Annual Report
2021
www.avcorp.com
Avcorp Industries Inc.
annual report 2021
Page 1
CEO’s Letter to Shareholders
2021 was a challenging year. The aerospace industry is constantly changing and adjusting to many variable
factors such as geopolitical tensions, fuel prices, emergence of new players and consolidations. Along with the
suffering caused by the COVID-19 virus, like many other industries and our peers, the aerospace sector suffered
collapsing demand for commercial air travel. A full recovery in the commercial aerospace sector is several years
away, yet we are seeing encouraging signs of demand coming back. The industry fully expects that commercial
air travel will return to a historical long term growth trend as the vaccination rates increase and travel restrictions
related to COVID-19 are lifted.
In 2021, Avcorp took significant steps forward. Fortunately for Avcorp, the demand in defense market remained
strong during the year. Over the past year, the employees and management of Avcorp have continued to give
great efforts to improve productivity, reduce operating costs, consolidation of facility footprint and reduce
general and administrative costs. To strengthen our economic future, during the past year, Avcorp was
successful in negotiating a multiparty agreement to improve its balance sheet and provide additional liquidity if
required. This agreement eliminated a significant portion of the accrued interest costs and the fees that were
payable in the future. The Company also extended its loan agreement to June 2023 with its biggest lender.
An important milestone was reached in 2021 when Avcorp celebrated the 10th anniversary of the first delivery
of F-35 Outboard Wing assembly to BAE Systems.
During 2021, Avcorp was successful in negotiating new contracts and contract renewals. These contract
performance periods extend to 2027 and beyond. These renewals provide significant firm revenue backlog for
the future. Current order backlog as of December 31, 2021, is $457 million. As the demand for the commercial
air traffic improves and OEM production rates increase for both commercial and defense programs, the Company
is expecting +20% annual growth in revenue in the coming couple of years. With the expected growth in revenue
and full impact of the cost cutting initiatives undertaken by the management, the Company expects significant
improvement in net cash from operating activities in the coming years. Based on the current expectations of
the operational performance, the Company expects to repay any outstanding banking indebtedness by fiscal
year 2026.
It is a challenge that I know our dedicated team is up to. I am grateful for the team’s resilience and dedication
for going above and beyond in supporting and providing “Better Solutions” to our customers.
These are very challenging times for the industry but also interesting and exciting times at Avcorp. We are
strategically positioned to take advantage of the opportunities and have a dedicated and committed team to
make the required difference.
I thank our employees, management, the Board, and all shareholders for their continued support in the future.
Amandeep Kaler, CEO, March 24, 2022
Avcorp Industries Inc.
annual report 2021
Page 2
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 65 years of experience, over 450 skilled
employees and 560,000 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, and
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).
Avcorp Industries Inc.
annual report 2021
Page 3
management discussion & analysis
This Management Discussion and Analysis (“MD&A”) has been prepared as of March 24, 2022 and should be read in conjunction with
the Company’s consolidated financial statements and notes thereto for the year ended December 31, 2021.
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 guided 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” or “Delta facility”), is dedicated to metallic and composite
aerostructures assembly and integration. Comtek Advanced Structures Ltd., located in Burlington, Ontario, (“Comtek” or “Burlington
facility”) is dedicated to aircraft structural component repair services, and design and manufacture of composite aerostructures.
Located in Gardena, California, Avcorp Composite Fabrication Inc. (“ACF” or “Gardena facility”) 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.
2021 Highlights
•
2021 revenue was $99,476,000 compared to $150,962,000 in 2020. 2021 revenue decreased by $51,486,000, in comparison to
2020. The decrease in revenue in 2021 was due to COVID-19 impact on customer requirements and the recognition of variable
consideration on the contract termination of convenience in 2020. In addition, the Gardena facility’s revenue decreased as it has
fulfilled the remaining customer requirements on a contract and Boeing suspended deliveries of its 787 aircraft during 2021 which
impacted Subaru’s delivery requirement from the Gardena facility.
•
2021 net loss was $531,000 compared to net loss of $6,725,000 in 2020. The net loss improved by $6,194,000 in comparison to
2020, mainly supported by the Accommodation Agreement settlement of $21,391,000 and the decrease in net financing charge
of $4,514,000; offset by the impairment of assets in the Gardena facility, higher administrative and general expenses, a decrease
in government grants, and the recognition of variable consideration on the termination of convenience in 2020.
•
On March 12, 2021, the Company entered into a multiparty amended and restated Accommodation Agreement with a customer
and Panta Canada B.V.
•
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.
•
The elimination of an unamortized cash advance, mutual release and forgiveness of certain historic and future guarantee
fees payable to the customer, and a legal claim.
•
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, reduce shared operating expenses, and reduced the lease term.
•
On March 15, 2021, the Company received a $2,508,000 (USD $2,000,000) second wave Small Business Administration Paycheck
Protection Program Loan and has recognized the amount as other income in the year ended December 31, 2021 as the company
determined it has satisfied the requirements of loan forgiveness.
•
On June 8, 2021, the Company received approval for forgiveness on the first wave Small Business Administration Paycheck
Protection Program Loan full loan amount of USD $4,123,000. An amount of $4,601,000 (USD $3,430,000) was recognized as
other income in the year ended December 31, 2020, the Company recognized the remaining portion of loan forgiveness and
related interest of $924,000 (USD $737,000) as other income in the year ended December 31, 2021.
•
On June 22, 2021, the Company amended its loan agreement with a Canadian Chartered Bank to extend the maturity date of the
existing loan agreement to June 30, 2023, which is supported by a major and material customer of the Company by way of a
guarantee and recorded a modification gain of $1,155,000 (USD $932,000).
•
On June 28, 2021, the Company received an award letter from BLR Aerospace to produce Wingtips with estimated first delivery
by the second quarter of 2022.
•
In August 2021, the Company signed a contract extension with Boeing to provide the Wheel Well Fairing assemblies for the Boeing
737 MAX aircraft.
Avcorp Industries Inc.
annual report 2021
Page 4
Financial Overview
Three-Year Results
The following table provides selected financial information for the three years to December 31, 2021.
For the year ended December 31, 2021, the Avcorp Group’s revenue was $99,476,000 compared to $150,962,000 in 2020 and
$164,770,000 in 2019. The decrease in revenue in 2021 and 2020 compared to 2019 was mainly attributed to lower deliveries
caused by lower customer requirements due to the impact of Coronavirus (“COVID-19”). In addition, the 2020 revenue included
the recognition of variable consideration on the contract termination of convenience. The Gardena facility’s revenue decreased as
it has fulfilled the remaining customer requirements on a contract and Boeing suspended deliveries of its 787 aircraft during 2021
which impacted Subaru’s delivery requirement from the Gardena facility.
For the year ended December 31, 2021, the Avcorp Group recorded income from operations of $2,686,000 (December 31, 2020:
$2,371,000). Operating income in 2021 increased slightly over 2020 mainly due to the inclusion of the Accommodation Agreement
settlement of $21,391,000, offset by lower gross profit of $8,303,000 and impairment loss of $7,815,000 driven from the Gardena
facility, lower other income of $3,462,000 and higher administrative and general expenses of $1,560,000.
The decrease in the operating loss in 2020 compared to 2019 is due to continued operational improvement, cost reduction
initiatives, growth in defence program revenue, and the recognition of variable consideration on the contract termination of
convenience. The 2019 $1,124,000 operating loss contains $17,325,000 net claim settlement gain.
Bank indebtedness and term debt has decreased by $9,135,000 in 2021 compared to 2020. The decrease in bank indebtedness
is mainly due to the net repayment of $839,000, and a reduction upon recognition of a modification gain of $1,155,000 (USD
$932,000) as a result of executing a loan amendment during the year. The decrease in term debt was mainly contributed by the
revaluation of the Gardena facility lease during the year upon executing a lease amendment effective January 1, 2021 to vacate
certain buildings and reduced the lease term.
The improvement in current ratio in 2021 to 1.18 from 0.47 in both 2020 and 2019 is mainly due to the reclassification of bank
indebtedness as non-current in 2021 as a result of executing a loan amendment to extend the maturity to June 30, 2023. The
current ratio is calculated by current assets divided by current liabilities.
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.
Total assets have decreased by $18,901,000 in 2021 compared to 2020, mainly contributed by the decrease in assets in ACF.
The impairment assessment of ACF determined the right-of-use assets, plant and equipment and intangible assets are impaired
due to historical operating losses and lower forecasted revenue. Boeing suspended deliveries of its 787 aircraft during 2021 which
impacted Subaru’s delivery requirement from ACF affecting current and forecasted revenue in ACF. An impairment of $7,815,000
was recognized in 2021.
THREE-YEAR RESULTS
(prepared in accordance with IFRS, expressed in thousands of Canadian dollars except per share amounts)
FOR THE YEAR ENDED DECEMBER 31
2021
2020
2019
OPERATIONS
Revenue
$99,476
$150,962
$164,770
EBITDA1
11,207
19,492
10,813
Operating income (loss)
2,686
2,371
(1,124)
Net (loss) income
(531)
(6,725)
(9,316)
Basic and diluted (loss) income per share
(0.00)
(0.02)
(0.03)
FINANCIAL POSITION
Capital expenditures
2,221
1,769
904
Total assets
102,637
121,538
128,140
Bank indebtedness and term debt
103,609
112,744
115,086
Shareholders’ (deficit)
(48,107)
(49,140)
(43,475)
Net book value per share2
(0.13)
(0.13)
(0.12)
Current ratio: current assets/current liabilities
1.18
0.47
0.47
Shares outstanding at period end
370,931,120
368,118,620
368,118,620
1.
EBITDA = earnings before interest, taxes, depreciation and amortization. This is not a recognized term under International Financial
Reporting Standards (“IFRS”), refer to page 9.
2.
Net book value per share is not a recognized term under IFRS, refer to page 12.
Avcorp Industries Inc.
annual report 2021
Page 5
Impact of COVID-19
In March 2020, the World Health Organization (“WHO”) declared the COVID-19 virus a global pandemic. The ongoing COVID-19
pandemic, including the emergence of new variants, continues to negatively impact the global economy, global supply chains,
the aviation industry particularly in the commercial airline industry, and create economic uncertainty. Governments worldwide
have enacted emergency measures including travel bans, social distancing measures and mandatory quarantine requirements.
Avcorp’s operations in 2020 and 2021 at varying times have been challenged with reduced production driven by customers’ build
rate adjustments, government related enacted measures to modify work practices to meet health and safety standards, and
related supply chain issues.
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.
There continues to be positive signs of market recovery and recovering air travel into 2022. The Company will continue to
implement measures to align its cost structure and maximize cash preservation during the current market conditions to ensure it
emerges from the current crisis on solid footing. 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.
Quarterly Results
The following table provides selected quarterly consolidated financial information for the eight most recent fiscal quarters to
December 31, 2021, prepared in accordance with IAS 34 – Interim Financial Reporting (“IAS 34”) as issued by the International
Accounting Standards Board (“IASB”).
The quarterly revenue in 2020 decreased in the second quarter of 2020 onwards due to the COVID-19 pandemic, detrimentally
impacting Commercial program revenues. The fourth quarter of 2020 showed strong revenue and net income performance as it
included an estimate of variable consideration 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. Quarterly revenue in 2021 show continued improvement from
the first quarter in 2021 as the F35 program in the Delta facility continues to grow, offset by lower commercial customer
requirements due to the impact of COVID-19 and fulfilling the remaining defence customer requirements at the Gardena facility.
QUARTERLY RESULTS
(prepared in accordance with IFRS, expressed in thousands of Canadian dollars except per share amounts)
2021
2020
FOR THE 3 MONTHS ENDED
Dec 31
Sep 30
Jun 30
Mar 31
Dec 31
Sep 30
Jun 30
Mar 31
Revenue
$25,253
$25,905
$24,385
$23,933
$44,742
$33,769
$32,246
$40,205
Operating (loss) income
(12,020)
(1,590)
(1,978)
18,274
8,477
(326)
(1,080)
(4,700)
EBITDA1
(10,248)
243
538
20,674
17,895
3,623
2,937
(4,963)
Net (loss) income
(13,537)
(3,172)
(1,212)
17,390
6,546
(1,263)
(1,594)
(10,414)
EBITDA per share1
Basic
(0.03)
0.00
0.00
0.06
0.05
0.01
0.01
(0.01)
Diluted
(0.03)
0.00
0.00
0.06
0.05
0.01
0.01
(0.01)
Net (loss) income per share
Basic
(0.04)
(0.01)
(0.00)
0.05
0.02
(0.00)
(0.00)
(0.03)
Diluted
(0.04)
(0.01)
(0.00)
0.05
0.02
(0.00)
(0.00)
(0.03)
Long-term debt2
100,568
100,212
13,123
15,364
19,168
24,801
25,240
35,358
1.
EBITDA = earnings before interest, taxes, depreciation and amortization. This is not a recognized term under International Financial
Reporting Standards (“IFRS”) - refer to page 9.
2.
Long-term debt at the end of the third and fourth quarter of 2021 includes bank indebtedness classified as non-current upon the loan
maturity extension to June 30, 2023 and non-current term debt.
Avcorp Industries Inc.
annual report 2021
Page 6
During the second quarter of 2020, Avcorp implemented cost savings initiatives designed to reduce operating costs and rebalanced
its workforce upon the onset of COVID-19. Avcorp applied for Canadian and United States government subsidies in the amount
of $8,220,000 recognized in 2021 and $$11,397,000 recognized in 2020 to other income. The fourth quarter of 2020 recognized
government grants of $7,761,000 compared to the fourth quarter of 2021 of $208,000.
The first quarter of 2021, Avcorp entered into a multiparty amended and restated Accommodation Agreement with a customer
and Panta Canada B.V. This provided a gain to operating income of $21,391,000 with the elimination of an unamortized cash
advance, mutual release and forgiveness of certain historic and future guarantee fees payable to the customer, and a legal claim.
For the quarter ended December 31, 2021, the Avcorp Group recorded loss from operations of $12,020,000 (December 31, 2020:
$8,477,000 income). The impairment assessment of ACF determined the right-of-use assets, plant and equipment and intangible
assets are impaired due to historical operating losses and lower forecasted revenue. Boeing suspended deliveries of its 787 aircraft
during 2021 which impacted Subaru’s delivery requirement from ACF affecting current and forecasted revenue in ACF. An
impairment write-off of $7,815,000 was recognized in the fourth quarter of 2021. The Company expensed $2,558,000 of overhead
costs during the fourth quarter 2021 (2020: $2,684,000) in respect of unutilized plant capacity. Provision for onerous contracts
accrued during the fourth quarter 2021 totaled $1,064,000 (December 31, 2020: $188,000).
Revenue
For the year ended December 31, 2021, revenues totaled $99,476,000, a $51,486,000 decrease in revenues relative to 2020
(December 31, 2020; $150,962,000).
Operating segment revenues are as follows:
The Company operates within “general terms agreements” with its customers. These typically have a duration of five or more
years. The contracts provide long lead-time orders; the civil aerospace business is slightly seasonal as some aircraft manufacturers
reduce or suspend production in December and for a period of time during the summer months.
Delta facility revenues for 2021 totaled $75,976,000 (December 31, 2020: $86,756,000).
Delta facility commercial aircraft programs production revenues have decreased by $495,000 in 2021 relative to 2020. In addition,
production for defence programs decreased by $10,285,000 in 2021 relative to 2020 due to the recognition of an estimate of
variable consideration related to a contract termination of convenience in 2020. The F-35 program revenue continued to increase
in 2021 as the ramp up in production continued, expansion of the F-35 work cell, and utilization of additional tooling sets received.
