Avon Products, Inc. Annual Report 2020

FY2020 Annual Report · Avon Products, Inc.

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Annual Report
2020

www.avcorp.com

Avcorp Industries Inc.

annual report 2020

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 500 skilled employees and 636,000 square feet of facilities. Avcorp Structures
& Integration located in Delta British Columbia, Canada is dedicated to metallic and composite aerostructures assembly and
integration; Avcorp Engineered Composites located in Burlington Ontario, Canada is dedicated to design and manufacture of
composite aerostructures, and Avcorp Composite Fabrication located in Gardena California, USA has advanced composite
aerostructures fabrication capabilities for composite aerostructures. The Avcorp Group offers integrated composite and metallic
aircraft structures to aircraft manufacturers, a distinct advantage in the pursuit of contracts for new aircraft designs, which require
lower-cost, light-weight, strong, reliable structures. Comtek Advanced Structures Ltd., at our Burlington, Ontario, Canada location
also provides aircraft operators with aircraft structural component repair services for commercial aircraft.

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

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

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

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Avcorp Industries Inc.

annual report 2020

management discussion & analysis

This Management Discussion and Analysis has been prepared as of March 19, 2021 and should be read in conjunction with the
Company’s consolidated financial statements and notes thereto for the year ended December 31, 2020.

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.

2020 Highlights

•

2020 revenue was $150,962,000 compared to $164,770,000 in 2019. 2020 revenue decreased by $13,808,000, in comparison
to 2019. The decrease in revenue in 2020 was due to lower customer requirements because of the impact of the Coronavirus
(“COVID-19”) on the commercial aerospace sector and 737 MAX grounding.

2020 net loss was $6,725,000 compared to net loss of $9,316,000 in 2019. The net loss improved by $2,591,000 in comparison
to 2019 mainly due to higher gross profit and savings in administrative and general expenses. In addition, the 2020 net loss was
supported by $11,397,000 in government grants while 2019 was supported by a net claim settlement of $17,974,000.

2020 cash flows from operating activities was $9,125,000 compared to $10,911,000 in 2019. 2020 cash flows from operating
activities was supported by the Canada Emergency Wage Subsidies of $4,765,000 and 2019 was supported by 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.

In 2020, the Company repaid $7,368,000 of bank indebtedness (December 31, 2019: $18,010,000) and paid trade payables
down to $10,980,000 (December 31, 2019: $23,201,000).

• March 2, 2020, the Company entered into an amendment to the standby credit facility (“2019 Panta Loan”) with Panta Canada

B.V. (“Panta”) securing and drawing an additional $2,686,000 (USD $2,000,000).

•

BAE Systems awarded the Company a contract for the assembly of the F-35 Carrier Variant Outboard Wing. The total awards are
approximately $87 million extending Avcorp’s current long-term contract with BAE systems into 2022.

Highlights Subsequent to Year-End

•

The Company received Canada Emergency Wage Subsidies of $712,000 in February and March 2021 and applied for an additional
$2,415,000.

On February 25, 2021, the Company amended the Avcorp Composite Fabrication Inc.’s Gardena facility lease agreement effective
January 1, 2021 to vacate certain buildings and negotiated new lease terms.

On March 12, 2021, the Company entered into a multiparty amended and restated Accommodation Agreement with each of a
customer, and Panta Canada B.V. whereby, inter alia;

•

Panta Canada B.V. has agreed to provide a USD $10,000,000 non-revolving standby loan facility and a USD $3,000,000
equipment loan for an aggregate availability of USD $13,000,000; and

The elimination of unamortized cash advance, mutual release and forgiveness of certain historic and future guarantee fees
payable to the customer. As at December 31, 2020, the guarantee fee is $8,178,000 (USD $6,423,000), the customer
advance is $5,911,000 (USD $4,643,000) and the legal claim is $7,130,000 (USD $5,600,000).

On March 15, 2021, the Company received a USD $2,000,000 second wave Small Business Administration Paycheck Protection
Program Loan.

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Avcorp Industries Inc.

annual report 2020

•

On March 19, 2021, the Company approved the grant of an aggregate of 17,350,000 incentive stock options under the
Company’s 2007 Stock Option Plan to Directors, Officers and Employees. The options will have a five year term and will have an
exercise price determined by the market price effective the close of markets March 22,2021.

Financial Overview

Three-Year Results

The following table provides selected financial information for the three years to December 31, 2020.

THREE-YEAR RESULTS

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

FOR THE YEAR ENDED DECEMBER 31

20203

20193

2018

OPERATIONS

Revenue

EBITDA1

Operating income (loss)

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

$150,962

$164,770

$170,710

19,492

2,371

(6,725)

(0.02)

1,769

121,538

112,744

(49,140)

(0.13)

0.47

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

368,118,620

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 8.
Net book value per share is not a recognized term under IFRS, refer to page 12.
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 year ended December 31, 2020, the Avcorp Group’s revenue was $150,962,000 compared to $164,770,000 in 2019 and
$170,710,000 in 2018. The decrease in revenue in 2020 compared to 2019 was mainly attributed to lower deliveries caused by
lower customer requirements due to the impact of Coronavirus (“COVID-19”) on the commercial aerospace sector, and the
decrease from 2018 to 2019 was due to the 737 MAX grounding.

The 2020 $2,371,000 operating income contains $308,000 provision of onerous contracts and $11,642,000 government grant
and other income. The decrease in the operating loss in 2020 compared to 2019 is due to continued operational improvement,
cost reduction initiatives, growth in defense program revenue, and the recognition of variable consideration on the contract
termination of convenience. The 2019 $1,124,000 operating loss contains $1,665,000 amortization of onerous contract and
$17,325,000 net claim settlement gain and other loss. The 2018 $26,917,000 operating income was supported by a $41,470,000
net contract modification gain, a $4,617,000 amortization of an unfavourable contracts liability, a $9,115,000 amortization of
onerous contracts provision, and a $5,421,000 loss on net claim position.

Capital expenditures during the three-year period presented have been limited to upgrading and sustaining manufacturing
equipment and capabilities, new program introductions, and information technology assets.

Bank indebtedness and term debt has decreased by $2,342,000 in 2020 compared to 2019 due to the repayment of 7,368,000
in bank indebtedness and foreign exchange translation gain offset by the Panta Loan draw of $6,924,000. 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.

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Avcorp Industries Inc.

annual report 2020

Impact of COVID-19

In March 2020, the World Health Organization (“WHO”) declared coronavirus (“COVID-19”) a global pandemic. Governments
worldwide enacted emergency measures including travel bans, social distancing measures and mandatory quarantine
requirements. The measures have negatively impacted the global economy and adversely impacted the aviation industry
worldwide particularly in the commercial airline industry. The significant decrease in air travel resulting from the COVID-19
pandemic is adversely affecting Avcorp’s customers and their demand for the Company’s products. The situation remains dynamic
and the ultimate duration and magnitude of the impact on the economy and the financial effect on the Company remains unknown
at this time.

The Company has been closely monitoring and actively implementing and updating its response to the evolving COVID-19
pandemic and its impacts on employees and operations. Avcorp has implemented additional safety, sanitization and physical
distancing procedures, including remote work schedules where possible and ceased all non-essential business travel. The
Company has formed a committee composed of the senior leadership team in the organization to monitor the evolution of the
pandemic, to evaluate the measures being put in place by local, provincial/state and national governments and the resulting
impacts on the Company and to implement necessary contingency plans as the current situation continues to evolve, with a focus
on protecting our employees’ health and safety; supporting customers; and ensuring that the Company can successfully navigate
through this global crisis. The Company actions are closely aligned with both the health and safety mandates that have been
announced by the local or provincial/state health authorities.

In addition, the company has implemented measures to align its cost structure and maximize cash preservation during the current
market conditions, including headcount reductions to ensure that it emerges from the current crisis on solid footing, and expenses
were reduced in various areas. The Company applied and received the Canada Emergency Wage Subsidy (“CEWS”) for its
Canadian operations and support as part of Paycheck Protection Plan for it US operations. On a consolidated basis, the COVID-
19 pandemic had a material negative impact on free cash flow for the full year due to lower revenue.

Quarterly Results

The following table provides selected quarterly consolidated financial information for the eight most recent fiscal quarters to
December 31, 2020 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)

2020

2019

Dec 31

Sep 30

Jun 30

Mar 31

Dec 31

Sep 30

Jun 30

Mar 31

Revenue

$44,742

$33,769

$32,246

$40,205

$38,309

$37,437

$46,799

$42,225

Operating (loss) income

8,477

(326)

(1,080)

(4,700)

(8,114)

(5,164)

(2,903)

15,057

EBITDA1

Net (loss) income
EBITDA per share1

Basic

Diluted

Net income (loss) per share

Basic

Diluted

17,895

3,623

2,937

(4,963)

(4,455)

(2,901)

172

6,546

(1,263)

(1,594)

(10,414)

(10,846)

(7,511)

(4,568)

0.05

0.02

0.01

(0.00)

(0.01)

(0.03)

(0.01)

0.00

(0.03)

(0.02)

(0.01)

17,997

13,609

0.05

0.04

Long-term debt

19,168

24,801

25,240

35,358

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 8.

2020 revenue was $150,962,000 compared to $164,770,000 in 2019. 2020 revenue decreased by $13,808,000, in comparison
to 2019. The decrease in revenue in 2020 was attributed to lower deliveries caused by lower customer requirements due to the
Coronavirus (“COVID-19”) on commercial aerospace sector and 737 MAX grounding. For the quarter ended December 31, 2020,
the Avcorp Group’s revenue was $44,742,000 compared to $38,309,000 in 2019. The Company recognized an estimate of variable
consideration in the current quarter related to a contract termination of convenience. Variable consideration is estimated as the
most likely amount to which we expect to be entitled and is recognized to the extent it is probable that a significant reversal will
not occur when the uncertainty associated with the variable consideration is subsequently resolved. We were also adversely
impacted in the second to fourth quarter by lower customer requirements for certain commercial programs due to COVID-19.

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Avcorp Industries Inc.

annual report 2020

For the quarter ended December 31, 2020, the Avcorp Group recorded income from operations of $8,477,000 (December 31,
2019: $8,114,000 loss). Operating results in the fourth quarter of 2020 improved in comparison to 2019 by $16,591,000, because
the fourth quarter 2020 operating income included government grants and other income of $7,646,000 (December 31, 2019:
other loss of $630,000). In addition, the Company recognized an estimate of variable consideration for the contract termination
of convenience. Included in the government grant income in the quarter ended December 31, 2020 is the forgiveness of
$4,601,000 (USD $3,430,000) as the company has satisfied the requirements of loan forgiveness. The forgiveness application
was submitted in March 2021 and the forgiveness amount may change once reviewed and confirmed by our U.S. Chartered Bank
and the Small Business Administration. The improvement in operating result is due to higher revenue, continued operational
improvement and cost reduction initiatives.

2020 and 2019 Results Overview

During the year ended December 31, 2020 Avcorp Group revenues totaled $150,962,000 compared with $164,770,000 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.

Gardena facility commercial aerospace contracts have generated $18,382,000 in revenue (December 31, 2019: $31,256,000).
These contracts, whose production occurs in the Gardena facility, support customer production of commercial aircraft and have
decreased from 2019 as customer requirements have decreased due to the impact of COVID-19. The Gardena facility defence
aerospace contracts generated $29,315,000 of revenue during the year ended December 31, 2020 for ACF (December 31, 2019:
$34,960,000). Defence revenue in 2021 is expected to decline further compared to 2020 and 2019, as we continue to fulfill all
delivery requirements on certain purchase orders extending to the second quarter of 2021. The Company is actively pursuing
follow-on purchase orders and bidding for new work.

Burlington facility revenues have decreased by $3,946,000 during the current year relative to the year ended December 31,
2019 due to the impact of COVID-19. There was a decline in customer delivery requirements and repairs services.

Delta facility revenues, for all programs generated by production contracts, have increased by $8,657,000 during the current
year relative to the year ended December 31, 2019. Delta revenues from the production and delivery of business and commercial
jet programs has decreased by approximately $22,438,000 in 2020 relative to 2019 primarily due to COVID-19 and 737 MAX
grounding, while defence programs’ revenues increased by $31,095,000 as it was supported by the inclusion of variable
consideration on a termination of convenience and the growth in the F-35 programs.

