On November 15, 2019, 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 agreements entered into on September 27, 2012
and subsequently on May 26, 2017. The loan agreement extends the maturity to June 30, 2021

Maximum availability under the Loan agreement cannot exceed USD $68,000,000 less USD $2,300,000 until June 30, 2021.
Drawdowns under the USD$45,000,000 borrowing capacity are supported by a major and material customer of the Company (the
“Guarantor”) by way of a guarantee (the “Guarantee”). On November 15, 2019, Panta Holdings B.V., the holding company of
Panta Canada B.V. which is Avcorp’s majority shareholder, entered into a guarantee agreement with the Guarantor. Pursuant to
the guarantee agreement, Panta Holdings B.V. provided guarantee to the Guarantor in the maximum payment of USD$10,000,000
if the bank draws on the Guarantee in whole or in part.

Interest rate for advances made up to the maximum of the allowable borrowing base of USD$23,000,000 revolving loan less
USD$2,300,000:

•

Royal Bank Prime (“RBP”) plus 1.50% per annum

Royal Bank US Base Rate (“RBUSBR”) plus 1.50% per annum

Banker’s Acceptance (“BA”) Equivalent Rate plus 3.00% per annum

LIBOR Rate plus 3.00% per annum

Interest rate for advances made on the additional USD$45,000,000 borrowing capacity up to USD$68,000,000.

•

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

Pursuant to the terms of the amending loan agreement, the Company is required to meet certain financial covenants beginning
in Q1 2020. In the event that the Company fails to meet the covenants, Panta Holdings B.V. and Panta Canada B.V. shall be
entitled to make cash injections for a fiscal quarter by way of loan or equity investment in Avcorp. Such injections will be
considered a positive addition to the calculation of the financial metrics for the purposes of determining compliance with the
covenants. In addition, the Company will have a cure period measured cumulatively for the failed quarter and the subsequent
quarter. There is uncertainty as to the ability of the company to meet its financial covenants without the additional financial
support from Panta Holdings B.V. and Panta Canada B.V.

On February 6, 2020, the Company entered into an amendment to its existing loan agreement with a Canadian Chartered Bank
whereby the following amendments were made:

•

The threshold of the financial covenants for the first and second fiscal quarters for the 2020 fiscal year were amended in
favor of the Company.

On November 15, 2019, the Company entered into a standby credit facility agreement (“2019 Panta Loan”) with Panta Canada
B.V which amended and restated the 2018 Panta Loan, as well as securing an additional $4,546,000 (USD$3,500,000). As at
December 31, 2019, the company had drawn $325,000 (USD $250,000) on this 2019 Panta Loan. The Company drew the
remaining available amount in January 2020 of $4,238,000 (USD $3,250,000).

On March 2, 2020, the Company entered into an amendment to the standby credit facility (“2019 Panta Loan”) securing an
additional and drawing $2,598,000 (USD$2,000,000). As at the date of this report the company is able to draw up to an additional
$Nil on the standby credit facility.

The Company ended the year with bank operating line utilization of $84,661,000 offset by $4,316,000 cash compared to utilization
of $85,840,000 with $2,051,000 cash on hand as at December 31, 2018. Based on net collateral provided to its bank, the
Company is able to draw up to an additional $335,000 (USD$258,000) on its operating line of credit as at December 31, 2019
(December 31, 2018: $1,059,000 (USD$776,000)). As at the date of this report the Company is able to draw up to an additional
$21,000 (USD$16,000) on its operating line of credit.

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. 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; such event
occurred during the third quarter 2018. 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 face value of the unamortized portion
of the cash advance as at December 31, 2019 is $6,030,000 (USD$4,643,000) (December 31, 2018: $6,334,000
(USD$4,643,000)).

Page 10

Avcorp Industries Inc.

annual report 2019

During the year ended December 31, 2019, the Company had a net loss of $9,316,000 (December 31, 2018: net income of
$20,373,000), had operating cash flows of $10,911,000 (December 31, 2018: negative $16,029,000) and a shareholders’
deficiency of $43,475,000 as of December 31, 2019 (December 31, 2018: $36,144,000 deficiency) and an accumulated deficit of
$142,194,000 (December 31, 2018: $132,878,000). Management assesses the Company’s ability to continue as a going concern
at each reporting date, using 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 achieve improvements in operating results
in the future through additional revenue from defense related contracts, successfully negotiate extended terms with its creditors
including the past due date of its customer advance and other debt related items, continue to raise adequate financing, and
mitigate the adverse impact of the COVID-19 virus. In assessing whether the going concern assumption was appropriate,
management considered all relevant information available about the future, which was at least, but not limited to, the 12-month
period from the date of this report.

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

•

Contract renegotiations with existing customers, actively working to secure additional purchase orders and pursuing new
customer contracts have provided an improved basis for operations in the future.

The company reached a new labour agreement with the International Association of Machinists and Aerospace Workers
(Lodge 250)(the “Union”) at its Delta, British Columbia facility. The new six-year labour agreement was ratified by the Union
and will expire on March 31, 2025 bringing the company long term stability.

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

The COVID-19 virus impact to the aviation industry and the Company continues to evolve. The Company has implemented
strict precautions to mitigate the risk to its employees’ health and safety through restrictions on in-person meetings, rotating
shifts and social distancing guidelines. In addition, the company will continue to assess the risk to the supply chain and its
customers and will implement steps to mitigate this risk.

The assessment of the Company’s ability to execute its strategy of reducing operating costs, funding future working capital
requirements, and ability to mitigate the risk of the COVID-19 virus 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.

Management is actively working to secure extension to its banking agreements, will continue to work with an existing common
shareholder, 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.

Cash Flows from Operating Activities

Cash flows from operating activities, before consideration of changes in non-cash working capital, generated $2,631,000
during the year ended December 31, 2019 as compared to a utilization of $11,632,000 cash during the year ended December
31, 2018. The company received a net cash settlement of USD$10,810,000 from the agreement with Hitco Carbon
Composites Inc., SGL Carbon, SGL, and SGL Carbon SE (the “SGL Parties”) and a customer in 2019.

Non-cash operating assets and liabilities generated $8,280,000 of cash during the current year, compared to utilizing
$4,397,000 of cash during the previous year; primarily due to customer providing shorter payment terms as well as the
timing of collection of large customer invoices.

Avcorp Group continues to closely monitor accounts receivable and accounts payables, and to work with its customers and
suppliers in order to ensure cash is collected on a timely basis and payment terms that can meet operational needs.

Cash Flows from Investing Activities

During the year ended December 31, 2019, the Avcorp Group purchased equipment totalling $904,000 compared with
$1,429,000 during the year ended December 31, 2018. Avcorp Group continues to minimize its capital expenditures in order
to conserve cash, with only operation critical expenditures being made.

During 2019 and 2018, the Company commenced the new program introduction process in support of the recently awarded
production contracts. The start-up of new production contracts requires significant investments in hard and soft tooling. Such
tooling investments amounted to $4,116,000 for the year ended December 31, 2019 (December 31, 2018: $6,410,000).

Cash Flows from Financing Activities

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

Cash flows from financing activities utilized $3,610,000 of cash during the current year compared with providing $21,406,000
of cash in 2018.

The Company’s operating line was $84,661,000 drawn as at December 31, 2019 (December 31, 2018: $85,840,000). The
Company drew $20,844,000 in cash during the year (December 31, 2018: $17,961,000 was drawn) and repaid $18,010,000
in cash during the year (December 31, 2018: $Nil was repaid).

Page 11

Avcorp Industries Inc.

annual report 2019

Repayment of term debt during the current year amounted to $2,591,000 (December 31, 2018: $294,000); which was used
to fund equipment and development costs and tooling. This includes the payments made to lease liabilities identified on
transition to IFRS 16.

Proceeds from term debt during the current year amounted to $1,196,000 (December 31, 2018: $6,601,000).

Payment of interest during the year amounted to $5,049,000 (December 31, 2018: $2,862,000); with the increase in 2019
over 2018 primarily attributable to interest on lease liabilities identified on transition to IFRS16.

On December 31, 2019, the ratio of the Company's current assets to current liabilities was 0.47:1 (December 31, 2018:
0.48:1).

Contractual Obligations

Total

2020

2021 – 2024

Post 2024

Lease obligations

Bank indebtedness

Term loan

Other long-term obligations1

Purchase obligations2

20,493

85,470

5,550

3,573

70,622

2,415

85,470

352

58,869

Total contractual obligations

185,708

147,106

12,598

5,550

1,409

11,753

31,310

5,480

1,812

7,292

1. This amount represents obligations the Company has with Industrial Technologies Office.
2. Purchase obligations include payments for the Company’s 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.

Capital Stock

As at December 31, 2019, there were 368,118,620 common shares, no common share purchase warrants, and 11,443,000 stock
options issued and outstanding.

Common Shares

Panta Canada B.V., is 100% owned by Panta Holdings B.V. and is Avcorp’s majority shareholder owning approximately 71.2%
of issued and outstanding common shares as of December 31, 2019.

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 368,118,620 common shares issued at December 31, 2019. The book value of
common shares issued and outstanding as at December 31, 2019 was $86,219,000 (December 31, 2018: $86,219,000),
and a shareholders’ deficiency of $43,475,000 (December 31, 2018: $36,144,000 deficiency).

Accounting standards

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

Amendments to IAS 1 and IAS 8: Definition of Material

In October 2018, the International Accounting Standards Board (“IASB”) issued amendments to IAS 1 Presentation of
Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors to align the definition of
‘material’ across the standards and to clarify certain aspects of the definition. The new definition states that, ’Information is
material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of
general purpose financial statements make on the basis of those financial statements, which provide financial information
about a specific reporting entity.’ The standard is effective for annual periods beginning on or after January 1, 2020, with
early application permitted. The amendments to the definition of material is not expected to have a significant impact on the
Company’s consolidated financial statements.

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Avcorp Industries Inc.

annual report 2019

Amendments to IAS 1: Classification of Liabilities as Current or Non-Current

In January 2020, the IASB issued Classification of Liabilities as Current or Non-current (Amendments to IAS 1). The
amendments aim to promote consistency in applying the requirements by helping companies determine whether, in the
statement of financial position, debt and other liabilities with an uncertain settlement date should be classified as current
(due or potentially due to be settled within one year) or non-current. The amendments include clarifying the classification
requirements for debt a company might settle by converting it into equity. The amendments are effective for annual reporting
periods beginning on or after January 1, 2022, with earlier application permitted.

The following is a brief summary of the new standard adopted:

Adoption of IFRS 16 - Leases

IFRS 16 supersedes IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating
Leases-Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. The standard
sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to
account for all leases under a single on-balance sheet model.

The Company adopted IFRS 16 using the modified retrospective method of adoption with the date of initial application of
January 1, 2019. Under this method, the standard is applied retrospectively with the cumulative effect of initially applying
the standard recognized at the date of initial application. The Company elected to use the transition practical expedient
allowing the standard to be applied only to contracts that were previously identified as leases applying IAS 17 and IFRIC 4
at the date of initial application. As part of the initial application of IFRS 16, the Company applied the available practical
expedients wherein it:

•

Used a single discount rate to a portfolio of leases with reasonably similar characteristics

Applied the short-term leases exemptions to leases with lease term that ends within 12 months at the date of initial
application (“short-term leases”)

Applied the recognition exemptions to lease contracts for which the underlying asset is of low value (“low-value assets”)

Used hindsight in determining the lease term where the contract contains options to extend or terminate the lease

Excluded the initial costs from the measurement of the right-of-use asset at the date of initial application

The Company did not change the initial carrying amounts of recognized assets and liabilities at the date of initial application
for leases previously classified as finance leases under IAS 17. The Company recognized right-of-use assets and lease
liabilities for those leases previously classified as operating leases, except for short-term leases and leases of low-value
assets. The right-of-use assets were recognized based on the amount equal to the lease liabilities, adjusted for any related
prepaid and accrued lease payments previously recognized. Lease liabilities were recognized based on the present value of
the remaining lease payments, discounted using the incremental borrowing rate at the date of initial application.

Based on the foregoing, as at January 1, 2019:

•

Right-of-use assets of $13,755,000 were recognized (included in Property, Plant and Equipment). This includes the lease
assets recognized previously under finance leases of $666,000 that were classified in machinery and equipment and
computer hardware and software.

Additional lease liabilities of $12,765,000 (included in Term Debt) were recognized.

Prepayments of $324,000 related to previous operating leases were derecognized and included in the right-of-use
assets.