Production of the Boeing 737 Max programs increased in the second half of 2021 as delivery requirements begin to return.
Avcorp’s Delta location continues to actively pursue aerospace production contracts throughout North America, Asia, and Europe
in both 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.
Burlington facility revenues for 2021 totalled $13,373,000 (December 31, 2020: $16,509,000).
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 $3,136,000 during the current year relative to the year ended December 31, 2020
due to the impact of COVID-19. The primary decrease was in composite floor panels revenue.
REVENUE DISTRIBUTION
(prepared in accordance with IFRS, expressed in thousands of Canadian dollars)
FOR THE YEAR ENDED DECEMBER 31
2021
2020
Revenue
% of Total
Revenue
% of Total
Avcorp Structures & Integration. (ASI)
$75,976
76.4
$86,756
57.5
Comtek Advanced Structures Ltd. (AEC)
13,373
13.4
16,509
10.9
Avcorp Composite Fabrication Inc. (ACF)
10,127
10.2
47,697
31.6
Total
99,476
100.0
150,962
100.0
Avcorp Industries Inc.
annual report 2021
Page 7
Gardena facility revenues for 2021 totaled $10,127,000 (December 31, 2020: $47,697,000).
The Gardena facility provides a unique aerostructures composite capability to the Avcorp Group’s existing metal fabrication and
integrated assembly business by broadening the product range and strengthening Avcorp’s composite capabilities. Advanced
composite fabrication capabilities enhance Avcorp Group’s ability to participate in large aerospace assembly programs which
combine mixed material components.
For the year ended December 31, 2021, revenues arising from the assignment by customers of commercial aerospace contracts
to Avcorp Industries Inc. for which the production occurs in Gardena facility have generated $4,852,000 in production revenue
(December 31, 2020: $18,382,000). Boeing suspended deliveries of its 787 aircraft during 2021 which impacted Subaru’s delivery
requirement from the Gardena facility; consequently, the Gardena facility has not made any shipments on this program since
August 2021. Avcorp is working closely with Subaru to ensure a continued steady rate of supply. The Gardena facility defence
aerospace contracts generated $5,275,000 of production revenue during the year ended December 31, 2021, for ACF (December
31, 2020: $29,316,000). These contract revenues have decreased from 2020 as the remaining customer contract requirements
were fulfilled in 2021. Follow-on purchase orders and contract extensions are in discussions with the customer; however, the
Company cannot provide any assurance of the outcome. Avcorp received a follow-on purchase order with delivery requirements
into the first quarter of 2022.
Deliveries and quality performance as at December 31, 2021 for Avcorp manufacturing operations were at customer required
levels. Manufacturing operations have achieved, and continue to maintain, top quality and delivery ratings for the majority of
their programs.
Revenues from Avcorp Group customers are as follows:
The Avcorp Delta BC facility is the single source supplier for the F-35 carrier variant outboard wing (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 $9,176,000 relative to 2020. Production contracts have been secured through to end of the second
fiscal quarter of 2022, with discussions underway with the customer to secure constant production through to 2026. 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 through an agreed record of negotiation Avcorp
continues discussions with the customer for production under Lot Fifteen through Lot Seventeen.
Avcorp’s Gardena California facility provided content for all three models of the F-35 fighter aircraft. Fabricated components
include the wing skins 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
completed a multi-year contract with Lockheed Martin Corporation, who released order quantity and schedule requirements
to the Company through to the end of the second fiscal quarter of 2021. Follow-on purchase orders and contract extensions are
currently in discussions with the customer, however the Company cannot provide any assurance of the outcome. Avcorp received
a follow-on purchase order with delivery requirements into the first quarter of 2022.
REVENUE DISTRIBUTION
(prepared in accordance with IFRS, expressed in thousands of Canadian dollars)
FOR THE YEAR ENDED DECEMBER 31
2021
2020
Revenue
% of Total
Revenue
% of Total
BAE Systems
$40,508
40.7
$31,332
20.8
Boeing1
26,047
26.2
48,237
31.9
Bombardier
10,796
10.9
12,998
8.6
Lockheed Martin
6,208
6.2
30,444
20.2
Subaru Corporation
4,299
4.3
16,311
10.8
Other
11,618
11.7
11,640
7.7
Total
99,476
100.0
150,962
100.0
1.
Includes Boeing program partner revenue consisting of industry tier-one suppliers to Boeing.
Avcorp Industries Inc.
annual report 2021
Page 8
Shipments of large complex metal assemblies and fabricated parts and components out of the Delta facility to Boeing
Commercial Airplane Group (“BCA”), primarily for the 737 commercial jet program, decreased by 47% in 2021 relative to
2020, primarily as a result of the continued reduced customer requirements for the Boeing 737 MAX and COVID-19. Total
production deliveries generated for the Company from various Boeing Commercial aircraft programs amounted to $21,132,000
for the year ended December 31, 2021 (December 31, 2020: $23,728,000). In August 2021, the Company signed a multi-year
contract extension with Boeing to provide the Wheel Well Fairing assemblies for the Boeing 737 MAX. The Company also delivers
components to Boeing Defence, Space & Security (“BDSS”) totaling $4,915,000 of revenues, an increase in revenues relative
to 2020 (December 31, 2020: $2,718,000).
Production deliveries for Bombardier Aerospace (“Bombardier”) programs decreased during the current year relative to the
year ended December 31, 2020. Shipments of large assemblies for the CL605 business jet program increased by $1,808,000
during the current year as demand for these products increased relative to 2020; which was offset by a $4,010,000 decrease in
its deliveries of composite panels and related products to Bombardier. Avcorp Group’s primary source of revenue from Bombardier
in 2022 will continue to be from components for the CL605 and CL850 business jets and composite floor panels for various
Bombardier aircraft programs.
Avcorp’s deliveries to Subaru Corporation (“Subaru”) of large complex composite structural components are integrated into
the center wing box in support of the Boeing 787 commercial jet program totaled $4,299,000 for the current year (December 31,
2020: $16,311,000); a decrease as a result of decreased customer demand due to COVID-19 and ongoing delivery delays by the
customer. Boeing suspended deliveries of its 787 aircraft during 2021 which impacted Subaru’s delivery requirement from the
Gardena facility; consequently, the Gardena facility has not made any shipments on this program since August 2021. Avcorp is
working closely with Subaru to ensure a continued steady rate of supply. This is a significant commercial production contract
component being manufactured in the Gardena facility for the life of the individual aircraft program contract. This long-term
agreement represents an important relationship with a long-standing industry Tier 1 supplier.
Composite aircraft structure repair revenues out of Comtek decreased by 8% relative to revenues in the previous year. The
Avcorp Group also supplies Canadian aircraft retrofit programs out of its Delta facility, and large composite structures in support
of various U.S. defence programs out of its Gardena facility, whose revenues decreased relative to 2020. These Other revenues
are significant to the Group’s operations as they generated $11,618,000 in revenue during the year ended December 31, 2021
(December 31, 2020: $11,640,000).
Defence program revenues for the Avcorp Group in 2021 totaled $52,992,000 (December 31, 2020: $87,783,000); 53.3% of
total production sales (December 31, 2020: 58.1%). Commercial program sales provided a lower percentage of the Company’s
sales in 2021 (December 31, 2021:46.7%; December 31,2020: 41.9%) amounting to $46,484,000 for 2021 and $63,179,000
for 2020. The Group continues to move forward with revenue diversification between commercial and defence aerospace
programs.
Gross Profit
Gross profit (revenue less cost of sales) for the year ended December 31, 2021, was negative 0.1% of revenue compared to
positive 5.5% of revenue for the year ended December 31, 2020.
The Gardena facility gross margin for 2021 was negative $11,438,000 (December 31, 2020: $5,223,000 negative gross margin).
The gross margin decreased by $6,215,000, mainly attributable to the decrease in revenue during the year. Avcorp is managing
the cost structure in the Gardena facility due to the lower revenue by rebalancing the work force, signing a new lease agreement
to reduce operating expenses, and working to secure additional production contracts. On February 25, 2021, the Company
amended the Avcorp Composite Fabrication Inc.’s Gardena facility lease agreement effective January 1, 2021, to vacate certain
under-utilized buildings and to reduce shared operating expenses. In addition, the Company sold several out of production pieces
of equipment in those buildings to reduce unutilized plant capacity expense.
The Delta facility gross margin for 2021 was positive $8,709,000 (December 31, 2020: $10,888,000 positive gross margin).
Delta gross margin decreased by $2,179,000 from the previous year, mainly due to 2020 gross margin being supported by the
inclusion of an estimate of variable consideration on a contract termination of convenience. The Delta facility continues to
implement production methods to create efficiencies.
Burlington production contracts produced a positive gross margin of $2,659,000 for the year ended December 31, 2021, as
compared to a positive gross margin of $2,568,000 in 2020. Gross margins for 2021 increased slightly by $91,000 due to lower
labour costs and product mix.
There is unutilized plant capacity within the Company’s Delta, British Columbia facility, and within the Gardena, California facility.
The Company has expensed $10,112,000 of overhead costs during the year as compared to $8,346,000 for December 31, 2020,
in respect of unutilized plant capacity. The amount of these overhead costs expensed, because of unutilized capacity, will fluctuate
as production in support of deliveries varies. Revenue growth in these facilities would benefit Company profitability by contributing
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 manufacturing capabilities
further leveraging existing production capacity and investments, in addition to, pursuing new work.
Avcorp Industries Inc.
annual report 2021
Page 9
Administrative and General Expenses
As a percentage of revenue, administrative and general expenses increased to 18.4% for the year ended December 31, 2021,
from 11.1% in 2020 as a result of the decrease in revenue. In absolute terms, administrative and general expenses increased by
$1,560,000 during the current year relative to 2020 mainly attributable to the recognition of stock-based compensation expense
amounting to $1,376,000 on the fair value of the immediately vesting options granted in 2021. 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
During the year ended 2021, the Canadian dollar strengthened against the US dollar resulting in a gain attributable to the
translation of the Company’s US dollar denominated Bank indebtedness and Term debt. Avcorp Group recorded a $295,000
foreign exchange gain during the year ended December 31, 2021, (December 31, 2020: $364,000 loss) as a result of holding US
dollar-denominated cash, receivables, payables and debt.
Finance Costs
Total interest and financing charges on bank indebtedness and current and non-current term debt for the year ended December
31, 2021, were $3,091,000, which is net of $5,000 interest income as compared to $7,605,000 expense, net of $122,000 interest
income for the year ended December 31, 2020. Net interest expenditures have decreased relative to the previous year mainly
due to the repayment of bank indebtedness and other term debt throughout 2020 and 2021, the removal of the loan guarantee
fee payable to a customer as a result of the Accommodation Agreement signed on March 12, 2021, as well as a net gain on
modification of bank indebtedness of $1,155,000 as a result of executing an amending agreement during the year.
Income Taxes
Avcorp Group has not incurred a tax expense during the year ended December 31, 2021, (December 31, 2020: $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, 2021, was $531,000 compared to a loss of $6,725,000 for the year ended December 31,
2020. The December 31, 2021 net loss contains $21,391,000 from the Accommodation Agreement settlement, other income of
$8,180,000 and impairment loss of $7,815,000.
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, and a legal claim provision. $21,391,000 was released to the Consolidated Statements of Loss for
the year ended December 31, 2021.
•
The Company is required to use a portion of the variable consideration at the time of settlement of the termination of
convenience towards permanently reducing the maximum availability of the guaranteed portion of the bank indebtedness.
The Canada Emergency Wage Subsidies from the Canadian Government for the year ended December 31, 2021, of $4,389,000
were included in other income (December 31, 2020: $6,796,000), $394,000 of Canada Emergency Rent Subsidies was also
included as other income in the year (December 31, 2020: $Nil). There are no unfulfilled conditions or other contingencies
attached to these grants.
On April 28, 2020, the Company received a loan in the amount of $5,529,000 (USD $4,123,000) from a U.S. Chartered Bank
through the U.S. Small Business Administration Paycheck Protection Program (“PPP loan”). The Company has determined that
$4,601,000 (USD $3,430,000) met the forgiveness criteria and the amount was included in the year ended December 31, 2020
as other income. On June 8, 2021, the Company received approval for forgiveness on the full loan amount of USD $4,123,000.
The Company recognized the remaining portion of loan forgiveness and related interest of $924,000 (USD $737,000) as other
income in the year ended December 31, 2021.
On March 15, 2021, the Company received a $2,508,000 (USD $2,000,000) second wave PPP loan and has determined that the
full loan amount and the related interests of $2,513,000 (USD $2,004,000) met the forgiveness criteria. The full loan amount
and related interest is included in the year ended December 31, 2021 as other income.
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 by March 31, 2021, and reduced the lease term. As the lease modification is not
accounted for as a separate lease, the Company remeasured the lease liability by discounting the revised lease payments on
revised lease term and revalued the right of use asset with a loss on modification of $204,000 of the lease recognized as other
loss in the year ended December 31, 2021 (December 31, 2020: $Nil).
The impairment assessment of ACF determined the right-of-use assets, plant and equipment and intangible assets are impaired
due to historical operating losses and lower forecasted revenue. Boeing suspended deliveries of its 787 aircraft during 2021 which
impacted Subaru’s delivery requirement from ACF affecting current and forecasted revenue in ACF. A $7,815,000 impairment
loss was recognized in 2021.
Avcorp Industries Inc.
annual report 2021
Page 10
The decrease in net loss for 2021 relative to 2020 was also contributed by the decrease in finance costs, increase in foreign
exchange gain and lower loss on sale of equipment, offset by lower gross profit and higher administrative and general expenses.
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 or may not be comparable to similar financial measures disclosed by other issuers. However, the Company’s management
believes that the Company’s stakeholders consider this metric to be useful information to assist the evaluation of profitability.
EBITDA was positive $11,207,000 for the year ended December 31, 2021, compared to EBITDA of positive $19,492,000 for the
year ended December 31, 2020.
The decrease in EBITDA was mainly due to the decrease in revenue, decrease in other income, recognition of impairment loss
and increase in administrative and general expenses, offset by the accommodation agreement settlement.
Capital Resources
On May 26, 2017, the Company entered into a loan agreement for an expanded operating credit facility with a Canadian Chartered
Bank. This loan agreement was subject to a significant amendment on November 15, 2019. This loan agreement was further
amended on June 22, 2021, to extend the maturity to June 30, 2023. The Company recorded a net gain on modification of bank
indebtedness of $1,155,000 (USD $932,000) as a result of executing this amending agreement.
•
Maximum availability under the Loan agreement cannot exceed USD $68,000,000 less USD $1,000,000 until June 30, 2023.
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 a 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 $1,000,000:
•
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
•
The Company ended the year with bank operating line utilization of $75,335,000 (USD $59,421,000) offset by $4,060,000
cash compared to utilization of $76,439,000 (USD $60,037,000) with $7,044,000 cash on hand as of December 31, 2020.
The bank indebtedness balance of the modification gain and related adjustments as a result of executing the amending
agreement in 2021 was $923,000 as at December 31, 2021, (December 31, 2020, loss of $269,000 from 2019 amendment).
As at the date of this report the Company is able to draw up to an additional $3,092,000 (USD $2,439,000) on its operating
line of credit.