Avcorp Group 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, 2020, the Avcorp Group recorded income from operations totaling $2,371,000 from
$150,962,000 revenue, as compared to $1,124,000 operating loss from $164,770,000 revenue for the previous year. The 2019
operating loss contains $1,665,000 amortization of onerous contract and $17,325,000 net claim settlement gain and other loss.
The 2020 operating income contains $308,000 provision of onerous contracts, $11,642,000 government grant and other income,
and the estimate of variable consideration on the contract termination of convenience. The operating loss improvement was also
due to continued operational improvement and cost reduction initiatives, growth in revenue related to defence programs, and
offset by a decrease in revenue related to commercial programs as a result of COVID-19.

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 within the Gardena, California facility due to
the transition out of certain loss-making production contracts and the reduction in customer requirements due to COVID-19 and
the 737 MAX grounding. The Company has expensed $8,346,000 of overhead costs during the year as compared to $7,004,000
in prior year 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, 2020, cash flows from operating activities was $9,125,000 compared with $10,911,000 in
2019. 2020 cash flows from operating activities was supported by the Canada Emergency Wage Subsidies of $4,765,000 and
2019 was supported by 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.

As at December 31, 2020, the Company had $7,044,000 cash on hand (December 31, 2019: $4,316,000) and had utilized
$76,439,000 of its operating line of credit (December 31, 2019: $84,661,000). The balance of the net loss and related
adjustments on modification of bank indebtedness as a result of executing an amending agreement in 2019 was $269,000 as at
December 31, 2020 (December 31, 2019 $809,000). The Company has a working capital deficit of $77,780,000 as at December
31, 2020 which has increased from the December 31, 2019 $71,561,000 deficit. Working capital is defined as the difference
between current assets and current liabilities. However, the Company’s accounts and other receivables, contract assets, and
inventories net of accounts payable, amount to a $33,174,000 surplus as at December 31, 2020 (December 31, 2019:
$18,542,000 surplus). The Company’s accumulated deficit as at December 31, 2020 is $148,919,000 (December 31, 2019:
$142,194,000).

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Avcorp Industries Inc.

annual report 2020

Revenue

For the year ended December 31, 2020 revenues totaled $150,962,000, a $13,808,000 decrease in revenues relative to 2019
(December 31, 2019; $164,770,000).

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

2020

2019

Revenue

% of Total

Revenue

% of Total

Avcorp Structures & Integration. (ASI)

Comtek Advanced Structures Ltd. (AEC)

Avcorp Composite Fabrication Inc. (ACF)

Total

$86,756

16,509

47,697

150,962

57.5

10.9

31.6

100.0

$78,099

20,455

66,216

164,770

47.4

12.4

40.2

100.0

Delta facility revenues 2020 totaled $86,756,000 (December 31, 2019: $78,099,000).

The Delta facility 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.

Delta facility commercial aircraft programs production revenues have decreased by $22,438,000 of which established commercial
aircraft production contract revenues have contributed $18,275,000 of this revenue decrease in 2020 relative to 2019. The Delta
facility had lower customer delivery requirements due to COVID-19 and the 737 Max grounding. This was more than offset with
production for defence programs which increased by $31,095,000 in 2020 relative to 2019. The defence revenue was supported
by an estimate of variable consideration related to the termination of convenience of certain defence contracts and continued
growth of the F-35 program.

Burlington facility revenues for 2020 totaled $16,509,000 (December 31, 2019: $20,455,000).

The Burlington facility is dedicated to aircraft structural component repair services, and design and manufacture of composite
aerostructures. They service customers from around the world.

The Burlington facility revenues decreased by $3,946,000 during the current year relative to the year ended December 31, 2019.
The impact of COVID-19 has contributed significantly to a reduction in customer demand and deliveries during 2020.

Gardena facility revenues for 2020 totaled $47,697,000 (December 31, 2019: $66,216,000).

The Gardena facility provides a unique aerostructures 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, 2020 revenues arising from the assignment by customers of commercial aerospace contracts to Avcorp
Industries Inc. have generated $18,382,000 in production revenue (December 31, 2019: $31,256,000). The decline in
Commercial revenues resulted from a decline in customer requirements due largely to the impact of COVID-19. 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 $29,316,000 of production revenue during the year
ended December 31, 2020 for ACF (December 31, 2019: $34,960,000) with the impact of COVID-19 attributing to this decline in
revenue. In addition, Defence revenue in 2021 is expected to decline further compared to 2020 and 2019, as we continue to fulfill
all delivery requirements on certain purchase orders extending to the second quarter of 2021. The Company is actively pursuing
follow-on purchase orders and bidding for new work.

Deliveries and quality performance as at December 31, 2020 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 2020

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

Total

2020

2019

Revenue

% of Total

Revenue

% of Total

$31,332

48,237

12,998

30,444

16,311

11,640

20.8

31.9

8.6

20.2

10.8

7.7

$18,181

50,351

18,535

35,812

28,306

13,585

11.0

30.6

11.2

21.8

17.2

8.2

150,962

100.0

164,770

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
(“BAE”) 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
$13,151,000 in 2020 relative to 2019. Production contracts have been secured through to end of Q1 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 Lot fourteen; and are in discussions with the customer for production under Lot fifteen
through seventeen.

Avcorp’s Gardena California facility provides content for all three models of the F-35 fighter aircraft. Fabricated components
include; wing skins, 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 to the second quarter of
2021. Avcorp is in discussion with Lockheed Martin pursuing follow-on contract, assuming acceptable quality and delivery
performance. Total revenues for the defence program totaled $27,588,000 for the year ended December 31, 2020 (December
2019 $33,469,000).

Shipments of large complex metal assemblies and fabricated parts and components out of the Delta facility to Boeing
Commercial Airplane Group (“Boeing”), primarily for the 737 commercial jet program, decreased by 49% in 2020 relative to
2019, primarily as a result of Boeing 737 MAX grounding, decreased customer demand, and the shutdown of Boeing facilities due
to COVID-19. Total production deliveries generated for the Company from various Boeing Commercial aircraft programs amounted
to $23,728,000 for the year ended December 31, 2020 (December 31, 2019: $41,930,000). The Company also delivers
components to Boeing Defence, Space & Security (“Boeing DSS”) totaling $2,718,000, a decrease in production revenues
recorded for the same period in 2019 (December 31, 2019: $6,849,000) as a result of the planned shutdown of Boeing facilities
due to COVID-19.

Production deliveries for Bombardier Aerospace (“Bombardier”) programs decreased by 32% during the current year relative
to the year ended December 31, 2019. Shipments of large assemblies for the CL605 business jet program decreased by
$2,589,000 during the current year as demand for these products decreased relative to 2019, partially as a result of the COVID-
19 impact; while concurrently the Company experienced a $3,432,000 decrease in its deliveries of composite panels and related
products to Bombardier. Avcorp Group’s primary source of revenues from Bombardier in 2021 will continue to be from components
for the CL605 and Global Express business jets.

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 totaled $16,311,000 for the current year (December
31, 2019: $28,306,000); a decrease in customer demand due to COVID-19. 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 29% relative to revenues in the previous year due
primarily to COVID-19. The Avcorp Group also supplies Canadian aircraft retrofit 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 2019. These Other revenues are of significant importance to the Group’s operations as they generated $11,640,000 in revenue
during the year ended December 31, 2020 (December 31, 2019: $13,585,000).

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Avcorp Industries Inc.

annual report 2020

Defence program revenues for the Avcorp Group in 2020 totaled $87,783,000 (December 31, 2019: $62,333,000); 58.1% of
total production sales (December 31, 2019: 37.8%). Commercial program sales provided a lower portion of the Company’s
sales in 2020 (December 31,2020: 41.9%; December 31,2019: 62.2%) amounting to $63,179,000 for 2020 and $102,437,000
for 2019. The Group continues to move forward with its revenue diversification between commercial and defence aerospace
programs.

Gross Profit

Gross profit (revenue less cost of sales) for the year ended December 31, 2020 was positive 5.5% of revenue compared to
positive 2.3% of revenue for the year ended December 31, 2019.

The Gardena facility gross margin for the current year was negative $5,223,000 (December 31, 2019: $1,650,000 negative gross
margin). The Gardena facility gross margin decreased by $3,573,000 in 2020 relative to 2019 mainly attributable to the decrease
in revenue during the year due to COVID-19. The Gardena site was also challenged with high absenteeism related to COVID-19
and equipment down time.

The Delta facility gross margin for the current year was positive $10,888,000 (December 31, 2019: $1,893,000 positive gross
margin). 2020 Delta facility gross margin increased by $8,995,000 from the 2019 gross margin. The improvement was attributed
to the inclusion of an estimate of variable consideration on a contract termination of convenience. There was continued operational
efficiencies, cost reduction initiatives and changes in program revenue mix.

Burlington production contracts produced a positive gross margin for the year ended December 31, 2020 of $2,568,000 as
compared to a positive gross margin of $3,545,000 for 2019 attributable to the decrease in revenue due to COVID-19.

Administration and General Expenses

As a percentage of revenue, administration and general expenses decreased to 11.1% for the year ended December 31, 2020
from 13.0% for the year ended December 31, 2019. In absolute terms, administration and general costs decreased by $4,750,000
during the current year relative to the previous year. Management have taken steps to manage expenses due to COVID-19 by
reducing headcount, and saving on various other expenses during the year.

Foreign Exchange Gain or Loss

Avcorp Group recorded a $364,000 foreign exchange loss during the year ended December 31, 2020 (December 31, 2019:
$843,000 gain) as a result of holding US dollar-denominated cash, receivables, payables and debt.

Earnings Before Interest, Taxes, Depreciation & Amortization

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

EBITDA was positive $19,492,000 for the year ended December 31, 2020 compared to EBITDA of positive $10,813,000 for the
year ended December 31, 2019. The EBITDA in 2020 was supported by $6,796,000 of Canadian Emergency Wage Subsides and
$4,601,000 of recognized loan forgiveness on the U.S. Small Business Administration’s Paycheck Protection Program. In addition,
the 2020 EBITA was supported by the estimate of variable consideration related to the contract termination of convenience. The
EBTIDA in 2019 was supported by the net gain on claims of $17,974,000. In addition to these specific events the increase EBITDA
was due to continued operational improvements, cost reduction initiatives, and change in program revenue product mix; offset
by the adverse impact of COVID-19.

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

2020

$(6,725)

7,727

8,338

10,152

19,492

2019

$(9,316)

8,941

8,218

2,970

10,813

2018

$20,373

5,813

4,482

4,670

35,338

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

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Avcorp Industries Inc.

annual report 2020

Finance Costs

Total interest and financing charges on both short- and long-term debt for the year ended December 31, 2020 were $7,605,000,
which is net of $122,000 interest income as compared to $8,924,000 expense, net of $17,000 interest income for the year ended
December 31, 2019. Interest expenditures have decreased during the current year relative to the previous year mainly due to
repayment of bank indebtedness.

Income Taxes

Avcorp Group has not incurred a tax expense during the year ended December 31, 2020 (December 31, 2019: $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, 2020 was $6,725,000 compared to a loss of $9,316,000 for the year ended December 31,
2019. The December 31, 2020 net loss contains $11,642,000 of other income and the recognition of an estimate of variable
consideration on the termination of convenience.

The Canada Emergency Wage Subsidy from the Canadian Government for the year ended December 31, 2020 of $6,796,000
were included in other income, $657,000 was capitalized as deferred income which would be recognized as other income when
the related inventory are sold by the Company. There are no unfulfilled conditions or other contingencies attaching to these
grants.

On April 28, 2020, the Company received a loan in the amount of USD $4,123,000 from a U.S. Chartered Bank through the U.S.
Small Business Administration Paycheck Protection Program (“PPP Loan”). The loan has a term of 2 years. The loan bears interest
at a fixed rate of 1% per annum. The Company has recognized an estimated forgiveness of $4,601,000 (USD $3,430,000) in
2020 as the Company has satisfied the requirements of loan forgiveness. On March 9, 2021, the Company submitted the
application for review to receive this forgiveness.