Impact to the consolidated balance sheet as follows:

Property, plant and equipment, net book amount

$28,416

$13,089

$41,505

Prepayments and other assets

Lease liability (current)

Lease liability (non-current)

6,222

(263)

(324)

(986)

5,898

(1,249)

(159)

(11,779)

(11,938)

As reported
December 31, 2018

Adjustment

Revised opening
balance
January 1, 2019

Page 13

Avcorp Industries Inc.

annual report 2019

•

The lease liabilities as at January 1, 2019 can be reconciled to the operating lease commitments as of December 31,
2018 as follows:

Operating lease commitments as at December 31, 2018

Less: Commitments relating to short-term leases

Less: Commitments relating to leases of low-value assets

Less: Commitments relating to property tax and operating cost

Add: Payments in optional extension periods not recognized as at December 31, 2018

Lease payments included in the initial measurement of lease liability

Weighted average incremental borrowing rate as at January 1, 2019

Discounted operating lease commitments at January 1, 2019

Add: Commitments relating to leases previously classified as finance leases

Lease liability at January 1, 2019

$26,950

(1,800)

(10)

(6,576)

265

18,829

9.00%

12,765

422

13,187

Set out below are the new accounting policies of the Company upon adoption of IFRS 16, which have been applied from the
date of initial application:

Right-of-use assets

The Company recognizes right-of-use assets at the commencement date of the lease. Right-of-use assets are measured at
cost, less any accumulated depreciation and impairment losses, and adjusted for any re-measurement of lease liabilities.
The cost of right-of-use assets includes the amount of lease liabilities recognized, initial direct costs incurred, and lease
payments made at or before the commencement date less any lease incentives received. Unless the Company is reasonably
certain to obtain ownership of the leased asset at the end of the lease term, the recognized right-of-use assets are
depreciated on a straight-line basis over the shorter of its estimated useful life and the lease term. Right-of-use assets are
subject to impairment.

Lease liabilities

At the commencement date of the lease, the Company recognizes lease liabilities measured at the present value of lease
payments to be made over the lease term. The lease payments include fixed payments (including in-substance fixed
payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts
expected to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option
reasonably certain to be exercised by the Company and payments of penalties for terminating a lease, if the lease term
reflects the Company exercising the option to terminate. The variable lease payments that do not depend on an index or a
rate are recognized as expense in the period on which the event or condition that triggers the payment occurs.
In calculating the present value of lease payments, the Company uses the incremental borrowing rate at the lease
commencement date if the interest rate implicit in the lease is not readily determinable. The incremental borrowing rate is
the rate of interest that the Company would have to pay to borrow over a similar term, and with a similar security, the funds
necessary to obtain an asset of a similar value to the lease asset in a similar economic environment. After the commencement
date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made.
In addition, the carrying amount of lease liabilities is re-measured if there is a modification, a change in the lease term, a
change in the in-substance fixed lease payments or a change in the assessment to purchase the underlying asset.

Short-term leases and leases of low-value assets

The Company applies the short-term lease recognition exemption to its short-term leases that have a lease term of 12
months or less from the commencement date and do not contain a purchase option. It also applies the lease of low-value
assets recognition exemption to leases of assets that are considered of low value. Lease payments on short-term leases and
leases of low-value assets are recognized as expense on a straight-line basis over the lease term.

Significant judgement in determining the lease term of contracts with renewal options

The Company determines the lease term as the non-cancellable term of the lease, together with any periods covered by an
option to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the
lease, if it is reasonably certain not to be exercised. The Company considers all relevant factors that create an economic
incentive for it to exercise the renewal. After the commencement date, the Company reassesses the lease term if there is a
significant event or change in circumstances that is within its control and affects its ability to exercise (or not to exercise)
the option to renew.

Operations Overview

Delivery and Quality Performance

Deliveries and quality performance as at December 31, 2019 for Canadian and US 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.

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Avcorp Industries Inc.

annual report 2019

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 2027.

Agreements with Boeing Defence, Space and Security extend from 2013 into 2022 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 2022.

Agreements with BAE Systems (Operations) Limited extend into 2022 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, 2019, is $664 million in consideration
of attaining full award values, compared to $839 million as at December 31, 2018. The changes in order backlog are as follows:

•

$164 million decrease in order backlog resulting from revenues recorded during the year ended December 31, 2019;

$24 million increase in order backlog due to increases in the production rates, contract renewals for various existing
programs, and contract awards;

$35 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.

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 in
process and continuing into the future.

Working Capital Utilization

Total current assets less total current liabilities were in a deficit position of $71,561,000 at December 31, 2019 and a $74,374,000
deficit position at December 31, 2018. However, the Company’s accounts receivable, contract assets, and inventories net of
accounts payable, amount to a $18,542,000 surplus as at December 31, 2019 (December 31, 2018: $22,000,000).

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, 2019 was 740 (December 31, 2018: 674). The increase in the number of
employees during 2019 occurred primarily as a result of ramp up of certain production programs in the Delta facility.

Equipment, Systems, Technologies and Processes

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

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Avcorp Industries Inc.

annual report 2019

Risk Assessment

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

•

additional financing is required to maintain and grow its business;

impact of 737 MAX grounding on the aviation industry;

adverse impact of the COVID-19 virus on the aviation industry, employees, supply chain and customers;

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. The COVID-19 virus impact to the aviation
industry and the Company continues to evolve. The Company has implemented strict precautions to mitigate the risk to its
employees’ health and safety through restrictions on in-person meetings, rotating shifts and social distancing guidelines. In
addition, the company will continue to assess the risk to the supply chain and its customers and will implement steps to mitigate
this risk. 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;

develop or enhance existing services and capabilities;

respond to competitive pressures; or

finance business acquisitions.

On November 15, 2019, 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 agreements entered into on September 27,
2012 and subsequently on May 26, 2017. The loan agreement extends the maturity to June 30, 2021.

• Maximum availability under the Loan agreement cannot exceed USD $68,000,000 less USD $2,300,000 until June 30,
2021. Drawdowns under the USD$45,000,000 borrowing capacity are supported by a major and material customer of
the Company (the “Guarantor”) by way of a guarantee (the “Guarantee”). On November 15, 2019, Panta Holdings B.V.,
the holding company of Panta Canada B.V. which is Avcorp’s majority shareholder, entered into a guarantee agreement
with the Guarantor. Pursuant to the guarantee agreement, Panta Holdings B.V. provided guarantee to the Guarantor in
the maximum payment of USD$10,000,000 if the bank draws on the Guarantee in whole or in part.

•

Interest rate for advances made up to the maximum of the allowable borrowing base of USD$23,000,000 revolving loan
less USD$2,300,000:

•

Royal Bank Prime (“RBP”) plus 1.50% per annum

Royal Bank US Base Rate (“RBUSBR”) plus 1.50% per annum

Banker’s Acceptance (“BA”) Equivalent Rate plus 3.00% per annum

LIBOR Rate plus 3.00% per annum

Interest rate for advances made on the additional USD$45,000,000 borrowing capacity up to USD$68,000,000.

•

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

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Avcorp Industries Inc.

annual report 2019

•

Pursuant to the terms of the amending loan agreement, the Company is required to meet certain financial covenants
beginning in Q1 2020. In the event that the Company fails to meet the covenants, Panta Holdings B.V. and Panta Canada
B.V. shall be entitled to make cash injections for a fiscal quarter by way of loan or equity investment in Avcorp. Such
injections will be considered a positive addition to the calculation of the financial metrics for the purposes of determining
compliance with the covenants. In addition, the Company will have a cure period measured cumulatively for the failed
quarter and the subsequent quarter. There is uncertainty as to the ability of the company to meet its financial covenants
without the additional financial support from Panta Holdings B.V. and Panta Canada B.V.

On February 6, 2020, the Company entered into an amendment to its existing loan agreement with a Canadian Chartered
Bank whereby the following amendments were made:

•

The threshold of the financial covenants for the first and second fiscal quarters for the 2020 fiscal year were amended
in favor of the Company.

On November 15, 2019, the Company entered into a standby credit facility agreement (“2019 Panta Loan”) with Panta
Canada B.V which amended and restated the 2018 Panta Loan, as well as securing an additional $4,546,000
(USD$3,500,000). As at December 31, 2019, the company had drawn $325,000 (USD $250,000) on this 2019 Panta Loan.
The Company drew the remaining available amount in January 2020 of $4,238,000 (USD $3,250,000).

The Company ended the year with bank operating line utilization of $84,661,000 offset by $4,316,000 cash compared to
utilization of $85,840,000 with $2,051,000 cash on hand as at December 31, 2018. Based on net collateral provided to its
bank, the Company is able to draw up to an additional $335,000 (USD$258,000) on its operating line of credit as at December
31, 2019 (December 31, 2018: $1,059,000 (USD$776,000)). As at the date of this report the Company is able to draw up
to an additional $21,000 (USD$16,000) on its operating line of credit.

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 from 2013 into 2022 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 2022. 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 2020.

Growth in air travel rates has and will further increase production rates on the Boeing 737 and Airbus A320 platforms
in the coming years.

Boeing 737 MAX grounding has resulted in reduced production rates for 2019 and 2020.

Bombardier Challenger CL650 aircraft production requirements to remain substantially flat through 2020.

The global market for defence aircraft has continued growth expected for 2020.

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 2019

•

The COVID-19 virus will adversely impact the aviation industry.

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 57% of Avcorp Group’s cost of sales is related to labour and overhead and 43% 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
September 25, 2019, the company reached a new labour agreement with the International Association of Machinists and
Aerospace Workers (Lodge 250) (the “Union”) at its Delta, British Columbia facility. The new six-year labour agreement was
ratified by the Union and will expire on March 31, 2025. 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 and commercial 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 during 2019, followed by Lockheed Martin, Subaru, Bombardier, and BAE Systems. The
Company forecasts its 2020 revenues to increase due to orders received for defence related program deliveries, and Delta production
ramp-up for recently awarded contracts.

The Company forecasts its working capital financing requirements for 2020 to be met by the operating line of credit and working
capital surplus (exclusive of bank indebtedness). Working capital financing has been supplemented, at times, by shareholder loans,
however, further debt and equity financing may be required.

On November 15, 2019, 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 agreements entered into on September 27, 2012 and subsequently
on May 26, 2017. The loan agreement extends the maturity to June 30, 2021.

• Maximum availability under the Loan agreement cannot exceed USD $68,000,000 less USD $2,300,000 until June 30, 2021.
Drawdowns under the USD$45,000,000 borrowing capacity are supported by a major and material customer of the Company
(the “Guarantor”) by way of a guarantee (the “Guarantee”). On November 15, 2019, Panta Holdings B.V., the holding
company of Panta Canada B.V. which is Avcorp’s majority shareholder, entered into a guarantee agreement with the
Guarantor. Pursuant to the guarantee agreement, Panta Holdings B.V. provided guarantee to the Guarantor in the maximum
payment of USD$10,000,000 if the bank draws on the Guarantee in whole or in part.

•

Interest rate for advances made up to the maximum of the allowable borrowing base of USD$23,000,000 revolving loan less
USD$2,300,000:

•

Royal Bank Prime (“RBP”) plus 1.50% per annum

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Avcorp Industries Inc.

annual report 2019

•

Royal Bank US Base Rate (“RBUSBR”) plus 1.50% per annum

Banker’s Acceptance (“BA”) Equivalent Rate plus 3.00% per annum

LIBOR Rate plus 3.00% per annum

Interest rate for advances made on the additional USD$45,000,000 borrowing capacity up to USD$68,000,000.

•

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

Pursuant to the terms of the amending loan agreement, the Company is required to meet certain financial covenants
beginning in Q1 2020. In the event that the Company fails to meet the covenants, Panta Holdings B.V. and Panta Canada
B.V. shall be entitled to make cash injections for a fiscal quarter by way of loan or equity investment in Avcorp. Such
injections will be considered a positive addition to the calculation of the financial metrics for the purposes of determining
compliance with the covenants. In addition, the Company will have a cure period measured cumulatively for the failed quarter
and the subsequent quarter. There is uncertainty as to the ability of the company to meet its financial covenants without the
additional financial support from Panta Holdings B.V. and Panta Canada B.V.

On February 6, 2020, the Company entered into an amendment to its existing loan agreement with a Canadian Chartered
Bank whereby the following amendments were made:

•

The threshold of the financial covenants for the first and second fiscal quarters for the 2020 fiscal year were amended
in favor of the Company.

On November 15, 2019, the Company entered into a standby credit facility agreement (“2019 Panta Loan”) with Panta
Canada B.V which amended and restated the 2018 Panta Loan, as well as securing an additional $4,546,000
(USD$3,500,000). As at December 31, 2019, the company had drawn $325,000 (USD $250,000) on this 2019 Panta Loan.
The Company drew the remaining available amount in January 2020 of $4,238,000 (USD $3,250,000).