EBITDA1
(expressed in thousands of Canadian dollars)
FOR THE YEAR ENDED DECEMBER 31
2021
2020
2019
Loss for the year
$(531)
$(6,725)
$(9,316)
Interest expense and financing charges
3,096
7,727
8,941
Income tax expense
-
-
-
Depreciation
7,147
8,338
8,218
Amortization of development costs and intangibles
1,495
10,152
2,970
11,207
19,492
10,813
1.
This is not a recognized term under International Financial Reporting Standards
Avcorp Industries Inc.
annual report 2021
Page 11
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.
On March 15, 2021, the Company received a second wave Small Business Administration Paycheck Protection Program Loan in
the amount of $2,508,000 (USD $2,000,000) to support Avcorp Composite Fabrication Inc (“ACF”). The Company has recognized
full forgiveness of the loan in the year ended December 31, 2021, as the Company has satisfied the requirements of loan
forgiveness.
The Company received the Canada Emergency Wage Subsidies and Canada Emergency Rent Subsidies in the amount of
$4,389,000 (December 31, 2020: $6,796,000) and $394,000 (December 31, 2020: $Nil) respectively in the year ended December
31, 2021. The Company will continue to apply for additional government subsidies when eligible.
The Company has a working capital surplus of $7,613,000 as at December 31, 2021, compared with $77,780,000 deficit as at
December 31, 2020. Working capital is defined as the difference between current assets and current liabilities. The increase
compared to 2020 was mainly due to the bank indebtedness re-classified as non-current upon extension of maturity to June 30,
2023. On December 31, 2021, the ratio of the Company's current assets to current liabilities was 1.18:1 (December 31, 2020:
0.47:1). The Company’s accounts receivable, government grant receivable, current contract assets, and inventories net of current
accounts payable amount to a $24,452,000 surplus as at December 31, 2021, (December 31, 2020: $33,174,000 surplus).
Cash Flows from Operating Activities
Cash flows from operating activities, before consideration of changes in non-cash working capital, utilized $699,000 during the
year ended December 31, 2021 as compared to generating $13,022,000 cash during the year ended December 31, 2020. Cash
flows in 2021 included a receipt of Canada Emergency Wage and Rent Subsidies of $6,814,000 (December 31, 2020: $4,765,000).
Non-cash operating assets and liabilities generated $5,602,000 of cash during the year ended 2021, compared to utilizing
$3,897,000 of cash during the previous year, primarily due to timing in payments to suppliers.
Avcorp Group continues to closely monitor accounts receivable and accounts payable, and to work with its customers and suppliers
to ensure cash is collected on a timely basis and on payment terms that meet its operational needs.
Cash Flows from Investing Activities
During the year ended December 31, 2021, the Avcorp Group purchased equipment totalling $2,221,000, of which $147,000 was
supported by government grant, compared with $1,769,000 during the year ended December 31, 2020. Avcorp Group continues
to minimize its capital expenditures in order to conserve cash, with only operation critical expenditures being made.
During 2021 and 2020, the Company continued the new program introduction process in support of production contracts. The
start-up of new production contracts requires significant investments in hard and soft tooling. Such tooling investments amounted
to $2,956,000 for the year ended December 31, 2021, (December 31, 2020: $3,929,000).
The Gardena facility sold several out of production equipment for proceeds of $852,000 during the year as it vacated unutilized
buildings as part of the new lease agreement (December 31, 2020: $Nil).
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 $3,707,000 of cash during the current year compared with utilizing $740,000 of cash
in 2020.
The Company’s operating line was $75,335,000 drawn as at December 31, 2021, (December 31, 2020: $76,439,000). The
Company drew $1,266,000 in cash during the year (December 31, 2020: $653,000 was drawn) and repaid $2,105,000 in cash
during the year (December 31, 2020: $7,368,000 was repaid).
Repayment of term debt during the year ended December 31, 2021 amounted to $3,047,000 (December 31, 2020: $2,524,000);
which was used to fund equipment and facility leases.
Proceeds from term debt during the current year amounted to $2,508,000 (December 31, 2020: $12,453,000), which represents
the receipts of Paycheck Protection Program Loan from the U.S. Small Business Administration to ACF (“PPP Loan”). 2020 amount
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)
PPP loan.
Payment of interest during the year ended December 31, 2021 amounted to $2,441,000 (December 31, 2020: $3,954,000);
Decrease in payment mainly attributable to repayment of bank indebtedness and term debt throughout 2020 and 2021.
During the year a holder of the Company’s stock options exercised 2,812,500 stock options at a price of $0.04 resulting in the
issuance of 2,812,500 common shares with a value of $112,000.
Avcorp Industries Inc.
annual report 2021
Page 12
Contractual Obligations
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, nor does it have transactions that are not recorded or disclosed in
the consolidated financial statements.
Capital Stock
As at December 31, 2021, there were 370,931,120 common shares, no common share purchase warrants, and 19,248,000 stock
options issued and outstanding.
Common Shares
Panta Canada B.V., is wholly owned by Panta Holdings B.V. and is Avcorp’s majority shareholder owning approximately 70.6% of
issued and outstanding common shares as of December 31, 2021.
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 370,931,120 common shares issued at December 31, 2021 (December 31, 2020: 368,118,620
Common Shares). During the fourth quarter of 2021, a holder of the Company’s stock options exercised 2,812,500 stock options
at a price of $0.04 resulting in the issuance of 2,812,500 common shares with a value of $112,000.
The book value of common shares issued and outstanding as at December 31, 2021 was $86,456,000 (December 31, 2020:
$86,219,000), and a shareholders’ deficiency of $48,107,000 (December 31, 2020: $49,140,000 deficiency).
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 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.
PAYMENTS DUE BY PERIOD
(unaudited, expressed in thousands of Canadian dollars)
Total
Within 1 year
Between 1-5 years
Over 5 years
Lease obligations
$11,750
2,712
6,487
2,551
Bank indebtedness
74,412
-
74,412
-
Term loan1
17,447
329
15,443
1,675
Purchase obligations2
29,893
28,741
1,152
-
Total contractual obligations
133,502
31,782
97,494
4,226
1.
This amount includes loan with a related party and obligations the Company has with Industrial Technologies Office.
2.
Purchase obligations include payments for the Company’s committed contractual operational purchase order obligations
outstanding.
Avcorp Industries Inc.
annual report 2021
Page 13
The amendments are effective for annual reporting periods beginning on or after January 1, 2022, with earlier application
permitted. The Company will apply these amendments to contracts for which it has not yet fulfilled all its obligations at the
beginning of the annual reporting period in which it first applies the amendments. The Company presently applies a “directly
related cost approach” to assess whether a contract is onerous and does not expect the adoption to have a significant impact on
the Company’s consolidated financial statements.
Amendments to IAS 8: Definition of Accounting Estimates
In February 2021, the IASB issued amendments to IAS 8, in which it introduces a definition of ‘accounting estimates’. The
amendments clarify the distinction between changes in accounting estimates and changes in accounting policies and the correction
of errors. Also, they clarify how entities use measurement techniques and inputs to develop accounting estimates.
The amendments are effective for annual reporting periods beginning on or after 1 January 2023 and apply to changes in
accounting policies and changes in accounting estimates that occur on or after the start of that period. Earlier application is
permitted as long as this fact is disclosed.
The Company is currently assessing the impact and timing of the amendments on current practice.
Amendments to IAS 1 and IFRS Practice Statement 2: Disclosure of Accounting Policies
In February 2021, the IASB issued amendments to IAS 1 and IFRS Practice Statement 2 Making Materiality Judgements, in which
it provides guidance and examples to help entities apply materiality judgements to accounting policy disclosures. The amendments
aim to help entities provide accounting policy disclosures that are more useful by replacing the requirement for entities to disclose
their ‘significant’ accounting policies with a requirement to disclose their ‘material’ accounting policies and adding guidance on
how entities apply the concept of materiality in making decisions about accounting policy disclosures.
The amendments to IAS 1 are applicable for annual periods beginning on or after 1 January 2023 with earlier application
permitted. Since the amendments to the Practice Statement 2 provide non-mandatory guidance on the application of the definition
of material to accounting policy information, an effective date for these amendments is not necessary.
The Company is currently assessing the impact of the amendments to determine the impact they will have on the Company’s
accounting policy disclosures.
Operations Overview
Delivery and Quality Performance
Deliveries and quality performance as at December 31, 2021, 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 to December 2027 with options to 2029. Agreements
with Boeing Defence, Space and Security extend into 2022. 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 backlogs.
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, 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, 2021, is $457 million in consideration
of attaining full award values, compared to $407 million as at December 31, 2020. The changes in order backlog are as follows:
•
$99 million decrease in order backlog resulting from revenues recorded during the year ended December 31, 2021;
•
Insignificant impact 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.
•
$149 million increase in order backlog due to an increase in the production rates for existing commercial and defence
programs, offset partially by decreases in several existing commercial program requirements;
•
In August 2021, the Company signed a contract extension with Boeing to provide the Wheel Well Fairing assemblies
for the Boeing 737 MAX.
•
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
aircraft. Some of the Company’s major commercial programs had previously reduced their production requirements
and now are showing signs of recovery into 2022 to 2023.
Avcorp Industries Inc.
annual report 2021
Page 14
Supply Chain
Supplier quality and delivery performance continued to meet targeted levels during the period; the Company continues to monitor
supplier performance in all aspects of quality, delivery, and price. The Company works closely with its supply chain to ensure a
stable, uninterrupted delivery of compliant products and is making changes in product sourcing processes where necessary. The
capacity and delivery performance of a limited number of critical vendors continues to be closely monitored to mitigate risks to
assembly start dates. Risk mitigation plans have been implemented.
The Company during 2021 has had disruptions in the supply chain for chemicals and other raw materials due to COVID-19. Avcorp
is working with suppliers to mitigate this new and evolving risk. There has not been a material impact to the supply chain.
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 surplus position of $7,613,000 at December 31, 2021, and a $77,780,000
deficit position at December 31, 2020. On December 31, 2021, the ratio of the Company's current assets to current liabilities was
1.18:1 (December 31, 2020: 0.47:1). The Company’s accounts receivable, government grant receivable, current contract assets,
and inventories net of current accounts payable, amount to a $24,452,000 surplus as at December 31, 2021, (December 31,
2020: $33,174,000 surplus).
Financial Resources
Avcorp Group has invested in its strengths: 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 these 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, 2021, was 488 (December 31, 2020: 546). The decrease in the number of
employees was due to reduced delivery requirements from customers affected by COVID-19.
Equipment, Systems, Technologies and Processes
Manufacturing equipment and information technology assets have been upgraded and further deployed, increasing reliability
and utility when required limited by liquidity availability.
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 COVID-19 on the aviation industry, employees, supply chain and customers;
•
no agreement on extension of customer contracts, or terminated customer programs that are not replaced;
•
availability of material and 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.
In March 2020, the World Health Organization (“WHO”) declared the COVID-19 virus a global pandemic. The ongoing COVID-19
pandemic, including the emergence of new variants, continues to negatively impact the global economy, global supply chains,
the aviation industry particularly in the commercial airline industry, and create economic uncertainty. Governments worldwide
have enacted emergency measures including travel bans, social distancing measures and mandatory quarantine requirements.
Avcorp’s operations in 2020 and 2021 at varying times have been challenged with reduced production driven by customers’ build
rate adjustments, government related enacted measures to modify work practices to meet health and safety standards, and
related supply chain issues.
Avcorp Industries Inc.
annual report 2021
Page 15
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.
There continues to be positive signs of market recovery and recovering air travel into 2022. The Company will continue to
implement measures to align its cost structure and maximize cash preservation during the current market conditions to ensure
it emerges from the current crisis on solid footing. 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.
Additional Financing
Avcorp Group’s growth strategy requires continued access to capital. From time to time, the Company may require additional
financing to enable it to:
•
finance unanticipated working capital requirements;
•
finance transitional operating losses incurred upon integration of acquired entities;
•
finance new program development and introduction;
•
develop or enhance existing services and capabilities;
•
respond to competitive pressures;
•
finance business acquisitions.
The Avcorp’s Canadian operations are currently working to secure additional financing through the Aerospace Regional Recovery
Initiative which is a national program that will provide financing for the Canadian aerospace sector emerging from the pandemic
and continue to compete on the global stage. Companies will be eligible to apply for funding of projects that will help them green
their operations and adopt environmentally sustainable practices, improve productivity and strengthen commercialization,
support digital adoption and enhanced cybersecurity, improve diversity and inclusion to address barriers faced by certain groups,
and strengthen integration into regional and global supply chains.
Customer Contracts
The Company is exposed to the risk that existing customer fixed-term contracts are not renewed at the expiration date. Avcorp
Group operates within “general terms agreements” with its customers. These typically have a duration of five or more years.
The Company’s agreements with Boeing Commercial Airplanes extend from current date, with various expiry timelines, through
to the end of 2027 with options to 2029. Agreements with Boeing Defence, Space & Security extend into 2022 with minimum
base quantity requirements. It is the Company’s objective to successfully renew Boeing production contracts in advance of expiry
dates.
The Bombardier and Subaru agreements extend for the life of the individual aircraft programs.
BAE Systems and Lockheed Martin customer contracts extend into 2022. The Company is currently negotiating the extension
of follow-on contracts into 2026.
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, 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 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 and ensure
uninterrupted delivery of compliant products with a cost structure closely matching product pricing. Forecast changes are closely
monitored so that prompt adjustments can be made to material and parts procurement with the objective of limiting unwanted
inventory build-up.
Aircraft Production Rates
The following industry and program trends impact the Company:
•
The aerostructures markets for commercial aircraft and larger business jets is expected to recover by 2023.
•
Boeing has resumed production of the 737 MAX with low rate production in 2021 with a gradual increase in early 2022.
•
Bombardier Challenger CL650 aircraft production requirements are higher in 2021 compared to 2020, production
requirements are projected to increase over the next 5 years.
•
The global market for defence aircraft is expected to continue to grow.
Avcorp Industries Inc.
annual report 2021
Page 16
•
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 Fixed Wing Search and Rescue could lead to additional revenue opportunities from this aerospace sector.
•
The COVID-19 virus has adversely impacted the aviation industry. The pandemic drastically reduced passenger airline traffic.
The OEMs have reduced their production rates with anticipated full recoveries in late 2022 to early 2023.
Competitors
The long-term trend continues towards more intense competition from larger entities having operations in Asia, Mexico, and
Europe, while OEMs continue to increase the size and quantity 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 enhance vertical strengths or additional strategic
capabilities.
Cost Reductions
Approximately 59% of Avcorp Group’s cost of sales is related to labour and overhead and 41% is related to procurement of raw
materials and finished parts. The Company’s wage rates are generally lower than its western European and northwestern United
States competitors and higher than those in the southeastern United States, Asia, Eastern Europe, and Mexico. On September
25, 2019, the Company reached a labour agreement with the International Association of Machinists and Aerospace Workers
(Lodge 250) (the “Union”) at its Delta, British Columbia facility. The six-year labour agreement was ratified by the Union and
will expire on March 31, 2025. On June 29, 2016, the labour force at the Gardena facility ratified a six-year collective agreement,
adding language that allows for High Performance Work Teams and incentive bonus payments for accomplishing annual targets
regarding operational and quality performance.