On a comparative basis, the 2019 $9,316,000 net loss contains, a $1,665,000 amoritization of the onerous contracts provision
and a $17,325,000 net claim settlement and other loss.

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.

The reduction in net loss for 2020 relative to 2019 was also attributed to continued improvements in cost saving initiatives to
mitigate the impact of COVID-19, improved operational improvements, and change in program revenue product mix.

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, re-states 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. The Company is currently in
discussions to extend the maturity date.

• Maximum availability under the Loan agreement cannot exceed USD $68,000,000 less USD $2,300,000 until June 30, 2021.
USD $45,000,000 borrowing capacity under the loan agreement is supported by a 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 2020

•

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.

•

The Company cannot provide assurance it will be able to meet the financial metrics going forward and may seek a
waiver or amendment to the loan agreement if an event of default is to occur.

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 April 27, 2020 through to October 30, 2020, the Company entered into multiple extensions to the amendment above to
its existing loan agreement with a Canadian Chartered Bank whereby the following amendment was made:

•

The maximum availability under the Loan agreement cannot exceed USD $68,000,000 less USD $1,000,000 until
December 31, 2020 and thereafter less USD $2,300,000.

On November 15, 2019, the Company entered into a standby credit facility agreement (“2019 Panta Loan”) with Panta Canada
B.V which amended and re-stated the 2018 Panta Loan, as well as securing an additional $4,566,000 (USD $3,500,000). As at
December 31, 2019, the company had drawn $328,000 (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 $2,686,000 (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.

On March 12, 2021, the Company entered into a multiparty amended and restated Accommodation Agreement with each of a
customer, and Panta Canada B.V. whereby, inter alia;

•

Panta Canada B.V. has agreed to provide a USD $10,000,000 non-revolving standby loan facility and a USD $3,000,000
equipment loan for an aggregate availability of USD $13,000,000; and

On April 28, 2020, the Company received a loan in the amount of USD $4,123,000 to support Avcorp Composite Fabrication Inc
(“ACF”) from a U.S. Chartered Bank through the U.S. Small Business Administration Paycheck Protection Program. The company
has recognized a forgiveness of USD $3,430,000 in 2020 as the company has satisfied the requirements of loan forgiveness. On
March 9, 2021, the company submitted the application for review to receive this forgiveness. The remaining loan balance has a
term of 2 years and bears interest at a fixed rate of 1% per annum. Subsequent to year end, the Company has applied for and
received a second wave Paycheck Protection Program loan for an additional USD $2,000,000 on March 15, 2021.

The Company received the Canada Emergency Wage Subsidy in the amount of $4,765,000 in 2020. The Company has received
$712,000 and applied for an additional $2,415,000 subsequent to year end and will continue to apply for additional government
subsidies when eligible.

On March 15, 2021, the Company received a USD $2,000,000 second wave Small Business Administration Paycheck Protection
Program Loan.

Cash Flows from Operating Activities

Cash flows from operating activities, before consideration of changes in non-cash working capital, generated $13,022,000 during
the year ended December 31, 2020 as compared to generating $2,631,000 cash during the year ended December 31, 2019. The
company received $4,765,000 from the Canada Emergency Wage Subsidy in 2020 and a net cash settlement of $14,431,000
(USD $10,810,000) from the agreement with the SGL Parties and a customer in 2019.

Non-cash operating assets and liabilities utilized $3,897,000 of cash during the current year, compared to generating $8,280,000
of cash during the previous year; primarily due to timing in payments to suppliers, partially offset by increase in payments
received from customers.

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, 2020, the Avcorp Group purchased equipment totalling $1,769,000 compared with $904,000
during the year ended December 31, 2019. Avcorp Group continues to minimize its capital expenditures in order to conserve
cash, with only operation critical expenditures being made.

During 2020 and 2019, 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 $3,929,000 for the year ended December 31, 2020 (December 31, 2019: $4,116,000).

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Avcorp Industries Inc.

annual report 2020

Cash Flows from Financing Activities

Avcorp Group finances working capital through a combination of government subsidies, shareholder loans, bank debt and equity
financings.

Cash flows from financing activities utilized $740,000 of cash during the current year compared with utilizing $3,610,000 of cash
in 2019.

The Company’s operating line was $76,439,000 drawn as at December 31, 2020 (December 31, 2019: $84,661,000). The
Company drew $653,000 in cash during the year (December 31, 2019: $20,844,000 was drawn) and repaid $7,368,000 in cash
during the year (December 31, 2019: $18,010,000 was repaid).

Repayment of term debt during the current year amounted to $2,524,000 (December 31, 2019: $2,591,000); which was used
to fund equipment, facility leases, and development costs and tooling.

Proceeds from term debt during the current year amounted to $12,453,000 (December 31, 2019: $1,196,000), which includes
the drawdown of $6,924,000 (USD $5,250,000) of the 2019 Panta loan and receipts of $5,529,000 (USD $4,123,000) Paycheck
Protection Program Loan from the U.S. Small Business Administration to ACF.

Payment of interest during the year amounted to $3,954,000 (December 31, 2019: $5,049,000); Decrease in payment mainly
due to repayment of bank indebtedness and term debt during the year.

On December 31, 2020, the ratio of the Company's current assets to current liabilities was 0.47:1 (December 31, 2019: 0.47:1).

Contractual Obligations

PAYMENTS DUE BY PERIOD
(unaudited, expressed in thousands of Canadian dollars)

Total

Within 1 year

Between 1-5 years

Over 5 years

Lease obligations

Bank indebtedness

Term loan1

Purchase obligations2

18,243

76,708

17,793

35,238

2,619

76,708

14,249

31,601

Total contractual obligations

147,982

125,177

11,639

1,774

3,637

17,050

3,985

1,770

5,755

1. This amount includes loan with a related party, obligations the Company has with Industrial Technologies Office and the U.S. Small

Business Administration

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, 2020, there were 368,118,620 common shares, no common share purchase warrants, and 5,441,000
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, 2020.

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, 2020. The book value of
common shares issued and outstanding as at December 31, 2020 was $86,219,000 (December 31, 2019: $86,219,000),
and a shareholders’ deficiency of $49,140,000 (December 31, 2019: $43,475,000 deficiency).

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Avcorp Industries Inc.

annual report 2020

Accounting standards

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

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, 2023, with earlier application permitted. The Company is currently assessing the
impact and timing to adopt this amendment.

Amendments to IAS 37: Onerous Contracts – Costs of Fulfilling a contract

In May 2020, the IASB issued amendments to IAS 37 to specify which costs an entity needs to include when assessing
whether a contract is onerous or loss-making.

The amendments apply a “directly related cost approach”. The costs that relate directly to a contract to provide goods or
services include both incremental costs and an allocation of costs directly related to contract activities. General and
administrative costs do not relate directly to a contract and are excluded unless they are explicitly chargeable to the
counterparty under the contract.

The amendments are effective for annual reporting periods beginning on or after 1 January 2022, with earlier application
permitted. The Company is currently assessing the impact and timing to adopt this amendment.

Operations Overview

Delivery and Quality Performance

Deliveries and quality performance as at December 31, 2020 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.

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 December 2022; certain select production contracts
extend to 2027. Agreements with Boeing Defence, Space and Security extend to 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, 2020, is $407 million in consideration
of attaining full award values, compared to $664 million as at December 31, 2019. The changes in order backlog are as follows:

•

$151 million decrease in order backlog resulting from revenues recorded during the year ended December 31, 2020;

$112 million decrease in order backlog due to decreases in the production rates for several existing commercial programs,
offset by an increase in BAE production requirements;

•

COVID-19 has significantly impacted the aviation and aerospace manufacturing industry causing disruptions in
production and slowing demand as workers go home, passengers stop travelling and customers defer delivery of
new aircrafts. Some of the Company’s major commercial programs have reduced their production requirements
into 2021 with recovery expected by 2023.

$6 million increase 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.

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Avcorp Industries Inc.

annual report 2020

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 $77,780,000 at December 31, 2020 and a $71,561,000
deficit position at December 31, 2019. However, the Company’s accounts receivable, contract assets, and inventories net of
accounts payable, amount to a $33,174,000 surplus as at December 31, 2020 (December 31, 2019: $18,542,000).

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, 2020 was 546 (December 31, 2019: 740). The decrease in the number of
employees during 2020 was due to reduced requirements from our customers directly impacted by COVID-19.

Equipment, Systems, Technologies and Processes

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

Risk Assessment

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

•

additional financing is required to maintain and grow its business;

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.

•

Social distancing practices have been implemented at all sites surrounding meetings, working from home, sanitation
procedures and rotating shifts.

Regularly communicating with customers and suppliers to assess the impact to their businesses and the impact to the
Company. Stopping supplier shipments as customer delivery schedules are pushed out.

• Management has taken extensive measures to cut costs by reducing headcount at the Burlington, Gardena and Delta facility,

halting salary increases and bonuses, and reducing expenses in various other areas.

•

A few commercial programs had production shutdowns for a period of a month in the Delta facility to adjust to customer
delivery schedules.

Applying for government grant support relief initiatives such as the Canada Emergency Wage Subsidy and U.S. Small
Business Administration Paycheck Protection Program from the U.S. Small Business Administration.

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Avcorp Industries Inc.

annual report 2020

•

The Company has formed a committee composed of the senior leadership team in the organization to monitor the evolution
of the pandemic, to evaluate the measures being put in place by local, provincial/state and national governments and the
resulting impacts on the Company and to implement necessary contingency plans as the current situation continues to
evolve.

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;

finance new equipment purchases;

develop or enhance existing services and capabilities;

respond to competitive pressures;

finance business acquisitions.

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 2027.
Agreements with Boeing DSS have been renewed and established which extend to 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 will continue to
be depressed in 2021 due to the impact of COVID-19 with recoveries in 2022 to 2023.

Boeing 737 MAX grounding has resulted in reduced production rates for 2021 and 2022.

Bombardier Challenger CL650 aircraft production requirements declined in 2020 and expected to remain at current levels in
2021.

The global market for defence aircraft has seen continued growth in 2021 and expected to grow further in 2022.

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.

The COVID-19 virus has adversely impacted the aviation industry. As the pandemic continues to reduce passenger airline
traffic, OEMs have reduced their future production rates with anticipated full recoveries in 2022 to 2023.

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.

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Avcorp Industries Inc.

annual report 2020

Cost Reductions

Approximately 58% of Avcorp Group’s cost of sales is related to labour and overhead and 42% 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.

Subsequent to year end on February 25, 2021, the Company amended the Avcorp Composite Fabrication Inc.’s Gardena facility
lease agreement effective January 1, 2021 to vacate certain buildings and negotiated new lease terms. This will reduce lease
costs and shared operating costs.

US Dollar

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.

The Company carries US dollar denominated debt within Bank Indebtedness, Term Debt, Accounts Payable, and Customer
Advance. If the Canadian dollar weakens against the US Dollar, the Company will have a foreign exchange loss and if the Canadian
dollar strengthens against the US dollar, the Company will have a foreign exchange gain. The impact of this will be mitigated by
US dollar denominated cash, accounts receivable, and contract assets.

Outlook

•

Social distancing practices have been implemented at all sites surrounding meetings, working from home, sanitization
procedures, and rotating shifts.

Regularly communicating with customers and suppliers to assess the impact to their businesses and the impact to the
Company. Stopping supplier shipments as customer delivery schedules are pushed out.

• Management has taken extensive measures to cut costs by reducing headcount at the Burlington, Gardena and Delta

facility, halting salary increases and bonuses, and reducing expenses in various other areas.

•

A few commercial programs had production shutdowns for a period of a month in the Delta facility to adjust to customer
delivery schedules.

The Company continues to work towards securing additional defence and commercial program production contracts in order to
augment and diversify its backlog. Both defence and commercial production contracts are being renewed, with select new
customer agreements extending into 2027. Variability of the Canadian dollar relative to the US dollar continues to cause the
value of the Company’s current order backlog to fluctuate. 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.

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Avcorp Industries Inc.

annual report 2020

The Company forecasts its working capital financing requirements for 2021 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.