The Company ended the year with bank operating line utilization of $84,661,000 offset by $4,316,000 cash compared to
utilization of $85,840,000 with $2,051,000 cash on hand as at December 31, 2018. Based on net collateral provided to its
bank, the Company is able to draw up to an additional $335,000 (USD$258,000) on its operating line of credit as at December
31, 2019 (December 31, 2018: $1,059,000 (USD$776,000)). As at the date of this report the Company is able to draw up
to an additional $21,000 (USD$16,000) on its operating line of credit.

•

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

Periodically, consulting services are provided by certain directors. Fees paid to certain directors, or companies with which they have
beneficial ownership, during the year ended December 31, 2019 amount to $3,000 (December 31, 2018: $Nil). Fees payable to certain
directors or Companies with which they have beneficial ownership, as at December 31, 2019 are $Nil (December 31, 2018: $Nil).
These fees are included in the Consolidated statements of Loss and Comprehensive Loss as administrative and general expenses and
amount to $3,000 for the year ended December 31, 2019 (December 31, 2018: $Nil).

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)

Salaries and other short-term employee benefits

Contributions to defined contribution plan

Option-based awards

2019

2018

$2,002

2,160

$2,150

164

2,381

The balance of loans receivable from key management as at December 31, 2019 is $5,000 (December 31, 2018: $15,000). These
loans are unsecured and payable on demand.

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Avcorp Industries Inc.

annual report 2019

Other related party transactions are disclosed elsewhere in these consolidated financial statements.

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

Business Acquisition

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 financial results for the fourth quarter 2019.

Operating loss for the fourth quarter of 2019 was $8,114,000 from $38,309,000 in revenues, as compared to operating loss of
$9,833,000 from $39,280,000 in revenues for the quarter ended December 31, 2018. The Company expensed $2,072,000 of overhead
costs during the fourth quarter 2019 (2018: $3,602,000) in respect of unutilized plant capacity. Provision amortization for onerous
contracts accrued during the fourth quarter 2019 totalled $155,000 (December 31, 2018: $3,739,000 provision). The Company has
provisioned for a claim asserted by a customer in the amount of $Nil in the fourth quarter of 2019 (2018: $7,640,000).

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 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.

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 of the Company’s CGU. 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 and debt classification: Management assesses the Company’s ability to continue as a going concern at each
reporting date, using quantitative and qualitative information available. Management also determines the appropriate
classification of its debt arrangements based on terms of the various agreements based on the company’s financial condition.
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 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 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.

During 2018 production requirements associated with the unfavourable contract were redirected to another supplier, giving rise
to the full amortization of the unfavourable contract liability and the onerous contract provision into income. In addition, the
customer advance was adjusted to its face value through income. This has been recorded in the 2018 Annual Consolidated
Statements of Income (Loss) and Comprehensive Income (Loss) as a contract modification in the amount of $41,470,000.
Uncertainties exist as to ultimate outcome of a formal contract termination. While the Company believes that it has fulfilled all of
its obligations under the contract, it is possible claims may be levied against the Company. The Company has assessed such
possible claims as not probable.

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 exists.

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Avcorp Industries Inc.

annual report 2019

•

On a periodic basis the Company reviews its plant capacity and estimates the portion of its under-utilized overhead expenditures.
The Company has expensed $7,004,000 of overhead costs during the current year (December 31, 2018: $6,469,000) in respect
of unutilized plant capacity. These amounts are included in the Consolidated Statements of Income (Loss) and Comprehensive
Income (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. 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 total onerous
contract provision for the year ended December 31, 2019 is $251,000 (December 31, 2018: $1,930,000)

• While a formal claim has yet to be levied by the customer, the Company has provisioned for a claim asserted by a customer in

the amount of $7,273,000 as at December 31, 2019 (December 31, 2018: $7,640,000).

•

Right of use asset and lease liability: On January 1, 2019, the Company transitioned to IFRS 16 and recognized a right of use
asset and lease liability. These values use judgement in determining lease terms such as extension option and discount rate used.
In the case where incremental borrowing rate is used, the Company estimates the incremental borrowing rate based on the lease
term, collateral assumptions, and the economic environment in which the lease is denominated.

The company has provisioned USD $1,350,000 for a legal action due to certain employment practices at the Gardena facility.
These practices were in place prior to acquisition. The company has corrected these practices going forward.

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 gain recorded for the quarter ended December 31, 2019 is $1,067,000 (December
31, 2018: $770,000 loss).

The Company had the following US dollar denominated balances:

CURRENCY RISK

(expressed in thousands of dollars)

FOR THE QUARTER ENDED DECEMBER 31

2019 (expressed in USD)

2018 (expressed in USD)

Bank cash position

Accounts receivable

Accounts payable

Customer advance

Bank indebtedness

Term debt

$2,639

9,824

6,948

4,643

65,184

4,273

$1,050

12,996

8,838

4,643

62,924

3,633

With other variables unchanged, each $0.10 strengthening (weakening) of the CAD against the USD would result in an increase
(decrease) of approximately $6,859,000 in net income for the year ended December 31, 2019 as a result of holding a net liability
position in USD as at December 31, 2019.

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Avcorp Industries Inc.

annual report 2019

As at December 31, 2018, a $0.10 strengthening (weakening) of the CAD against the USD would result in an increase
(decrease) of approximately $6,599,000 in net income for the year ended December 31, 2018 as a result of holding a net
liability position in USD as at December 31, 2018.

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 Defence, 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 85.6% (December 31, 2018: 90.8%) 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, 2019. 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, in conjunction with its Board of Directors, is currently implementing various financing strategies which include:

•

On November 15, 2019, 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 agreements entered into on September 27,
2012 and subsequently on May 26, 2017. The loan agreement extends the maturity to June 30, 2021.

•

Interest rate for advances made up to the maximum of the allowable borrowing base of USD$23,000,000 revolving loan
less USD$2,300,000:

•

Royal Bank Prime (“RBP”) plus 1.50% per annum

Royal Bank US Base Rate (“RBUSBR”) plus 1.50% per annum

Banker’s Acceptance (“BA”) Equivalent Rate plus 3.00% per annum

LIBOR Rate plus 3.00% per annum

Interest rate for advances made on the additional USD$45,000,000 borrowing capacity up to USD$68,000,000.

•

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

Page 22

Avcorp Industries Inc.

annual report 2019

•

Pursuant to the terms of the amending loan agreement, the Company is required to meet certain financial covenants
beginning in Q1 2020. In the event that the Company fails to meet the covenants, Panta Holdings B.V. and Panta Canada
B.V. shall be entitled to make cash injections for a fiscal quarter by way of loan or equity investment in Avcorp. Such
injections will be considered a positive addition to the calculation of the financial metrics for the purposes of determining
compliance with the covenants. In addition, the Company will have a cure period measured cumulatively for the failed
quarter and the subsequent quarter. There is uncertainty as to the ability of the company to meet its financial covenants
without the additional financial support from Panta Holdings B.V. and Panta Canada B.V.

On February 6, 2020, the Company entered into an amendment to its existing loan agreement with a Canadian Chartered
Bank whereby the following amendments were made:

•

The threshold of the financial covenants for the first and second fiscal quarters for the 2020 fiscal year were amended
in favor of the Company.

On November 15, 2019, the Company entered into a standby credit facility agreement (“2019 Panta Loan”) with Panta
Canada B.V which amended and restated the 2018 Panta Loan, as well as securing an additional $4,546,000
(USD$3,500,000). As at December 31, 2019, the company had drawn $325,000 (USD $250,000) on this 2019 Panta Loan.
The Company drew the remaining available amount in January 2020 of $4,238,000 (USD $3,250,000).

The Company ended the year with bank operating line utilization of $84,661,000 offset by $4,316,000 cash compared to
utilization of $85,840,000 with $2,051,000 cash on hand as at December 31, 2018. Based on net collateral provided to its
bank, the Company is able to draw up to an additional $335,000 (USD$258,000) on its operating line of credit as at December
31, 2019 (December 31, 2018: $1,059,000 (USD$776,000)). As at the date of this report the Company is able to draw up
to an additional $21,000 (USD$16,000) on its operating line of credit.

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. 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; such event occurred during the third quarter 2018. 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 face value
of the unamortized portion of the cash advance as at December 31, 2019 is $6,030,000 (USD$4,643,000) (December 31,
2018: $6,334,000 (USD$4,643,000)).

•

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

•

The company reached a new labour agreement with the International Association of Machinists and Aerospace Workers
(Lodge 250) (the “Union”) at its Delta, British Columbia facility. The new six-year labour agreement was ratified by the Union
and will expire on March 31, 2025 bringing the company long term stability.

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 of USD$23,000,000 revolving loan less
USD$2,300,000:

•

Royal Bank Prime (“RBP”) plus 1.50% per annum

Royal Bank US Base Rate (“RBUSBR”) plus 1.50% per annum

Banker’s Acceptance (“BA”) Equivalent Rate plus 3.00% per annum

Page 23

Avcorp Industries Inc.

annual report 2019

•

LIBOR Rate plus 3.00% per annum

Interest rate for advances made on the additional USD$45,000,000 borrowing capacity up to USD$68,000,000.

•

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

There is uncertainty as to the continued use of LIBOR in the future. LIBOR is the subject of recent national, international and
other regulatory guidance and proposals for reform. These reforms and other pressures may cause LIBOR to be eliminated or to
perform differently than in the past. The consequences of these developments cannot be entirely predicted but could include an
increase in the cost of our variable rate indebtedness and obligations.

Drawdown under the USD$45,000,000 additional borrowing capacity is supported by a Guarantee provided by a Guarantor. Panta
Holdings B.V. provided guarantee to the Guarantor in the maximum payment of USD$10,000,000 if the bank draws on the
Guarantee in whole or in part

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 $85,331,000 (USD $65,700,000) of which $84,661,000 is utilized as at
December 31, 2019 (December 31, 2018: $85,840,000). 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, 2019, with other variables unchanged,
a 1% change in the base borrowing rate would have an $847,000 (December 31, 2018: $858,000) 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 $258,000 on its
operating line of credit as at December 31, 2019 (December 31, 2018: $776,000). As at the date of this report the Company is
able to draw up to an additional USD$16,000 on its operating line of credit.

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 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.

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

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 (“CEO”) and the Finance Director (“FD”) 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 CEO and the FD have designed internal controls over financial reporting or have caused them to be designed under their
supervision, in order to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with IFRS.

An evaluation was carried out, under the supervision of the CEO and the FD, of the design and effectiveness of our internal
controls over financial reporting. Based on this evaluation, the CEO and the FD concluded that the internal controls over financial
reporting are effective, using the criteria set forth by the Committee of Sponsoring. Organizations of the Treadway Commission
(COSO) on Internal Control – Integrated Framework (2013 Framework).

Page 24

Avcorp Industries Inc.

annual report 2019

Disclosure Controls and Procedures (“DCP”)

The CEO and the FD have designed disclosure controls and procedures, or have caused them to be designed under their
supervision, in order to provide reasonable assurance that:

• material information relating to the Corporation has been made known to them; and

•

information required to be disclosed in the Corporation’s filings is recorded, processed, summarized and reported within the
time periods specified in securities legislation.

An evaluation was carried out, under the supervision of the CEO and the FD, of the design and effectiveness of our disclosure
controls and procedures. Based on this evaluation, the CEO and the FD concluded that the disclosure controls and procedures are
effective.

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 or where
the Company offers financing; (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 25

Avcorp Industries Inc.

annual report 2019

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, 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.