The Company continues to focus on cost reductions for direct labour, material, and overhead costs. These cost reductions will
be achieved through continuous improvements in the internal and external parts supply chain using lean manufacturing
technology, through continued negotiation of long-term agreements with the majority of key suppliers, through increased
efficiency of plant capacity augmented by technological improvements, and through continued focus on cost targets at all levels
of the organization. All discretionary spending is reviewed and controlled by senior management, with expenditures focused on
expediting new commercial program business growth and launching of long-term defence programs. However, fixed overhead
costs continue to have an adverse impact on the Company’s cost structure during this period of reduced revenues. This will be
mitigated by increased revenue and facility utilization.
US Dollar
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, and Accounts Payable. 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
The Company is positioned to perform well in 2022 and into the longer term. Longer term performance, based on current
expectations of contracts and contract renewals, show a growth plan with positive operational performance and significant
improvement in net cash from operating activities that will enable the Company to repay any outstanding bank indebtedness by
fiscal year 2026. The Company continues to work toward securing new defence and commercial program production contracts
to augment and diversify its backlog and renewing existing customer production contracts. Current contracts extend as far as
2027 and beyond. As the demand for the commercial air traffic improves and original equipment manufacturer (“OEM”)
production rates increase for both commercial and defense programs, the Company is expecting a 20% annual growth in revenue
in the coming couple of years. We have strong order backlog as at December 31, 2021 of $457 million.
There continues to be positive signs of market recovery and returning air travel into 2022 onward as we emerge from the COVID-
19 pandemic. The Company has implemented a number of measures to align its cost structure to demand and maximize cash
preservation during these market conditions which will benefit the Company as it emerges from the current crisis on solid footing.
The Delta and Burlington facility performance is expected to improve as the commercial customer delivery requirements recover
into 2022 and onward from the COVID-19 Pandemic. At the Gardena facility, management is navigating through changing
customer requirements and will continue to rebalance the labour force accordingly, enforce stringent cost cutting measures and
consolidate its footprint. Boeing suspended deliveries of its 787 aircraft during 2021 which continues to impact Subaru’s delivery
requirement from the Gardena facility. Avcorp is working closely with Subaru to ensure a continued steady rate of supply in the
short-term and expect a recovery of the production rate in the long term. The Company is actively seeking new production
contracts with customers such as Space Exploration Technologies Corp. and SpinLaunch inc. out of the Gardena facility.
Avcorp Industries Inc.
annual report 2021
Page 17
On March 12, 2021, the Company entered into a multiparty amended and restated Accommodation Agreement with a customer
and Panta Canada B.V. This eliminated a future guarantee fees payable to the customer significantly reducing financing costs
annually.
The Company forecasts its working capital requirements during the growth path will be met by the current operating line of credit,
working capital surplus, and availability on a shareholder loan.
Going Concern
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, such as, the Company’s ability to 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.
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 revenue and related profitability are
continually evaluated and are based on historical experience and other factors, including expectations of future events that are
believed to be reasonable under the circumstances.
The Company, in conjunction with its Board of Directors, has implemented various financing strategies to mitigate this risk. The
Company has raised on March 12, 2021, by way of a multiparty amended and restated Accommodation Agreement with a
customer and Panta Canada B.V., a USD $10,000,000 non-revolving standby loan facility and a USD $3,000,000 equipment loan
for an aggregate undrawn availability of USD $13,000,000. In addition, as at December 31, 2021 the Company had a cash balance
of $4,060,000 (December 31, 2020 $7,044,000) and ability to draw up to an additional $7,879,000 (USD $6,215,000) on its
operating line of credit.
Management will continue to evaluate the operations of the company to improve profitability and will continue to work with its
current lender, an existing common shareholder and other parties to seek additional financing if necessary. The Company cannot
provide assurance that it will achieve profitability or that, if it needs to raise additional funds, such funds will be available on
favorable terms, or at all. If the Company cannot achieve profitability or raise adequate funds on acceptable terms, its business
could be materially harmed.
In March 2020, the World Health Organization (“WHO”) declared the COVID-19 virus a global pandemic. The ongoing COVID-19
pandemic, including the emergence of new variants, continues to negatively impact the global economy, global supply chains,
the aviation industry particularly in the commercial airline industry, and create economic uncertainty. Governments worldwide
have enacted emergency measures including travel bans, social distancing measures and mandatory quarantine requirements.
Avcorp’s operations in 2020 and 2021 at varying times have been challenged with reduced production driven by customers’ build
rate adjustments, government related enacted measures to modify work practices to meet health and safety standards, and
related supply chain issues.
There continues to be positive signs of market recovery and recovering air travel into 2022. The Company will continue to
implement measures to align its cost structure and maximize cash preservation during the current market conditions to ensure it
emerges from the current crisis on solid footing. 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.
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, 2021, amount to $Nil (December 31, 2020: $Nil). Fees payable
to certain directors or Companies with which they have beneficial ownership, as at December 31, 2021, are $Nil (December 31,
2020: $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, 2021, (December 31, 2020: $Nil).
Key management includes members of the Board of Directors of the Company and executive officers for all operating facilities,
as they have the collective authority for and responsibility of planning, directing, and controlling the activities of the Company.
The compensation expense for key management for services is shown below:
KEY MANAGEMENT COMPENSATION
(expressed in thousands of Canadian dollars)
2021
2020
Salaries and other short-term employee benefits
$2,672
$1,867
Contributions to defined contribution plan
97
91
Option-based awards
1,357
32
4,126
1,990
Avcorp Industries Inc.
annual report 2021
Page 18
The balance of loans receivable from key management as at December 31, 2021, is $5,000 (December 31, 2020: $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.
Critical Accounting Estimates and Judgements
The preparation of consolidated financial statements in conformity with IFRS requires management to make estimates and judgments
that affect the amounts which are reported in the consolidated financial statements during the reporting period. Estimates and other
judgments are evaluated at each reporting date and are based on management’s experience and other factors, including expectations
about future events that are believed to be reasonable under the circumstances. The Company reviews its estimates and assumptions
on an ongoing basis and uses the most current information available and exercises careful judgement in making these estimates and
assumptions.
•
Functional currency: The functional currency for the Company and its subsidiaries is the currency of the primary economic
environment in which each operates. The Company has determined that the functional currency for the Company and all its
subsidiaries except for Avcorp US Holdings Inc. and ACF is the Canadian dollar. The functional currency for Avcorp US Holdings
Inc. and ACF is the US dollar. The determination of functional currency may require certain judgements to determine the primary
economic environment. The Company reconsiders the functional currency used when there is a change in events and conditions
which determined the primary economic environment.
•
Impairments: The recoverable amount of intangible assets, development costs and property, plant and equipment is based on
estimates and assumptions regarding the expected market outlook and cash flows from each of the Company’s CGU. Assumptions,
judgments, and estimates about future values are complex and often subjective. They can be affected by a variety of factors,
including external factors such as industry and economic trends, and internal factors such as changes in the Company’s business
strategy or internal forecasts. Although the Company believes the assumptions, judgments, and estimates made in the past have
been reasonable and appropriate, different assumptions, judgments and estimates could materially affect the Company’s reported
financial results.
During the year the Company determined that the equipment, the right-of-use assets and intangible assets of its ACF cash
generating unit were impaired. The equipment were written down to its recoverable amount of $5,509,000 (USD $4,345,000).
The fair value less cost to sell of the equipment was determined by an independent appraiser using sales of comparable equipment
or a cost approach. The main inputs were estimate of value based on recent sales of comparable equipment and estimates of the
impact of physical deterioration, functional or technological obsolescence and external or economic obsolescence for value derived
from using a cost approach. Management estimated that no value can be generated out of the right-of-use assets upon a sale or
sublease, their fair value less cost of sell was estimated to be nil as at the end of the year.
•
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. 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.
•
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 $10,112,000 of overhead costs during the current year (December 31, 2020: $8,346,000) in respect
of unutilized plant capacity. These amounts are included in the Consolidated Statements of 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, 2021 is $1,864,000 (December 31, 2020: $565,000).
•
The 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.
Avcorp Industries Inc.
annual report 2021
Page 19
•
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 forgiveness of the second wave U.S. Small Business
Administration Paycheck Protection Program loan and has recognized $2,513,000 (USD $2,004,000) in other income in the current
year.
Financial Instruments and Other Instruments
Market Risk
Market risk arises as a consequence of the fact that changes in the market prices, such as foreign exchange rates and interest
rates, will affect the Company’s income or the value of its holdings of financial instruments. The Company’s policy is not to utilize
derivative financial instruments for trading or speculative purposes. The Company may utilize derivative instruments in the
management of its foreign currency and interest rate exposures.
Currency Risk
Currency risk arises because the amount of the local currency receivable or payable for transactions denominated in foreign
currencies may vary due to changes in exchange rate (“transaction exposures”) and because the non-Canadian dollar
denominated financial statements of the Company’s subsidiaries may vary on consolidation into the reporting currency of
Canadian dollars (“translation exposures”).
The Company sells a significant proportion of its products in US dollars at prices which are often established well in advance of
manufacture and shipment dates. In addition, the Company purchases a significant proportion of its raw materials and
components in US dollars at prices that are usually established at the order date. The Company’s operations are based in Canada
and in the US. As a result of this, the Company is exposed to currency risk to the extent that fluctuations in exchange rates are
experienced. The amount of foreign exchange gain recorded for the year ended December 31, 2021 is $295,000 (December 31,
2020: $364,000 loss).
The Company had the following US dollar denominated balances:
With other variables unchanged, each $0.10 strengthening (weakening) of the CAD against the USD would result in an increase
(decrease) of approximately $6,399,000 in net income for the year ended December 31, 2021, as a result of holding a net liability
position in USD as at December 31, 2021.
As at December 31, 2020, a $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.
CURRENCY RISK
(expressed in thousands of dollars)
AS AT DECEMBER 31
2021 (expressed in USD)
2020 (expressed in USD)
Bank cash position
$2,568
$3,285
Accounts receivable
9,849
6,393
Accounts payable
5,843
3,726
Customer advance
-
4,643
Bank indebtedness
59,421
60,037
Term debt
11,143
10,322
Avcorp Industries Inc.
annual report 2021
Page 20
Credit Risk
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its
contractual obligations. 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 88.0% (December 31, 2020: 89.6%) 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 OEM and Tier 1 aerospace customer
base as at December 31, 2021. 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.
The Company has a working capital surplus of $7,613,000 as at December 31, 2021, compared with $77,780,000 deficit as at
December 31, 2020. Working capital is defined as the difference between current assets and current liabilities. The increase
compared to 2020 was mainly due to the bank indebtedness re-classified as non-current upon extension of maturity to June 30,
2023. On December 31, 2021, the ratio of the Company's current assets to current liabilities was 1.18:1 (December 31, 2020:
0.47:1). The Company’s accounts receivable, government grant receivable, current contract assets, and inventories net of current
accounts payable amount to a $24,452,000 surplus as at December 31, 2021, (December 31, 2020: $33,174,000 surplus).
Current accounts payable and accrued liabilities are all due within the next twelve months.
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, such as, the Company’s ability to 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.
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 revenue and related profitability are
continually evaluated and are based on historical experience and other factors, including expectations of future events that are
believed to be reasonable under the circumstances.
The Company, in conjunction with its Board of Directors, has implemented various financing strategies to mitigate this risk. The
Company has raised on March 12, 2021, by way of a multiparty amended and restated Accommodation Agreement with a
customer and Panta Canada B.V., a USD $10,000,000 non-revolving standby loan facility and a USD $3,000,000 equipment loan
for an aggregate undrawn availability of USD $13,000,000. In addition, as at December 31, 2021 the Company had a cash balance
of $4,060,000 (December 31, 2020 $7,044,000) and ability to draw up to an additional $7,879,000 (USD $6,215,000) on its
operating line of credit.
Management will continue to evaluate the operations of the company to improve profitability and will continue to work with its
current lender, an existing common shareholder and other parties to seek additional financing if necessary. The Company cannot
provide assurance that it will achieve profitability or that, if it needs to raise additional funds, such funds will be available on
favorable terms, or at all. If the Company cannot achieve profitability or raise adequate funds on acceptable terms, its business
could be materially harmed.
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$1,000,000:
•
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
The utilized portion of this operating line of credit at year end amounting to $18,303,000 (USD $14,437,000).
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
Avcorp Industries Inc.
annual report 2021
Page 21
•
RBUSBR plus 0.00% per annum
•
BA Equivalent Rate plus 0.875% per annum
•
LIBOR Rate plus 0.875% per annum
The utilized portion of this operating line of credit at year end amounting to $57,032,000 (USD $44,984,000).
The LIBOR has been subject to recent proposed reforms. The LIBOR will be phased out by June 30, 2023 which is consistent to
the term of the loan agreement. The consequences of these developments cannot be predicted with certainty, however, no
significant impact is expected.
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 provided 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). On March 12, 2021, the
Company has amended and restated the accommodation agreement with the Guarantor 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.
Capital Risk
The Company’s objectives when managing capital are to safeguard its ability to continue as a going concern, to meet short term
obligations 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 matters, 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, 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, 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.
Avcorp Industries Inc.
annual report 2021
Page 22
Forward Looking Statements Disclaimer
This MD&A includes forward-looking statements, which may involve, but are not limited to: statements with respect to our business
objectives, prospects, and guidance in respect of various financial and industry metrics, including, goals, strategies, capabilities,
market position, competitive strengths, prospects, plans, expectations, anticipations, estimates and intentions; business and
economic, industry trends; customer demand for products; order backlog mix; the regulatory environment and legal proceedings;
strength of our balance sheet, creditworthiness, capital resources, anticipated financial requirements, productivity enhancements,
operational efficiencies, cost reduction and the intended benefits and timing thereof; availability of government assistance programs,
compliance with debt covenants; and the impact of the COVID-19 pandemic on the foregoing; expectations regarding gradual market
and economic recovery in the aftermath of the COVID-19 pandemic.
Forward-looking statements can generally be identified by the use of forward-looking terminology such as “may”, “will”, “shall”, “can”,
“expect”, “estimate”, “intend”, “anticipate”, “plan”, “forecast”, “foresee”, “believe”, “continue”, “maintain” or “align”, the negative of
these terms, variations of them or similar terminology.
Forward-looking statements are presented for the purpose of assisting investors and others in understanding certain key elements of
our current objectives, strategic priorities, expectations, outlook, and plans, and to obtain an understanding of our business and
anticipated operating environment. Readers are cautioned that such information may not be appropriate for other purposes.
Forward-looking statements require management and the Board to make assumptions and are subject to and unknown risks and
uncertainties, which may cause our actual results in future periods to differ materially from forecast results set forth in forward-looking
statements. While management and the Board consider these assumptions to be reasonable and appropriate based on information
currently available, there is risk that they may not be accurate. The assumptions underlying the forward-looking statements made in
this MD&A in relation to the five-year forecast include the following material assumptions: the award and fulfilment of customer
contracts that the Company does not currently have in its backlog, the continuation of existing customer programs and anticipated
labour costs associated with our operations for the periods covered in the forecast. Additional information, including with respect to
other assumptions and risk factors underlying the forward-looking statements made in this MD&A, refer to the risk factors in both our
Annual Report and our Annual Information Form for the fiscal year ended December 31, 2021. Given the impact of the changing
circumstances surrounding the COVID-19 pandemic, there is inherently more uncertainty associated with the Corporation’s
assumptions as compared to prior years.