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. The Company’s ability to continue as a going concern is dependent upon its
ability to successfully negotiate extended terms with its creditor, meet financial covenants, achieve improvements in operating
results, 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 is the 12-month period from
the date of this report. 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.

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.

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

•

The Company is in discussions to extend the maturity of a loan agreement with a Canadian Chartered Bank maturing on
June 30, 2021. As of the date of this report, the Company has drawn USD $60,037,000 (CAD $76,439,000) of the loan.
The Company cannot provide assurance it will be able to extend the maturity date.

The Company ended the year with bank operating line utilization of $76,439,000 (USD $60,037,000) offset by $7,044,000
cash compared to utilization of $84,661,000 (USD $65,184,000) with $4,316,000 cash on hand as of December 31, 2019.
The balance of the net loss and related adjustments on modification of bank indebtedness as a result of executing an
amending agreement in 2019 was $269,000 as at December 31, 2020 (December 31, 2019 $809,000). As at the date of
this report the Company is able to draw up to an additional $20,000 (USD $16,000) on its operating line of credit.

The loan agreement with a Canadian Chartered Bank has certain financial covenants. The Company cannot provide
assurance it will be able to meet the financial metrics going forward. The Company may seek a waiver or amendment to
the loan agreement as described in the loan agreement, if an event of default is to occur. The financial covenants may also
be cured by drawing additional funds from the non-revolving standby facility secured on March 12, 2021 with Panta Canada
B.V.

On March 12, 2021, the Company entered into a multiparty amended and restated Accommodation Agreement with each
of a customer, and Panta Canada B.V. whereby, inter alia;

•

Panta Canada B.V. has agreed to provide a USD $10,000,000 non-revolving standby loan facility and a USD
$3,000,000 equipment loan for an aggregate availability of USD $13,000,000; and

The elimination of unamortized cash advance, mutual release and forgiveness of certain historic and future guarantee
fees payable to the customer. As at December 31, 2020, the guarantee fee is $8,178,000 (USD $6,423,000), the
customer advance is $5,911,000 (USD $4,643,000) and the legal claim is $7,130,000 (USD $5,600,000).

On April 28, 2020, the Company received a loan in the amount of USD $4,123,000 to support Avcorp Composite Fabrication
Inc (“ACF”) from a U.S. Chartered Bank through the U.S. Small Business Administration Paycheck Protection Program. The
Company has recognized a forgiveness of USD $3,430,000 in 2020 as the Company has satisfied the requirements of loan
forgiveness. On March 9, 2021, the Company submitted the application for review to receive this forgiveness. The
remaining loan balance has a term of 2 years and bears interest at a fixed rate of 1% per annum.

On March 15, 2021, the Company received a second wave U.S. Small Business Administration Paycheck Protection Program
loan in the amount of USD $2,000,000.

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

The assessment of the Company’s ability to execute its strategy of reducing operating costs, and 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.

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, 2020 amount to $Nil (December 31, 2019: $3,000). Fees payable to certain
directors or Companies with which they have beneficial ownership, as at December 31, 2020 are $Nil (December 31, 2019: $Nil).
These fees are included in the Consolidated statements of Loss and Comprehensive Loss as administrative and general expenses and
amount to $Nil for the year ended December 31, 2020 (December 31, 2019: $3,000).

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

Page 16

Avcorp Industries Inc.

annual report 2020

KEY MANAGEMENT COMPENSATION

(expressed in thousands of Canadian dollars)

Salaries and other short-term employee benefits

Contributions to defined contribution plan

Option-based awards

2020

2019

$1,746

1,869

$2,002

2,160

The balance of loans receivable from key management as at December 31, 2020 is $5,000 (December 31, 2019: $5,000). These loans
are unsecured and payable on demand.

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 2020.

Operating profit for the fourth quarter of 2020 was $8,477,000 from $44,742,000 in revenues, as compared to operating loss of
$8,114,000 from $38,309,000 in revenues for the quarter ended December 31, 2019, mainly contributed by the government grant
income of $7,646,000 and an estimate of variable consideration related to a contract termination of convenience. The Company
expensed $2,684,000 of overhead costs during the fourth quarter 2020 (2019: $2,072,000) in respect of unutilized plant capacity.
Provision for onerous contracts accrued during the fourth quarter 2020 totaled $188,000 (December 31, 2019: $155,000
amortization).

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. 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 are 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. A change in estimate of the amortization period occurred for a contract that received a termination
of convenience, an accelerated amortization of $7,469,000 was recognized in the year ended December 31, 2020.

Page 17

Avcorp Industries Inc.

annual report 2020

•

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.

On a periodic basis the Company reviews its plant capacity and estimates the portion of its under-utilized overhead
expenditures. The Company has expensed $8,346,000 of overhead costs during the current year (December 31, 2019:
$7,004,000) 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, 2020 is $565,000 (December 31, 2019:
$251,000).

• While a formal claim has not been levied by the customer, the Company has provisioned for a claim asserted by a customer
in the amount of $7,130,000 (USD $5,600,000) as at December 31, 2020 (December 31, 2019: $7,273,000 (USD
$5,600,000)). Subsequent to year end on March 12, 2021, the Company has amended and restated the accommodation
agreement with customer and Panta B.V. Canada providing a mutual release and settlement on all claims.

•

Values of right of use assets and lease liabilities require 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 (December 31, 2019: USD $1,350,000) for a legal action due to certain
employment practices at the Gardena facility.

Upon termination for convenience for customer contracts subject to the Federal Acquisition Regulation (“FAR”), the Company
must assess the contractual provisions that permit termination and the related contractual remedies available to recover all
or a portion of our incurred costs and fees for work performed. Variable consideration is recognized as estimated revenue to
the extent it is probable that a significant reversal in the amount of revenue recognized will not occur when the uncertainty
associated with the variable consideration is subsequently resolved. Management estimated the variable consideration using
actual costs, an estimate of reasonable profit margin determined in accordance with the contractual provisions and historical
experience, and delay cost estimates under the contractual entitlement subject to FAR. Although the Company believes its
estimates and assumptions made are consistent with the terms and conditions of the contract, the actual settlement amount
determined at a future date could materially affect the Company’s reported financial results.

The Company has determined that it will meet the eligibility requirements for the Canada Emergency Wage Subsidies not
yet received and has estimated the amounts recognized as other income and deferred government grant to be $2,031,000
and $657,000 respectively in the current year.

The Company has determined that it will meet the eligibility requirements for partial forgiveness of the U.S. Small Business
Administration Paycheck Protection Program loan has recognized $4,601,000 (USD3,430,000) in other income in the current
year.

Financial Instruments and Other Instruments

Market Risk

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

Currency Risk

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

The Company sells a significant proportion of its products in US dollars at prices which are often established well in advance of
manufacture and shipment dates. In addition, the Company purchases a significant proportion of its raw materials and
components in US dollars at prices that are usually established at the order date. The Company’s operations are based in Canada
and in the US. As a result of this, the Company is exposed to currency risk to the extent that fluctuations in exchange rates are
experienced. The amount of foreign exchange loss recorded for the year ended December 31, 2020 is $364,000 (December 31,
2019: $843,000 gain).

The Company had the following US dollar denominated balances:

Page 18

Avcorp Industries Inc.

annual report 2020

CURRENCY RISK

(expressed in thousands of dollars)

AS AT DECEMBER 31

2020 (expressed in USD)

2019 (expressed in USD)

Bank cash position

Accounts receivable

Accounts payable

Customer advance

Bank indebtedness

Term debt

$3,285

6,393

3,726

4,643

60,037

10,322

$2,639

9,824

6,948

4,643

65,184

4,273

With other variables unchanged, each $0.10 strengthening (weakening) of the CAD against the USD would result in an increase
(decrease) of approximately $6,905,000 in net income for the year ended December 31, 2020 as a result of holding a net liability
position in USD as at December 31, 2020.

As at December 31, 2019, a $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.

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 89.6% (December 31, 2019: 85.6%) 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, 2020. 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 strategies which include:

•

Page 19

Avcorp Industries Inc.

annual report 2020

•

On March 12, 2021, the Company entered into a multiparty amended and restated Accommodation Agreement with each
of a customer, and Panta Canada B.V. whereby, inter alia;

•

Panta Canada B.V. has agreed to provide a USD $10,000,000 non-revolving standby loan facility and a USD
$3,000,000 equipment loan for an aggregate availability of USD $13,000,000; and

The elimination of unamortized cash advance, mutual release and forgiveness of certain historic and future guarantee
fees payable to the customer. As at December 31, 2020, the guarantee fee is $8,178,000 (USD $6,423,000), the
customer advance is $5,911,000 (USD $4,643,000) and the legal claim is $7,130,000 (USD $5,600,000).

On April 28, 2020, the Company received a loan in the amount of USD $4,123,000 to support Avcorp Composite Fabrication
Inc (“ACF”) from a U.S. Chartered Bank through the U.S. Small Business Administration Paycheck Protection Program. The
Company has recognized a forgiveness of USD $3,430,000 in 2020 as the Company has satisfied the requirements of loan
forgiveness. On March 9, 2021, the Company submitted the application for review to receive this forgiveness. The
remaining loan balance has a term of 2 years and bears interest at a fixed rate of 1% per annum.

On March 15, 2021, the Company received a second wave U.S. Small Business Administration Paycheck Protection Program
loan in the amount of USD $2,000,000.

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

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 national, international and other
regulatory guidance and proposals for reform. These reforms and other pressures have outlined a complete phase out by June
30, 2023, with some plans starting as early as December 31, 2021. 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. Subsequent
to year end on March 12, 2021, the Company has amended and restated the accommodation agreement with a customer and
Panta B.V. Canada waiving all rights to the Guarantee Fee.

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

Page 20

Avcorp Industries Inc.

annual report 2020

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 Vice President, Finance (“VP Finance”) 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 and tax accounting
resources to assist with complex accounting maters, as well as develop the expertise of in-house staff. 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 VP Finance 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 VP Finance, of the design and effectiveness of our
internal controls over financial reporting. Based on this evaluation, the CEO and the VP Finance 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).

Disclosure Controls and Procedures (“DCP”)

The CEO and the VP Finance 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 VP Finance, of the design and effectiveness of our
disclosure controls and procedures. Based on this evaluation, the CEO and the VP Finance 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 21

Avcorp Industries Inc.

annual report 2020

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 and has been reviewed and approved by the Board of Directors of the
Company. The Board of Directors is responsible for ensuring that we fulfill our responsibilities for financial reporting and is ultimately
responsible for reviewing and approving the MD&A. The Board of Directors carries out this responsibility principally through its Audit
Committee. The Audit Committee is appointed by the Board of Directors and is comprised entirely of independent directors. The Audit
Committee reports its findings to the Board of Directors for its consideration when it approves the MD&A and financial statements for
issuance to shareholders. 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. As at the end of the period
covered by this report, the system of internal control provides reasonable assurance regarding the reliability of financial reporting and
preparation of financial statements for external purposes in accordance with IFRS. 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

Group Chief Executive
Officer

“Amish Patel”

AMISH PATEL

Group Vice President,
Finance

Page 22

Independent auditor’s report

To the Shareholders of
Avcorp Industries Inc.

Opinion

We have audited the consolidated financial statements of Avcorp Industries Inc. and its subsidiaries [the
“Group”], which comprise the consolidated statements of financial position as at December 31, 2020 and 2019,
and the consolidated statements of loss and comprehensive loss, consolidated statements of changes in
shareholders’ deficiency and consolidated statements of cash flows for the years then ended, and notes to the
consolidated financial statements, including a summary of significant accounting policies.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects the
consolidated financial position of the Group as at December 31, 2020 and 2019, and its consolidated financial
performance and its consolidated cash flows for the years then ended in accordance with International Financial
Reporting Standards [“IFRSs”].

Basis for opinion

We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities
under those standards are further described in the Auditor's responsibilities for the audit of the consolidated fin-
ancial statements section of our report. We are independent of the Group in accordance with the ethical require-
ments that are relevant to our audit of the consolidated financial statements in Canada, and we have fulfilled our
other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have
obtained is sufficient and appropriate to provide a basis for our opinion.