“Amandeep Kaler”

AMANDEEP KALER

“Amish Patel”

Executive Officer and
Group Chief Executive
Officer

AMISH PATEL

Director, Finance

Page 26

Avcorp Industries Inc.

annual report 2019

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(expressed in thousands of Canadian dollars)

AS AT DECEMBER 31

ASSETS

Current assets

Cash (note 16)

Accounts receivable (note 9)

Contract assets (note 10)

Inventories (note 11)

Prepayments and other assets (note 12)

Non-current assets

Prepayments and other assets (note12)

Development costs (note 13)

Property, plant and equipment (notes 3 and 14)

Intangibles (note 15)

Investment in AVS-SYS (note 34)

Total assets

LIABILITIES AND EQUITY

Current liabilities

Bank indebtedness (note 16)

Accounts payable and accrued liabilities (note 18)

Current portion of term debt (note 21)

Customer advance (note 17)

Contract liability (note 19)

Onerous contract provision (note 22)

Non-current liabilities

Guarantee fee (note 16)

Term debt (notes 3 and 21)

Contract liability (note 19)

Onerous contract provision (note 22)

(Deficiency) Equity

Capital stock (note 24)

Contributed surplus

Accumulated other comprehensive income

Accumulated deficit

Total liabilities and deficiency

Nature of operations and going concern (note 1)

Subsequent events (note 35)

2019

2018

$4,316

17,625

26,162

12,933

2,136

63,172

2,738

14,075

46,328

1,827

$2,051

23,442

24,762

15,601

3,205

69,061

3,017

11,755

28,416

3,137

682

128,140

116,068

85,470

38,178

2,768

6,030

2,036

251

85,840

41,805

5,510

6,334

2,137

1,809

134,733

143,435

5,277

26,848

4,757

2,994

2,800

2,862

121

171,615

152,212

86,219

5,446

7,054

86,219

5,370

5,145

(142,194)

(132,878)

(43,475)

(36,144)

128,140

116,068

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

Approved by the Board of Directors on March 30, 2020

“David Levi”

David Levi
Chairman

“Ken Robertson”

Ken Robertson
Committee Chair, Audit & Corporate Governance Committee

Page 30

Avcorp Industries Inc.

annual report 2019

CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)

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

AS AT DECEMBER 31

Revenues (notes 3, 17, 20 and 33)

Cost of sales (notes 3, 22, and 33)

Gross profit

Administrative and general expenses

Office equipment depreciation

Net contract modification (notes 17, 20 and 22)

Net (gain) loss on claims (note 27)

Other losses (note 34)

Operating (loss) income

Finance costs – net (note 28)

Foreign exchange (gain) loss

Net loss on sale of equipment

(Loss) income before income tax

Income tax expense

(Loss) income for the year

Other comprehensive income gain (loss)

Total comprehensive (loss) income for the year

(Loss) income per share:

Basic (loss) income per common share (note 25)

Diluted (loss) income per common share (note 25)

2019

2018

$164,770

160,982

3,788

21,467

770

(17,974)

649

(1,124)

8,924

(843)

111

(9,316)

1,909

(7,407)

(0.03)

$170,710

155,753

14,957

23,466

623

(41,470)

5,421

26,917

5,774

770

20,373

(4,751)

15,622

0.06

Basic weighted average number of shares outstanding (000’s) (note 32)

368,118

345,651

Diluted weighted average number of shares outstanding (000’s) (note 32)

368,118

345,993

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

Page 31

Avcorp Industries Inc.

annual report 2019

CONSOLIDATED STATEMENTS OF CASH FLOWS

(expressed in thousands of Canadian dollars)

AS AT DECEMBER 31

Cash flows from (used in) operating activities

Net (loss) income for the year

Adjustment for items not affecting cash:

Interest expense

Depreciation

Development cost amortization

Intangible assets amortization

Non-cash financing cost accretion

Provision for unfavourable contracts

Provision for onerous contracts

Provision for doubtful accounts

Provision for obsolete inventory

Stock based compensation

Net termination of Contract

Net claim settlement

Loss on disposal of equipment

Unrealized foreign exchange

Loss on Investment in AVS-SYS

Loss on loan modification

Other items

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

Changes in non-cash working capital

Accounts receivable

Contract assets

Inventories

Prepayments and other assets

Accounts payable and accrued liabilities

Customer advance payable

Contract liability

Net cash from (used in) operating activities

Cash flows used in investing activities
Proceeds from sale of equipment

Purchase of equipment

Addition of developed software

Payments relating to development costs and tooling

Investment in AVS - SYS

Initial lease payments and other direct costs incurred

Net cash used in investing activities

Cash flows (used in) from financing activities

Proceeds from bank indebtedness

Repayment of bank indebtedness

Payment of interest

Proceeds from term debt

Repayment of term debt

Net cash (used in) from financing activities

Net increase (decrease) in cash

Net foreign exchange difference

Cash - Beginning of the year

Cash - End of the year

2019

2018

$(9,316)

$20,373

8,008

8,218

1,786

1,184

(1,665)

(1,425)

(1,177)

(3,539)

111

(1,196)

649

906

2,631

6,747

(1,673)

3,502

1,846

(3,324)

1,182

10,911

(904)

(4,116)

(102)

(5,023)

20,844

(18,010)

(5,049)

1,196

(2,591)

(3,610)

2,278

(13)

2,051

4,316

5,765

4,482

3,291

1,379

(4,617)

(9,115)

543

(928)

(445)

(41,470)

7,640

1,558

(97)

(11,632)

(2,922)

(6,108)

2,509

(805)

9,820

(2,660)

(4,231)

(16,029)

(1,429)

(371)

(6,410)

(551)

(8,761)

17,961

(2,862)

6,601

(294)

21,406

(3,384)

223

5,212

2,051

Supplementary Cash Flow Information (note 29).

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

Page 32

Avcorp Industries Inc.

annual report 2019

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

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

Capital Stock

Number of
Shares

Amount

Contributed
Surplus

Accumulated
Deficit

Accumulated
Other
Comprehensive
Income

Total
Deficiency

Balance at January 1, 2018

337,404,502

82,905

6,979

(153,251)

9,896

(53,471)

Issue of common shares

30,714,118

2,150

Transfer to share capital on exercise of stock options

Stock-based compensation expense

Cancellation of issued stock options

Unrealized currency loss on translation for the year

Net income for the year

1,164

(1,164)

195

(640)

2,150

195

(640)

(4,751)

20,373

Balance at December 31, 2018

368,118,620

86,219

5,370

(132,878)

5,145

(36,144)

Balance at December 31, 2018

368,118,620

86,219

5,370

(132,878)

5,145

(36,144)

Stock-based compensation expense

Unrealized currency gain on translation for the year

Net loss for the year

1,909

(9,316)

Balance at December 31, 2019

368,118,620

86,219

5,446

(142,194)

7,054

(43,475)

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, 2019
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2019

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, 2019 were authorized for issue in
accordance with a resolution of its Board of Directors on March 30, 2020.

The Company’s ability to continue as a going concern is dependent upon its ability to achieve improvements in operating results
in the future through additional revenue from defense related contracts, successfully negotiate extended terms with its creditors
including the past due date of its customer advance (note 17) and other debt related items, continue to raise adequate financing,
and mitigate the adverse impact of the COVID-19 virus. In assessing whether the going concern assumption was appropriate,
management considered all relevant information available about the future, which was at least, but not limited to, the 12-month
period from the date of this report.

The Company, in conjunction with its Board of Directors, is currently implementing various financing strategies which include:

•

On November 15, 2019, 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 agreements entered into on September 27,
2012 and subsequently on May 26, 2017. The loan agreement extends the maturity to June 30, 2021.

•

Interest rate for advances made up to the maximum of the allowable borrowing base of USD$23,000,000 revolving loan
less USD$2,300,000:

•

Royal Bank Prime (“RBP”) plus 1.50% per annum

Royal Bank US Base Rate (“RBUSBR”) plus 1.50% per annum

Banker’s Acceptance (“BA”) Equivalent Rate plus 3.00% per annum

LIBOR Rate plus 3.00% per annum

Interest rate for advances made on the additional USD$45,000,000 borrowing capacity up to USD$68,000,000.

•

RBP plus 0.00% per annum

RBUSBR plus 0.00% per annum

BA Equivalent Rate plus 0.875% per annum

Page 34

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2019
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2019

•

LIBOR Rate plus 0.875% per annum

•

Pursuant to the terms of the amending loan agreement, the Company is required to meet certain financial covenants
beginning in Q1 2020. In the event that the Company fails to meet the covenants, Panta Holdings B.V. and Panta Canada
B.V. shall be entitled to make cash injections for a fiscal quarter by way of loan or equity investment in Avcorp. Such
injections will be considered a positive addition to the calculation of the financial metrics for the purposes of determining
compliance with the covenants. In addition, the Company will have a cure period measured cumulatively for the failed
quarter and the subsequent quarter. There is uncertainty as to the ability of the company to meet its financial covenants
without the additional financial support from Panta Holdings B.V. and Panta Canada B.V.

On February 6, 2020, the Company entered into an amendment to its existing loan agreement with a Canadian Chartered
Bank whereby the following amendments were made:

•

The threshold of the financial covenants for the first and second fiscal quarters for the 2020 fiscal year were amended
in favor of the Company.

On November 15, 2019, the Company entered into a standby credit facility agreement (“2019 Panta Loan”) with Panta
Canada B.V which amended and restated the 2018 Panta Loan, as well as securing an additional $4,546,000
(USD$3,500,000) (note 21). As at December 31, 2019, the company had drawn $325,000 (USD $250,000) on this 2019
Panta Loan. The Company drew the remaining available amount in January 2020 of $4,238,000 (USD $3,250,000).

On March 2, 2020, the Company entered into an amendment to the standby credit facility (“2019 Panta Loan”) securing an
additional and drawing $2,598,000 (USD$2,000,000) (note 35). As at the date of this report the company is able to draw up
to an additional $Nil on the standby credit facility.

The Company ended the year with bank operating line utilization of $84,661,000 offset by $4,316,000 cash compared to
utilization of $85,840,000 with $2,051,000 cash on hand as at December 31, 2018. Based on net collateral provided to its
bank, the Company is able to draw up to an additional $335,000 (USD$258,000) on its operating line of credit as at December
31, 2019 (December 31, 2018: $1,059,000 (USD$776,000)). As at the date of this report the Company is able to draw up
to an additional $21,000 (USD$16,000) on its operating line of credit.

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. 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; such event occurred during the third quarter 2018. 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 face value
of the unamortized portion of the cash advance as at December 31, 2019 is $6,030,000 (USD$4,643,000) (December 31,
2018: $6,334,000 (USD$4,643,000)) (note 17).

•

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

•

The company reached a new labour agreement with the International Association of Machinists and Aerospace Workers
(Lodge 250) (the “Union”) at its Delta, British Columbia facility. The new six-year labour agreement was ratified by the Union
and will expire on March 31, 2025 bringing the company long term stability.

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

Page 35

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2019
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2019

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, except for financial equity investments that
have been measured at fair value. The consolidated financial statements are presented in Canadian dollars and all values are
rounded to the nearest thousand (000), except where otherwise indicated.

Certain prior year amounts have been reclassified to correct prior year classifications. On the consolidated balance sheets
$2,871,000 deposit has been reclassified from “Prepayments and other assets” current to “Prepayments and other assets” non-
current.

Accounting standards issued but not yet effective

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

Amendments to IAS 1 and IAS 8: Definition of Material

In October 2018, the International Accounting Standards Board (“IASB”) issued amendments to IAS 1 Presentation of Financial
Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors to align the definition of ‘material’ across
the standards and to clarify certain aspects of the definition. The new definition states that, ’Information is material if omitting,
misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial
statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.’
The standard is effective for annual periods beginning on or after January 1, 2020, with early application permitted. The
amendments to the definition of material is not expected to have a significant impact on the Company’s consolidated financial
statements.

Amendments to IAS 1: Classification of Liabilities as Current or Non-Current

In January 2020, the IASB issued Classification of Liabilities as Current or Non-current (Amendments to IAS 1). The amendments
aim to promote consistency in applying the requirements by helping companies determine whether, in the statement of financial
position, debt and other liabilities with an uncertain settlement date should be classified as current (due or potentially due to be
settled within one year) or non-current. The amendments include clarifying the classification requirements for debt a company
might settle by converting it into equity. The amendments are effective for annual reporting periods beginning on or after January
1, 2022, with earlier application permitted.

3. Significant Accounting Policies

The significant accounting policies and methods of computation used in the preparation of these consolidated financial statements
are described below. The 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,
2019. 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.

Page 36

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2019
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2019

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.

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 statements 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 statements 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.

Financial instruments

a) Financial assets

Financial assets include, in particular, cash, accounts receivables and equity investments.

Financial assets are classified, at initial recognition, as subsequently measured at amortized cost, fair value through other
comprehensive income, and fair value through profit or loss. The classification of financial assets at initial recognition depends
on the financial asset’s contractual cash flow characteristics. With the exception of accounts receivables that do not contain
a significant financing component or for which the Company has applied the practical expedient, the Company initially
measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss,
transaction costs. Accounts receivables that do not contain a significant financing component or for which the Company has
applied the practical expedient are measured at the transaction price determined under IFRS 15. Refer to the accounting
policies for Revenue from contracts with customers.

The Company measures financial assets at amortized cost if the financial asset is held within a business model with the
objective to hold financial assets in order to collect contractual cash flows and the contractual terms of the financial asset
give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount
outstanding. Financial assets at amortized cost are subsequently measured using the effective interest method and are
subject to impairment. Gains and losses are recognized in profit or loss when the asset is derecognized, modified or impaired.

The Company’s financial assets at amortized cost includes accounts receivables.