Certain factors that could cause actual results to differ materially from those anticipated in the forward-looking statements include,
but are not limited to, risks associated with overall global and domestic economic conditions, risks associated with our business
environment (such as risks associated with the financial condition of our customers; increased competition from international and
domestic suppliers; force majeure events), operational risks such as the award of new business; order backlog; the execution of
customer orders; cash flows and capital expenditures based on cyclicality; productivity enhancements, operational efficiencies, cost
reduction initiatives; product warranty; regulatory and legal proceedings; environmental, health and safety risks; dependence on
certain customers, contracts and suppliers; supply chain risks; human resources; reliance on information systems; reliance on and
protection of intellectual property rights; adequacy of insurance coverage), financing risks (such as risks related to liquidity and access
to capital markets; substantial debt and interest payment requirements; debt covenants), market risks (such as foreign currency
fluctuations; changing interest rates; increases in commodity prices; and inflation rate fluctuations). For more details, see the Risks
outlined in our MD&A. The foregoing factors may be exacerbated by the ongoing COVID-19 outbreak and may have a significantly
more severe impact on the Corporation’s business, results of operations and financial condition than in the absence of such outbreak.
As a result of the current COVID-19 pandemic, additional factors that could cause actual results to differ materially from those
anticipated in the forward-looking statements include, but are not limited to: risks related to the impact and effects of the COVID-19
pandemic on economic conditions and financial markets and the resulting impact on our business, operations, capital resources,
liquidity, financial condition, margins, prospects and results; uncertainty regarding the magnitude and length of economic disruption
as a result of the COVID-19 outbreak and the resulting effects on the demand for our products and services; emergency measures
and restrictions imposed by public health authorities or governments, fiscal and monetary policy responses by governments and
financial institutions; disruptions to global supply chain, customers, workforce, counterparties and third-party service providers;
further disruptions to operations, orders and deliveries; technology, privacy, cyber security and reputational risks; and other
unforeseen adverse events.
The forward-looking statements present certain non-IFRS financial measures to assist readers in understanding the Company’s
forecasted performance. Non-IFRS financial measures are measures that either exclude or include amounts that are not excluded or
included in the most directly comparable measures calculated and presented in accordance with Generally Accepted Accounting
Principles (“GAAP”).
The foregoing list of factors that may affect future results and performance is not exhaustive and undue reliance should not be placed
on forward-looking statements. The forward-looking statements set forth herein reflect management’s expectations as at the date of
this MD&A and are subject to change after such date. Unless otherwise required by applicable securities laws, we expressly disclaim
any intention, and assume no obligation to update or revise any forward-looking statements, whether as a result of new information,
future events or otherwise. The forward-looking statements contained in this MD&A are expressly qualified by this cautionary
statement.
Avcorp Industries Inc.
annual report 2021
Page 23
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
Executive Officer and
Group Chief Executive
Officer
“Amish Patel”
AMISH PATEL
Group Vice President,
Finance
Avcorp Industries Inc.
annual report 2021
Page 24
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(expressed in thousands of Canadian dollars)
AS AT DECEMBER 31
2021
2020
ASSETS
Current assets
Cash (note 16)
$4,060
$7,044
Accounts receivable (note 9)
18,116
14,436
Government grant receivable (note 27)
-
2,688
Contract assets (note 10)
13,319
34,325
Inventories (note 11)
12,809
9,657
Prepayments and other assets (note 12)
2,091
2,108
50,395
70,258
Non-current assets
Prepayments and other assets (note 12)
2,868
2,877
Development costs (note 13)
10,597
9,045
Contract assets (note 10)
18,079
-
Property, plant, and equipment (note 14)
20,698
38,703
Intangibles (note 15)
-
655
Total assets
102,637
121,538
LIABILITIES AND DEFICIENCY
Current liabilities
Bank indebtedness (note 16)
-
76,708
Accounts payable and accrued liabilities (note 18 and 24)
19,792
27,932
Term debt (note 20)
3,041
16,868
Contract liability (note 19)
18,625
11,502
Onerous contract provision (note 21)
1,324
282
Deferred government grant (note 27)
-
657
Customer advance (note 17 and 24)
-
5,911
Guarantee fee (note 16 and 24)
-
8,178
42,782
148,038
Non-current liabilities
Bank indebtedness (note 16)
74,412
-
Term debt (note 20)
26,156
19,168
Contract liability (note 19)
4,843
3,189
Accounts payable and accrued liabilities (note 18)
2,011
-
Onerous contract provision (note 21)
540
283
150,744
170,678
(Deficiency) Equity
Capital stock (note 23)
86,456
86,219
Contributed surplus
6,742
5,478
Accumulated other comprehensive income
8,145
8,082
Accumulated deficit
(149,450)
(148,919)
(48,107)
(49,140)
Total liabilities and deficiency
102,637
121,538
Nature of operations and going concern (note 1). The accompanying notes are an integral part of these consolidated financial statements.
Approved by the Board of Directors on March 24, 2022.
“David Levi”
David Levi
Chairman
“Ken Robertson”
Ken Robertson
Committee Chair, Audit & Corporate Governance Committee
Avcorp Industries Inc.
annual report 2021
Page 25
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
2021
2020
Revenues (notes 33)
$99,476
$150,962
Cost of sales (notes 11, 21 and 33)
99,546
142,729
Gross (loss) profit
(70)
8,233
Administrative and general expenses
18,277
16,717
Office equipment depreciation
723
787
Accommodation agreement settlement (note 24)
(21,391)
-
Impairment loss (note 14, 15)
7,815
-
Other income (note 27)
(8,180)
(11,642)
Operating income
2,686
2,371
Finance costs – net (note 28)
3,091
7,605
Foreign exchange (gain) loss
(295)
364
Net loss on sale and write-off of equipment
421
1,127
Loss before income tax
(531)
(6,725)
Income tax expense
-
-
Loss for the year
(531)
(6,725)
Other comprehensive income
63
1,028
Total comprehensive loss for the year
(468)
(5,697)
Loss per share:
Basic loss per common share (note 32)
(0.00)
(0.02)
Diluted loss per common share (note 32)
(0.00)
(0.02)
Basic weighted average number of shares outstanding (000’s) (note 32)
368,257
368,118
Diluted weighted average number of shares outstanding (000’s) (note 32)
368,257
368,118
The accompanying notes are an integral part of these consolidated financial statements.
Avcorp Industries Inc.
annual report 2021
Page 26
CONSOLIDATED STATEMENTS OF CASH FLOWS
(expressed in thousands of Canadian dollars)
FOR THE YEAR ENDED DECEMBER 31
2021
2020
Cash flows from operating activities
Net loss for the year
$(531)
$(6,725)
Adjustment for items not affecting cash:
Net interest expense
3,091
7,605
Depreciation
7,147
8,338
Development cost amortization
1,404
8,955
Intangible assets amortization
91
1,197
Loss on disposal of equipment
421
1,127
Provision for onerous contracts
1,299
308
Stock based compensation
1,389
32
Provision for obsolete inventory
2,030
(163)
Provision for doubtful accounts
4
(326)
Unrealized foreign exchange
(235)
(694)
Government grant income
(3,437)
(6,632)
Accommodation agreement settlement
(21,391)
-
Impairment Loss
7,815
-
Loss on lease modification
204
-
Cash (used in) flows from operating activities before
changes in non-cash working capital
(699)
13,022
Changes in non-cash working capital
Accounts receivable
5,536
9,195
Contract assets
2,879
(8,270)
Inventories
(5,157)
3,397
Prepayments and other assets
2,850
13
Accounts payable and accrued liabilities
894
(10,265)
Deferred government grant
(657)
-
Contract liability
(743)
2,033
Net cash from operating activities
4,903
9,125
Cash flows used in investing activities
Proceeds from sale of equipment
852
61
Purchase of equipment
(2,221)
(1,769)
Payments relating to development costs and tooling
(2,956)
(3,929)
Receipt of government grants for purchase of equipment
147
-
Initial lease payments and other direct costs incurred
-
(31)
Net cash used in investing activities
(4,178)
(5,668)
Cash flows used in financing activities
Proceeds from bank indebtedness
1,266
653
Repayment of bank indebtedness
(2,105)
(7,368)
Payment of interest
(2,441)
(3,954)
Proceeds from term debt
2,508
12,453
Repayment of term debt
(3,047)
(2,524)
Proceeds from Issuance of Common Shares
112
-
Net cash used in financing activities
(3,707)
(740)
Net (decrease) increase in cash
(2,982)
2,717
Net foreign exchange difference
(2)
11
Cash - Beginning of the year
7,044
4,316
Cash - End of the year
4,060
7,044
Supplementary Cash Flow Information (note 29).
The accompanying notes are an integral part of these consolidated financial statements.
Avcorp Industries Inc.
annual report 2021
Page 27
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, 2019
368,118,620
86,219
5,446
(142,194)
7,054
(43,475)
Stock-based compensation expense
-
-
32
-
-
32
Unrealized currency gain on translation for the period
-
-
-
-
1,028
1,028
Net loss for the period
-
-
-
(6,725)
-
(6,725)
Balance at December 31 2020
368,118,620
86,219
5,478
(148,919)
8,082
(49,140)
Balance at December 31, 2020
368,118,620
86,219
5,478
(148,919)
8,082
(49,140)
Issue of Common Shares
2,812,500
112
-
-
-
112
Transfer to share capital on exercise of stock options
-
125
(125)
-
-
-
Stock-based compensation expense
-
-
1,389
-
-
1,389
Unrealized currency gain on translation for the period
-
-
-
-
63
63
Net loss for the period
-
-
-
(531)
-
(531)
Balance at December 31, 2021
370,931,120
86,456
6,742
(149,450)
8,145
(48,107)
The accompanying notes are an integral part of these consolidated financial statements.
Avcorp Industries Inc.
annual report 2021
Notes to Consolidated Financial Statements
For the year ended December 31, 2021
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)
Page 28
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,
there exist 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, 2021, were authorized for issue in
accordance with a resolution of its Board of Directors on March 24, 2022.
During the year ended December 31, 2021, the Company had a net loss of $531,000 (December 31, 2020: net loss of
$6,725,000), had positive operating cash flows of $4,903,000 (December 31, 2020: positive $9,125,000) shareholders’ deficiency
of $48,107,000 as of December 31, 2021 (December 31, 2020: $49,140,000 deficiency) and an accumulated deficit of
$149,450,000 (December 31, 2020: $148,919,000).
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, such as, the Company’s ability to 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 for at least 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 could materially impact the validity of such an assessment.
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 revenue and related profitability are
continually evaluated and are based on historical experience and other factors, including expectations of future events that are
believed to be reasonable under the circumstances.
The Company, in conjunction with its Board of Directors, has implemented various financing strategies to mitigate this risk. The
Company has secured on March 12, 2021, by way of a multiparty amended and restated Accommodation Agreement with a
customer and Panta Canada B.V., a USD $10,000,000 non-revolving standby loan facility and a USD $3,000,000 equipment loan
for an aggregate undrawn availability of USD $13,000,000. In addition, as at December 31, 2021 the Company had a cash balance
of $4,060,000 (December 31, 2020 $7,044,000) and ability to draw up to an additional $7,879,000 (USD $6,215,000) on its
operating line of credit.
Management will continue to evaluate the operations of the company to improve profitability and will continue to work with its
current lender, an existing common shareholder and other parties to seek additional financing if necessary. The Company cannot
provide assurance that it will achieve profitability or that, if it needs to raise additional funds, such funds will be available on
favorable terms, or at all. If the Company cannot achieve profitability or raise adequate funds on acceptable terms, its business
could be materially harmed.
Impact of COVID-19
In March 2020, the World Health Organization (“WHO”) declared the COVID-19 virus a global pandemic. The ongoing COVID-19
pandemic, including the emergence of new variants, continues to negatively impact the global economy, global supply chains,
the aviation industry particularly in the commercial airline industry, and create economic uncertainty. Governments worldwide
have enacted emergency measures including travel bans, social distancing measures and mandatory quarantine requirements.
Avcorp’s operations in 2020 and 2021 at varying times have been challenged with reduced production driven by customers’ build
rate adjustments, government related enacted measures to modify work practices to meet health and safety standards, and
supply chain issues.
There continues to be positive signs of market recovery and recovering air travel into 2022. The Company will continue to
implement measures to align its cost structure and maximize cash preservation during the current market conditions to ensure it
emerges from the current crisis on solid footing. 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.
Avcorp Industries Inc.
annual report 2021
Notes to Consolidated Financial Statements
For the year ended December 31, 2021
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)
Page 29
2.
Basis of Preparation and Measurement
The consolidated financial statements of the Company have been prepared in accordance with International Financial Reporting
Standards (“IFRS”).
The consolidated financial statements have been prepared on a historical cost basis. The consolidated financial statements are
presented in Canadian dollars and all values are rounded to the nearest thousand (000), except where otherwise indicated.
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.
The amendments are effective for annual reporting periods beginning on or after January 1, 2022, with earlier application
permitted. The Company will apply these amendments to contracts for which it has not yet fulfilled all its obligations at the
beginning of the annual reporting period in which it first applies the amendments. The Company presently applies a “directly
related cost approach” to assess whether a contract is onerous and does not expect the adoption to have a significant impact on
the Company’s consolidated financial statements.
Amendments to IAS 8: Definition of Accounting Estimates
In February 2021, the IASB issued amendments to IAS 8, in which it introduces a definition of ‘accounting estimates’. The
amendments clarify the distinction between changes in accounting estimates and changes in accounting policies and the
correction of errors. Also, they clarify how entities use measurement techniques and inputs to develop accounting estimates.
The amendments are effective for annual reporting periods beginning on or after 1 January 2023 and apply to changes in
accounting policies and changes in accounting estimates that occur on or after the start of that period. Earlier application is
permitted as long as this fact is disclosed.
The Company is currently assessing the impact of the amendments on current practice.
Amendments to IAS 1 and IFRS Practice Statement 2: Disclosure of Accounting Policies
In February 2021, the IASB issued amendments to IAS 1 and IFRS Practice Statement 2 Making Materiality Judgements, in
which it provides guidance and examples to help entities apply materiality judgements to accounting policy disclosures. The
amendments aim to help entities provide accounting policy disclosures that are more useful by replacing the requirement for
entities to disclose their ‘significant’ accounting policies with a requirement to disclose their ‘material’ accounting policies and
adding guidance on how entities apply the concept of materiality in making decisions about accounting policy disclosures.
The amendments to IAS 1 are applicable for annual periods beginning on or after 1 January 2023 with earlier application
permitted. Since the amendments to the Practice Statement 2 provide non-mandatory guidance on the application of the
definition of material to accounting policy information, an effective date for these amendments is not necessary.
The Company is currently assessing the impact of the amendments to determine the impact they will have on the Company’s
accounting policy disclosures.
Avcorp Industries Inc.
annual report 2021
Notes to Consolidated Financial Statements
For the year ended December 31, 2021
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)
Page 30
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,
2021. 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.
Foreign currency translation
•
Functional and presentation currency: Foreign currency items included in the consolidated financial statements of each
consolidated entity in the Avcorp Industries Inc. group are measured using the currency of the primary economic environment
in which the entity operates (the “functional currency”). The consolidated financial statements are presented in Canadian
dollars, which is the Company’s functional currency. The functional currency of the Company’s subsidiary, Comtek, is also
determined to be Canadian dollars. The functional currency of the Company’s 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
loss.
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.
Avcorp Industries Inc.
annual report 2021
Notes to Consolidated Financial Statements
For the year ended December 31, 2021
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)
Page 31
Financial instruments
a)
Financial assets
Financial assets include, in particular, cash and accounts receivables.