Material uncertainty related to going concern

We draw attention to note 1 in the consolidated financial statements, which indicates that the Group had a net loss
of $6,725,000, operating cash flows of $9,125,000, shareholders’ deficiency of $49,140,000, and an accumulated
deficit of $148,919,000. These events or conditions, along with other matters as set forth in note 1, indicate that a
material uncertainty exists that may cast significant doubt on the Group’s ability to continue as a going concern.
Our opinion is not modified in respect of this matter.

Key audit matters

Key audit matters are those matters that, in our professional judgment, were of most significance in the audit of
the consolidated financial statements of the current period. In addition to the matters described in the Material
uncertainty related to going concern section, we have determined the matters described below to be the key
audit matters to be communicated in our report. These matters were addressed in the context of the audit of the
consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separ-
ate opinion on these matters. For each matter below, our description of how our audit addressed the matter is
provided in that context.

We have fulfilled the responsibilities described in the Auditor’s responsibilities for the audit of the consolidated
financial statements section of our report, including in relation to these matters. Accordingly, our audit included the
performance of procedures designed to respond to our assessment of the risks of material misstatement of the
consolidated financial statements. The results of our audit procedures, including the procedures performed to
address the matters below, provide the basis for our audit opinion on the accompanying consolidated financial
statements.

A member firm of Ernst & Young Global Limited

– 2 –

Key audit matter

How our audit addressed the key audit matter

Valuation of Avcorp Structures & Integration [“ASI”] and Avcorp Composite Fabrication [“ACF”] cash-generating
units [“CGUs”]

Our audit procedures included, among others, the
following to address the key assumptions mentioned
above:

•

• We involved valuation specialists to assist in: [1]
evaluating the Company’s application of the
FVLCS model; [2] performing a comparison of
key assumptions used to determine the EBITDA
margin, terminal value and discount rate to other
similar companies taking into account industry-
specific risk data.
To test management’s cash flows forecast, we:
[1] compared the prior-year forecast to actual
results to assess the reliability of management’s
estimation process; [2] assessed the
reasonability of future revenue by comparing to
product delivery forecasts provided by
customers, when available, and evaluating other
relevant support; [3] performed a sensitivity
analysis on forecasted revenues and discount
rate; and [4] considered management’s
assumptions relative to industry and economic
trends.

As at December 31, 2020, the Group has
$48,403,000 of long-lived assets allocated to three
CGUs. At the end of each reporting period, the
Group determines whether indicators of impairment
exist for each CGU. If indicators of impairment are
identified for a CGU, the Group compares the
CGU’s carrying value to its recoverable amount
determined as the higher of the fair value less costs
to sell [“FVLCS”] or value in use [“VIU”].
Management of the Group determined that indicators
of impairment existed for the ASI and ACF
CGUs and the Group determined that the
recoverable amount, determined as the FVLCS, of
each CGU exceeded its carrying value. The
Group’s policy is disclosed in notes 3 and 4 of the
consolidated financial statements.

We identified the determination of the recoverable
amount for the ASI and ACF CGUs as a key
audit matter because it involves significant judgment
in determining certain key assumptions such as
expected revenue, discount rate, EBITDA margin
and terminal value. Key assumptions are affected by
expectations about future market and economic
conditions, which include the uncertainty of demand
from customers resulting from the impact of COVID-
19 on the industry, both globally and locally.
Changes in these assumptions can have a material
effect on the determination of the recoverable
amount.

A member firm of Ernst & Young Global Limited

– 3 –

Key audit matter

How our audit addressed the key audit matter

Valuation of variable consideration to be recognised in Revenue related to contract terminations

Our audit procedures included the following, among
others to address the judgments and inputs to the
estimate:

• We obtained an understanding of the process of
estimating variable consideration through
inquiries with management, program managers
and internal company analysts.

• We compared the inputs such as actual costs
incurred, reasonable profit margin and delay
costs, used in management’s estimate to the
relevant contractual termination provisions
including FAR.

• We compared FAR rates used by management

in determining the claim to
historical FAR rates.

• We compared labour and overhead hours to

program budgets and forecasts and actual hours
incurred over the life of the program.

• We compared management’s estimate of a

reasonable profit margin to historical margins
achieved and program forecasted margins.

As at December 31, 2020 the Company reported a
Contract Asset balance of $34,325,000, which
includes variable consideration related to certain
contracts with a customer, and which were
terminated for the convenience of the U.S.
government under the Federal Acquisition
Regulation [“FAR”]. The regulation along with the
terms within the Company’s contracts allow for the
Company to claim certain costs incurred associated
with the contracts plus a reasonable profit margin
upon termination.

The determination of the variable consideration
requires significant judgment and estimation. The
amount of variable consideration is based on the
actual costs, reasonable profit margin and delay cost
estimated under the contractual entitlement subject
to FAR. The Company has recognised variable
consideration in revenue to the extent that it is highly
probable that a significant reversal will not occur
when the uncertainty related to the amount is
resolved.

The Company’s policy related to variable
consideration is described in notes 3 and 4 to the
consolidated financial statements.

We identified the valuation of variable consideration
to be a key audit matter because it involves
significant judgment by management in determining
the constrained estimated value of the various key
inputs involved such as actual costs incurred, a
reasonable profit margin and the delay cost
estimated.

Other information

Management is responsible for the other information. The other information comprises:

• Management’s Discussion and Analysis
• The information, other than the consolidated financial statements and our auditor's report thereon, in the

Annual Report

A member firm of Ernst & Young Global Limited

– 4 –

Our opinion on the consolidated financial statements does not cover the other information and we do not express
any form of assurance conclusion thereon.

In connection with our audit of the consolidated financial statements, our responsibility is to read the other
information, and in doing so, consider whether the other information is materially inconsistent with the consolidated
financial statements, or whether our knowledge obtained in the audit or otherwise appears to be materially
misstated.

We obtained Management’s Discussion and Analysis and the Annual Report prior to the date of this auditor’s
report. If, based on the work we have performed, we conclude that there is a material misstatement of this other
information, we are required to report that fact in this auditor’s report. We have nothing to report in this regard.

Responsibilities of management and those charged with governance for the consolidated financial
statements

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

In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to
continue as a going concern, disclosing, as applicable, matters related to going concern and using the going
concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or
has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Group’s financial reporting process.

Auditor’s responsibilities for the audit of the consolidated financial statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole
are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes
our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in
accordance with Canadian generally accepted auditing standards will always detect a material misstatement when
it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate,
they could reasonably be expected to influence the economic decisions of users taken on the basis of these
consolidated financial statements.

As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional
judgment and maintain professional scepticism throughout the audit. We also:

•

Identify and assess the risks of material misstatement of the consolidated financial statements, whether due
to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence
that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material
misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion,
forgery, intentional omissions, misrepresentations, or the override of internal control.
Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Group’s internal control.
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates
and related disclosures made by management.

A member firm of Ernst & Young Global Limited

– 5 –

•

Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based
on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may
cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material
uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the
consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our
conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future
events or conditions may cause the Group to cease to continue as a going concern.
Evaluate the overall presentation, structure and content of the consolidated financial statements, including
the disclosures, and whether the consolidated financial statements represent the underlying transactions and
events in a manner that achieves fair presentation.
Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business
activities within the Group to express an opinion on the consolidated financial statements. We are responsible
for the direction, supervision and performance of the group audit. We remain solely responsible for our audit
opinion.

We communicate with those charged with governance regarding, among other matters, the planned scope and
timing of the audit and significant audit findings, including any significant deficiencies in internal control that we
identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant ethical
requirements regarding independence, and to communicate with them all relationships and other matters that may
reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or
safeguards applied.

From the matters communicated to those charged with governance, we determine those matters that were of most
significance in the audit of the consolidated financial statements of the current period and are therefore the key
audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure
about the matter or when, in extremely rare circumstances, we determine that a matter should not be
communicated in our report because the adverse consequences of doing so would reasonably be expected to
outweigh the public interest benefits of such communication.

The engagement partner on the audit resulting in this independent auditor’s report is Nicole Poirier.

Vancouver, Canada
March 19, 2021

A member firm of Ernst & Young Global Limited

Avcorp Industries Inc.

annual report 2020

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)

Government grant receivable (note 27)

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 (note 14)

Intangibles (note 15)

Total assets

LIABILITIES AND DEFICIENCY

Current liabilities

Bank indebtedness (note 16)

Accounts payable and accrued liabilities (note 18 and 34)

Current portion of term debt (note 20)

Customer advance (note 17 and 34)

Guarantee fee (note 16 and 34)

Deferred government grant (note 27)

Contract liability (note 19)

Onerous contract provision (note 21)

Non-current liabilities

Guarantee fee (note 16 and 34)

Term debt (note 20)

Contract liability (note 19)

Onerous contract provision (note 21)

(Deficiency) Equity

Capital stock (note 23)

Contributed surplus

Accumulated other comprehensive income

Accumulated deficit

Total liabilities and deficiency

Nature of operations and going concern (note 1)

Subsequent events (note 34)

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

Approved by the Board of Directors on March 19, 2021

2020

2019

$7,044

14,436

2,688

34,325

9,657

2,108

70,258

2,877

9,045

38,703

655

$4,316

17,625

26,162

12,933

2,136

63,172

2,738

14,075

46,328

1,827

121,538

128,140

76,708

27,932

16,868

5,911

8,178

657

11,502

282

148,038

19,168

3,189

283

85,470

38,178

2,768

6,030

2,036

251

134,733

5,277

26,848

4,757

170,678

171,615

86,219

5,478

8,082

86,219

5,446

7,054

(148,919)

(142,194)

(49,140)

(43,475)

121,538

128,140

“David Levi”

David Levi
Chairman

“Ken Robertson”

Ken Robertson
Committee Chair, Audit & Corporate Governance Committee

Page 23

Avcorp Industries Inc.

annual report 2020

CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS

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

FOR THE YEAR ENDED DECEMBER 31

Revenues (notes 3, 17, and 33)

Cost of sales (notes 3, 11, 21, and 33)

Gross profit

Administrative and general expenses

Office equipment depreciation

Net gain on claims (note 26)

Other (income) losses (note 27)

Operating income (loss)

Finance costs – net (note 28)

Foreign exchange loss (gain)

Net loss on sale and write-off of equipment

Loss before income tax

Income tax expense

Loss for the year

Other comprehensive income

Total comprehensive loss for the year

Loss per share:

Basic loss per common share (note 32)

Diluted loss per common share (note 32)

2020

2019

$150,962

142,729

8,233

16,717

787

(11,642)

2,371

7,605

364

1,127

(6,725)

1,028

(5,697)

(0.02)

$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)

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

368,118

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

368,118

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

Page 24

Avcorp Industries Inc.

annual report 2020

CONSOLIDATED STATEMENTS OF CASH FLOWS

(expressed in thousands of Canadian dollars)

2020

2019

$(6,725)

$(9,316)

7,605

8,338

8,955

1,197

1,127

308

(163)

(326)

(694)

(6,632)

13,022

9,195

(8,270)

3,397

(10,265)

2,033

9,125

(1,769)

(3,929)

(31)

(5,668)

653

(7,368)

(3,954)

12,453

(2,524)

(740)

2,717

4,316

7,044

8,924

8,218

1,786

1,184

111

(1,665)

649

(1,177)

(1,425)

(1,195)

(3,539)

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

FOR THE YEAR ENDED DECEMBER 31

Cash flows from operating activities

Net loss for the year

Adjustment for items not affecting cash:

Net interest expense

Depreciation

Development cost amortization

Intangible assets amortization
Loss on disposal and write-off of
equipment

Provision for onerous contracts

Stock based compensation

Loss on Investment in AVS-SYS

Provision for obsolete inventory

Provision for doubtful accounts

Unrealized foreign exchange

Government grant income

Net claim settlement

Cash flows from 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

Contract liability

Net cash from operating activities

Cash flows used in investing activities
Proceeds from sale of equipment

Purchase of equipment

Payments relating to development costs and tooling

Initial lease payments and other direct costs incurred

Net cash used in investing activities

Cash flows used in 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 financing activities

Net increase in cash

Net foreign exchange difference

Cash - Beginning of the year

Cash - End of the year

Supplementary Cash Flow Information (note 29).