Page 37

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2019
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2019

The Company recognizes an allowance for expected credit losses (ECLs) for all debt instruments not held at fair value through
profit or loss. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and
all the cash flows that the Company expects to receive, discounted at an approximation of the original effective interest rate.
The expected cash flows will include cash flows from the sale of collateral held or other credit enhancements that are integral
to the contractual terms. For accounts receivables and contract assets, the Company applies a simplified approach in
calculating ECLs. Therefore, the Company does not track changes in credit risk, but instead recognizes a loss allowance
based on lifetime ECLs at each reporting date.

The Company has established a provision matrix that is based on its historical credit loss experience, adjusted for forward-
looking factors specific to the debtors and the economic environment. The provision for ECL rates is based on days past due
for groupings of various customer segments that have similar loss patterns (i.e., by customer type and rating). The
assessment of the correlation between historical credit loss pattern, forecast economic conditions and ECLs is a significant
estimate. The amount of ECLs is sensitive to changes in circumstances and of forecast economic conditions. The Company’s
historical credit loss experience and forecast of economic conditions may also not be representative of customer’s actual
default in the future.

Equity investments in non-listed companies are classified and measured as equity instruments at fair value through profit or
loss. Impairment losses were recognized in profit or loss for these investments in the current year (Note 34).

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, customer advance guarantee
fee, 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.

Page 38

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2019
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2019

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.

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.

Page 39

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2019
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2019

•

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.

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”) the Company assumed existing long-term and short-term customer
contracts. Based on 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 unfavourable 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.

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 for the year ended December 31, 2018 is the non-cash amortization of acquired liabilities recognized as fair
value adjustments through purchase accounting from the acquisition of ACF. For the year ended December 31, 2019, the Company
recognized net amortization of unfavourable contract liabilities of $Nil (December 31, 2018: $4,617,000). The balance of the
liability as of December 31, 2019 is $Nil (December 31, 2018: $Nil) and, is based on a units of production basis over the expected
life of the contracts. The unfavourable contract liability was amortized on a units-of-production basis over the expected lives of
the contracts.

During 2018, production requirements associated with the unfavourable contract were redirected to another supplier, giving rise
to the full amortization of the unfavourable contract liability into income. This has been recorded in Consolidation Statements of
Income and Comprehensive Income as a contract modification in the amount of $39,982,000 (note 20).

Revenue

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.

Revenue is recognized either at a point in time or over time, as the Company satisfies performance obligations by transferring
the promised goods or services to its customers. An asset is transferred as the customer obtains control of the asset. If a
performance obligation is not satisfied over time, the Company satisfies the performance obligation at a point in time.

The Company transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognizes
revenue over time, if one of the following criteria is met:

•

the customer simultaneously receives and consumes the benefits provided by the Company's performance as the
Company performs;

the Company's performance creates or enhances an asset (for example, work in progress) that the customer controls
as the asset is created or enhanced; or

the Company's performance does not create an asset with an alternative use to the Company and the Company has an
enforceable right to payment for performance completed to date.

Page 40

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2019
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2019

The Company transfers control of the goods over time as evidenced either by contractual termination clauses or by our rights to
payment for work performed to date plus a reasonable profit to deliver products that do not have an alternative use to the
Company. The Company uses the input method to measure the satisfaction of performance obligations over time. The inputs are
labour hours expended and cost of materials consumed relative to the total expected inputs to the satisfaction of that performance
obligation.

Determining whether a contract transfers control of the goods over time requires management to consider the terms of the
contract, as well as any laws that apply to the contract, and make judgements as to (1) whether the asset created by the
Company's performance does not have an alternative use to the Company if the Company is either restricted contractually from
readily directing the asset for another use during the creation or enhancement of that asset or limited practically from readily
directing the asset in its completed state for another use and (2) evaluating whether it has an enforceable right to payment for
performance completed to date.

The Company transfers control of the goods at a point in time evidenced when the delivery has occurred.

Revenue is measured based on the price specified in the sales contract.

Contract Assets include unbilled amounts typically resulting from sales under long-term contracts when over time method of
revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer, and right to payment is not
just subject to passage of time. Amounts may not exceed their net realizable value. Contract assets are current in nature.

Contract liabilities consist of advance payments and billings in excess of revenue recognized. Advance payments and billings in
excess of revenue recognized are classified as current or non-current based on the timing of when revenue is expected to be
recognized. This period of contract liabilities realization can extend, dependent on the amortization of the related costs, over one
or more fiscal years. Certain program inventories have been funded by a customer, whereby the associated contract liability will
be recorded as revenue upon delivery of units of production.

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.

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.

Page 41

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2019
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2019

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 income (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

Prior to the adoption of IFRS 16 – Leases in 2019, 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.

Adoption of IFRS 16 - Leases

IFRS 16 supersedes IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases-
Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. The standard sets out the
principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases
under a single on-balance sheet model.

The Company adopted IFRS 16 using the modified retrospective method of adoption with the date of initial application of January
1, 2019. Under this method, the standard is applied retrospectively with the cumulative effect of initially applying the standard
recognized at the date of initial application. The Company elected to use the transition practical expedient allowing the standard
to be applied only to contracts that were previously identified as leases applying IAS 17 and IFRIC 4 at the date of initial
application. As part of the initial application of IFRS 16, the Company applied the available practical expedients wherein it:

•

Used a single discount rate to a portfolio of leases with reasonably similar characteristics

Applied the short-term leases exemptions to leases with lease term that ends within 12 months at the date of initial
application (“short-term leases”)

Applied the recognition exemptions to lease contracts for which the underlying asset is of low value (“low-value assets”)

Used hindsight in determining the lease term where the contract contains options to extend or terminate the lease

Excluded the initial direct costs from the measurement of the right-of-use asset at the date of initial application

The Company did not change the initial carrying amounts of recognized assets and liabilities at the date of initial application for
leases previously classified as finance leases under IAS 17. The Company recognized right-of-use assets and lease liabilities for
those leases previously classified as operating leases, except for short-term leases and leases of low-value assets. The right-of-
use assets were recognized based on the amount equal to the lease liabilities, adjusted for any related prepaid and accrued lease
payments previously recognized. Lease liabilities were recognized based on the present value of the remaining lease payments,
discounted using the incremental borrowing rate at the date of initial application.

Based on the foregoing, as at January 1, 2019:

•

Right-of-use assets of $13,755,000 (included in Property, Plant and Equipment) were recognized. This includes the lease
assets recognized previously under finance leases of $666,000 that were classified in machinery and equipment and computer
hardware and software.

Page 42

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2019
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2019

•

Additional lease liabilities of $12,765,000 (included in Term Debt) were recognized.

Prepayments of $324,000 related to previous operating leases were derecognized and included in the right-of-use assets.

Impact to the consolidated balance sheet as follows:

Property, plant and equipment, net book amount

$28,416

$13,089

$41,505

Prepayments and other assets

Lease liability (current)

Lease liability (non-current)

6,222

(263)

(324)

(986)

5,898

(1,249)

(159)

(11,779)

(11,938)

As reported
December 31, 2018

Adjustment

Revised opening
balance
January 1, 2019

The lease liabilities as at January 1, 2019 can be reconciled to the operating lease commitments as of December 31, 2018 as
follows:

Operating lease commitments as at December 31, 2018

Less: Commitments relating to short-term leases

Less: Commitments relating to leases of low-value assets

Less: Commitments relating to property tax and operating cost

Add: Payments in optional extension periods not recognized as at December 31, 2018

Lease payments included in the initial measurement of lease liability

Weighted average incremental borrowing rate as at January 1, 2019

Discounted operating lease commitments at January 1, 2019

Add: Commitments relating to leases previously classified as finance leases

Lease liability at January 1, 2019

$26,950

(1,800)

(10)

(6,576)

265

18,829

9.00%

12,765

422

13,187

Set out below are the new accounting policies of the Company upon adoption of IFRS 16, which have been applied from the date
of initial application:

Right-of-use assets

The Company recognizes right-of-use assets at the commencement date of the lease. Right-of-use assets are measured at cost,
less any accumulated depreciation and impairment losses, and adjusted for any re-measurement of lease liabilities. The cost of
right-of-use assets includes the amount of lease liabilities recognized, initial direct costs incurred, and lease payments made at
or before the commencement date less any lease incentives received. Unless the Company is reasonably certain to obtain
ownership of the leased asset at the end of the lease term, the recognized right-of-use assets are depreciated on a straight-line
basis over the shorter of its estimated useful life and the lease term. Right-of-use assets are subject to impairment.

Lease liabilities

In calculating the present value of lease payments, the Company uses the incremental borrowing rate at the lease commencement
date if the interest rate implicit in the lease is not readily determinable. The incremental borrowing rate is the rate of interest
that the Company would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an
asset of a similar value to the lease asset in a similar economic environment. After the commencement date, the amount of lease
liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying
amount of lease liabilities is re-measured if there is a modification, a change in the lease term, a change in the in-substance fixed
lease payments or a change in the assessment to purchase the underlying asset.

Page 43

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2019
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2019

Short-term leases and leases of low-value assets

The Company applies the short-term lease recognition exemption to its short-term leases that have a lease term of 12 months
or less from the commencement date and do not contain a purchase option. It also applies the lease of low-value assets
recognition exemption to leases of assets that are considered of low value. Lease payments on short-term leases and leases of
low-value assets are recognized as expense on a straight-line basis over the lease term.

Significant judgement in determining the lease term of contracts with renewal options

The Company determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option
to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is
reasonably certain not to be exercised. The Company considers all relevant factors that create an economic incentive for it to
exercise the renewal. After the commencement date, the Company reassesses the lease term if there is a significant event or
change in circumstances that is within its control and affects its ability to exercise (or not to exercise) the option to renew.

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.

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 of the Company’s CGU.
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 and debt classification: Management assesses the Company’s ability to continue as a going concern at each
reporting date, using quantitative and qualitative information available. Management also determines the appropriate
classification of its debt arrangements based on terms of the various agreements based on the company’s financial condition.
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 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 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.

During 2018 production requirements associated with the unfavourable contract were redirected to another supplier, giving
rise to the full amortization of the unfavourable contract liability and the onerous contract provision into income. In addition,
the customer advance was adjusted to its face value through income. This has been recorded in the 2018 Annual Consolidated
Statements of Income (Loss) and Comprehensive Income (Loss) as a contract modification in the amount of $41,470,000.
Uncertainties exist as to ultimate outcome of a formal contract termination. While the Company believes that it has fulfilled
all of its obligations under the contract, it is possible claims may be levied against the Company. The Company has assessed
such possible claims as not probable.

Page 44

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2019
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2019

•

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.

On a periodic basis the Company reviews its plant capacity and estimates the portion of its under-utilized overhead
expenditures. The Company has expensed $7,004,000 of overhead costs during the current year (December 31, 2018:
$6,469,000) 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. 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 total onerous contract provision for the year ended December 31, 2019 is $251,000 (December 31, 2018:
$1,930,000).

• While a formal claim has yet to be levied by the customer, the Company has provisioned for a claim asserted by a customer

in the amount of $7,273,000 as at December 31, 2019 (December 31, 2018: $7,640,000).

•

Right of use asset and lease liability: On January 1, 2019, the Company transitioned to IFRS 16 and recognized a right of
use asset and lease liability. These values use judgement in determining lease terms such as extension option and discount
rate used. In the case where incremental borrowing rate is used, the Company estimates the incremental borrowing rate
based on the lease term, collateral assumptions, and the economic environment in which the lease is denominated.

The company has provisioned USD$1,350,000 for a legal action due to certain employment practices at the Gardena facility.

Page 45

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2019
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2019

5. Expenses by Nature

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

Expenses by nature:

Raw materials, purchased parts and consumables

Salary, wages and benefits

Depreciation

Contracted services and consulting

Utilities

Legal and Audit Fees

Transportation

Rent

Office equipment rental/maintenance

Amortization of development costs

Other expenses and conversion of costs into inventory

Amortization of intangible assets

Plant equipment rental and maintenance

Travel costs

Insurance

Royalties

Office supplies

Bad debt expense

Change in onerous contracts provision

2019

2018

$84,377

68,816

8,218

4,605

3,592

2,382

2,273

1,893

1,837

1,786

1,481

1,184

892

733

606

193

188

(172)

(1,665)

183,219

$83,142

74,707

4,482

4,862

3,713

2,774

2,501

4,499

2,346

3,291

(3,126)

1,379

1,652

1,178

795

179

291

292

(9,115)

179,842

6. Capital Risk Management

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 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.

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.

Page 46

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2019
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2019

b) Currency Risk

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 gain recorded for the year ended December 31, 2019 is $843,000
(December 31, 2018: $770,000 loss).