Financial assets are classified, at initial recognition, as subsequently measured at amortized cost, fair value through other
comprehensive income, or 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 the consolidated statement of 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 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.
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.
A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires. When an
existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an
existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original
liability and the recognition of a new liability. The difference in the respective carrying amounts is recognized in the
consolidated statement of loss.
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.
Avcorp Industries Inc.
annual report 2021
Notes to Consolidated Financial Statements
For the year ended December 31, 2021
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)
Page 32
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
2 - 10 years
Machinery and equipment
5 - 15 years
Leasehold improvements
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 the consolidated statement of 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 and impairment expense
on intangible assets with finite lives is recognized in the consolidated statement of loss in the expense category that is consistent
with the function of the intangible assets.
Research and development costs
Research costs are expensed as incurred. Development costs, which are currently all tooling and new program introduction costs
incurred on long-term programs that meet the criteria for deferral, are capitalized and amortized straight-line over the number
of shipsets management believes is a reasonable estimate of units to be sold for the program.
Segment Reporting
Management has determined the operating segments based on information regularly reviewed for the purposes of decision
making, allocating resources, and assessing performance by the Company’s chief operating decision maker; the Chief Executive
Officer (CEO). The Company evaluates the financial performance of its operating segments primarily based on operating income
or loss.
Impairment of non-financial assets
The Company assesses at each reporting date, whether there is an indication that an asset may be impaired. If any indication
exists, or when annual impairment testing for an asset is required, the Company estimates the asset’s recoverable amount. An
asset’s recoverable amount is the higher of an asset’s or cash generating units (“CGU”) fair value less costs of disposal and its
value in use. The Company’s CGUs are ASI, Comtek, and ACF. The recoverable amount is determined for an individual asset,
unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets.
When the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written
down to its recoverable amount.
In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that
reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less
costs of disposal, recent market transactions are taken into account. If no such transactions can be identified, an appropriate
valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded
companies or other available fair value indicators.
Avcorp Industries Inc.
annual report 2021
Notes to Consolidated Financial Statements
For the year ended December 31, 2021
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)
Page 33
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.
Impairment losses of continuing operations are recognized in the consolidated statement of loss separately.
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 consolidated
statement of 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 vesting period ranges
from immediately 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 when the
goods are delivered to customers.
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.
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.
Avcorp Industries Inc.
annual report 2021
Notes to Consolidated Financial Statements
For the year ended December 31, 2021
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)
Page 34
Revenue is measured based on the price specified in the sales contract.
Contract assets include unbilled amounts typically resulting from sales under purchase orders 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 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. 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.
The Company has a customer contract with price adjustments where the selling price is increased for sales made over an initial
specified period and a reduction in selling price for sales made in a subsequent specified period. This is a significant financing
component for this contract considering the length of time between the customers’ advance payment with the increased selling
price and the delivery made in the subsequent periods, as well as the prevailing interest rate in the market. As such, the advance
payment was recognized as contract liabilities and an interest on the advance payment is calculated using the Company’s weighted
average interest rate of debt. This rate is commensurate with the rate that would be reflected in a separate financing transaction
between the Company and the customer at contract inception.
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 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.
Avcorp Industries Inc.
annual report 2021
Notes to Consolidated Financial Statements
For the year ended December 31, 2021
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)
Page 35
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 is computed using the treasury stock method. The Company’s potentially
dilutive common shares comprise stock options granted to employees.
Lease
a)
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.
b)
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.
c)
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.
d)
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.
Avcorp Industries Inc.
annual report 2021
Notes to Consolidated Financial Statements
For the year ended December 31, 2021
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)
Page 36
Government grants
The Company recognized government grant income related to the Canada Emergency Wage and Rent 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. 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.
During the year the Company determined that the equipment, the right-of-use assets and intangible assets of its ACF cash
generating unit were impaired. The equipment were written down to its recoverable amount of $5,509,000 (USD
$4,345,000). The fair value less cost to sell of the equipment was determined by an independent appraiser using sales of
comparable equipment or a cost approach. The main inputs were estimate of value based on recent sales of comparable
equipment and estimates of the impact of physical deterioration, functional or technological obsolescence and external or
economic obsolescence for value derived from using a cost approach. Management estimated that no value can be generated
out of the right-of-use assets upon a sale or sublease, their fair value less cost of sell was estimated to be nil as at the end
of the year.
•
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. 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.
•
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 $10,112,000 of overhead costs during the current year (December 31, 2020:
$8,346,000) in respect of unutilized plant capacity. These amounts are included in the Consolidated Statements of 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, 2021 is $1,864,000 (December 31, 2020:
$565,000).
•
The 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
Avcorp Industries Inc.
annual report 2021
Notes to Consolidated Financial Statements
For the year ended December 31, 2021
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)
Page 37
borrowing rate based on the lease term, collateral assumptions, and the economic environment in which the lease is
denominated.
•
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 forgiveness of the second wave U.S. Small
Business Administration Paycheck Protection Program loan and has recognized $2,513,000 (USD $2,004,000) in other income
in the current year.
5.
Expenses by Nature
The Consolidated Statements of Loss presents expenses by function. Accordingly, amortization and depreciation are not presented
as a separate line on the statement (with the exception of office equipment) but are 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:
2021
2020
Salary, wages, and benefits
$50,938
$59,117
Raw materials, purchased parts and consumables
41,649
65,028
Depreciation
7,147
8,338
Contract services & consulting
3,091
3,606
Utilities
2,906
3,491
Office equipment rental and maintenance
1,904
1,867
Other expenses and conversion costs into inventory
1,714
1,537
Transportation
1,677
1,926
Amortization of development costs
1,404
8,955
Rent
1,388
1,514
Legal and audit fees
1,387
1,509
Change in onerous contracts provision
1,299
308
Insurance
730
664
Amortization of intangible assets
91
1,197
Plant equipment rental and maintenance
581
900
Royalties
279
159
Office supplies
209
171
Travel costs
77
203
Bad debt expense (recovery)
75
(257)
118,546
160,233
6.
Capital Risk Management
The Company’s objectives when managing capital are to safeguard its ability to continue as a going concern, to meet short term
obligations 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.
Avcorp Industries Inc.
annual report 2021
Notes to Consolidated Financial Statements
For the year ended December 31, 2021
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)
Page 38
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 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.
•
Currency Risk
Currency risk arises because the amount of the local currency receivable or payable for transactions denominated in foreign
currencies may vary due to changes in exchange rate (“transaction exposures”) and because the non-Canadian dollar
denominated financial statements of the Company’s subsidiaries may vary on consolidation into the reporting currency of
Canadian dollars (“translation exposures”).
The Company sells a significant proportion of its products in US dollars at prices which are often established well in advance
of manufacture and shipment dates. In addition, the Company purchases a significant proportion of its raw materials and
components in US dollars at prices that are usually established at the order date. The Company’s operations are based in
Canada and in the US. As a result of this, the Company is exposed to currency risk to the extent that fluctuations in exchange
rates are experienced. The amount of foreign exchange gain recorded for the year ended December 31, 2021 is $295,000
(December 31, 2020: $364,000 loss).
The Company had the following US dollar denominated balances:
AS AT DECEMBER 31
2021
2020
Bank cash position
USD$2,568
USD$3,285
Accounts receivable
9,849
6,393
Accounts payable
5,843
3,726
Customer advance
-
4,643
Bank indebtedness
59,421
60,037
Term loan
11,143
10,322
With other variables unchanged, each $0.10 strengthening (weakening) of the CAD against the USD would result in an
increase (decrease) of approximately $6,399,000 in net loss for the year ended December 31, 2021 as a result of holding a
net liability position in USD as at December 31, 2021.
As at December 31, 2020, a $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.
•
Interest Rate Risk
The Company is exposed to interest rate risk on the utilized portion of its operating line of credit (note 16).
Interest rate for advances made up to the maximum of the allowable borrowing base of USD $23,000,000 revolving loan
less USD $1,000,000:
•
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
Avcorp Industries Inc.
annual report 2021
Notes to Consolidated Financial Statements
For the year ended December 31, 2021
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)
Page 39
The utilized portion of this operating line of credit at year end amounting to $18,303,000 (USD $14,437,000).
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
The utilized portion of this operating line of credit at year end amounting to $57,032,000 (USD $44,984,000).
The LIBOR has been subject to recent proposed reforms. The LIBOR will be phased out by June 30, 2023 which is consistent
to the term of the loan agreement. The consequences of these developments cannot be predicted with certainty, however,
no significant impact is expected.
The Company provided 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). 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 24).
The maximum operating line of credit availability is $84,943,000 (USD $67,000,000) of which $75,335,000 (USD
$59,421,000) is utilized as at December 31, 2021 (December 31, 2020: $76,439,000 (USD $60,037,000)). 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, 2021, with other variables unchanged, a 1% change in the base borrowing rate would have a $753,000
(December 31, 2020: $764,000) 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 $7,879,000 (USD $6,215,000) on its operating line of credit as at December
31, 2021 (December 31, 2020: $1,762,000 (USD $1,384,000)). As at the date of this report the Company is able to draw
up to an additional $3,092,000 (USD $2,439,000) (note 16) on its operating line of credit.
The Company primarily finances the purchase of long-lived assets at fixed interest rates.
b)
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 88.0% (December 31, 2020: 89.6%) 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, 2021. 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 expected credit losses for trade receivables:
FOR THE YEAR ENDED DECEMBER 31
2021
2020
Balance as at January 1
$29
$355
Additions
4
36
Use
-
(42)
Collection
-
(320)
Balance as at December 31
33
29
Avcorp Industries Inc.
annual report 2021
Notes to Consolidated Financial Statements
For the year ended December 31, 2021
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)
Page 40
The following table provides aged trade receivables:
AS AT DECEMBER 31
2021
2020
Current
$16,270
$9,531
31 – 60 days
936
1,379
61 – 90 days
187
1,400
Over 90 days
275
1,499
Total
17,668
13,809
c)
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.
Current 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.
December 31, 2021
Less than 3
months
3 months to 1
year
1 – 5 years
Over 5 years
Bank indebtedness (note 16)
$-
$-
$74,412
$-
Term debt (note 20)
1,042
1,999
21,930
4,226
Trade payables (note 18)
13,046
-
-
-
Payroll related liabilities (note 18)
4,610
-
-
-
Customer advance (note 17, 24)
-
-
-
-
Guarantee fee (note 16, 24)
-
-
-
-
Accrued interest (note 18)
131
-
-
-
Other accruals (note 18)
123
-
-
-
December 31, 2020
Less than 3
months
3 months to 1
year
1 – 5 years
Over 5 years
Bank indebtedness (note 16)
$76,708
$-
$-
$-
Term debt (note 20)
1,205
15,663
13,413
5,755
Trade payables (note 18)
10,980
-
-
-
Payroll related liabilities (note 18)
5,242
-
-
-
Customer advance (note 17, 24)
5,911
-
-
-
Guarantee fee (note 16, 24)
-
8,178
-
-
Accrued interest (note 18)
159
-
-
-
Other accruals (note 18)
216
-
-
-
8.
Fair Value Measurement
a)
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.
As at December 31, 2021 and December 31, 2020, the Company’s financial assets and liabilities are categorized as follows:
Avcorp Industries Inc.
annual report 2021
Notes to Consolidated Financial Statements
For the year ended December 31, 2021
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)
Page 41
AS AT DECEMBER 31
2021
2020
Amortized cost
Total
Amortized cost
Total
Financial Assets
Cash
$4,060
$4,060
$7,044
$7,044
Accounts receivable
18,116
18,116
14,436
14,436
Financial Liabilities
Bank indebtedness
74,412
74,412
76,708
76,708
Trade payable
13,046
13,046
10,980
10,980
Term debt
29,197
29,197
36,036
36,036
Customer advance
-
-
5,911
5,911
Guarantee fee
-
-
8,178
8,178
b)
Fair value measurement
As at December 31, 2021 and December 31, 2020, the fair values of cash, accounts receivable and accounts payable
approximated their carrying values because of the current nature of these instruments. Bank indebtedness was classified as
non-current as at December 31, 2021 upon the loan maturity extension to June 30, 2023.
AS AT DECEMBER 31
2021
2020
Carrying value
Fair value
Carrying value
Fair value
Financial liabilities
Bank indebtedness (level 2)
74,412
74,412
76,708
76,708
Term debt (level 2)
29,197
29,197
36,036
36,036
Customer advance (level 2)
-
-
5,911
5,911
Guarantee fee (level 2)
-
-
8,178
8,178
Fair value hierarchy
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
2021
2020
Trade receivables
$17,668
$13,809
Input tax credits
396
545
Accrued receivables
52
82
18,116
14,436
Trade receivables are non-interest bearing and are generally on terms of 30 to 90 days.
Avcorp Industries Inc.
annual report 2021
Notes to Consolidated Financial Statements
For the year ended December 31, 2021
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)
Page 42
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 denominated in the following currencies:
AS AT DECEMBER 31
2021
2020
US dollar
USD$10,079
USD$6,813
Canadian dollar
5,337
5,761
10. Contract Assets
Contract assets include unbilled amounts typically resulting from sales under purchase orders and contracts, when certain
conditions are met, namely: 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 solely 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 to
which the Company is expected to be entitled.
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
2021
2020
Contract asset
$31,398
$34,325
Less: Current portion
13,319
34,325
Non-current portion
18,079
-
11. Inventories
AS AT DECEMBER 31
2021
2020
Raw materials
$10,427
$8,296
Work-in-progress
5,122
5,160
Finished products
2,511
216
Inventory obsolescence
(5,251)
(4,015)
12,809
9,657
The amount of inventory expensed in cost of sales during the year ended December 31, 2021, amounted to $88,030,000
(December 31, 2020: $125,428,000).
During the year ended December 31, 2021, $802,000 (December 31, 2020, reversal of expense $108,000) was recognized as an
expense for inventories carried at net realizable value. This is recognized in cost of sales.
The inventories are pledged as security under the Company’s operating line of credit (note 16).
Avcorp Industries Inc.
annual report 2021
Notes to Consolidated Financial Statements
For the year ended December 31, 2021
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)
Page 43
12. Prepayments and Other Assets
AS AT DECEMBER 31
2021
2020
Deposits on material purchases
$415
$646
Prepaid and deposits on insurance
3,438
3,437
Prepaid IT security maintenance and licenses
570
459
Prepaid property tax
284
287
Prepaid and other deposits
252
156
4,959
4,985
Less: Current portion
2,091
2,108
Non-current portion
2,868
2,877
13. Development Costs
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.