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

Page 25

Avcorp Industries Inc.

annual report 2020

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIENCY

(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 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)

Balance at December 31, 2019

368,118,620

86,219

5,446

(142,194)

7,054

(43,475)

Stock-based compensation expense

Unrealized currency gain on translation for the year

Net loss for the year

1,028

(6,725)

Balance at December 31, 2020

368,118,620

86,219

5,478

(148,919)

8,082

(49,140)

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

Page 26

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2020
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2020

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, 2020 were authorized for issue in
accordance with a resolution of its Board of Directors on March 19, 2021.

During the year ended December 31, 2020, the Company had a net loss of $6,725,000 (December 31, 2019: net loss of
$9,316,000), had operating cash flows of $9,125,000 (December 31, 2019: positive $10,911,000) and a shareholders’ deficiency
of $49,140,000 as of December 31, 2020 (December 31, 2019: $43,475,000 deficiency) and an accumulated deficit of
$148,919,000 (December 31, 2019: $142,194,000).

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. The Company’s ability to continue as a going concern is dependent upon its ability to
successfully negotiate extended terms with its creditor, meet financial covenants, achieve improvements in operating results, 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 is the 12-month period from the date of this
report. 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.

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 favorable terms, or at all. If the Company cannot raise adequate funds on
acceptable terms, its business could be materially harmed.

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

•

The Company is in discussions to extend the maturity of a loan agreement with a Canadian Chartered Bank maturing on
June 30, 2021. As of the date of this report, the Company has drawn USD $60,037,000 (CAD $76,439,000) of the loan. The
Company cannot provide assurance it will be able to extend the maturity date.

The loan agreement with a Canadian Chartered Bank has certain financial covenants. The Company cannot provide assurance
it will be able to meet the financial metrics going forward. The Company may seek a waiver or amendment to the loan
agreement as described in the loan agreement, if an event of default is to occur. The financial covenants may also be cured
by drawing additional funds from the non-revolving standby facility secured on March 12, 2021 with Panta Canada B.V.

On March 12, 2021, the Company entered into a multiparty amended and restated Accommodation Agreement with each of
a customer, and Panta Canada B.V. whereby, inter alia;

•

Panta Canada B.V. has agreed to provide a USD $10,000,000 non-revolving standby loan facility and a USD $3,000,000
equipment loan for an aggregate availability of USD $13,000,000; and

The elimination of unamortized cash advance, mutual release and forgiveness of certain historic and future guarantee
fees payable to the customer. As at December 31, 2020, the guarantee fee is $8,178,000 (USD $6,423,000), the
customer advance is $5,911,000 (USD $4,643,000) and the legal claim is $7,130,000 (USD $5,600,000).

Page 27

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2020
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2020

•

On April 28, 2020, the Company received a loan in the amount of USD $4,123,000 to support Avcorp Composite Fabrication
Inc (“ACF”) from a U.S. Chartered Bank through the U.S. Small Business Administration Paycheck Protection Program. The
Company has recognized a forgiveness of USD $3,430,000 in 2020 as the Company has satisfied the requirements of loan
forgiveness. On March 9, 2021, the Company submitted the application for review to receive this forgiveness. The remaining
loan balance has a term of 2 years and bears interest at a fixed rate of 1% per annum.

On March 15, 2021, the Company received a second wave U.S. Small Business Administration Paycheck Protection Program
loan in the amount of USD $2,000,000.

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

The assessment of the Company’s ability to execute its strategy of reducing operating costs, and 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.

Impact of COVID-19

In March 2020, the World Health Organization (“WHO”) declared coronavirus (“COVID-19”) a global pandemic. Governments
worldwide enacted emergency measures including travel bans, social distancing measures and mandatory quarantine
requirements. The measures have negatively impacted the global economy and adversely impacted the aviation industry
worldwide particularly in the commercial airline industry. Based on management’s best estimate, the significant decrease in air
travel resulting from the COVID-19 pandemic is adversely affecting Avcorp’s customers and their demand for the Company’s
products. The situation remains dynamic and the ultimate duration and magnitude of the impact on the economy and the financial
effect on the Company remains unknown at this time.

The Company has implemented measures to align its cost structure and maximize cash preservation during the current market
conditions, including headcount reductions to ensure that it emerges from the current crisis on solid footing. The Company also
applied and received the Canada Emergency Wage Subsidy for its Canadian operations and support as part of Paycheck Protection
Plan for its U.S. operations. On a consolidated basis, the COVID-19 pandemic had a material negative impact on free cash flow
for the full year due to lower revenue.

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.

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: 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, 2023, with earlier application permitted. The Company is currently assessing the impact and the timing to adopt this
amendment.

Amendments to IAS 37: Onerous Contracts – Costs of Fulfilling a contract

In May 2020, the IASB issued amendments to IAS 37 to specify which costs an entity needs to include when assessing whether
a contract is onerous or loss-making.

The amendments apply a “directly related cost approach”. The costs that relate directly to a contract to provide goods or services
include both incremental costs and an allocation of costs directly related to contract activities. General and administrative costs
do not relate directly to a contract and are excluded unless they are explicitly chargeable to the counterparty under the contract.

Page 28

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2020
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2020

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,
2020. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee
and has the ability to affect those returns through its power over the investee. Specifically, the Group controls an investee if, and
only if, the Group has:

•

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

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

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

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

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

Business combinations

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

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 subsidiaries, Comtek, is also
determined to be Canadian dollars. The functional currency of the Company’s subsidiaries, 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.

Page 29

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2020
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2020

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.

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.

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 the 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 based on market interest rate for a similar financial liability.
The financial liability initially recognized at fair value is amortized subsequent to initial recognition using the effective interest
method.

Page 30

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2020
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2020

Inventories

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

Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. Cost includes
expenditures that are directly attributable to the acquisition of the asset. Subsequent costs are included in the asset’s carrying
amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with
the item will flow to the Company and the cost can be measured reliably. The carrying amount of a replaced asset is derecognized
when replaced. Repairs and maintenance costs are charged to the consolidated statement of loss during the period in which they
are incurred.

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

Computer hardware and software
Machinery and equipment
Leasehold improvements

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

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

Intangible Assets

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

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

Research and development costs

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

Segment Reporting

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

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.

Page 31

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2020
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2020

When the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written
down to its recoverable amount.

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

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

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

Employee benefits

•

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

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

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

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

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

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.

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.

Page 32

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2020
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2020

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 when the goods are delivered to the customers.

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

Contract Assets include unbilled amounts typically resulting from sales under purchase orders and 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.

The Company’s customer contracts with the U.S. government are subject to the Federal Acquisition Regulation (“FAR”) and are
competitively priced based on estimated costs of providing the contractual goods or services. The U.S. Government or the prime
contractor may cancel any contract at any time through a termination for convenience or for cause. Many of our contracts have
terms that create an enforceable right to payment for performance completed to date in the event of a termination for
convenience. Variable consideration is estimated as the most likely amount to which we expect to be entitled and is recognized
to the extent it is probable that a significant reversal will not occur when the uncertainty associated with the variable consideration
is subsequently resolved.

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 not recognized for 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 33

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2020
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2020

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.

Lease

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.

Page 34

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2020
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2020

Government grants

The Company recognized government grant income related to the Canada Emergency Wage Subsidy and the U.S. Small Business
Administration Paycheck Protection Program loan when there is reasonable assurance that the Company will comply with eligibility
requirements and the grants will be received. The Company has recognized deferred government grant on wages capitalized as
inventory. The deferred government grant will be recognized as income upon sale of the inventory.

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. Any changes in
estimates and assumptions could have a material impact on the assets and liabilities at the date of the statement of financial
position. The Company reviews its estimates and assumptions on an ongoing basis and uses the most current information available
and exercises careful judgement in making these estimates and assumptions.

•

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

Page 35

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2020
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2020

•

The Company has provisioned USD $1,350,000 (December 31, 2019: USD $1,350,000) for a legal action due to certain
employment practices at the Gardena facility.

Upon termination for convenience for customer contracts subject to the Federal Acquisition Regulation (“FAR”), the Company
must assess the contractual provisions that permit termination and the related contractual remedies available to recover all
or a portion of our incurred costs and fees for work performed. Variable consideration is recognized as estimated revenue to
the extent it is probable that a significant reversal in the amount of revenue recognized will not occur when the uncertainty
associated with the variable consideration is subsequently resolved. Management estimated the variable consideration using
actual costs, an estimate of reasonable profit margin determined in accordance with the contractual provisions and historical
experience, and delay cost estimated under the contractual entitlement subject to FAR. Although the Company believes its
estimates and assumptions made are consistent with the terms and conditions of the contract, the actual settlement amount
determined at a future date could materially affect the Company’s reported financial results.

The Company has determined that it will meet the eligibility requirements for partial forgiveness of the U.S. Small Business
Administration Paycheck Protection Program loan and has recognized $4,601,000 (USD $3,430,000) in other income in the
current year.

Page 36

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2020
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2020

5. Expenses by Nature

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

Expenses by nature:

Raw materials, purchased parts and consumables

Salary, wages, and benefits

Amortization of development costs

Depreciation

Contract services & consulting

Utilities

Transportation

Office equipment rental and maintenance

Other expenses and conversion costs into inventory

Rent

Legal and audit fees

Amortization of intangible assets

Plant equipment rental and maintenance

Insurance

Change in onerous contracts provision

Travel costs

Office supplies

Royalties

Bad debt recovery

2020

2019

$65,028

59,117

8,955

8,338

3,606

3,491

1,926

1,867

1,537

1,514

1,509

1,197

900

664

308

203

171

159

(257)

160,233

$84,377

68,816

1,786

8,218

4,605

3,592

2,273

1,837

1,481

1,893

2,382

1,184

892

606

(1,665)

733

188

193

(172)

183,219

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 37

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2020
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2020

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 loss recorded for the year ended December 31, 2020 is $364,000
(December 31, 2019: $843,000 gain).

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

2020

2019

USD$3,285

USD$2,639

6,393

3,726

4,643

60,037

10,322

9,824

6,948

4,643

65,184

4,273

With other variables unchanged, each $0.10 strengthening (weakening) of the CAD against the USD would result in an
increase (decrease) of approximately $6,905,000 in net income for the year ended December 31, 2020 as a result of holding
a net liability position in USD as at December 31, 2020.

As at December 31, 2019, a $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 89.6% (December 31, 2019: 85.6%) 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, 2020. 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 38

2020

$355

(42)

(320)

2019

$1,780

336

(16)

(1,745)

355

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2020
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2020

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

2020

$9,531

1,379

1,400

1,499

13,809

2019

$10,221

3,507

2,055

1,137

16,920

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 20.

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 20)

Trade payables (note 18)

Payroll related liabilities (note 18)

Customer advance (note 17)

Guarantee fee (note 16)

Accrued interest (note 18)

Other accruals (note 18)

Bank indebtedness (note 16)

Term debt (note 20)

Trade payables (note 18)

Payroll related liabilities (note 18)

Customer 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

$76,708

1,205

10,980

5,242

5,911

159

216

15,663

8,178

December 31, 2020

1 – 5 years

Over 5 years

13,413

5,755

Less than 3
months

3 months to 1
year

1 – 5 years

Over 5 years

December 31, 2019

$85,470

593

23,201

4,952

6,030

356

176

2,175

19,556

5,277

7,292

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 39

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2020
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2020

•

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

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. Subsequent to year end on March 12, 2021, the Company has amended and restated the accommodation
agreement with a customer and Panta B.V. Canada waiving all rights to the Guarantee Fee (note 34).