The Company had the following US dollar denominated balances:

AS AT DECEMBER 31

Bank cash position

Accounts receivable

Accounts payable

Customer advance

Bank indebtedness

Term loan

2019

2018

USD$2,639

USD$1,050

9,824

6,948

4,643

65,184

4,273

12,996

8,838

4,643

62,924

3,633

With other variables unchanged, each $0.10 strengthening (weakening) of the CAD against the USD would result in an
increase (decrease) of approximately $6,859,000 in net income for the year ended December 31, 2019 as a result of holding
a net liability position in USD as at December 31, 2019.

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 Defence, 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 85.6% (December 31, 2018: 90.8%) 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, 2019. 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

Page 47

2019

$1,780

336

(16)

(1,745)

355

2018

$1,237

630

(87)

1,780

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2019
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2019

The following table provides aged trade receivables:

AS AT DECEMBER 31

Current

31 – 60 days

61 – 90 days

Over 90 days

Total

d) Liquidity Risk

2019

$10,221

3,507

2,055

1,137

16,920

2018

$10,193

6,540

3,743

1,232

21,708

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. Term debt repayments are as outlined in
note 21.

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.

Bank indebtedness (note 16)

Term debt (note 21)

Trade payables (note 18)

Payroll related liabilities (note 18)

Boeing advance (note 17)

Guarantee fee (note 16)

Accrued interest (note 18)

Other accruals (note 18)

Bank indebtedness (note 16)

Term debt (note 21)

Trade payables (note 18)

Payroll related liabilities (note 18)

Boeing advance (note 17)

Guarantee fee (note 16)

Accrued interest (note 18)

Other accruals (note 18)

Interest Rate Risk

Less than 3
months

3 months to 1
year

December 31, 2019

1 – 5 years

Over 5 years

$85,470

593

23,201

4,952

6,030

356

176

2,175

19,556

5,277

7,292

Less than 3
months

3 months to 1
year

1 – 5 years

Over 5 years

December 31, 2018

$85,840

28,225

4,707

6,334

423

354

385

5,779

2,994

2,077

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 of USD$23,000,000 revolving loan less
USD$2,300,000:

•

Royal Bank Prime (“RBP”) plus 1.50% per annum

Royal Bank US Base Rate (“RBUSBR”) plus 1.50% per annum

Banker’s Acceptance (“BA”) Equivalent Rate plus 3.00% per annum

Page 48

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2019
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2019

•

LIBOR Rate plus 3.00% per annum

Interest rate for advances made on the additional USD$45,000,000 borrowing capacity up to USD$68,000,000.

•

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

There is uncertainty as to the continued use of LIBOR in the future. LIBOR is the subject of recent national, international and
other regulatory guidance and proposals for reform. These reforms and other pressures may cause LIBOR to be eliminated
or to perform differently than in the past. The consequences of these developments cannot be entirely predicted but could
include an increase in the cost of our variable rate indebtedness and obligations.

Drawdown under the USD$45,000,000 additional borrowing capacity is supported by a Guarantee provided by a Guarantor.
Panta Holdings B.V. provided guarantee to the Guarantor in the maximum payment of USD$10,000,000 if the bank draws
on the Guarantee in whole or in part.

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 $85,331,000 (USD $65,700,000) of which $84,661,000 is utilized as at
December 31, 2019 (December 31, 2018: $85,840,000). 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, 2019, with other variables
unchanged, a 1% change in the base borrowing rate would have an $847,000 (December 31, 2018: $858,000) 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
$335,000 (USD $258,000) on its operating line of credit as at December 31, 2019 (December 31, 2018: $1,059,000
(USD$776,000)). As at the date of this report the Company is able to draw up to an additional $21,000 (USD $16,000) (note
16) on its operating line of credit.

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

Price Risk

Certain of the Company’s sales contracts contain derivative financial instruments to reduce exposure to price risk associated
with its revenues. The price adjustment clause within these sales contracts was not recorded as it does not produce a
significant amount to be recorded.

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
other comprehensive income and fair value through profit and loss, financial liabilities at fair value through profit or loss,
and other financial liabilities and financial assets at amortized cost.

Page 49

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2019
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2019

As at December 31, 2019 and December 31, 2018, the Company’s financial assets and liabilities are categorized as follows:

AS AT DECEMBER 31

Financial Assets

Cash

Accounts receivable

Investment in AVS-SYS

Financial Liabilities

Bank indebtedness

Accounts payable

Term debt

Customer advance

Guarantee fee

Amortized
cost

2019

Fair value
through
profit or
loss

Total

Amortized
cost

2018

Fair value
through
profit or
loss

Total

$4,316

17,625

85,470

38,178

29,616

6,030

5,277

$4,316

17,625

$2,051

23,442

85,470

38,178

29,616

6,030

5,277

85,840

41,805

8,310

6,334

2,994

682

$2,051

23,442

682

85,840

41,805

8,310

6,334

2,994

8. Fair Value Measurement

As at December 31, 2019 and December 31, 2018, the fair values of cash, accounts receivable, accounts payable, and bank
indebtedness approximated their carrying values because of the short-term nature of these instruments.

AS AT DECEMBER 31

2019

2018

Financial asset

Investment in AVS-SYS (level 3)

Financial liabilities

Term debt (level 2)

Customer advance (level 2)

Guarantee fee (level 2)

Fair value hierarchy

Carrying value

Fair value

Carrying value

Fair value

$682

29,615

6,030

5,277

29,615

6,030

5,277

8,310

6,334

2,994

8,310

6,334

2,994

The Company’s financial assets 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.

9. Accounts Receivable

AS AT DECEMBER 31

Trade receivables

Input tax credits

Accrued receivables

2019

2018

$16,920

623

17,625

$21,708

1,659

23,442

Page 50

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2019
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2019

The average trade receivables days outstanding is 37 days as at December 31, 2019 (December 31, 2018: 46 days).

The accounts receivables are pledged as security under the Company’s operating line of credit (note 16).

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

AS AT DECEMBER 31

US dollar

Canadian dollar

10. Contract Assets

2019

2018

USD$10,935

USD$14,592

3,423

3,536

Contract assets include unbilled amounts typically resulting from sales under long-term contracts when over time method of
revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer, and right to payment is not
just subject to the passage of time. Amounts may not exceed their net realizable value. Contract Assets are released when the
customer is invoiced and is recorded to accounts receivable. Contract assets are current in nature.

The contract assets are pledged as security under the Company’s operating line of credit (note 16).

AS AT DECEMBER 31

Contract asset

11. Inventories

AS AT DECEMBER 31

Raw materials

Work-in-progress

Finished products

Inventory obsolescence

2019

2018

$26,162

$24,762

2019

$9,222

7,203

571

(4,063)

12,933

2018

$11,164

9,231

890

(5,684)

15,601

The amount of inventory expensed in cost of sales during the year ended December 31, 2019 amounted to $152,192,000
(December 31, 2018: $147,038,000).

During the year ended December 31, 2019, $431,000 (December 31, 2018, $466,000) was recognized as an expense for
inventories carried at net realizable value. This is recognized in cost of sales.

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

The inventories are pledged as security under the Company’s operating line of credit (note 16).

Page 51

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2019
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2019

12. Prepayments and Other Assets

AS AT DECEMBER 31

Deposits on material purchases

Prepaid insurance

Prepaid IT security maintenance and licenses

Prepaid property tax

Prepaid other

Less: Current portion

Non-current portion

13. Development Costs

2019

$543

3,229

190

537

375

4,874

2,136

2,738

2018

$934

3,351

641

645

651

6,222

3,205

3,017

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

Foreign exchange

FOR THE YEAR ENDED DECEMBER 31

Cost

Accumulated amortization

Net book amount

2019

$11,755

4,116

(1,786)

(10)

14,075

2019

$ 27,057

(12,982)

14,075

2018

$8,623

6,410

(3,291)

11,755

2018

$22,951

(11,196)

11,755

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.

Page 52

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2019
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2019

14. Property, Plant and Equipment

Building

Machinery
and
equipment

Computer
hardware and
software

Leasehold
improvements

Total

Year ended December 31, 2018

Opening net book amount

Additions

Depreciation charge

Currency translation adjustment

Net book amount at December 31, 2018

IFRS 16 transition (note 3)

12,205

1,443

(3,667)

1,550

25,291

594

Net book amount at January 1, 2019

12,205

25,885

At January 1, 2019

Cost at December 31, 2018

IFRS 16 transition at January 1, 2019 (note 3)

Cost

Accumulated depreciation

12,205

59,907

594

60,501

$25,965

$2,028

$1,325

$29,318

227

(473)

113

1,895

290

2,185

9,676

290

9,966

139

1,809

(342)

(4,482)

108

1,771

1,230

28,416

13,089

1,230

41,505

2,962

72,545

13,089

2,962

85,634

(34,616)

(7,781)

(1,732)

(44,129)

Net book amount at January 1, 2019

12,205

25,885

2,185

1,230

41,505

Year ended December 31, 2019

Opening net book amount

Additions

Disposals – cost

Disposals – accumulated depreciation

Depreciation charge

Currency translation adjustment

12,205

12,759

(3,414)

(225)

25,885

740

(587)

377

(3,967)

(832)

Closing net book amount

21,325

21,616

2,185

867

(615)

(101)

2,336

1,230

41,505

14,439

(587)

377

(222)

(8,218)

(30)

(1,188)

1,051

46,328

At December 31, 2019

Cost

Accumulated depreciation

Net book amount

24,694

(3,369)

59,409

(37,793)

10,709

(8,373)

2,992

97,804

(1,941)

(51,476)

21,325

21,616

2,336

1,051

46,328

The Company has $318,000 in commitments at December 31, 2019 (December 31, 2018: $580,000) to purchase property, plant
and equipment in 2020.

Page 53

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2019
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2019

The Company leases various assets including buildings, equipment, and computer hardware and software. The following table
summarizes the changes in right-of-use assets within Property, plant and equipment:

Leased assets as at December 31, 2018 reclassified as right-of-use assets

Building

Machinery
and
equipment

Computer
hardware and
software

at January 1, 2019

IFRS 16 transition

January 1, 2019

Additions

Depreciation charge

Currency translation adjustment

At December 31, 2019

12,205

12,759

(3,471)

(225)

21,268

$507

594

1,101

(238)

(25)

838

$159

290

449

776

(209)

(2)

Total

$666

13,089

13,755

13,535

(3,918)

(252)

1,014

23,120

On January 25, 2019, the Company and its subsidiary Avcorp Composite Fabrication Inc. (the “Avcorp Parties”) entered into an
agreement with HITCO Carbon Composites, Inc., SGL Carbon, LLC, and SGL Carbon SE (the “SGL parties”) and a customer to
settle all claims related to alleged deficiencies in HITCO’s non-destructive inspection processes, a mutual release amount the
Avcorp Parties, SGL Parties and a customer and other business matters including a lease renewal (note 27). The Gardena Facility’s
lease was renewed resulting in the addition of $12,759,000 to the right-of-use assets.

15. Intangibles

Year ended December 31, 2018

Opening net book amount

Additions

Amortization charge

Currency translation adjustment

Closing net book amount

At December 31, 2018

Cost

Accumulated depreciation

Net book amount

Year ended December 31, 2019

Opening net book amount

Additions (note 27)

Amortization charge

Currency translation adjustment

Closing net book amount

At December 31, 2019

Cost

Accumulated depreciation

Net book amount

Lease

Customer
contract –
re-compete

Developed
Software

$225

(233)

737

(737)

702

(702)

$3,086

(1,062)

214

2,238

5,593

(3,355)

2,238

(1,088)

(85)

1,065

5,325

(4,260)

1,065

$553

371

(84)

899

988

(89)

899

(96)

(41)

762

941

(179)

762

Total

$3,864

371

(1,379)

281

3,137

7,318

(4,181)

3,137

(1,184)

(126)

1,827

6,968

(5,141)

1,827

Page 54

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2019
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2019

16. Bank Indebtedness

• Maximum availability under the Loan agreement cannot exceed USD $68,000,000 less USD $2,300,000 until June 30, 2021.
Drawdowns under the USD$45,000,000 borrowing capacity are supported by a major and material customer of the Company
(the “Guarantor”) by way of a guarantee (the “Guarantee”). On November 15, 2019, Panta Holdings B.V., the holding
company of Panta Canada B.V. which is Avcorp’s majority shareholder, entered into a guarantee agreement with the
Guarantor. Pursuant to the guarantee agreement, Panta Holdings B.V. provided guarantee to the Guarantor in the maximum
payment of USD$10,000,000 if the bank draws on the Guarantee in whole or in part.