FOR THE YEAR ENDED DECEMBER 31
2021
2020
Opening balance
$9,045
$14,075
Additions
2,956
3,929
Amortization
(1,404)
(8,955)
Foreign exchange
-
(4)
10,597
9,045
FOR THE YEAR ENDED DECEMBER 31
2021
2020
Cost
$33,938
$30,982
Accumulated amortization
(23,341)
(21,937)
Net book amount
10,597
9,045
Avcorp Industries Inc.
annual report 2021
Notes to Consolidated Financial Statements
For the year ended December 31, 2021
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)
Page 44
14. Property, Plant and Equipment
Building
Machinery
and
equipment
Computer
hardware and
software
Leasehold
improvements
Total
Year ended December 31, 2020
Opening net book amount
21,325
21,616
2,336
1,051
46,328
Additions
63
928
156
1,062
2,209
Disposals – cost
-
(1,701)
-
(95)
(1,796)
Disposals – accumulated depreciation
-
574
-
35
609
Depreciation charge
(3,515)
(3,962)
(638)
(223)
(8,338)
Transfers
-
(139)
47
92
-
Currency translation adjustment
(153)
(120)
(25)
(11)
(309)
Closing net book amount
17,720
17,196
1,876
1,911
38,703
At December 31, 2020
Cost
24,511
57,994
10,860
4,029
97,394
Accumulated depreciation
(6,791)
(40,798)
(8,984)
(2,118)
(58,691)
Net book amount
17,720
17,196
1,876
1,911
38,703
Year ended December 31, 2021
Opening net book amount
17,720
17,196
1,876
1,911
38,703
Additions
-
1,682
486
571
2,739
Disposals – cost
-
(3,101)
-
(51)
(3,152)
Disposals – accumulated depreciation
-
1,855
-
24
1,879
Depreciation charge
(3,006)
(3,228)
(587)
(326)
(7,147)
Impairment
(1,640)
(5,026)
(355)
(240)
(7,261)
Lease modification
(4,757)
(21)
-
-
(4,778)
Currency translation adjustment
(124)
(144)
(10)
(7)
(285)
Closing net book amount
8,193
9,213
1,410
1,882
20,698
At December 31, 2021
Cost
24,459
56,441
11,339
4,545
96,784
Accumulated depreciation and impairment
(16,266)
(47,228)
(9,929)
(2,663)
(76,086)
Net book amount
8,193
9,213
1,410
1,882
20,698
Government grants of $147,000 have been received for the purchase of certain items of property, plant and equipment. The
amounts were deducted in the net book amount as shown above. There are no unfulfilled conditions or contingencies attached to
these grants.
The Company has $271,000 in commitments at December 31, 2021 (December 31, 2020: $52,000) to purchase property, plant
and equipment.
Avcorp Industries Inc.
annual report 2021
Notes to Consolidated Financial Statements
For the year ended December 31, 2021
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)
Page 45
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
Total
January 1, 2020
21,325
781
1,014
23,120
Additions
63
265
112
440
Disposals - cost
-
(215)
-
(215)
Disposals – accumulated depreciation
-
59
-
59
Depreciation charge
(3,515)
(261)
(257)
(4,033)
Currency translation adjustment
(153)
57
(2)
(98)
At December 31, 2020
17,720
686
867
19,273
January 1, 2021
17,720
686
867
19,273
Lease modification
(4,757)
(21)
-
(4,778)
Additions
-
665
-
665
Depreciation charge
(3,006)
(206)
(244)
(3,456)
Impairment
(1,640)
(570)
(62)
(2,272)
Currency translation adjustment
(124)
(4)
(1)
(129)
At December 31, 2021
8,193
550
560
9,303
On February 25, 2021, the Company amended the ACF’s facility lease agreement effective January 1, 2021 to vacate certain
buildings by March 31, 2021, and reduced the lease term. This lease modification resulted in a reduction in value of the right-of-
use asset of $4,757,000 (USD $3,794,000).
The impairment assessment of the ACF cash generating unit determined the right-of-use assets, plant and equipment and
intangible assets are impaired due to historical operating losses and lower forecasted revenue. Boeing suspended deliveries of
its 787 aircraft during 2021 which impacted Subaru’s delivery requirement from ACF affecting current and forecasted revenue
in ACF.
The plant and equipment were written down to its recoverable amount of $5,509,000 (USD $4,345,000). The fair value less
cost to sell of the equipment was determined by an independent appraiser using sales of comparable equipment or a cost
approach. The main inputs were estimate of value based on recent sales of comparable equipment and estimates of the impact
of physical deterioration, functional or technological obsolescence and external or economic obsolescence for value derived from
using a cost approach. Since these valuation inputs are unobservable inputs, the fair value of the plant and equipment is
classified as a level 3 fair value.
As no value can be generated out of the right-of-use assets upon a sale or sublease, their fair value less cost of disposal was
nil.
The $7,261,000 impairment loss of these assets is included in the consolidated statement of loss.
Avcorp Industries Inc.
annual report 2021
Notes to Consolidated Financial Statements
For the year ended December 31, 2021
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)
Page 46
15. Intangibles
Lease
Customer
contract –
re-compete
Developed
Software
Total
Year ended December 31, 2020
Opening net book amount
$-
$1,065
$762
$1,827
Amortization charge
-
(1,100)
(97)
(1,197)
Currency translation adjustment
-
35
(10)
25
Closing net book amount
-
-
655
655
At December 31, 2020
Cost
688
5,219
922
6,829
Accumulated amortization
(688)
(5,219)
(267)
(6,174)
Net book amount
-
-
655
655
Year ended December 31, 2021
Opening net book amount
-
-
655
655
Amortization charge
-
-
(91)
(91)
Impairment
-
-
(554)
(554)
Currency translation adjustment
-
-
(10)
(10)
Closing net book amount
-
-
-
-
At December 31, 2021
Cost
685
5,198
919
6,802
Accumulated amortization and impairment
(685)
(5,198)
(919)
(6,802)
Net book amount
-
-
-
-
The impairment loss relates to assets that were written down to their recoverable amounts (note 14). The amount was recognized
as impairment loss in the consolidated statement of loss.
16. Bank Indebtedness
On May 26, 2017, the Company entered into a loan agreement for an expanded operating credit facility with a Canadian Chartered
Bank. This loan agreement had a significant amendment on November 15, 2019. This loan agreement was further amended on
June 22, 2021, to extend the maturity to June 30, 2023. The Company recorded a net gain on modification of bank indebtedness
of $1,155,000 (USD $932,000) as a result of executing this amending agreement.
•
Maximum availability under the loan agreement cannot exceed USD $68,000,000 less USD $1,000,000 until June 30, 2023.
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 a 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 $1,000,000:
•
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
Avcorp Industries Inc.
annual report 2021
Notes to Consolidated Financial Statements
For the year ended December 31, 2021
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)
Page 47
•
BA Equivalent Rate plus 0.875% per annum
•
LIBOR Rate plus 0.875% per annum
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 provided 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). On March 12, 2021, the Company has amended and
restated the accommodation agreement with the Guarantor and Panta B.V. Canada waiving all rights to the Guarantee Fee (note
24).
The Company ended the year with bank operating line utilization of $75,335,000 (USD $59,421,000) offset by $4,060,000 cash
compared to utilization of $76,439,000 (USD $60,037,000) with $7,044,000 cash on hand as at December 31, 2020. The bank
indebtedness balance of the modification gain and related adjustments as a result of executing the amending agreement in 2021
was $923,000 as at December 31, 2021, (December 31, 2020: loss $269,000 from 2019 amendment). Based on net collateral
provided to its bank, the Company is able to draw up to an additional $7,879,000 (USD $6,215,000) on its operating line of credit
as at December 31, 2021 (December 31, 2020: $1,762,000 (USD$1,384,000)). As at the date of this report the Company is able
to draw up to an additional $3,092,000 (USD$2,439,000) on its operating line of credit.
FOR THE YEAR ENDED DECEMBER 31
2021
2020
Opening balance
$76,708
$85,470
Drawdowns on bank indebtedness
1,266
653
Amortization of loan modification loss
(269)
(540)
Loan modification gain
(1,155)
-
Amortization of loan modification gain
306
-
Repayment of loans
(2,105)
(7,368)
Foreign exchange gain
(339)
(1,507)
Ending balance
74,412
76,708
The carrying amount of accounts receivable pledged as security under the Company’s operating line of credit as at December 31,
2021 is $13,245,000 (December 31, 2020: $8,605,000). The inventory and contract asset pledged as security under the
Company’s operating line of credit as at December 31, 2021, is $21,452,000 (December 31, 2020: $20,306,000).
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.
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 24).
Avcorp Industries Inc.
annual report 2021
Notes to Consolidated Financial Statements
For the year ended December 31, 2021
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)
Page 48
FOR THE YEAR ENDED DECEMBER 31
2021
2020
Opening balance
$5,911
$6,030
Released upon accommodation agreement
(5,800)
-
Foreign exchange
(111)
(119)
-
5,911
18. Accounts Payable and Accrued Liabilities
AS AT DECEMBER 31
2021
2020
Trade payables
$13,046
$10,980
Claims provision (note 24)
3,406
10,859
Payroll-related liabilities
4,610
5,242
Restoration provision
487
476
Accrued interest
131
159
Other
123
216
21,803
27,932
Less: Current portion
19,792
27,932
Non-current portion
2,011
-
19. Contract Liability
FOR THE YEAR ENDED DECEMBER 31
2021
2020
Opening balance
$14,691
$6,793
Additions
49,838
46,550
Realized
(41,061)
(38,652)
23,468
14,691
Less: Current portion
18,625
11,502
Non-current portion
4,843
3,189
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.
The Company has a customer contract with price adjustments where the selling price is increased for sales made over an initial
specified period and a reduction in selling price for sales made in a subsequent specified period. This is a significant financing
component for this contract considering the length of time between the customers’ advance payment with the increased selling
price and the delivery made in the subsequent periods, as well as the prevailing interest rate in the market. As such, the advance
payment was recognized as contract liabilities and an interest on the advance payment is calculated using the Company’s weighted
average interest rate of debt. This rate is commensurate with the rate that would be reflected in a separate financing transaction
between the Company and the customer at contract inception.
Avcorp Industries Inc.
annual report 2021
Notes to Consolidated Financial Statements
For the year ended December 31, 2021
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)
Page 49
20. Term Debt
AS AT DECEMBER 31
2021
2020
Lease liabilities (a)
$11,750
$18,243
Panta loans (b)
14,127
13,142
SADI loans (c)
3,320
3,734
PPP loans (d)
-
917
29,197
36,036
Less: Current portion
3,041
16,868
Non-current portion
26,156
19,168
a)
Lease Liabilities
There are various lease liabilities that have a weighted average interest rate of 9.0% per annum (December 2020: 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.
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 lease liability related to the
lease agreement was revalued from $6,666,000 (USD $5,317,000) to $2,115,000 (USD $1,687,000) due to reduced monthly
lease payments over reduced lease term.
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.
December 31, 2021
Within 1 Year
Between 1 – 5
Years
Over 5 Years
Lease liability
$2,712
$6,487
$2,551
December 31, 2020
Within 1 Year
Between 1 – 5
Years
Over 5 Years
Lease liability
$2,619
$11,639
$3,985
b)
Panta Loan
Panta Canada B.V. is Avcorp’s majority shareholder owning approximately 70.6% 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.
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 and drawing an additional
$2,686,000 (USD$2,000,000). As at December 31, 2021, the Company is able to draw up to an additional $Nil on the standby
credit facility.
•
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 loan agreement (note 16).
Avcorp Industries Inc.
annual report 2021
Notes to Consolidated Financial Statements
For the year ended December 31, 2021
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)
Page 50
•
The loan bears interest at the aggregate rate of interest, expressed as an annual rate, of the U.S. Base Rate of Royal
Bank of Canada (“RBUSBR”) plus a margin of 5.375% per annum which shall accrue and not be compounded until the
maturity date. If either an event of default occurs and is continuing or the indebtedness is not repaid in full on the
maturity date, the interest rate in such period shall increase to the rate of 15% per annum and all outstanding
indebtedness, including unpaid interest, shall continue to accrue interest at such increased rate of interest from and
after the maturity date until paid in full.
•
The maturity date is the earlier of: (i) the date upon which, for any reason, the outstanding principal balance of the
operating credit facility established under the 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. No such events have occurred and therefore, the Panta Loan is
long term in nature.
•
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.
On March 12, 2021, the Company has amended and restated the accommodation agreement with a customer and Panta B.V.
Canada providing an additional USD $10,000,000 by way of a non-revolving standby loan facility and USD $3,000,000
equipment loan (“2021 Panta Loan”) (note 24). As at December 31, 2021, the Company is able to draw USD $13,000,000
on the 2021 Panta Loan.
•
The 2021 Panta Loan carries the same terms and conditions as noted above for the 2018 Panta Loan and 2019 Panta
Loan except for interest. The 2021 Panta 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 plus a margin of 2% 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 10% 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.
FOR THE YEAR ENDED DECEMBER 31
2021
2020
Opening balance
$13,142
$5,550
Add: Draw down
-
6,924
Add: Accrued interest
1,030
1,079
Foreign exchange gain
(45)
(411)
14,127
13,142
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;
•
Amounts repayable are unsecured.
$3,320,000 was drawn on this facility as at December 31, 2021 (December 31, 2020: $3,734,000).
December 31, 2021
December 31, 2020
Opening balance
$3,734
$3,573
Add: Accrued interest
142
161
Avcorp Industries Inc.
annual report 2021
Notes to Consolidated Financial Statements
For the year ended December 31, 2021
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)
Page 51
Less: Repayments
(556)
-
Ending Balance
3,320
3,734
Less: Current portion
329
556
Non-current portion
2,991
3,178
d)
Paycheck Protection Program Loan
On April 28, 2020, the Company received a loan in the amount of $5,529,000 (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 was included in the year ended December 31, 2020, as other income (note 27).
On June 8, 2021, the Company received approval for forgiveness on the full loan amount of USD $4,123,000. The Company
recognized the remaining portion of loan forgiveness and related interest of $924,000 (USD $737,000) as other income in
the year ended December 31, 2021 (note 27).
On March 15, 2021, the Company received a $2,508,000 (USD $2,000,000) second wave PPP loan and has determined that
the full loan amount and the related interest of $2,513,000 (USD $2,004,000) met the forgiveness criteria and the amount
is included in the year ended December 31, 2021, as other income (note 27).
FOR THE YEAR ENDED DECEMBER 31
2021
2020
Opening balance
$917
$-
Add: Accrued interest
27
37
Add: Contributions
2,508
5,529
Less: Loan forgiveness
(3,437)
(4,601)
Less: Foreign exchange gain
(15)
(48)
Ending Balance
-
917
21. Onerous Contract Provision
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, 2021, is $1,864,000 (December 31, 2020: $565,000).
FOR THE YEAR ENDED DECEMBER 31
2021
2020
Opening balance
$565
$251
Additions
1,864
565
Amortization
(565)
(257)
Foreign exchange loss
-
6
Balance
1,864
565
Less: Current portion
1,324
282
Non-current portion
540
283
22. Obligations, Commitments and Contingent Liabilities
The Company has $270,000 in commitments at December 31, 2021 (December 31, 2020: $52,000) to purchase property, plant
and equipment in 2021.
As at December 31, 2021, including the above, the Company had a total of $29,893,000 of committed contractual operational
purchase order obligations outstanding (December 31, 2020: $35,238,000).
Avcorp Industries Inc.
annual report 2021
Notes to Consolidated Financial Statements
For the year ended December 31, 2021
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)
Page 52
23. Capital Stock
The Company is authorized to issue an unlimited number of common shares as well as an unlimited number of first preferred and
second preferred shares, issuable in series, the terms of which will be determined by the Company’s directors at the time of
creation of each series. There were 370,931,120 common shares issued at December 31, 2021.
Common shares issued or reserved:
Number of shares
Amount
December 31, 2019
368,118,620
86,219
Share issue
Exercise of stock warrants
-
-
Transfer from contributed surplus on exercise of stock warrants
-
-
December 31, 2020
368,118,620
86,219
Share issue
Cash
2,812,500
112
Transfer from contributed surplus on exercise of stock options
-
125
December 31, 2021
370,931,120
86,456
During the fourth quarter of 2021, holder of the Company’s stock options exercised 2,812,500 stock options at a price of
$0.04 resulting in the issuance of 2,812,500 common shares with a value of $112,000. Weighted average share price at the
date of exercise is $0.07.