The maximum operating line of credit availability is $83,649,000 (USD $65,700,000) of which $76,439,000 (USD
$60,037,000) is utilized as at December 31, 2020 (December 31, 2019: $84,661,000 (USD $65,184,000)). 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, 2020, with other variables unchanged, a 1% change in the base borrowing rate would have an $764,000
(December 31, 2019: $847,000) 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 $1,762,000 (USD $1,384,000) on its operating line of credit as at December
31, 2020 (December 31, 2019: $335,000 (USD $258,000)). As at the date of this report the Company is able to draw up to
an additional $20,000 (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 9, 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 40

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2020
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2020

As at December 31, 2020 and December 31, 2019, the Company’s financial assets and liabilities are categorized as follows:

AS AT DECEMBER 31

2020

2019

Amortized cost

Total

Amortized cost

Total

Financial Assets

Cash

Accounts receivable

Financial Liabilities

Bank indebtedness

Accounts payable

Term debt

Customer advance

Guarantee fee

$7,044

14,436

76,708

27,932

36,036

5,911

8,178

$7,044

14,436

76,708

27,932

36,036

5,911

8,178

$4,316

17,625

85,470

38,178

29,616

6,030

5,277

$4,316

17,625

85,470

38,178

29,616

6,030

5,277

8. Fair Value Measurement

As at December 31, 2020 and December 31, 2019, 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

2020

2019

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

36,036

5,911

8,178

36,036

5,911

8,178

29,616

6,030

5,277

29,616

6,030

5,277

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

2020

2019

$13,809

$16,920

545

623

14,436

17,625

The average trade receivables days outstanding is 33 days as at December 31, 2020 (December 31, 2019: 37 days).

Page 41

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2020
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2020

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

2020

2019

USD$6,813

USD$10,935

5,761

3,423

Contract assets include unbilled amounts typically resulting from sales under purchase orders and 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 also include variable consideration
recognized upon contract modifications, determined using the most likely amount expected to be entitled. Contract assets are
current in nature.

A significant portion of 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

2020

2019

$34,325

$26,162

2020

$8,296

5,160

216

(4,015)

9,657

2019

$9,222

7,203

571

(4,063)

12,933

The amount of inventory expensed in cost of sales during the year ended December 31, 2020 amounted to $125,428,000
(December 31, 2019: $152,192,000).

During the year ended December 31, 2020, $108,000 (December 31, 2019, $431,000) was recognized as a reversal of 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 42

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2020
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2020

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

2020

$646

3,437

459

287

156

4,985

2,108

2,877

2019

$543

3,229

190

537

375

4,874

2,136

2,738

Development costs represent hard and soft tooling, and prototype design costs incurred for various customer programs.
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. A change in estimate of the
amortization period occurred for a contract that received a termination of convenience, this accelerated $7,469,000 of
amortization in the year ended December 31, 2020.

FOR THE YEAR ENDED DECEMBER 31

Opening balance

Additions

Amortization

Foreign exchange

FOR THE YEAR ENDED DECEMBER 31

Cost

Accumulated amortization

Net book amount

2020

$14,075

3,929

(8,955)

(4)

9,045

2020

$30,982

(21,937)

9,045

2019

$11,755

4,116

(1,786)

(10)

14,075

2019

$27,057

(12,982)

14,075

Page 43

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2020
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2020

14. Property, Plant and Equipment

Building

Machinery
and
equipment

Computer
hardware and
software

Leasehold
improvements

Total

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

10,709

(8,373)

2,336

156

(638)

(25)

1,876

1,230

41,505

14,439

(587)

377

(222)

(8,218)

(30)

(1,188)

1,051

46,328

2,992

97,804

(1,941)

(51,476)

1,051

46,328

1,051

1,062

(95)

46,328

2,209

(1,796)

609

(223)

(8,338)

(11)

(309)

1,911

38,703

24,694

(3,369)

59,409

(37,793)

21,325

21,616

21,325

21,616

928

(1,701)

574

(3,515)

(3,962)

(153)

(139)

(120)

17,720

17,196

24,511

(6,791)

57,994

(40,798)

17,720

17,196

10,860

(8,984)

1,876

4,029

97,394

(2,118)

(58,691)

1,911

38,703

At December 31, 2019

Cost

Accumulated depreciation

Net book amount

Year ended December 31, 2020

Opening net book amount

Additions

Disposals – cost

Disposals – accumulated depreciation

Depreciation charge

Transfers

Currency translation adjustment

Closing net book amount

At December 31, 2020

Cost

Accumulated depreciation

Net book amount

The Company has $52,000 in commitments at December 31, 2020 (December 31, 2019: $318,000) to purchase Property, Plant
and Equipment in 2021.

Page 44

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2020
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2020

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:

Building

Machinery
and
equipment

Computer
hardware and
software

January 1, 2019

Additions

Depreciation charge

Currency translation adjustment

At December 31, 2019

January 1, 2020

Additions

Disposals - cost

Disposals – accumulated depreciation

Depreciation charge

Currency translation adjustment

At December 31, 2020

12,205

12,759

(3,471)

(168)

21,325

(3,515)

(153)

17,720

1,101

(238)

(82)

781

265

(215)

(261)

686

Total

13,755

13,535

(3,918)

(252)

449

776

(209)

(2)

1,014

23,120

1,014

112

(257)

(2)

23,120

440

(215)

(4,033)

(98)

867

19,273

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 26). The Gardena Facility’s
lease was renewed resulting in the addition of $12,759,000 to the right-of-use assets. Subsequent to year end on February 25,
2021, the Company and SGL Composites Inc. amended the Gardena Facility’s lease agreement effective January 1, 2021 (note
34).

Page 45

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2020
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2020

15. Intangibles

Year ended December 31, 2019

Opening net book amount

Amortization charge

Currency translation adjustment

Closing net book amount

At December 31, 2019

Cost

Accumulated depreciation

Net book amount

Year ended December 31, 2020

Opening net book amount

Amortization charge

Currency translation adjustment

Closing net book amount

At December 31, 2020

Cost

Accumulated depreciation

Net book amount

16. Bank Indebtedness

Lease

Customer
contract –
re-compete

Developed
Software

702

(702)

688

(688)

2,238

(1,088)

(85)

1,065

5,325

(4,260)

1,065

(1,100)

5,219

(5,219)

899

(96)

(41)

762

941

(179)

762

(97)

(10)

655

922

(267)

655

Total

3,137

(1,184)

(126)

1,827

6,968

(5,141)

1,827

(1,197)

655

6,829

(6,174)

655

•

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 46

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2020
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2020

•

The Company cannot provide assurance it will be able to meet the financial metrics going forward and may seek a
waiver or amendment to the loan agreement if an event of default is to occur.

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 maximum availability under the Loan agreement cannot exceed USD $68,000,000 less USD $1,000,000 until
December 31, 2020 and thereafter less USD $2,300,000.

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 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 of the
outstanding loan balance. Subsequent to year end on Mar 12, 2021, the Company has amended and restated the accommodation
agreement with a customer and Panta B.V. Canada waiving all rights to the Guarantee Fee (note 34).

The Company ended the year with bank operating line utilization of $76,439,000 (USD $60,037,000) offset by $7,044,000 cash
compared to utilization of $84,661,000 (USD $65,184,000) with $4,316,000 cash on hand as at December 31, 2019. The balance
of the net loss and related adjustments on modification of bank indebtedness as a result of executing an amending agreement in
2019 was $269,000 as at December 31, 2020 (December 31, 2019 $809,000). Based on net collateral provided to its bank, the
Company is able to draw up to an additional $1,762,000 (USD $1,384,000) on its operating line of credit as at December 31,
2020 (December 31, 2019: $335,000 (USD $258,000)).

FOR THE YEAR ENDED DECEMBER 31

Opening balance

Drawdowns on bank indebtedness

(Amortization)/Recognition of loan modification loss

Repayment of loans

Foreign exchange gain

Ending balance

2020

$85,470

653

(540)

(7,368)

(1,507)

76,708

2019

$85,840

20,844

906

(18,010)

(4,110)

85,470

The carrying amount of accounts receivable pledged as security under the Company’s operating line of credit as at December 31,
2020 is $8,605,000 (December 31, 2019: $13,121,000). The inventory and contract asset pledged as security under the
Company’s operating line of credit as at December 31, 2020 is $20,306,000 (December 31, 2019: $22,185,000).

17. Customer advance

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

Page 47

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2020
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2020

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 Company amortized into revenue $Nil of the customer advance during the year ended December 31, 2020. 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, 2020 is USD $4,643,000 (December 31, 2019
is USD $4,643,000).

Subsequent to year end on March 12, 2021, the Company has amended and restated the accommodation agreement with a
customer and Panta B.V. Canada settling and waiving all rights to the customer advance (note 34).

FOR THE YEAR ENDED DECEMBER 31

Opening balance

Foreign exchange

18. Accounts Payable and Accrued Liabilities

AS AT DECEMBER 31

Trade payables

Claims provision (note 26 and 34)

Payroll-related liabilities

Restoration provision

Accrued interest

Other

19. Contract Liability

FOR THE YEAR ENDED DECEMBER 31

Opening balance

Additions

Realized

Less: Current portion

Non-current portion

2020

$6,030

(119)

5,911

2020

$10,980

10,859

5,242

476

159

216

2019

$6,334

(304)

6,030

2019

$23,201

9,027

4,952

466

356

176

27,932

38,178

2020

$6,793

46,550

2019

$4,999

16,399

(38,652)

(14,605)

14,691

11,502

3,189

6,793

2,036

4,757

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.

Page 48

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2020
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2020

20. Term Debt

AS AT DECEMBER 31

Lease liabilities(a)

Panta loans (b)

SADI loans (c)

PPP loans (d)

Less: Current portion

Non-current portion

a) Lease Liabilities

2020

$18,243

13,142

3,734

917

36,036

16,868

19,168

2019

$20,493

5,550

3,573

29,616

2,768

26,848

There are various lease liabilities that have a weighted average interest rate of 9.0% per annum (2019: 9.0%). 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 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.

Within 1 Year

Between 1 – 5
Years

Over 5 Years

December 31, 2020

Lease liability

$2,619

$11,639

$3,985

Lease liability

$2,415

$12,598

$5,480

Within 1 Year

Between 1 – 5
Years

Over 5 Years

December 31, 2019

b) Panta Loan

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 $4,566,000 (USD
$3,500,000). The Company had drawn the full amount on this 2019 Panta Loan in December 2019 and January 2020.

On March 2, 2020, the Company entered into an amendment to the 2019 Panta Loan securing an additional and drawing
$2,686,000 (USD $2,000,000). As at December 31, 2020 the Company is able to draw up to an additional $Nil on the standby
credit facility.

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.

Page 49

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2020
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2020

•

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. The Panta Loan has been deemed current in
nature due to the maturity date of June 30, 2021 of the operating credit facility.

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.

FOR THE YEAR ENDED DECEMBER 31

Opening balance

Add: Draw down

Add: Accrued interest

Less: Foreign exchange gain

2020

$5,550

6,924

1,079

(411)

13,142

2019

$4,956

328

518

(252)

5,550

Subsequent to year end on March 12, 2021, the Company has amended and restated the accommodation agreement with a
customer and Panta B.V. Canada providing an additional aggregate USD $13,000,000 by way of a non-revolving standby
loan facility and equipment loan (“Panta 2021”) (note 34).

c) SADI Loans

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;

In September 2020 the Company received a 9 months deferral of repayment obligations from the Government of Canada
for the scheduled payment in 2020 and all the subsequent annual payments in response to COVID-19; and

Amounts repayable are unsecured.

$3,734,000 was drawn on this facility as at December 31, 2020 (December 31, 2019: $3,573,000). The amounts owing,
when due, are repayable to the Industrial Technologies Office.

Opening balance

Add: Accrued interest

Add: Contributions

Less: Repayments

Ending Balance

d) Paycheck Protection Program Loan

December 31, 2020

December 31, 2019

$3,573

161

3,734

$2,902

155

868

(352)

3,573

On April 28, 2020, the Company received a loan in the amount of USD $4,123,000 from a U.S. Chartered Bank through the
U.S. Small Business Administration Paycheck Protection Program (“PPP Loan”). The loan has a term of 2 years. The loan
bears interest at a fixed rate of 1% per annum. The Company has determined that $4,601,000 (USD $3,430,000) met the
forgiveness criteria and the amount is included in other income. On March 9, 2021, the Company submitted the application
for review to receive this forgiveness.

Page 50

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2020
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2020

FOR THE YEAR ENDED DECEMBER 31

December 31, 2020

December 31, 2019

Opening balance

Add: Accrued interest

Add: Contributions

Less: Loan forgiveness

Less: Foreign exchange gain

Ending Balance

21. Onerous Contract Provision

5,529

(4,601)

(48)

917

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, 2020 is $565,000 (December 31, 2019: $251,000).