•

Interest rate for advances made up to the maximum of the allowable borrowing base of USD$23,000,000 revolving loan less
USD$2,300,000:

•

Royal Bank Prime (“RBP”) plus 1.50% per annum

Royal Bank US Base Rate (“RBUSBR”) plus 1.50% per annum

Banker’s Acceptance (“BA”) Equivalent Rate plus 3.00% per annum

LIBOR Rate plus 3.00% per annum

Interest rate for advances made on the additional USD$45,000,000 borrowing capacity up to USD$68,000,000.

•

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

Pursuant to the terms of the amending loan agreement, the Company is required to meet certain financial covenants
beginning in Q1 2020. In the event that the Company fails to meet the covenants, Panta Holdings B.V. and Panta Canada
B.V. shall be entitled to make cash injections for a fiscal quarter by way of loan or equity investment in Avcorp. Such
injections will be considered a positive addition to the calculation of the financial metrics for the purposes of determining
compliance with the covenants. In addition, the Company will have a cure period measured cumulatively for the failed
quarter and the subsequent quarter. There is uncertainty as to the ability of the company to meet its financial covenants
without the additional financial support from Panta Holdings B.V. and Panta Canada B.V.

•

On February 6, 2020, the Company entered into an amendment to its existing loan agreement with a Canadian Chartered
Bank whereby the following amendments were made:

•

The threshold of the financial covenants for the first and second fiscal quarters for the 2020 fiscal year were amended
in favor of the Company.

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 recorded a net loss on modification of bank indebtedness of $906,000 (2018: $Nil) as a result of executing the
amending agreement on November 15, 2019.

Page 55

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2019
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2019

FOR THE YEAR ENDED DECEMBER 31

Opening balance

Add: Drawdowns on bank indebtedness

Add: Net Modification loss

Less: Repayment of loans

Less: Foreign exchange (gain) loss

Ending balance

2019

$85,840

20,844

906

(18,010)

(4,110)

85,470

2018

$61,283

17,961

6,596

85,840

The carrying amount of accounts receivable pledged as security under the Company’s operating line of credit as at December 31,
2019 is $13,121,000 (December 31, 2018: $13,480,000). The inventory and contract asset pledged as security under the
Company’s operating line of credit as at December 31, 2019 is $22,185,000 (December 31, 2018: $22,017,000).

17. Customer advance

During the third quarter 2018, production requirements associated with the unfavourable contract were redirected to another
supplier, giving rise to the full amortization of the unfavourable contract liability of $39,982,000 (note 20), full amortization of
the associated onerous contract provision of $2,728,000 (note 22) and revaluation of the customer advance to its unamortized
face value of $1,240,000. This has been recorded in 2018 as a net contract modification in the amount of $41,470,000.

Uncertainties exist as to the ultimate outcome of a formal contract termination. While the Company believes that it has fulfilled
all of its obligations under the contract, it is possible claims may be levied against the Company. The Company has assessed such
possible claims as not probable.

The customer advance was recorded at its fair value on December 18, 2015 in the amount of $18,953,000. The Company
amortized into revenue $nil of the customer advance during the year ended December 31, 2019. The remaining unamortized
customer advance has been recorded at its face value to reflect the amount due and is non-interest bearing. The face value of
the unamortized portion of the customer advance as at December 31, 2019 is USD$4,643,000 (December 31, 2018 is
USD$4,643,000).

FOR THE YEAR ENDED DECEMBER 31

Opening balance

Amortization

Contract modification

Foreign exchange

18. Accounts Payable and Accrued Liabilities

AS AT DECEMBER 31

Trade payables

Claims provision (note 27)

Payroll-related liabilities

Restoration provision

Accrued interest

Other

Page 56

2019

$6,334

(304)

6,030

2019

$23,201

9,027

4,952

466

356

176

2018

$7,227

(2,660)

1,240

527

6,334

2018

$28,225

7,640

4,707

456

423

354

38,178

41,805

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2019
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2019

19. Contract Liability

FOR THE YEAR ENDED DECEMBER 31

Opening balance

IFRS 15 opening adjustment

Additions

Realized

Less: Current portion

Non-current portion

2019

$4,999

16,399

(14,605)

6,793

2,036

4,757

2018

$17,241

(9,341)

13,125

(16,026)

4,999

2,137

2,862

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 contract 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 and as costs are incurred.

During 2018 production requirements associated with the unfavourable contract were redirected to another supplier, giving rise
to the full amortization of the unfavourable contract liability into income. This has been recorded in Consolidated Statements of
Income and Comprehensive Income as a contract modification in the amount of $39,982,000.

As at December 31, 2019, the remaining unamortized unfavourable contract liability amounted to $Nil (December 31, 2018:
$Nil).

FOR THE YEAR ENDED DECEMBER 31

Opening net book amount

IFRS 15 opening adjustment

Amortization

Contract modification

Foreign exchange

Closing net book amount

Less: Current portion

Non-current portion

2018

$44,460

(1,578)

(4,617)

(39,982)

1,717

Page 57

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2019
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2019

21. Term Debt

AS AT DECEMBER 31

Lease liabilities(a)

Term loans (b) (c)

SADI (d)

Less: Current portion

Non-current portion

a) Lease Liabilities

2019

$20,493

5,550

3,573

29,616

2,768

26,848

2018

$422

4,986

2,902

8,310

5,510

2,800

There are various lease liabilities that have a weighted average interest rate of 9.0% per annum (2018: 8.98%). The leases
are secured by way of a charge against specific assets. The leases are repayable in installments over periods up to 10 years.

The Company adopted IFRS 16 using the modified retrospective method of adoption on January 1, 2019. The additional lease
liability recognized on application was $12,765,000 (note 3).

The table below categorizes the lease liability into relevant maturity periods based on the remaining periods from the
consolidated statement of financial position date to the maturity date.

Lease liability

b) Term Loan

December 31, 2019

Within 1 Year

Between 1 – 5
Years

Over 5 Years

$2,415

$12,598

$5,480

On August 24, 2018, Avcorp entered into a non-revolving term loan agreement (“2018 Panta loan”) with Panta Canada B.V.
(“Panta”) in the principal amount of USD$3,500,000.

On November 15, 2019, the Company entered into a standby credit facility agreement (“2019 Panta Loan”) with Panta
Canada B.V which amended and restated the 2018 Panta Loan, as well as securing an additional $4,546,000
(USD$3,500,000). As at December 31, 2019, the company had drawn $325,000 (USD $250,000) on this 2019 Panta Loan.

Panta Canada B.V. is Avcorp’s majority shareholder owning approximately 71.2% of the issued and outstanding common
shares. 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 Avcorp, is the sole shareholder of Panta Holdings B.V.

•

The loan is subordinated to existing security agreements, except that in the event that Avcorp sells its wholly-owned
subsidiary, Comtek Advanced Structures Ltd., Avcorp shall pay to Panta an amount up to the indebtedness then
outstanding under the loan, subject to any priority payment required by the bank indebtedness and provided there does
not then exist an event of default under the Senior Loan Agreement.

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. If either an event of default occurs and is continuing or the indebtedness is not repaid in full on the
maturity date, the interest rate in such period shall increase to the rate of 15% per annum and all outstanding
indebtedness, including unpaid interest, shall continue to accrue interest at such increased rate of interest from and
after the maturity date until paid in full.

The maturity date is the earlier of: (i) the date upon which, for any reason, the outstanding principal balance of the
operating credit facility established under the Senior Loan Agreement becomes due and owing; (ii) June 30, 2023; and
(iii) the date on which there is an acceleration of the loan as a result of a written demand by Panta following the
occurrence and during the continuance of an uncured event of default.

Upon the happening of any event of default, Panta may at its option: (i) declare that the indebtedness has become
immediately due and payable; and (ii) declare that the indebtedness has become immediately due and payable and
elect to convert all or part of the indebtedness into common shares of Avcorp at an exercise price equivalent to the then
market price at the time of conversion which shall not exceed $0.15 per common share.

As at December 31, 2019, the Company had drawn $328,000 (USD$250,000) on the 2019 Panta Loan.

Page 58

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2019
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2019

•

The Company drew the remaining available amount on the 2019 Panta Loan in January 2020 of $4,238,000
(USD$3,250,000) (note 35).

On March 2, 2020, the Company entered into an amendment to the standby credit facility (“2019 Panta Loan”) securing
an additional and drawing $2,598,000 (USD$2,000,000) (note 35). As at the date of this report the company is able to
draw up to an additional $Nil on the standby credit facility.

FOR THE YEAR ENDED DECEMBER 31

Opening balance

Add: Draw down

Add: Accrued interest

Less: Foreign exchange (gain) loss

c) Term Loan

2019

$4,956

328

518

(252)

5,550

2018

$4,572

175

209

4,956

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, 2019 is $nil (December 31, 2018: $30,000).

d) 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;

Annual repayments are to occur over a 15-year term, commencing four months following the 2018 fiscal year end with
subsequent annual repayments to be paid within four months following the Company’s then fiscal year ends; and

Amounts repayable are unsecured.

$3,573,000 was drawn on this facility as at December 31, 2019 (December 31, 2018: $2,902,000). 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

Less: Repayments

Ending Balance

22. Onerous Contract Provision

2019

$2,902

155

868

(352)

3,573

2018

$1,715

1,092

2,902

The Company entered into production contracts in the ordinary course of business. The unavoidable costs of meeting the
obligations under certain of these contracts exceed the associated expected future net benefits; consequently, an onerous contract
provision has been recognized. The calculation of this provision involves the use of estimates. The onerous contract provision is
calculated by taking the expected future costs that will be incurred under the contracts and deducting any estimated revenues.
The onerous contract provision for the year ended December 31, 2019 is $251,000 (December 31, 2018: $1,930,000).

Page 59

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2019
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2019

FOR THE YEAR ENDED DECEMBER 31

Opening balance

Additions

Amortization

Contract modification (note 17)

Foreign exchange

Balance

Less: Current portion

Non-current portion

2019

$1,930

178

(1,843)

(14)

251

2018

$13,366

(9,115)

(2,728)

407

1,930

1,809

121

23. Obligations, Commitments and Contingent Liabilities

The Company has $318,000 in commitments at December 31, 2019 (December 31, 2018: $580,000) to purchase property, plant
and equipment in 2020.

As at December 31, 2019, including the above, the Company had a total of $70,622,000 of committed contractual operational
purchase order obligations outstanding (December 31, 2018: $51,613,000).

24. Capital Stock

Common shares issued or reserved:

December 31, 2017

Share issue

Exercise of stock warrants (a)

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

December 31, 2018

Share issue

Exercise of stock warrants

Transfer from contributed surplus on exercise of stock warrants

Number of shares

337,404,502

30,714,118

368,118,620

Amount

82,905

2,150

1,164

86,219

December 31, 2019

368,118,620

86,219

a) During the third quarter 2018 holders of the Company’s warrants exercised 30,714,118 warrants at a price of $0.07 resulting

in the issuance of 30,714,118 common shares with a value of $2,150,000.

b) 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, 2019 and December 31, 2018, and changes during
the periods ending on those dates, are presented below:

Page 60

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2019
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2019

FOR THE YEAR ENDED DECEMBER 31

2019

2018

Options

Weighted average
exercise price

Options

Weighted average
exercise price

Outstanding – Beginning of year

11,443,000

$0.067

49,532,500

$0.092

Granted

Expired

Exercised

Forfeited

4,710,500

(29,390,000)

(13,410,000)

Outstanding – End of year

11,443,000

0.067

11,443,000

0.042

0.094

0.090

0.067

The following table summarizes stock options which are exercisable as at December 31, 2019:

$0.083

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

FOR THE YEAR ENDED DECEMBER 31

Beginning of year

Stock-based compensation expense

Forfeiture of issued stock options

Transfer to share capital on exercise of warrants

End of year

Weighted average
remaining contractual
life (years)

Weighted average
exercise price

1.08

$0.083

Number

7,212,750

2019

$5,370

5,446

2018

$6,979

195

(640)

(1,164)

5,370

The stock-based compensation expense is included in the Consolidated Statements of Income (Loss) and Comprehensive
Income (Loss) as administrative and general expenses and amounts to $76,000 (December 31, 2018: $195,000).

The forfeiture of issued stock options was included in the Consolidated Statements of Income (Loss) and Comprehensive
Income (Loss) as administrative and general expense of $640,000 as a recovery of expense for the year ended December
31, 2018, no forfeiture of issued stock options occurred in the year ended December 31, 2019.

d) A summary of the Company’s warrants issued as of December 31, 2019 and December 31, 2018, and changes during the

periods ending on those dates, are presented below.