The Company’s incentive stock option plan is administered by the Board of Directors. It is a rolling share option plan wherein
15% 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, 2021 and December 31, 2020, and changes during
the periods ending on those dates, are presented below:
FOR THE YEAR ENDED DECEMBER 31
2021
2020
Options
Weighted average
exercise price
Options
Weighted average
exercise price
Outstanding – Beginning of year
5,441,000
$0.048
11,443,000
$0.067
Granted
17,350,000
0.088
-
-
Forfeited
-
-
-
-
Expired
(730,500)
0.085
(6,002,000)
0.085
Exercised
(2,812,500)
0.040
-
-
Outstanding – End of year
19,248,000
0.083
5,441,000
0.048
Avcorp Industries Inc.
annual report 2021
Notes to Consolidated Financial Statements
For the year ended December 31, 2021
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)
Page 53
The following table summarizes stock options as at December 31, 2021:
Number
Weighted average
remaining contractual
life (years)
Weighted average
exercise price
Stock options outstanding as at December 31, 2021
19,248,000
4.11
0.083
Stock options exercisable as at December 31, 2021
18,310,500
4.06
0.086
24. Accommodation Agreement Settlement
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, and a legal claim provision. $21,391,000 was released to the Consolidated Statements of Loss for
the year ended December 31, 2021.
•
The Company is required to use a portion of the variable consideration at the time of settlement of the termination of
convenience towards permanently reducing the maximum availability of the guaranteed portion of the bank indebtedness.
25. Stock Based Compensation
Under the Avcorp 2007 Share Option Plan (the “Plan”), the Company is authorized to issue up to 15% of the Company’s
outstanding common shares.
All options have a contractual life of up to a maximum of ten years. Vesting of options is at the discretion of the plan administrator
and is generally subject to the employees remaining employed by or continuing to provide services to the Company or remaining
as a Director or Officer during the vesting period. As of December 31, 2021, the Company had issued 19,248,000 options under
the Plan.
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.
The fair value of 17,350,000 stock options granted and vested immediately during the year ended December 31, 2021, was
$1,376,000 (December 31, 2020: Nil), at a weighted average fair value of $0.079. The contractual term of these share options
is five years.
The assumptions used in the valuation of stock options were as follows:
2021
Number of options
17,350,000
Risk free rate (%)
0.99
Dividend yield (%)
-
Expected Lives (years)
5
Volatility (%)
137.68
Exercise price
0.0875
The amount of stock-based compensation expense, for options granted in current and prior periods, amortized to earnings during
the year ended December 31, 2021, was $1,389,000 (December 31, 2020: $32,000). Stock-based compensation expense has
been included in the Consolidated Statements of Loss as administrative and general expenses.
Avcorp Industries Inc.
annual report 2021
Notes to Consolidated Financial Statements
For the year ended December 31, 2021
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)
Page 54
The expected life of the share options is based on historical data and current expectations and is not necessarily indicative of
exercise patterns that may occur. The expected volatility reflects the assumption that the historical volatility over a period
similar to the life of the options is indicative of future trends, which may not necessarily be the actual outcome.
26. Defined Contribution Plan
The total cost recognized and paid for the Company’s defined contribution plans is as follows.
FOR THE YEAR ENDED DECEMBER 31
2021
2020
Defined contribution plan
$1,318
$1,409
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. $413,000 of the defined contribution plan expenses have been included in the
Consolidated Statements of Loss as administrative and general expenses (December 31, 2020: $479,000) and $905,000 have
been included in cost of sales (December 31, 2020: $930,000).
27. Other Income and Losses
The Canada Emergency Wage and Rent Subsidies (“CEWS” and “CERS”) from the Canadian Government for the year ended
December 31, 2021, of $4,389,000 (December 31, 2020: $6,796,000) and $394,000 (December 31, 2020: $Nil) respectively
were included in the Consolidated Statements of Loss as other income. 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 $5,529,000 (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 was included in the year ended December 31, 2020, as other income. On June 8, 2021, the
Company received approval for forgiveness on the full loan amount of USD $4,123,000. The Company recognized the remaining
portion of loan forgiveness and related interest of $924,000 (USD $737,000) as other income in the year ended December 31,
2021.
On March 15, 2021, the Company received a $2,508,000 (USD $2,000,000) second wave PPP loan and has determined that the
full loan amount and the related interests of $2,513,000 (USD $2,004,000) met the forgiveness criteria. The full loan amount
and related interest is included in the year ended December 31, 2021 as other income.
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 by March 31, 2021, and reduced the lease term. As the lease modification is not
accounted for as a separate lease, the Company remeasured the lease liability by discounting the revised lease payments on
revised lease term and revalued the right of use asset with a loss on modification of the lease recognized in the Consolidated
Statements of Loss in the year ended December 31, 2021 as other loss.
FOR THE YEAR ENDED DECEMBER 31
2021
2020
Canada Emergency Wage Subsidy
$4,389
$6,796
Canada Emergency Rent Subsidy
394
-
Government loan forgiven
3,437
4,601
Lease modification loss
(204)
-
Others
164
245
8,180
11,642
Avcorp Industries Inc.
annual report 2021
Notes to Consolidated Financial Statements
For the year ended December 31, 2021
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)
Page 55
28. Finance Costs
FOR THE YEAR ENDED DECEMBER 31
2021
2020
Interest on lease liabilities
$1,207
$1,797
Interest on other term debt
169
198
Interest on bank indebtedness
1,688
4,524
Modification gain on bank indebtedness (note 16)
(1,155)
-
Interest on related party debt
1,030
1,079
Non-cash financing cost accretion
11
10
Interest on contract liabilities
146
119
Interest expense
3,096
7,727
Interest income
(5)
(122)
Net interest expense
3,091
7,605
29. Supplementary Cash Flow Information
FOR THE YEAR ENDED DECEMBER 31
2021
2020
Equipment acquired under lease liability
$665
$440
30. Income Tax
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 $34,073,000 (2020: $33,488,000) in respect of losses amounting to $85,381,000 (2020:
$75,676,000) which include foreign losses of $50,106,000 (2020: $40,329,000) that will expire beginning in 2035 through 2041
(except U.S. Net Operating Losses incurred from fiscal 2018 onwards of $24,166,000 that carryforward indefinitely), unclaimed
research and development costs of $10,037,000 (2020: $9,940,000) and capital losses of $1,512,000 (2020: $830,000) with no
expiry, investment tax credits of $969,000 (2020: $1,109,000) which expire beginning in 2022 through 2037, and deductible
temporary differences of $26,937,000 (2020: $35,255,000).
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 loss before taxes due to the following:
FOR THE YEAR ENDED DECEMBER 31
2021
2020
Canadian federal and provincial income tax rates
27.00%
27.00%
Income tax recovery at statutory rate
$(145)
$(1,816)
Change in unrecognized temporary differences
851
2,972
Tax rate differences
(96)
(42)
Permanent differences on loan forgiveness
(962)
(1,286)
Other permanent differences
352
172
Tax expense (recovery)
-
-
31. Related Party Transactions
a)
Periodically, consulting services are provided by certain directors. Fees paid to certain directors, or companies with which
they have beneficial ownership, during the year ended December 31, 2021, amount to $Nil (December 31, 2020: $Nil). Fees
payable to certain directors or Companies with which they have beneficial ownership, as at December 31, 2021, are $Nil
Avcorp Industries Inc.
annual report 2021
Notes to Consolidated Financial Statements
For the year ended December 31, 2021
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)
Page 56
(December 31, 2020: $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, 2021, (December 31, 2020: $Nil).
b)
Key management compensation
Key management includes members of the Board of Directors of the Company and executive officers for all operating
facilities, as they have the collective authority and responsibility of planning, directing, and controlling the activities of the
Company. The compensation expense for key management for services is shown below.
FOR THE YEAR ENDED DECEMBER 31
2021
2020
Salaries and other short-term employee benefits
$2,672
$1,867
Contributions to defined contribution plan
97
91
Option-based awards
1,357
32
4,126
1,990
c)
Loans to related parties
The balance of loans receivable from key management as at December 31, 2021, is $5,000 (December 31, 2020: $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, 2021 is 368,257,319 (December
31, 2020: 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 reportable segments separately for the purpose of making
decisions about resource allocation and performance assessment. Segment performance is evaluated based on operating profit
or loss and is measured consistently with operating profit or loss in the Consolidated Statements of Loss and Comprehensive
Loss.
Avcorp Industries Inc.
annual report 2021
Notes to Consolidated Financial Statements
For the year ended December 31, 2021
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)
Page 57
a)
Sales to five major customers for the year ended December 31, 2021, which comprise several programs and contracts,
accounted for approximately 88.3% (December 31, 2020: 92.3%) of sales.
FOR THE YEAR ENDED DECEMBER 31
2021
2020
Revenue
% of Total
Revenue
% of Total
BAE Systems
$40,508
40.7
$31,332
20.8
Boeing1
26,047
26.2
48,237
31.9
Bombardier
10,796
10.9
12,998
8.6
Lockheed Martin
6,208
6.2
30,444
20.2
Subaru Corporation
4,299
4.3
16,311
10.8
Other
11,618
11.7
11,640
7.7
Total
99,476
100.0
150,962
100.0
1.
Includes Boeing program partner revenue consisting of industry tier-one suppliers to Boeing
b)
The Company’s sales are distributed amongst the following geographical locations based on location of customers:
FOR THE YEAR ENDED DECEMBER 31
2021
2020
Revenue
% of Total
Revenue
% of Total
Europe
41,152
41.4
32,134
21.3
USA
35,555
35.7
81,317
53.9
Canada
17,388
17.5
19,801
13.1
Asia
4,706
4.7
17,462
11.6
Australia
674
0.7
186
0.1
Other
1
-
62
0.0
Total
99,476
100.0
150,962
100.0
c)
The Company operates in one industry that involves the manufacture and sale of aerospace products. All of the Company’s
operations and assets are in Canada and in the United States.
AS AT DECEMBER 31
2021
2020
Canada
$83,486
$84,644
USA
19,151
36,894
Total
102,637
121,538
d)
The Company’s sales are distributed amongst commercial and defence markets:
FOR THE YEAR ENDED DECEMBER 31
2021
2020
Revenue
% of Total
Revenue
% of Total
Commercial
$46,484
46.7
$63,179
41.9
Defence
52,992
53.3
87,783
58.1
Total
99,476
100.0
150,962
100.0
e)
The Company’s revenue is recognized either at a point in time or over time. For the year ended December 31, 2021, revenue
earned at a point in time is $13,854,000 (December 31, 2020: $26,700,000). Revenue earned over time is $85,622,000 for
the year ended December 31, 2021 (December 31, 2020: $124,262,000).
Avcorp Industries Inc.
annual report 2021
Notes to Consolidated Financial Statements
For the year ended December 31, 2021
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)
Page 58
f)
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, 2021
Total
ASI
Comtek
ACF
Corporate
Revenue
$99,476
$75,976
$13,373
$10,127
$-
Cost of sales
99,546
67,267
10,714
21,565
-
Gross profit (loss)
(70)
8,709
2,659
(11,438)
-
Administrative and general expenses
18,277
5,853
2,550
4,176
5,698
Depreciation and amortization
723
310
60
353
-
Accommodation agreement settlement
(21,391)
-
-
-
(21,391)
Impairment loss
7,815
-
-
7,815
-
Other income
(8,180)
(4,122)
(670)
(3,388)
-
Operating income (loss)
2,686
6,668
719
(20,394)
15,693
FOR THE YEAR ENDED DECEMBER 31, 2020
Total
ASI
Comtek
ACF
Corporate
Revenue
$150,962
86,756
$16,509
$47,697
$-
Cost of sales
142,729
75,868
13,941
52,920
-
Gross profit (loss)
8,233
10,888
2,568
(5,223)
-
Administrative and general expenses
16,717
5,779
2,288
4,247
4,403
Depreciation and amortization
787
314
60
413
-
Other income
(11,642)
(5,523)
(1,273)
(4,846)
-
Operating income (loss)
2,371
10,318
1,493
(5,037)
(4,403)
AS AT DECEMBER 31
2021
2020
Total Assets
% of Total
Total Assets
% of Total
Avcorp Industries Inc.
$72,258
70.4
$72,163
59.3
Comtek Advanced Structures Ltd.
11,078
10.8
12,345
10.2
Avcorp Composite Fabrication Inc.
19,151
18.7
36,894
30.4
Corporate
150
0.1
136
0.1
Total
102,637
100.0
121,538
100.0
AS AT DECEMBER 31
2021
2020
Development
Cost
Additions
Property,
Plant and
Equipment
Additions
Development
Cost
Additions
Property,
Plant and
Equipment
Additions
Avcorp Industries Inc.
$2,814
$1,741
$3,599
$1,651
Comtek Advanced Structures Ltd.
51
327
175
118
Avcorp Composite Fabrication Inc.
91
671
155
440
Total
2,956
2,739
3,929
2,209
Avcorp Industries Inc.
annual report 2021
Notes to Consolidated Financial Statements
For the year ended December 31, 2021
(all figures in tables are expressed in thousands of Canadian dollars, except per share amounts)
Page 59
AS AT DECEMBER 31
2021
2020
Total
Liabilities
% of Total
Total
Liabilities
% of Total
Avcorp Industries Inc.
$52,366
34.7
$41,361
24.2
Comtek Advanced Structures Ltd.
2,383
1.6
3,037
1.8
Avcorp Composite Fabrication Inc.
5,984
4.0
19,630
11.5
Corporate
90,011
59.7
106,650
62.5
Total
150,744
100
170,678
100.0
notes
AVCORP INDUSTRIES INC.
BOARD OF DIRECTORS AND OFFICERS
David Levi (1)(2)
CHAIRMAN OF THE BOARD
Executive Chairman
GrowthWorks Capital Ltd.
Vancouver, British Columbia
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
Surrey, British Columbia
MANAGEMENT
Amandeep Kaler
Group Chief Executive Officer
Surrey, British Columbia
Jessica Gill
Group Vice President, Human Resources & IT
Surrey, British Columbia
Amish Patel
Group Vice President, Finance
North Vancouver, British Columbia
Robin Lovell
President
Comtek Advanced Structures Ltd.
Oakville, Ontario
Tony Kelsey
General Manager
Avcorp Composite Fabrication Inc.
Jurupa Valley, California
Mike Elvidge
General Manager
Avcorp Structures and Integration
Surrey, British Columbia
(1) Member of the Audit and Corporate Governance Committee
(2) Member of the Compensation and Nominating Committee
*Designates the Committee Chair
DIRECTORY
Legal Counsel
McMillan LLP
Barristers & Solicitors
Vancouver, British Columbia
Auditors
Ernst & Young LLP
Chartered Professional Accountants
Vancouver, British Columbia
Shares Listed
Toronto Stock Exchange
Symbol AVP
Registrar and Transfer Agent
TSX Trust Company (Canada)
Vancouver, British Columbia
Bank
Royal Bank of Canada
Richmond, British Columbia
Avcorp Industries Inc.
10025 River Way
Delta, British Columbia
Canada V4G 1M7
Telephone:
604-582-6677
Facsimile:
604-582-2620
Email:
info@avcorp.com
Website:
www.avcorp.com
www.avcorp.com