FOR THE YEAR ENDED DECEMBER 31

Opening balance

Additions

Amortization

Foreign exchange

Balance

Less: Current portion

Non-current portion

2020

$251

565

(257)

565

282

283

2019

$1,930

178

(1,843)

(14)

251

22. Obligations, Commitments and Contingent Liabilities

The Company has $52,000 in commitments at December 31, 2020 (December 31, 2019: $318,000) to purchase property, plant
and equipment in 2021.

As at December 31, 2020, including the above, the Company had a total of $35,238,000 of committed contractual operational
purchase order obligations outstanding (December 31, 2019: $70,622,000).

23. Capital Stock

Common shares issued or reserved:

December 31, 2018

Share issue

Exercise of stock warrants

Number of shares

368,118,620

Amount

86,219

Transfer from contributed surplus on exercise of stock warrants

December 31, 2019

Share issue

Exercise of stock warrants

Transfer from contributed surplus on exercise of stock warrants

368,118,620

86,219

December 31, 2020

368,118,620

86,219

Page 51

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2020
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2020

a) 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, 2020 and December 31, 2019, and changes during
the periods ending on those dates, are presented below:

FOR THE YEAR ENDED DECEMBER 31

2020

2019

Options

Weighted average
exercise price

Options

Weighted average
exercise price

Outstanding – Beginning of year

11,443,000

$0.067

11,443,000

$0.067

Granted

Expired

Exercised

Forfeited

(6,002,000)

0.085

Outstanding – End of year

5,441,000

0.048

11,443,000

0.067

The following table summarizes stock options which are exercisable as at December 31, 2020:

$0.052

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

FOR THE YEAR ENDED DECEMBER 31

Beginning of year

Stock-based compensation expense (note 24)

End of year

24. Stock Based Compensation

Weighted average
remaining contractual
life (years)

Weighted average
exercise price

3.74

$0.052

Number

3,566,000

2020

$5,446

5,478

2019

$5,370

5,446

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, 2020 and 2019.

The amount of stock-based compensation expense, for options granted in prior periods, amortized to earnings during the year
ended December 31, 2020 was $32,000 (2019: $76,000). Stock-based compensation expense has been included in the
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) as administrative and general expenses.

25. 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

2020

$1,409

2019

$1,423

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.

Page 52

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2020
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2020

26. Net Claims

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.

While a formal claim has not been levied by the customer, the Company has provisioned for a claim asserted by a customer in
the amount of $7,130,000 (USD $5,600,000) as at December 31, 2020. Subsequent to year end on March 12, 2021, the Company
has amended and restated the accommodation agreement with customer and Panta B.V. Canada providing a mutual release and
settlement on all claims. (note 34)

27. Other Income and Losses

The Canada Emergency Wage Subsidy from the Canadian Government for the year ended December 31, 2020 of $6,796,000
were included in the Consolidated Statements of Income (Loss) as other income, $657,000 was capitalized as deferred income
which would be recognized as other income when the related inventory are sold by the Company. There are no unfulfilled
conditions or other contingencies attaching to these grants. The Company recorded $2,688,000 as a government grant receivable
as at December 31, 2020, which the Company expected to receive subsequent to year end.

On April 28, 2020, the Company received a loan in the amount of USD $4,123,000 from a U.S. Chartered Bank through the U.S.
Small Business Administration Paycheck Protection Program (“PPP Loan”). The loan has a term of 2 years. The loan bears interest
at a fixed rate of 1% per annum. As at December 31, 2020, the Company has determined that $4,601,000 (USD $3,430,000)
met the forgiveness criteria and the amount is included as other income. On March 9, 2021, the Company submitted the
application for review to receive this forgiveness.

FOR THE YEAR ENDED DECEMBER 31

Canada Emergency Wage Subsidy

Government loan forgiven

Fair value losses in investment

Others

28. Finance Costs

FOR THE YEAR ENDED DECEMBER 31

Interest on lease liabilities

Interest on other term debt

Interest on bank indebtedness

(Amortization) 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

Page 53

2020

6,796

4,601

245

11,642

2020

$1,797

198

5,064

(540)

1,079

119

7,727

(122)

7,605

2019

(649)

2019

$1,961

156

5,355

906

518

8,941

(17)

8,924

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2020
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2020

29. Supplementary Cash Flow Information

FOR THE YEAR ENDED DECEMBER 31

Equipment acquired under lease liability

30. Income Tax

2020

$440

2019

$674

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 $33,488,000 (2019: $30,830,000) in respect of losses amounting to $75,676,000 (2019:
$69,781,000) which include foreign losses of $40,329,000 (2019: $37,429,000) that will expire beginning in 2035 through 2040
(except U.S. Net Operating Losses from fiscal 2018 onwards of $24,401,000 that carryforward indefinitely), unclaimed research
and development costs of $9,940,000 (2019: $11,173,000) and capital losses of $830,000 (2019: $830,000) with no expiry,
investment tax credits of $1,109,000 (2019: $1,109,000) which expire beginning in 2022 through 2037, and deductible temporary
differences of $35,255,000 (2019: $29,428,000).

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 recovery at statutory rate

Change in unrecognized temporary differences

Tax rate differences

Permanent differences on loan forgiveness

Other permanent differences

Tax expense (recovery)

31. Related Party Transactions

2020

27.00%

$(1,816)

2,972

(42)

(1,286)

172

2019

27.00%

$(2,515)

2,412

(82)

185

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, 2020 are included in the Consolidated statements of
Loss and Comprehensive Loss as administrative and general expenses and amount to $Nil (December 31, 2019: $3,000).
Fees payable to certain directors or Companies with which they have beneficial ownership, as at December 31, 2020 are $Nil
(December 31, 2019: $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

Page 54

2020

$1,746

1,869

2019

$2,002

2,160

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2020
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2020

The balance of loans receivable from key management as at December 31, 2020 is $5,000 (December 31, 2019: $5,000).
These loans are unsecured and payable on demand.

Other related party transactions are disclosed elsewhere in these consolidated financial statements (note 20).

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

32. Earnings per share

Weighted average number of common shares for basic earnings per share as at December 31, 2020 is 368,118,620 (December
31, 2019: 368,118,620). Effect of dilution was not applicable in both years.

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.

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, 2020, which comprise several programs and contracts, accounted
for approximately 92.3% (December 31, 2019: 91.8%) of sales.

FOR THE YEAR ENDED DECEMBER 31

2020

2019

BAE Systems

Boeing1

Bombardier

Lockheed Martin

Subaru Corporation

Other

Total

Revenue % of Total

Revenue

% of Total

$31,332

48,237

12,998

30,444

16,311

11,640

20.8

31.9

8.6

20.2

10.8

7.7

$18,181

50,351

18,535

35,812

28,306

13,585

11.0

30.6

11.2

21.8

17.2

8.2

150,962

100.0

164,770

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:

Page 55

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2020
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2020

FOR THE YEAR ENDED DECEMBER 31

2020

2019

Canada

USA

Europe

Asia

Australia

Other

Total

Revenue

% of Total

Revenue

% of Total

$19,801

81,317

32,134

17,462

186

13.1

53.9

21.3

11.6

0.1

0.0

$26,081

87,624

20,032

30,706

257

15.8

53.2

12.2

18.6

0.2

0.0

150,962

100.0

164,770

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.

AS AT DECEMBER 31

Canada

USA

Total

2020

$84,644

36,894

121,538

2019

$82,233

45,907

128,140

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.

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

FOR THE YEAR ENDED DECEMBER 31

2020

2019

Commercial

Defence

Total

Revenue % of Total

Revenue

% of Total

$63,179

87,783

41.9

58.1

$102,437

62,333

62.2

37.8

150,962

100.0

164,770

100.0

d) The Company’s revenue is recognized either at a point in time or over time. For the year ended December 31, 2020, revenue
earned at a point in time is $26,700,000 (December 31, 2019: $42,671,000). Revenue earned over time is $124,262,000
for the year ended December 31, 2020 (December 31, 2019: $122,099,000).

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, 2020

Total

ASI

Comtek

ACF

Corporate

Revenue

Cost of sales

Gross profit (loss)

Administrative and general expenses

Depreciation and amortization

Other income

Operating income (loss)

$150,962

142,729

8,233

16,717

787

86,756

75,868

10,888

5,779

314

$16,509

$47,697

13,941

2,568

2,288

52,920

(5,223)

4,247

413

(11,642)

(5,523)

(1,273)

(4,846)

4,403

2,371

10,318

1,493

(5,037)

(4,403)

Page 56

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2020
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2020

FOR THE YEAR ENDED DECEMBER 31, 2019

Total

ASI

Comtek

ACF

Corporate

Revenue

Cost of sales

Gross profit (loss)

Administrative and general expenses

Depreciation and amortization

Net (gain) loss on claims

Other 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

Operating income (loss)

(1,124)

(3,565)

850

(10,274)

11,865

AS AT DECEMBER 31

2020

2019

Avcorp Industries Inc.

Comtek Advanced Structures Ltd.

Avcorp Composite Fabrication Inc.

Corporate

Total

AS AT DECEMBER 31

Avcorp Industries Inc.

Comtek Advanced Structures Ltd.

Avcorp Composite Fabrication Inc.

Total

AS AT DECEMBER 31

Avcorp Industries Inc.

Comtek Advanced Structures Ltd.

Avcorp Composite Fabrication Inc.

Corporate

Total

34. Subsequent Events

Total Assets % of Total

Total Assets

% of Total

$72,163

12,345

36,894

136

59.3

10.2

30.4

0.1

$69,638

12,460

45,907

135

54.4

9.7

35.8

0.1

121,538

100.0

128,140

100.0

2020

2019

Development
Cost
Additions

Property,
Plant and
Equipment
Additions

Development
Cost
Additions

Property,
Plant and
Equipment
Additions

$3,599

$1,651

$3,934

175

155

118

440

100

3,929

2,209

4,116

$1,067

239

13,133

14,439

2020

Total

Liabilities % of Total

$41,361

3,037

19,630

106,650

24.2

1.8

11.5

62.5

2019

Total
Liabilities

$37,783

3,909

24,156

105,767

% of Total

22.0

2.3

14.1

61.6

170,678

100.0

171,615

100.0

a) The Company received Canada Emergency Wage Subsidies of $712,000 in February and March 2021 and applied for an

additional $2,415,000.

b) On February 25, 2021, the Company amended the Avcorp Composite Fabrication Inc.’s Gardena facility lease agreement
effective January 1, 2021 to vacate certain buildings and renegotiated new lease terms. The amended terms of the lease
reduced lease payments, reduced shared operating cost, and ends on December 31, 2022 with an option to extend for three
months.

c) On March 12, 2021, the Company entered into a multiparty amended and restated the Accommodation Agreement with each

of a customer, and Panta Canada B.V. whereby, inter alia;

Page 57

Avcorp Industries Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 2020
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)

annual report 2020

•

Panta Canada B.V. has agreed to provide a USD $10,000,000 non-revolving standby loan facility and a USD
$3,000,000 equipment loan for an aggregate availability of USD $13,000,000; and

The elimination of unamortized cash advance, mutual release and forgiveness of certain historic and future
guarantee fees payable to the customer. As at December 31, 2020, the guarantee fee is $8,178,000 (USD
$6,423,000), the customer advance is $5,911,000 (USD $4,643,000) and the legal claim is $7,130,000 (USD
$5,600,000).

d) On March 15, 2021, the Company received a USD $2,000,000 second wave Small Business Administration Paycheck

Protection Program Loan.

e) On March 19, 2021, the Company approved the grant of an aggregate of 17,350,000 incentive stock options under the
Company’s 2007 Stock Option Plan to Directors, Officers and Employees. The options will have a five year term and will
have an exercise price determined by the market price effective the close of markets March 22,2021.

Page 58

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

Tucson, Arizona

Jaap Rosen Jacobson (2*)
DIRECTOR

President
Panta Holdings B.V.
Mijdrecht, The Netherlands

Ken Robertson (1*)
DIRECTOR

Vancouver, British Columbia

Amandeep Kaler
DIRECTOR

Group CEO, Avcorp Industries Inc.
Surrey, British Columbia

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

*Designates the Committee Chair