FOR THE YEAR ENDED DECEMBER 31

Outstanding – Beginning of year

Granted

Expired

Exercised (i)

Outstanding – End of year

2019

2018

30,714,118

(30,714,118)

i. September 19, 2018: Exercise of 30,714,118 Warrants expiring September 19, 2018 at $0.07 to Panta.

Page 61

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2019
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2019

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 option was granted in the year ended December 31, 2019. Fair value of 4,710,500 options granted during the year
ended December 31, 2018 was $204,000.

The assumptions used in the valuation of stock options for the year ended December 31, 2018 were as follows:

Number of options

Risk free rate (%)

Dividend yield (%)

Expected Lives (years)

Volatility (%)

2018

4,710,500 options

2.35

7.65

103.11

The amount of stock-based compensation expense, for options granted in prior periods, amortized to earnings during the year
ended December 31, 2019 was $76,000 (2018: $195,000). Stock-based compensation expense has been included in the
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) as administrative and general expenses.

During the year ended, no stock options was forfeited. (December 31, 2018: 13,410,000 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 plans is as follows.

FOR THE YEAR ENDED DECEMBER 31

Defined contribution plan

2019

$1,423

2018

$1,376

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 Income (Loss) and Comprehensive Income (Loss) as administrative and general expenses and cost of sales.

27. Net Claims

On January 25, 2019, the Company and its subsidiary Avcorp Composite Fabrication Inc. (the “Avcorp Parties”) entered into an
agreement with HITCO Carbon Composites, Inc., SGL Carbon, LLC, and SGL Carbon SE (the “SGL parties”) and a customer to
settle all claims related to alleged deficiencies in HITCO’s non-destructive inspection processes and other business matters
including a lease renewal and collection of a previously provisioned account receivable in exchange for gross consideration of
USD$12,000,000 from the SGL parties to Avcorp and mutual releases among the Avcorp Parties, SGL Parties and a customer
related to the acquisition. The net cash payment received totaled USD$10,810,000. The net claim settlement resulted in a gain
of $19,759,000, including a lease renewal and collection of previously provisioned accounts receivable.

The Company has provisioned USD $1,350,000 for a legal action in the second quarter of 2019 due to certain employment
practices at its Gardena facility.

On August 20, 2018, the Company entered into a settlement agreement with a customer, in the amount of $2,219,000, which
provided the Company a net claim settlement in satisfaction of existing and potential claims, causes of action, and disputes
between the Company and its customer.

The Company has provisioned for a claim asserted by a customer in the amount of $7,273,000.

Page 62

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2019
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2019

28. Finance Costs

FOR THE YEAR ENDED DECEMBER 31

Interest on lease liabilities

Interest on other term debt

Interest on bank indebtedness

Modification loss on bank indebtedness

Interest on related party debt

Non-cash financing cost accretion

Interest on contract liabilities

Interest expense

Interest income

Net interest expense

29. Supplementary Cash Flow Information

FOR THE YEAR ENDED DECEMBER 31

Equipment acquired under lease liability

Panta loan settled with exercise of warrants

Restoration provision revaluation

Transfer to share capital on exercise of warrants

30. Income Tax

2019

$1,961

156

5,355

906

518

8,941

(17)

8,924

2019

$674

2018

$35

112

5,405

252

5,813

(39)

5,774

2018

$380

1,212

1,164

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 27%.

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.

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 $30,830,000 (2018: $28,897,000) in respect of losses amounting to $69,781,000 (2018:
$59,362,000) which include foreign losses of $37,429,000 (2018: $30,830,000) that will expire beginning in 2035 through 2037
(except U.S. Net Operating Losses from fiscal 2018 onwards of $19,170,000 that carryforward indefinitely), unclaimed research
and development costs of $11,173,000 (2018: $11,173,000) and capital losses of $830,000 (2018: $830,000) with no expiry,
investment tax credits of $1,109,000 (2018: $1,814,000) which expire beginning in 2022 through 2037, and deductible temporary
differences of $29,428,000 (2018: $30,829,000).

The company has recognized $Nil (2018: $Nil) in deferred income tax liabilities in relation to the fair value of the intangible lease.

Income tax expense reported differs from the amount computed by applying the combined Canadian federal and provincial income
tax rates, applicable to Avcorp Industries Inc., to the income (loss) before taxes due to the following:

FOR THE YEAR ENDED DECEMBER 31

Canadian federal and provincial income tax rates

Income tax expense (recovery) at statutory rate

Change in unrecognized temporary differences

Tax rate differences

Permanent differences

Tax expense (recovery)

2019

27.00%

$(2,515)

2,412

(82)

185

2018

27.00%

$5,501

(4,778)

(45)

(678)

Page 63

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2019
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2019

31. Related Party Transactions

a) Periodically, consulting services are provided by certain directors. Fees paid to certain directors, or companies with which
they have beneficial ownership, during the year ended December 31, 2019 amount to $3,000 (December 31, 2018: $Nil).
Fees payable to certain directors or Companies with which they have beneficial ownership, as at December 31, 2019 are $Nil
(December 31, 2018: $Nil). These fees are included in the Consolidated statements of Loss and Comprehensive Loss as
administrative and general expenses and amount to $3,000 for the year ended December 31, 2019 (December 31, 2018:
$Nil).

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

2019

$2,002

2,160

2018

$2,150

164

2,381

The balance of loans receivable from key management as at December 31, 2019 is $5,000 (December 31, 2018: $15,000).
These loans are unsecured and payable on demand.

Other related party transactions are disclosed elsewhere in these consolidated financial statements (note 21).

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

32. Earnings per share

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

FOR THE YEAR ENDED DECEMBER 31

Weighted average number of common shares for basic earnings per share (000’s)

Effect of dilution:

Warrants (000’s)

2019

368,118

2018

345,651

342

Weighted average number of ordinary shares adjusted for the effect of dilution (000’s)

368,118

345,993

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.

33. 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.

Page 64

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2019
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2019

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 Income and Comprehensive
Income.

Sales to five major customers for the year ended December 31, 2019, which comprise several programs and contracts,
accounted for approximately 91.7% (December 31, 2018: 89.0%) of sales.

FOR THE YEAR ENDED DECEMBER 31

2019

2018

BAE Systems

Boeing1

Bombardier

Lockheed Martin

Subaru Corporation

Other

Amortization of the unfavourable contract liability

Revenue % of Total

Revenue

% of Total

$18,181

50,351

18,535

35,812

28,306

13,585

11.0

30.6

11.2

21.8

17.2

8.2

$15,789

67,606

20,860

24,527

22,970

14,341

4,617

9.3

39.6

12.2

14.4

13.5

8.3

2.7

Total

164,770

100.0

170,710

100.0

Includes Boeing program partner revenue consisting of industry tier-one suppliers to Boeing

a) The Company’s sales are distributed amongst the following geographical locations based on location of customers:

FOR THE YEAR ENDED DECEMBER 31

2019

2018

Canada

USA

Europe

Asia

Australia

Other

Amortization of the unfavourable contract liability

Revenue

% of Total

Revenue

% of Total

$26,081

87,624

20,032

30,706

257

15.8

53.2

12.2

18.6

0.2

0.0

$27,165

91,302

21,961

25,400

238

4,617

15.9

53.6

12.8

14.9

0.1

0.0

2.7

Total

164,770

100.0

170,710

100.0

b) 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

2019

$82,233

45,907

128,140

2018

$62,378

53,690

116,068

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.

Page 65

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2019
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2019

c) The Company’s sales are distributed amongst commercial and defence markets:

FOR THE YEAR ENDED DECEMBER 31

2019

2018

Commercial

Defence

Amortization of the unfavourable contracts liability

Revenue % of Total

Revenue

% of Total

$102,437

62,333

62.2

37.8

$114,797

51,296

4,617

67.3

30.0

2.7

Total

164,770

100.0

170,710

100.0

d) The Company’s revenue is recognized either at a point in time or over time. For the year ended December 31, 2019, revenue
earned at a point in time is $42,671,000 (December 31, 2018: $42,979,000). Revenue earned over time is $122,099,000 for the
year ended December 31, 2019 (December 31, 2018: $127,731,000).

e) 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, 2019

Total

ASI

Comtek

ACF

Corporate

Revenue

Cost of sales

Gross profit

Administrative and general expenses

Depreciation and amortization

Net (gain) loss on claims

Other loss

Operating gain (loss)

$164,770

$78,099

$20,455

$66,216

160,982

76,206

16,910

3,788

21,467

770

(17,974)

649

1,893

5,130

328

3,545

2,632

67,866

(1,650)

6,460

379

7,245

1,785

(19,759)

649

(1,124)

(3,565)

850

(10,274)

11,865

FOR THE YEAR ENDED DECEMBER 31, 2018

Total

ASI

Comtek

ACF1

Corporate

Revenue

Cost of sales

Gross profit

Administrative and general expenses

Depreciation and amortization

Net contract modifications

Net (gain) loss on claims

Operating (loss) gain

$170,710

$83,589

$19,916

$67,205

155,753

75,287

16,417

64,049

14,957

23,466

623

(41,470)

5,421

8,302

5,360

217

3,499

2,453

3,156

7,762

342

7,891

(41,470)

5,421

26,917

2,725

982

(4,948)

28,158

ACF revenue includes $4,617,000 amortization of the unfavourable contract liability.

FOR THE YEAR ENDED DECEMBER 31

2019

2018

Avcorp Industries Inc.

Comtek Advanced Structures Ltd.

Avcorp Composite Fabrication Inc.

Corporate

Total

Total Assets % of Total

Total Assets

% of Total

$69,638

12,460

45,907

135

54.4

9.7

35.8

0.1

$50,748

10,695

53,690

935

43.7

9.2

46.3

0.8

128,140

100.0

116,068

100.0

Page 66

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2019
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2019

FOR THE YEAR ENDED DECEMBER 31

2019

Development
Cost
Additions

Property,
Plant and
Equipment

Intangible
Asset
Additions

Development
Cost
Additions

2018

Property,
Plant and
Equipment

Intangible
Asset
Additions

Avcorp Industries Inc.

$3,934

$1,067

$5,962

$1,422

Comtek Advanced Structures Ltd.

Avcorp Composite Fabrication Inc.

Total

100

239

13,133

4,116

14,439

201

247

387

6,410

1,809

371

FOR THE YEAR ENDED DECEMBER 31

Avcorp Industries Inc.

Comtek Advanced Structures Ltd.

Avcorp Composite Fabrication Inc.

Corporate

Total

34. Investment in AVS-SYS

2019

Total

Liabilities % of Total

$37,783

3,909

24,156

105,767

22.0

2.3

14.1

61.6

2018

Total
Liabilities

$27,339

2,673

18,193

104,007

% of Total

18.0

1.8

12.0

68.2

171,615

100.0

152,212

100.0

On November 29, 2018, the Company entered into an investment agreement with AVS-SYS Ltd., a private company which
specialized in providing aircraft operators with aircraft structural component repair services for commercial aircrafts.

During the year, the following movements were recognized in Consolidated Statements of Income (Loss):

FOR THE YEAR ENDED DECEMBER 31

Opening balance

Add: Acquisition

Less: Fair value losses recognised in other losses

Less: Foreign exchange loss

Ending Balance

35. Subsequent Events

2019

$682

(649)

(33)

2018

682

The Company drew on the 2019 Panta Loan in January 2020 the amount of $4,238,000 (USD$3,250,000).

On March 2, 2020, the Company entered into an amendment to the standby credit facility (“2019 Panta Loan”) securing an
additional $2,598,000 (USD$2,000,000).

Page 67

notes

AVCORP INDUSTRIES INC.

BOARD OF DIRECTORS AND OFFICERS

MANAGEMENT

David Levi (1)(2)
CHAIRMAN OF THE BOARD

Executive Chairman
GrowthWorks Capital Ltd.
Vancouver, British Columbia

Elizabeth Otis (1)(2)
DIRECTOR

Palm Springs, California

Jaap Rosen Jacobson (2*)
DIRECTOR

President
Panta Holdings B.V.
Mijdrecht, The Netherlands

Ken Robertson (1*)
DIRECTOR

Vancouver, British Columbia

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

*Designates the Committee Chair

Amandeep Kaler
Group Chief Executive Officer

Surrey, British Columbia

Jessica Gill
Group Vice President, Human Resources

Surrey, British Columbia

Amish Patel
Director of Finance

North Vancouver, British Columbia

Robin Lovell
President

Comtek Advanced Structures Ltd.
Oakville, Ontario

Tony Kelsey
General Manager

Avcorp Composite Fabrication Inc.
Jurupa Valley, California

Mike Elvidge
General Manager

Avcorp Industries Inc.
Surrey, British Columbia